Recent studies indicate dividends are associated with higher‐quality earnings. Our study extends the literature by examining whether dividends' information is associated with auditors' assessment of their clients' earnings quality. Our results show that auditors charge lower fees to dividend‐paying clients than to nondividend‐paying clients and the average fee discount ranges from 6.0 to 10.6 percent. More importantly, we find dividends have an interactive effect with respect to earnings persistence and earnings manipulation: the negative association between audit fees and earnings persistence is more pronounced for dividend firms; and dividend payouts mitigate the positive relation between earnings manipulation risk and audit fees. Our results imply dividends reduce audit risk by enhancing clients' earnings quality information. We contribute to the literature by showing that auditors reflect the earnings quality information content of firms' dividend policies in their pricing decisions.

This study examines the extent to which audit clients successfully engage in internal control opinion shopping activities and whether audit market competition appears to facilitate those activities. Regulators have long been concerned about the impact of both audit market competition and opinion shopping on audit quality. We adopt the framework developed in Lennox (2000) to construct a proxy to measure the tendency that clients engage in internal control opinion shopping activities. Our empirical results suggest that clients are successful in shopping for clean internal control opinions. In addition, we find evidence that internal control opinion shopping occurs primarily in competitive audit markets. Finally, our results indicate that among auditor dismissal clients, opinion shopping is more likely to occur when dismissals are made relatively late during a reporting period and when audit market competition is high. Our findings have implications for the current policy debate regarding audit quality and audit market competition.