How do auditors view managers' disclosure strategy? The effect of earnings and guidance on audit fees

This paper examines whether firms' earnings forecasting policy is associated with their audit fees. We find that firms that are more likely to issue earnings forecasts, and those that issue a greater number of earnings forecasts in a particular year, pay higher audit fees. Furthermore, we find that firms that make more precise forecasts also face higher audit fees. Finally, among the forecasting firms, we find some evidence that audit fees are higher when management earning forecasts are more optimistically biased. These results are consistent with the argument that auditors view clients that make earnings forecasts to be associated with a greater risk of earnings management and litigation. These results highlight a potential cost of this particular form of voluntary disclosures.