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Article
Publication date: 26 July 2021

Bennet Schierstedt and Maarten Corten

This study aims to examine the relationship between family firm characteristics and audit fees. It also examines the extent to which the family name is considered a red…

Abstract

Purpose

This study aims to examine the relationship between family firm characteristics and audit fees. It also examines the extent to which the family name is considered a red flag during the risk assessment of these firm characteristics.

Design/methodology/approach

Using an external panel data set that includes 1,252 firm-year observations of 204 private German firms with a time series from 2010–2016, regression analyses were conducted to test the hypotheses.

Findings

This study’s results indicate that family involvement in management and the supervisory board are negatively related to audit fees, suggesting less demand and supply of audit effort due to lower Type I agency conflicts. Family ownership is found to be positively associated with audit fees due to higher Type II agency conflicts. Moreover, the negative effect of family involvement in management on audit fees becomes weaker if the firm name contains the family name, indicating that it is considered a red flag by auditors during their risk assessment.

Originality/value

Prior studies that examined audit fees in family firms mainly compared family firms to non-family firms. However, auditors are not likely to look at firms in a dichotomous way during their risk assessment, especially as there are numerous definitions of family firms. Instead, they will assess the underlying characteristics regarding management, ownership and governance, although a firm name containing the family name may influence this assessment. This study contributes to the literature by accounting for the heterogeneity of family firms and examining how auditors will assess this heterogeneity.

Details

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

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Article
Publication date: 7 July 2021

Eugenia Yujin Lee and Wonsuk Ha

This study aims to examine how auditors respond to the revelation of clients’ corporate fraud.

Abstract

Purpose

This study aims to examine how auditors respond to the revelation of clients’ corporate fraud.

Design/methodology/approach

This study uses an ordinary least squares estimation to examine how audit fees and audit turnover change after the revelation of corporate fraud.

Findings

After a client discloses fraudulent activities, average audit fees significantly increase due to an increase in audit hours, rather than in audit premiums. Both new and continuing auditors increase audit hours for fraud firms, but only new auditors charge higher audit fees for the increased effort. In addition, when auditors are designated by regulators following the revelation of fraud, audit fees and premiums increase, but audit hours do not. Finally, auditor turnover becomes more frequent after the revelation of fraud. Overall, the findings suggest that auditors update their assessment of audit risks after fraud revelation and, thus, adjust their audit pricing and client acceptance decisions.

Practical implications

The study provides regulators and audit practitioners with insights into how to audit contract characteristics and regulatory intervention (auditor designations) affect auditors’ response to increased audit risks.

Originality/value

The study contributes to the auditing literature and practice by providing evidence on how auditors respond to the revelation of fraudulent activities and how their response depends on their ability to determine audit fees. Moreover, we provide novel evidence that audit contracting characteristics and regulatory requirements result in different responses of auditors toward changes in audit risks.

Details

Managerial Auditing Journal, vol. 36 no. 3
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 6 April 2021

Hanmei Chen, Weishi Jia, Shuo Li and Zenghui Liu

The purpose of this paper is to examine how the concentration of a specific customer type – governmental customer, affects the pricing of audit services in the USA.

Abstract

Purpose

The purpose of this paper is to examine how the concentration of a specific customer type – governmental customer, affects the pricing of audit services in the USA.

Design/methodology/approach

This paper applies a standard audit pricing model by regressing audit fees on governmental customer concentration and other common determinants of audit fees. This paper also adopts an instrumental variable approach and performs propensity-score matched sample analyzes to mitigate the potential endogeneity problem.

Findings

Using data from major customer disclosures of US publicly listed firms from 2000 to 2014, this paper finds that governmental customer concentration is positively associated with audit fees, suggesting that a higher level of governmental customer concentration increases a firm’s audit risks and audit effort. In addition, this paper performs cross-sectional analyzes and show that the association between governmental customer concentration and audit fees is more pronounced for firms with weak internal governance, weak external monitoring and high financial risks.

Originality/value

This paper furthers the understanding of the interactive relationships in supply chain systems and adds new evidence to the literature on customer concentration. Prior studies on customer concentration typically treat all customer types in a uniform manner. To the knowledge, this is the first study that separates governmental customers from other types of customers in an audit pricing setting. The findings highlight the importance of examining governmental customer concentration when assessing a firm’s audit risks and audit fees.

Details

Managerial Auditing Journal, vol. 36 no. 2
Type: Research Article
ISSN: 0268-6902

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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

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Article
Publication date: 8 March 2021

Radwan Hussien Alkebsee, Gao-Liang Tian, Muhammad Usman, Muhammad Abubakkar Siddique and Adeeb A. Alhebry

This study aims to investigate whether the presence of female directors on audit committees affects audit fees in Chinese listed companies. This study also investigates…

Abstract

Purpose

This study aims to investigate whether the presence of female directors on audit committees affects audit fees in Chinese listed companies. This study also investigates whether the audit committee’s gender diversity moderates the relationship between the firm’s inherent situational factors (e.g. audit complexity and firm risk) and audit fees. Finally, this study investigates whether the effect of the audit committee’s gender diversity on audit fees varies with within-country institutional contingencies (e.g. state-owned enterprises [SOEs] vs non-SOEs and firms that are located in more developed regions vs firms that are located in less developed regions)

Design/methodology/approach

This study used the data of all A-share listed companies on the Shanghai and Shenzhen stock exchanges for the period from 2009 to 2015. The authors use ordinary least squares regression as a baseline methodology, along with firm fixed effect, Deference in Deference method, two-stage least squares regression, two-stage Heckman model and generalized method of moments models to control for the possible issue of endogeneity.

Findings

The study’s findings suggest that the presence of female directors on the audit committee improves internal monitoring and communication, which reduce the perceived audit risk and the need for assurances from external auditors. The results also suggest that female directors demand high-quality audits and further assurance from external auditors when the firm is more complex and riskier. In addition, the results suggest that within-country, institutional factors play significant role in shaping the governance role of gender-diverse audit committee.

Practical implications

The study contributes to the agency theory by providing evidence that the interaction between agency theory and corporate governance “board composition” generates an effective monitoring mechanism and contributing to the institutional theory by finding that role of female directors on audit committee varies from context to another. In addition, this study contributes to literature review of gender diversity in the boardroom by finding the economic benefit of having female directors on audit committee. Finally, this study has implications for policy-makers in promoting regulations to legalize women presence on the board, to external auditors in assessing control risk during planning the audit, to those who responsible for appointing audit committee members.

Originality/value

The authors extend earlier studies by providing novel evidence on the relationship between gender-diverse audit committees and audit fees in terms of both the supply- and demand-side perspectives; that female directors moderate the relationship between firm inherent situational factors (e.g. audit complexity and firm risk) and audit fees; and that the effect of audit committees’ gender diversity on audit fees varies with sub-national institutional contingencies.

Details

Managerial Auditing Journal, vol. 36 no. 1
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 3 November 2020

Rateb Mohammad Alqatamin and Ernest Ezeani

This study investigates the association between the estimates of fair value and external auditor's fees.

Abstract

Purpose

This study investigates the association between the estimates of fair value and external auditor's fees.

Design/methodology/approach

Based on a sample of 32 Jordanian financial companies listed on the Amman Stock Exchange (ASE) over the period 2005–2018. We employ random effect models to test our hypothesis.

Findings

We found a positive relationship between audit fees and the proportion of fair value assets, which implies that external auditors are more likely to spend more effort for complex estimates, thereby increasing audit fees. We examined the relationship between audit fees and three levels of fair value inputs and found a positive relationship between the level of effort spent on assessment of higher uncertainty fair value inputs and audit fees. The findings are consistent with the expectation that more audit effort is required in a highly regulated environment due to the possibility of a higher cost of litigation.

Practical implications

The findings of this study could be beneficial for a number of users of financial information, such as investors, regulators, auditors. This group of users might consider the results of this study when they are using a company's financial information, and consequently, better able to make the right decisions.

Originality/value

Although prior studies have researched fair value, no study to date among developing countries has investigated its relationship with audit fees. This study, therefore, provides new empirical evidence that the complexity and risk of fair value estimates significantly influences auditors' motivation to expend additional effort, resulting in higher audit cost.

Details

Journal of Accounting in Emerging Economies, vol. 11 no. 2
Type: Research Article
ISSN: 2042-1168

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Article
Publication date: 31 January 2020

Yosra Mnif Sellami and Imen Cherif

The purpose of this paper is to examine the association between female audit committee representation and audit fees, taking into account their demographic attributes.

Abstract

Purpose

The purpose of this paper is to examine the association between female audit committee representation and audit fees, taking into account their demographic attributes.

Design/methodology/approach

Research hypotheses have been tested by performing both univariate and multivariate analyses based on a sample of 790 firm-year observations from Swedish listed firms, spanning the period 2013-2017.

Findings

Initial finding derived from the empirical analyses provides consistent evidence of a positive association between female audit committee representation and audit fees. Controlling for self-selection bias, this finding holds unchanged. Therefore, female directors are voluntarily appointed to the companies audit committees. Including demographic attributes of women directors sitting in audit committees in the audit fees, models show that increased audit fees is driven by the level of female directors’ professional experience rather than their mere representation. Results from supplementary analysis document that the positive relationship between female audit committee representation and audit fees is more pronounced when the partner in charge of the audit engagement is a female, indicating that women presence on both the demand and supply-side of audit pricing enhance audit quality more importantly than when women are present on only the demand-side position of audit fees.

Originality/value

This study extends beyond recently published literature on the relation between audit committee gender-diversity and audit fees by offering a novel insight on demographic attributes of female directors enabling them to demand higher quality audits, as reflected by increased audit fees.

Details

Managerial Auditing Journal, vol. 35 no. 3
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 August 1992

Tony Brinn, Michael J. Peel and Roydon Roberts

In recent years there has been a growing debate, in the academic, professional and popular literature, on the audit ‘expectation gap’ and the role and independence of the…

Abstract

In recent years there has been a growing debate, in the academic, professional and popular literature, on the audit ‘expectation gap’ and the role and independence of the auditor. As noted by Waller (1991): ‘Much of the criticism of auditors concerns an apparent lack of impartiality. Outsiders feel that independence is compromised… who knows what short cuts are taken by auditors keen to keep “well in” with management for the sake of winning profitable consultancy work to supplement the audit fee?’

Details

Management Research News, vol. 15 no. 8
Type: Research Article
ISSN: 0140-9174

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Article
Publication date: 31 January 2020

Janus Jian Zhang, Yun Ke, Shuo Li and Yanan Zhang

The purpose of this paper is to investigate whether and how auditors’ pricing decisions are affected by their clients’ offshore trading activities, which are…

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.

Details

Managerial Auditing Journal, vol. 35 no. 4
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 7 November 2019

Sheng Yao, Lingling Pan and Zhipeng Zhang

The purpose of this paper is to investigate whether firms with high environmental disclosure have a low possibility of non-standard audit opinions and audit fees and…

Abstract

Purpose

The purpose of this paper is to investigate whether firms with high environmental disclosure have a low possibility of non-standard audit opinions and audit fees and whether this trend is more obvious after than prior to the Measures for the Disclosure of Environmental Information (Measure) implemented in 2008.

Design/methodology/approach

Based on the Measures implemented in 2008, the authors select data for the listed manufacturing firms from 2004 to 2006 (Pre-Measure) and from 2009 to 2011 (Post-Measure) as research samples to investigate the relationships between environmental disclosures, audit opinions and audit fees with difference in difference models. In addition, we also consider the influence of media attention, the polluting industry and internal control on the audit effect of environmental disclosure.

Findings

The results show that the level of environmental disclosure is significantly negatively correlated with the possibility of issuing non-standard audit opinions and audit fees after measure is implemented, especially hard environmental information. Further evidence indicates that the auditing effect of environmental disclosures is stronger on firms that receive less media attention, in firms with better internal controls, and in firms belonging to industries with heavy pollution.

Originality/value

In the Chinese setting, a high level of environmental information disclosures can effectively reduce the audit risk and lead to a high possibility of standard audit opinions and low audit fees. This effect is pronounced after issuing Measure. The conclusions suggest that measure and increasing environmental disclosure have an obvious positive audit effect and that firms should be forced or encouraged to disclose more environmental information from the perspective of auditors in China.

Details

Managerial Auditing Journal, vol. 35 no. 1
Type: Research Article
ISSN: 0268-6902

Keywords

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