Fool's gold or value for money? The link between abnormal audit fees, audit firm type, fair‐value disclosures, and market valuation

Abstract

We analyze whether the audit firm type and abnormal audit fees are associated with the market valuation of banks' fair‐value assets. Our results indicate that different auditor types use different strategies when auditing fair values. First, we show that Big 4 auditors restrict the Level 3 valuations to the most illiquid assets. Thus, those banks audited by a Big 4 auditor have a lower proportion of Level 3 assets. Second, the market discount on the Level 3 assets is higher for the banks audited by a Big 4 auditor than for those audited by a non‐Big 4 auditor. Third, the discount on the Level 3 portfolios of banks with non‐Big 4 auditors is higher if the unexpected audit fees are high. Thus, non‐Big 4 auditors seem to allow more high‐uncertainty valuations but charge a risk premium. We find similar effects for industry‐specialist auditors.