Do Auditors Charge a Risk Premium? Evidence from the Association between Derivative Hedging and Audit Fees

Tharindra RANASINGHE

Assistant Professor

University of Maryland

 

Chairperson: 

Asst Professor Alper DARENDELI

 

Wednesday, 12 September 2018

1.30 pm to 3.00 pm

Executive Seminar Room 5 (S3.1-B1-07)

 

Although prior literature has documented a positive association between business risk and audit fees, it remains unclear whether, in addition to expending greater audit effort on riskier clients, auditors also charge a risk premium. This is an important issue because a risk premium is a deadweight loss. We examine this issue in the context of hedging derivative usage in the U.S. oil and gas exploration and production industry. While derivative hedging reduces business risk, the auditing of derivative instruments requires greater auditor effort. Consistent with the existence of a risk premium in audit fees, we find a negative relationship between the extent of hedging and audit fees. This relationship is weaker when the derivative instruments held by firms are less effective in offsetting the underlying risks and when internal control weaknesses prompt auditors to increase their efforts on auditing of derivative instruments. We contribute to the literature by documenting a deadweight component in audit fees that is unrelated to audit quality.

 

Dr Tharindra Ranasinghe, Assistant Professor of Accounting and Information Assurance, joined the Robert H. Smith School of Business in 2016. Prior to joining the Smith School, Tharindra was a faculty member at the Singapore Management University. His teaching interests include both financial and managerial accounting. Dr Ranasinghe conducts empirical research on hedging and derivative instruments, executive compensation, and voluntary disclosure. His research has been published in the Accounting Review and Journal of Accounting and Public Policy. Dr Ranasinghe earned his doctorate degree from the University of Houston and he is also a CFA charterholder. He also possesses industry experience as a management accountant and a buy-side financial analyst. 

 

For further information and enquiries, please contact Adeline Tang at amytang@ntu.edu.sg.

 

Nanyang Business School, Nanyang Technological University, Block S3, 50 Nanyang Avenue, Singapore 639798 https://www.ntu.edu.sg/business