R&D capitalization and audit fees: Evidence from China |
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| Institution: | 1. Yuan Ze University, 135 Yuan-Tung Road, Chung-Li, Taoyuan 32003, Taiwan;2. National Central University, No. 300 Jhongda Rd., Jhongli City, Taoyuan County 32001, Taiwan;3. Nankai University, 94 Weijin Road, Tianjin 300071, Peoples Republic of China;1. School of Accountancy, College of Business, University of Louisville, Louisville, KY 40292, United States;2. University of Louisville- retired, United States;1. School of Economics, Sichuan University, Chengdu, PR China;2. Department of Economics, The London School of Economics and Political Science, London, UK;1. China Europe International Business School, China;2. School of Accountancy, Central University of Finance and Economics, China |
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| Abstract: | Our study investigates the association between capitalized R&D costs and audit fees and whether this association reflects the effect of earnings management. By exploring Chinese listed firms, we find that capitalized R&D costs are positively associated with audit fees, where such positive association holds for both the discretionary and nondiscretionary portions of capitalized R&D costs. Moreover, the positive association between the discretionary portion of capitalized R&D costs and audit fees is more pronounced for firms with stronger incentives to manipulate earnings. Overall, our findings imply that firms' reporting incentives affect how auditors react to clients' accounting choices. This in turn suggests that auditors believe some firms capitalize R&D to manipulate earnings, and the resulting earnings-management concerns lead them to charge higher fees. |
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