AUDIT FEES AND CLIENT BUSINESS RISK DURING THE SAVINGS-AND-LOAN CRISIS - EMPIRICAL-EVIDENCE AND DIRECTIONS FOR FUTURE-RESEARCH

We investigate the relation between independent audit fees and client business risk in the savings and loan (S & L) industry from 1983-1988. The extent to which independent auditors recognized and reacted to S & L client business risk is important for understanding independent au ditors' behavior during the crisis. Evidence of an association between fees and client riskiness may bear upon litigation in which S & L reg ulators and investors are suing independent auditors for enormous sums of money, for allegedly negligent auditing. Economically rational aud itors, who were attuned to client business risk, should have priced th is risk into their fees. Audit fees were regressed on variables repres enting client business risk for each of six years, 1983-1988. The cons istent significance of these variables strongly suggests that independ ent auditors were sensitive to S & L riskiness throughout the middle 1 980s. The variance in fees explained by the risk variables, and the ma gnitude of the coefficient on one of the risk measures suggest that in creases in risk were accompanied by substantial, but perhaps ex post i nsufficient, fee increases. Additional research is needed to determine whether this fee premium is commensurate with independent auditors' c urrent litigation costs, or if insufficient auditing or competition in the audit market caused auditors to underprice their services, given the risk they assumed.