Abstract

In this paper, we examine how auditors respond in terms of audit fees, to cash holdings that are a growing concern in corporate America. Holding everything else constant, we find that cash holdings are positively related to audit fees, reflecting that auditors’ react to the level of firms’ cash holdings, which is a source of agency costs.

Additionally, our results indicate that cash holdings in firms with low growth opportunities induce auditors to raise audit fees. We also find that the audit fees-cash holdings relationship differs (1) between firms that are financially constrained and unconstrained and (2) between firms with high hedging and low hedging needs.

In addition, we assess how corporate governance quality influences audit fee sensitivity to cash holdings under varying dimensions of growth opportunities, financial constraints and hedging needs and we find evidence that, on average, cash holdings in the presence of higher/lower shareholders’ rights lead to higher/lower audit fees.