Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    The Volatility of Other Comprehensive Income and Audit Fees
    research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations 
    The Volatility of Other Comprehensive Income and Audit Fees
    Practical Implications:

    This paper asks whether auditors recognize the volatility of OCI and incorporate it into pricing of audits.  They find that audit fees do reflect changes in OCI and that these changes reflect various risk factors associated with OCI.  The findings suggest that auditors already recognize the difficulty in assessing value of fair value items which run through OCI—reinforcing regulator concerns about fair value valuation.


    Huang, H., S. Lin, K. Raghunandan. 2016. The Volatility of Other Comprehensive Income and Audit Fees. Accounting Horizons 30 (2): 195-210.

    Other comprehensive income; audit fees; fair value audits
    Purpose of the Study:

    This study investigates whether auditors incorporate volatility in other comprehensive income (OCI) into fees.  Increased attention from standard setters, both domestically and internationally, on fair value accounting has increased auditor focus on fair value financial instruments.  Fluctuations in many of these assets are reflected in OCI, thus volatility in OCI may indeed influence the auditor’s inherent risk assessment.  Other studies have shown that investors do not seem to accurately incorporate volatility of OCI in pricing, so it is an empirical question whether auditors can incorporate it into their risk assessment.

    Design/Method/ Approach:

    The authors use a sample of S&P 500 firms from 2002 to 2006 and supplement this sample with a comparable sample from 2008 to reinforce their findings.  Data on OCI was hand collected from the SEC’s EDGAR database and combined with financial information from Compustat and auditor data from Audit Analytics.  The authors exclude financial sector firms, resulting in a final sample of 1,858 firm-year observations.


    The authors find:

    • A positive relationship between volatility in OCI volatility and audit fees, with or without controlling for other factors that influence audit fees.
    • Changes in OCI have predictive power for audit fees above and beyond changes in net income, suggesting items that flow through OCI are incorporated into audit pricing.
    • When breaking out OCI volatility into its components, the authors find audit fees incorporate volatility in foreign currency translation, available-for-sale investments, and minimum pension liabilities.  Audit fees increase as volatility of these items increases.
    • Audit fees have a negative relationship with volatility of cash flow hedges.  These hedges offset risk in the underlying prices; therefore, volatility in the hedges is indicative of firms successfully hedging against risk.  These firms pay lower audit fees.
    Client Acceptance and Continuance, Engagement Management
    Audit Fee Decisions, Audit Fees & Fee Negotiations