Prior studies document that investors do not fully understand the differential reliability of accruals and cash flows. This study explores the extent to which audit fees incorporate the differential reliability of accruals and cash flows by investigating three questions: (1) Do audit fees distinguish accruals from cash flows? (2) Does the relationship between audit fees and accruals/cash flows change after the Sarbanes-Oxley Act of 2002? (3) Is the potential increase in audit fees after SOX associated with improved accrual reliability? This study reports the following findings. First, during the pre-SOX period, audit fees do not impound the differential reliability of accruals and cash flows. After SOX, however, audit fees for accruals are significantly greater than audit fees for cash flows. Second, across the pre- and post-SOX period, audit fees increase substantially for accruals, but not for cash flows. Third, the earnings persistence of accruals, but not of cash flows, increases significantly after SOX. Finally, the increase in audit fees is positively associated with the increase in accrual persistence, and such evidence is more pronounced for firms not identified with material weaknesses in internal controls.;Keywords: earnings persistence; cash flows and accruals; inherent risk; accounting information reliability, audit fees, Sarbanes-Oxley Act of 2002;Data Availability: Data used in this study are available from public sources.
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