This paper challenges the findings of Frankel et al. (2002) (FJN). The results of our discretionary accruals tests differ from FJN's when we adjust discretionary current accruals for firm performance. In our earnings benchmark tests, in contrast to FJN we find no statistically significant association between firms meeting analyst forecasts and auditor fees. Our market reaction tests also provide different results than those reported by FJN. Overall, our study indicates that FJN's results are sensitive to research design choices, and we find no systematic evidence supporting their claim that auditors violate their independence as a result of clients purchasing relatively more nonaudit services.

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SUMMARY: This paper examines IPO audit fees to assess the use of industry specialization as a differentiation strategy by audit firms. We extend existing theory on the impact of industry specialization on audit fees by incorporating Porter's (1985) theory of competition and differentiation. We suggest that market share enables audit firms to gain competitive advantages in terms of cost and service. However, the impact of such advantages on fees depends on whether the audit firm has successfully differentiated itself from competitors within client industries. Our results indicate that as audit firm industry market share increases without a differentiation in market share, the audit fee charged for a given IPO decreases. In the context of Porter (1985), this result suggests that the client is able to bargain for a portion of the auditor's cost savings because the audit firm has not successfully differentiated itself from competitors. In contrast, we show that audit firms that possess significantly higher market shares than their industry competitors earn fee premiums, suggesting that audit firms that have successfully differentiated themselves retain a stronger bargaining position with their clients.

This study investigates whether or not related party transactions serve as "red flags" that warn of potential financial misstatement. We hand-collect related party transactions for S&P 1500 firms in 2001, 2004, and 2007 and find a positive correlation between these transactions and future restatements, suggesting restatements are more likely when a firm engages in related party transactions. The association is concentrated among transactions that appear to reflect "tone at the top" rather than arguably more necessary business transactions. We also find RPT firms pay lower audit fees. However, "tone RPT" firms that subsequently restate pay higher audit fees, providing evidence that auditors recognize the individual restatement risks of these firms. Our results suggest that tone-based RPTs serve as signals of higher risk of material misstatement. Faut-il voir des signaux d'alarme dans les op erations entre apparent es ? R ESUM E Les auteurs se demandent si les op erations entre apparent es servent ou non de « signaux d'alarme » annonc ßant des anomalies financi eres potentielles. Ils rel event manuellement les op erations entre apparent es des soci et es composant l'indice S&P 1500 en 2001, 2004 et 2007 et observent une corr elation positive entre ces op erations et les retraitements ult erieurs, ce qui semble indiquer que les retraitements sont plus probables lorsque les soci et es concluent des op erations entre apparent es. Le lien se manifeste davantage parmi les op erations qui semblent refl eter le « ton donn e par la direction » plutôt que parmi les op erations commerciales pouvantêtre qualifi ees de plus n ecessaires. Les auteurs constatent egalement que les soci et es qui concluent des op erations entre apparent es paient moins d'honoraires d'audit. Toutefois, les soci et es dont la direction donne le ton aux op erations entre apparent es et qui proc edent subs equemment a un retraitement paient des honoraires d'audit plus elev es, ce qui permet de conclure que les auditeurs reconnaissent les risques de retraitement que pr esentent individuellement ces soci et es. Les r esultats de l' etude semblent indiquer que les op erations entre apparent es refl etant le ton donn e par la direction signalent un risque plus elev e d'anomalies significatives.