Corporate Innovation and Audit Fees

Economic literature documents that the rate of investment in intangibles has exceeded tangible assets in the U.S. private sector since the mid-1990s. However, whether or how the internally developed intangibles affect auditors' risk assessment and work has received little attention. This study investigates whether the features of corporate innovation are associated with audit fees and going-concern opinions. Using patent-based metrics to measure the features of innovation, we find that the complexity of corporate innovation is positively associated with audit fees. Firms with higher innovation efficiency (more aged patent portfolio) are associated with lower (higher) audit fees. Furthermore, firms with higher innovation complexity or higher proportions of intangibles are more likely to receive going-concern opinions while those obtaining patents timelier are less likely to receive going-concern opinions. Overall, the results suggest that auditors reasonably incorporate innovation risk into their pricing and going-concern decisions, even though most of the innovation outputs are not captured and reported in current accounting systems