While prior research provides abundant evidence that independent directors are associated with favorable outcomes, researchers have only recently started to investigate the impact of independent director reputation incentives. This study examines whether the reputation incentives of independent directors are associated with accruals quality and audit fees. The results reveal a negative relationship between the proportion of independent directors with relatively low reputation incentives and accruals quality. Further, the proportion of independent directors with relatively low reputation incentives is positively associated with audit fees, suggesting that auditors view lower reputation incentives as increasing risk. We also find that Big 4/5 auditor office size moderates the relationship between independent director reputation incentives and audit fees. Specifically, our results indicate that audit fees increase less in response to lower reputation incentives as office size increases, suggesting that larger offices respond to the risks associated with lower reputation incentives more efficiently than smaller offices.

SUMMARY This study proposes that earnings autocorrelation and earnings volatility are associated with audit fees. Autocorrelation and volatility are time-series of earnings characteristics that may affect an auditor's perception of inherent risk. In response to greater inherent risk, auditors should conduct more extensive substantive testing to reduce the overall risk associated with the audit. We find a negative (positive) association between earnings autocorrelation (volatility) and audit fees. The results indicate that a shift in the interquartile range in earnings autocorrelation and earnings volatility combined is associated with a 4.0 percent change in audit fees, which amounts to approximately $95,600 for the average firm-year observation in our primary sample. We also find that the relation between earnings autocorrelation and audit fees is attenuated for industry-specialist auditors, consistent with specialists responding to lower earnings autocorrelation more efficiently than non-specialists.

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