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1 – 10 of over 10000
Article
Publication date: 28 October 2022

Songsheng Chen, Michel Magnan, Zhili Tian and Li Yao

This paper aims to investigate the effect of prior years’ audit adjustments, a proxy for auditors’ private information regarding the persistence of their clients’ audit

Abstract

Purpose

This paper aims to investigate the effect of prior years’ audit adjustments, a proxy for auditors’ private information regarding the persistence of their clients’ audit risk, on audit pricing in the current year.

Design/methodology/approach

The authors use unique data sets of audit adjustments and audit fieldwork days from China, and a regression approach, to test their hypothesis.

Findings

The authors find that larger previous audit adjustments are associated with higher current-year audit fees, which is partially attributed to increased audit effort. The authors further document that the results are more pronounced when audit adjustments are consistently made in the same direction or more recent; in these cases, a larger percentage of the total effect is also attributable to the risk premium, instead of audit effort. Finally, the authors find that the effect of previous audit adjustments on current-year audit fees is stronger for firms with younger chief executive officers and specialist auditors.

Originality/value

To the authors’ best knowledge, they are the first to test the implication of auditors’ private information in setting audit fees. In addition to demonstrating that audit fees consist of a risk premium and a component to cover related costs, the authors further show variations in the relative importance between costs and risk premium under various contexts.

Details

Managerial Auditing Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0268-6902

Keywords

Open Access
Article
Publication date: 14 September 2022

Chinedu Francis Egbunike, Ikponmwosa Michael Igbinovia, Kenebechukwu Jane Okafor and Lucy Cecilia Mmadubuobi

The study investigated the relationship between residual audit fee and real income smoothening, proxied as real operating cash flow and production expenditure smoothing of…

Abstract

Purpose

The study investigated the relationship between residual audit fee and real income smoothening, proxied as real operating cash flow and production expenditure smoothing of non-financial firms in Nigeria.

Design/methodology/approach

The study relied on secondary data from annual financial statements of 75 firms in the non-financial sector from 2010 to 2019. The study estimated the residual audit fee using a modified model from several contexts to suit the Nigerian environment. The hypotheses were tested using the dynamic panel GMM estimation procedure.

Findings

The results showed a significant negative effect of residual audit fee on (real) operating cash flow smoothing and production expenditure smoothing of non-financial firms. The control variables showed mixed effects for the industry-related (firm size and profitability), auditor attribute (audit quality and audit report lag) and the board related (board size and board independence).

Research limitations/implications

The firms included in the analysis were selected based on data availability from MachameRatios® and the occurrence of missing values for some of the variables used in the various estimation models may bias results.

Practical implications

The study identifies the nexus between RAF and real earnings management practices of non-financial firms; and shows the implication of fee payment to the overall conduct of the audit. More so, the mixed findings from the CVs suggest that in the context of developing economies, shareholders and capital markets regulators should be watchful of residual audit fees and utilise it as a gauge for audit quality and also an indicator of opportunism and weak internal control in the firm in the future assessments.

Social implications

The implication of the study stems from its relevance to the capital market stability and the potential negative disastrous effect of corporate failure from earnings management practices.

Originality/value

The study develops a newly residual audit fee model to explore the effect of RAF on real income smoothing rather than the widely used models from prior literature; secondly, the focus on real activities manipulation may present additional evidence that applies to developing countries rather the widely used accrual measurement technique from an economic bonding perspective.

Details

Asian Journal of Accounting Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2443-4175

Keywords

Article
Publication date: 20 July 2022

Tajudeen John Ayoola

This study aims to examine the mediating role of audit seasonality on the association between audit fees and audit quality in Nigerian deposit money banks.

Abstract

Purpose

This study aims to examine the mediating role of audit seasonality on the association between audit fees and audit quality in Nigerian deposit money banks.

Design/methodology/approach

The sample comprises 14 banks with annual financial statements between 2008 and 2020. The modified Baron and Kenny’s (1986) causal mediation model by Iacobucci et al. (2007) through the use of bootstrapped partial least square structural equation modelling and Sobel’s (1986) z-test is adopted to achieve this study’s objective.

Findings

The results of the causal mediation analysis show evidence of a fully mediating role of audit seasonality in the association between audit fees and audit quality in the Nigerian banking industry.

Research limitations/implications

This study extends the body of knowledge by demonstrating how audit fees influence audit quality through audit seasonality as a mediator in line with the job demands-and resources and conservation of resources theories. Regulatory authorities should be wary of policies that will further increase the workload of already burdened personnel of audit firms as the uniform fiscal year-end of 31 December introduced in the Nigerian banking system has unintended consequences on audit fees and audit quality.

Originality/value

To the best of the author’s knowledge, this is one of the first studies to provide evidence on the indirect association between audit fees and audit quality.

Details

Journal of Financial Reporting and Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 15 July 2022

Maryam Firoozi and Michel Magnan

This study aims to investigate how audit committee members’ geographical location relative to corporate headquarters affects audit fees. The motivation for the paper rests…

Abstract

Purpose

This study aims to investigate how audit committee members’ geographical location relative to corporate headquarters affects audit fees. The motivation for the paper rests on the observation that regulatory and market trends have significantly affected the composition of boards of directors and audit committees. To ensure that audit committees play their monitoring role, regulations now require directors’ independence and some level of financial expertise. The need to find directors who meet these requirements, as well as the advent of globalization and technological improvements lead firms to expand their reach when looking for directors.

Design/methodology/approach

The authors use a sample of 1,517 firm-year observations of Canadian firms from 2008 to 2017. The study relies on multivariate analyses.

Findings

The results show that, among nonlocal audit committee members, the presence of foreign directors is associated with higher audit fees. In contrast, other nonlocal audit committee members do not have a differential impact on audit fees. This effect is more prevalent in large firms. Moreover, having a foreign chair of the audit committee as well as foreign audit committee members who are not accounting experts appear to accentuate the increase in audit fees. A possible explanation for the finding is that, from the supply side, auditors assign a higher risk to firms with a higher percentage of foreign audit committee members. Alternatively, from the demand side, firms with foreign audit committee members may ask for more audit effort. Further analysis indicates that having a higher percentage of foreign audit committee members is associated with a higher likelihood of restatements, an indication of low audit quality.

Originality/value

To the best of the authors’ knowledge, this study is the first to document that auditors price the location of audit committee members and consider it when planning for their audit.

Details

Managerial Auditing Journal, vol. 37 no. 8
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 18 August 2022

Jayalakshmy Ramachandran, Yezen H. Kannan and Samuel Jebaraj Benjamin

This paper aims to investigate auditors’ pricing of excess cash holdings and the variation in their pricing decisions in light of the precautionary motives of cash…

Abstract

Purpose

This paper aims to investigate auditors’ pricing of excess cash holdings and the variation in their pricing decisions in light of the precautionary motives of cash holdings and certain firm-specific conditions and during periods of crisis.

Design/methodology/approach

The authors conduct the two-stage-least-squares multivariate analysis using a sample of publicly listed non-financial US firms for the period 2003 to 2021 (42,413 firm-year observations).

Findings

The findings show a significant positive relationship between excess cash and audit fee. Next, the authors find that audit pricing of excess cash is significantly higher for firms with lower financial constraints. However, the authors do not find evidence to suggest that auditors price excess cash significantly higher for firms with lower hedging needs. In additional analysis, the authors find evidence to suggest that auditors charge significantly less for excess cash in firms that report financial loss and firms operating in industries with high litigation risk. The additional analysis also reveals excess cash is not positively and significantly priced by auditors as a result of the global financial crisis and Covid-19 pandemic.

Originality/value

Most researchers have analyzed excess cash holding from the perspective of managers, i.e. agency conflict or managerial prudence, while somewhat neglecting auditors’ perception of the embedded risk of excess cash holdings. The authors provide new insights on auditors’ perspective of excess cash holding and identify certain factors/situation/conditions that cause variation in the audit fee premium. The findings offer useful insights for managers and shareholders who are interested in assessing the effects of excess cash holdings policies on the audit fee premium.

Details

Meditari Accountancy Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2049-372X

Keywords

Article
Publication date: 9 August 2022

Saeed Rabea Baatwah, Ehsan Saleh Almoataz, Waddah Kamal Omer and Khaled Salmen Aljaaidi

This study investigates the consequences of the key audit matter (KAM) disclosure requirement by considering two salient audit proxies: audit fees and audit report lag…

Abstract

Purpose

This study investigates the consequences of the key audit matter (KAM) disclosure requirement by considering two salient audit proxies: audit fees and audit report lag. This investigation is relevant because most auditors worldwide are required to expand their audit report including discussion on key matters faced in the audit engagement. However, the emerging literature on the implications of KAM is inconclusive.

Design/methodology/approach

Using a distinctive dataset of 601 year-observations for firms listed on the Omani capital market over 2012–2019, this study employs pooled panel data regression with robust standard error.

Findings

Results indicate that auditors increased their fees considerably during the period of KAM but substantially shortened audit report lag. Conversely, using the KAM period as a sample, the authors find marginal or insignificant evidence for the effect of the number of KAM on both proxies. In additional analyses, this study shows that entity-level risk KAM is associated with higher fees and shorter audit report lag, while KAM related to account-level risk does not have the same effect. Interestingly, it is observed that KAM disclosure is strongly associated with higher fees and high-quality audit even when the auditors issue their report in a shorter time.

Originality/value

This study contributes to the limited research examining the consequences of KAM in emerging markets. It is also the first to show that KAM is associated with shorter audit report lag.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 15 July 2022

Maretno A. Harjoto and Indrarini Laksmana

The purpose of this study is to examine the impact of the 2020 COVID-19 lockdown on the audit fees and audit delay of audit client firms located in 52 countries and audit

Abstract

Purpose

The purpose of this study is to examine the impact of the 2020 COVID-19 lockdown on the audit fees and audit delay of audit client firms located in 52 countries and audit firm offices located in 40 countries.

Design/methodology/approach

Using archival audit data from Audit Analytics in the fiscal year 2020, this study examines the impact of the length of COVID-19 lockdown and other public health restrictions, measured by the stringency index (Hale et al., 2021), on audit fees and audit delay using a multivariate regression analysis.

Findings

Based on a sample of 2,726 US firms and 718 non-US firms from 51 different countries outside the USA and audit firm offices in 40 countries during the fiscal year 2020, the authors find that the COVID-19 lockdown and public health restrictions increase audit fees and audit delay. However, non-US firms experience longer audit delay because of the lockdown than their US counterparts. In addition, longer lockdown and greater restrictions increase the audit fees and audit delay of non-US firms with high audit risk at a greater rate than those of US firms with high audit risk.

Practical implications

The results of this study suggest that auditors increase audit fees and have longer audit delay when facing more COVID-19 restrictions. Increased audit fees and audit delay are likely to result from higher perceived audit risk and, consequently, additional audit effort to design new procedures, train staff to use the new procedures and implement them amid the pandemic restrictions. The impact of COVID lockdown and restrictions on audit fees and audit delay are more pronounced for non-US firms with greater audit risk. The results of this study suggest that audit firms should quickly adapt to the evolving audit, risk and financial landscape created by the pandemic.

Originality/value

Using archival audit data and large sample size, this study provides the first empirical evidence of the impact of lockdown and public health restrictions during the first wave of COVID-19 outbreak on audit processes as measured with audit fees and audit delay.

Details

International Journal of Accounting & Information Management, vol. 30 no. 4
Type: Research Article
ISSN: 1834-7649

Keywords

Open Access
Article
Publication date: 28 July 2022

Tatiana Mazza, Stefano Azzali and Andrey Simonov

This study aims to examine whether national industry expertise in Italy is more dominant than local expertise. Prior studies from Australia, USA and UK show that audit fees

Abstract

Purpose

This study aims to examine whether national industry expertise in Italy is more dominant than local expertise. Prior studies from Australia, USA and UK show that audit fees for industry experts are priced at a higher premium at the local level than the national level. These countries have voluntary audit firm rotation, while Italy has mandatory audit firm rotation (MAFR). The authors predict that Italy has a stronger national than local level of industry expertise, to better retain and transfer industry expertise.

Design/methodology/approach

The authors compare audit fee premiums of national industry experts to local levels, using quantitative (multivariate tests) and qualitative (interviews) methodology.

Findings

Using hand-collected audit fees, the authors find that the audit fee premium for industry expertise is greater at the national level than the local level. The authors find corroborating results with audit hours. To provide further support, the authors conduct analysis for a neighboring country that does not have audit firm rotation. Using hand-collected data from Germany, the authors find that audit fee premiums from national industry expertise are no different from local industry expertise.

Originality/value

The present study study has theoretical and practical implications, for European Union countries, which recently adopted MAFR and for countries considering adoption in the future.

Details

Managerial Auditing Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0268-6902

Keywords

Book part
Publication date: 20 October 2015

Matthew A. Notbohm, Jeffrey S. Paterson and Adrian Valencia

Prior research finds evidence that audit quality is positively associated with the joint purchase of tax nonaudit services (NAS) and concludes that jointly provided tax…

Abstract

Prior research finds evidence that audit quality is positively associated with the joint purchase of tax nonaudit services (NAS) and concludes that jointly provided tax services result in audit-related knowledge spillovers that lead to improved audit quality. We extend this line of research. We examine the relation between auditor-provided tax services and restatements and determine whether this relation differs when the auditor is a small or large accounting firm. We also examine whether the Securities Exchange Commission’s restrictions on certain tax consulting practices (SEC, 2006) altered this relation. Specifically, we measure whether the probability of financial statement restatements varies with (1) variation in accounting firm size (measured as PCAOB annually inspected firms versus PCAOB triennially inspected firms), and (2) the joint provision of audit and tax services. We find a negative relation between auditor-provided tax services and restatements which is consistent with prior research. We also find that this relation is significantly more negative when the auditor is a small accounting firm. Finally, we find that the lower probability of a restatement associated with the joint provision of audit and tax services persists regardless of auditor size after the SEC-imposed restrictions on certain tax consulting services in 2006. Our study provides evidence that accounting firms, and particularly small accounting firms, benefit from knowledge spillovers when jointly providing audit and tax services and these benefits lead to improved audit quality. Prior research concludes that large auditors provide higher audit quality and that the provision of tax services improves audit quality. Our results provide evidence that audit quality improvements are greater for small auditors and their clients. This improvement narrows that audit quality gap between large and small auditors. We do not find evidence that the SEC’s restrictions on certain tax consulting services altered the relation between audit quality and tax services.

Details

Advances in Taxation
Type: Book
ISBN: 978-1-78560-277-1

Keywords

Article
Publication date: 28 June 2022

Adel Al-Qadasi, Saeed Rabea Baatwah and Waddah Kamal Omer

The worldwide spread of the coronavirus disease 2019 (COVID-19) has significant effects on financial markets and companies, causing an unprecedented level of uncertainty…

Abstract

Purpose

The worldwide spread of the coronavirus disease 2019 (COVID-19) has significant effects on financial markets and companies, causing an unprecedented level of uncertainty in reporting and auditing companies' financial statements. This study explores whether and how COVID-19 affects audit fees.

Design/methodology/approach

Using a sample of 268 firm-year observations from the Omani capital market between 2017 and 2020, the ordinary least squares (OLS) regression with a robust standard error is applied to answer the research question of this study.

Findings

The authors find that the pandemic has a significant and positive association with audit fees and abnormal audit fees. This finding suggests that the threat of risk, complexity and legal liability circumstances resulting from the pandemic can be compensated by charging higher audit fees. In addition, the authors provide evidence that Big4 audit firms are those most responding to COVID-19 by charging higher audit fees. Finally, the authors conclude that large companies are less sensitive to the pandemic.

Practical implications

Users of financial reports and audit firms should anticipate changes in the audit efforts resulting in increased audit fees during COVID-19. Thus, this paper may guide practitioners and businesses in determining the audit fees and associated costs of any potential pandemic.

Originality/value

The study results are among the earliest empirical insights into the effect of COVID-19 on audit fees in Oman.

Details

Journal of Accounting in Emerging Economies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2042-1168

Keywords

1 – 10 of over 10000