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Offshore trading activities and audit fees: a textual approach

Janus Jian Zhang (School of Accounting and Finance, The Hong Kong Polytechnic University, Kowloon, Hong Kong)
Yun Ke (Department of Accounting, Brock University Goodman School of Business, St. Catharines, Canada and Department of Accounting and Information Systems, University of Texas at El Paso, El Paso, Texas, USA)
Shuo Li (Department of Accounting, College of Business and Economics, Western Washington University, Bellingham, Washington, USA)
Yanan Zhang (School of Accountancy, Central University of Finance and Economics, Beijing, China)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 31 January 2020

Issue publication date: 1 April 2020

482

Abstract

Purpose

The purpose of this paper is to investigate whether and how auditors’ pricing decisions are affected by their clients’ offshore trading activities, which are comprehensively measured through a textual analysis technique.

Design/methodology/approach

The authors identified a sample of 32,264 firm-year observations from publicly listed firms in the US during 2004 to 2015. The authors then used multivariate regressions to examine the effect of offshore trading activities on audit fees. In the regression models, the authors also control for a series of factors that are documented to influence audit pricing.

Findings

The authors find that offshore trading activities are positively associated with audit fees, suggesting that offshore activities are likely to increase a client firm’s business risk and/or the extent of client complexity. The authors also find that auditors charge higher audit fees only to firms purchasing inputs produced by their own assets overseas but not to firms buying inputs produced by local firms overseas. Moreover, the association between offshore trading activities and audit fees is more pronounced for offshore activities that are in countries with high trading centrality, for Big 4 auditors, or for auditors with industry expertise.

Originality/value

This paper extends the literature on the consequences of offshore activities by providing evidence on how auditors react to offshore activities. Moreover, it contributes to the audit fee literature. Prior studies largely focus on client-level determinants, while this study complements this line of literature by identifying firm’s offshore activities as an important risk indicator, which is perceived by auditors in their pricing decisions. A firm’s offshore activity is unique because the risk implication of the offshore activities depends not only on factors within the firm, but also on factors outside the firm in foreign nations.

Keywords

Citation

Zhang, J.J., Ke, Y., Li, S. and Zhang, Y. (2020), "Offshore trading activities and audit fees: a textual approach", Managerial Auditing Journal, Vol. 35 No. 4, pp. 549-573. https://doi.org/10.1108/MAJ-01-2019-2157

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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