Fair Value, Historical Cost model, and Audit Fees: Evidence from Investment Properties

Abstract

This study examines the effect of fair value model versus historical cost model for investment property on audit fees. Using China’s real state firms data from 2007-2014, controlling for other determinants of audit fees, this study finds that audit fees are higher for firms reporting investment property at the fair value model relative to those reporting investment property at the cost model. This study also finds that firm reporting investment properties at the fair value located in the cities with active markets leads to lower audit fees than those located in the remote areas with less active markets. This study does not find that investment property valued under the fair value model audited by industry specialist leads to higher audit fees than investment property audited by non-industry specialist. Finally, this study provides evidence that firms use external appraisers to monitor the fair value estimates of investment properties leads low audit fees. Overall, our result suggests that fair value measurements leads to lower audit fees in the developed regions relative to less developed regions.