Audit Opinion and Disclosure of Audit Fees

Dye (1991) suggests that when audit fees are disclosed, auditor inde-pendence will be improved because there are no quasi-rents to influence audit opinion and the public could assess the independence of the audi-tors. According to DeAngelo (1981a), however, disclosure of audit fees is irrelevant to the issuance of audit opinion because transaction costs, which give rise to quasi-rents, could not he affected by disclosure of audit fees. This paper examines this controversy by investigating the issu-ance of a going concern modified audit opinion before and after the dis-closure requirement c, $ the Securities and Exchange Commission (2000). The results show that financial statements issued after the disclosure requirement are more likely to be associated with a going concern opin-ion than those issued before the disclosure requirement. These results are robust to various.sensitivity tests, including the control for the effect of economic factors, auditor reporting conservatism, and auditor report-ing accuracy. In addition, it is found that firms before (after) the disclo-sure requirement are more (less) likely to receive a going concern opinion if audit fees were (were not) disclosed. Hence, this paper pro-vides evidence to suggest that disclosure of audit fees is associated with enhanced auditor independence, and thus supports Dye’s (1991) theory