Lean means less: operational leanness and audit fees in US firms

Purpose This study examines whether and how operational leanness affects audit fees. We propose that lean operations, characterized by reduced inventories, streamlined workflows, and stronger control systems, lower both audit risk and transaction complexity, thereby reducing auditors' expected effort and engagement risk and consequently, audit fees. Design/methodology/approach Using a large panel of 58,279 US firm-year observations from 2001 to 2024, we investigate the association between operational leanness and audit fees. We operationalize leanness using deviations in inventory levels relative to industry norms and audit pricing using audit fees scaled by sales and their logarithmic values. We also employ mediation analyses, alternative measures, and instrumental variable approaches to address potential endogeneity concerns and uncover underlying mechanisms. Findings We document a robust negative association between operational leanness and audit fees. Mediation analyses reveal that this relationship unfolds through two main channels: (1) reduced audit effort, proxied by shorter audit lags and (2) fewer inventory-related internal control weaknesses. The negative association between operational leanness and audit fees is stronger for firms audited by industry specialists, those with high-quality information environments, more complex firms, and those led by female CEOs. Practical implications Our findings suggest that lean operations function as a credible signal of lower audit risk. This has implications for auditors, who can more efficiently tailor their procedures, for managers, who can reduce audit costs through operational discipline and for policymakers concerned with the efficiency and affordability of assurance services. Originality/value This study provides the first large-sample evidence that operational leanness is an important determinant of audit fees. By integrating the audit risk model, transaction cost economics, and signaling theory, we bridge the auditing, corporate governance and operations management literature and reconceptualize operational efficiency as a strategic attribute with direct implications for audit pricing.