Abstract:
Abnormal audit fees could be claimed to be an incentive to
compromise the independence of an external auditor, which
impairs the quality of an audit. Alternatively, some have argued
that abnormal audit fees reflect the additional effort of the
auditors to reduce earnings management practices. Hence, this
study aimed to examine the relationship between abnormal audit
fees and the degree of earnings management of non-financial
listed companies in Sri Lanka. Using a quantitative approach in
the positivistic paradigm, descriptive statistics, correlation
analyses, regression analyses, and panel regression analyses were
performed in assessing the level and identifying the relationship
between abnormal audit fees and earnings management. Results
indicated that the abnormal audit fees in the Sri Lankan context
are comparatively higher than in selected developing and
developed countries and that degree of earnings management vary
over time. Moreover, none of the analyses performed showed a
statistically significant relationship between abnormal audit fees
and the degree of earnings management in Sri Lanka. The
findings of this study are expected to provide insights to
regulatory bodies, audit firms, investors, and other stakeholders.
Regulators and policymakers could take steps to discourage
excessive audit fees, as well as address the usage of unwarranted
earnings management practices. Furthermore, external auditors'
efforts to curtail excessive earnings management practices should
be further examined. This study is a pioneering effort to identify
whether there is a relationship between abnormal audit fees and
earnings management in Sri Lanka, and thus it is expected to add
to the extant literature, especially in a developing country context.
