Auditor Pricing of Excess Cash Holdings

Abstract

We examine auditor business risk by analyzing the relation between excess cash holdings and auditor pricing behavior. Prior research links excess cash holdings to risks associated with manager opportunism and external monitoring. Our analyses provide evidence of a positive relationship between excess cash and audit fees. The economic magnitude of the increase in total audit fees due to an increase in excess cash holdings is approximately 5% greater for firms in the top quartile of excess cash holdings versus those in the bottom quartile. We also find that the strength of shareholder rights reduces the positive relationship between excess cash and audit fees, and excess cash holdings are assigned lower audit fees among firms that follow an investment-intensive strategy than those that tend to hold on to their cash. Our article contributes to the literature by examining auditor pricing of excess cash holdings, including factors that affect auditors’ risk perceptions, and ultimately provides unique insights into how auditors view agency conflicts indicated by excess cash holdings.