This study investigates the economic auditor–client dependency issue by
examining the association between abnormal audit fee pricing and audit
quality. Our study is the first to analyze this phenomenon empirically for the
institutional setting of German IFRS firms by using a sample of 2,334 firm-
year observations for the period from 2005 to 2010. Our empirical results
demonstrate that positive abnormal audit fees are negatively associated with
audit quality and imply that the audit fee premium is a significant indicator
of compromised auditor independence due to economic auditor–client bonding.
Audit fee discounts generally do not lead to a reduced audit effort, or
respectively, audit quality is not impaired when client bargaining power is
strong. The association of positive abnormal audit fees and audit quality is
robust to different audit quality surrogates such as absolute discretionary
accruals, financial restatements, and meeting or beating analysts’ earnings
forecasts
