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Article
Publication date: 1 September 2017

Benjamin W. Hoffman and Albert L. Nagy

This paper aims to investigate whether the expected implementation of Section 404(b) of the Sarbanes-Oxley Act (SOX 404(b)) (the integrated audit requirement) caused…

Abstract

Purpose

This paper aims to investigate whether the expected implementation of Section 404(b) of the Sarbanes-Oxley Act (SOX 404(b)) (the integrated audit requirement) caused auditors to discount their audit fees for non-accelerated filers in anticipation of expected increased future economic rents (DeAngelo, 1981) from those clients.

Design/methodology/approach

This paper predicts that auditors charged their non-accelerated filer clients lower audit fees during the years 2005-2007 (in anticipation of increased expected future economic rents from the implementation of the SOX 404(b) requirement) compared with the years 2010-2012 (when it had been determined that non-accelerated filers were permanently exempt from complying with SOX 404(b)). The authors use ordinary least squares regression analysis to examine whether audit fees increased significantly for non-accelerated filers after the permanent exemption announcement.

Findings

The results show a significant positive association between the exemption announcement and audit fees, supporting the theory that auditors discounted their audit fees for non-accelerated filers in the pre-exemption announcement period. This finding is robust when sensitivity tests are used.

Practical implications

The findings of audit fee discounting literature related to the post-SOX period are mixed. This study adds to this stream of literature by supporting the notion that audit fee discounting is being practiced post-SOX and is a potential unintended consequence of SOX 404 and the exemption. Thus, investors will be interested in the results of this paper when making their investment decisions with regard to non-accelerated filers.

Social implications

The results of this paper show that, even in the post-SOX environment, auditors will employ the use of audit fee discounting if a change in regulation incentivizes it. This commentary on the present state of the audit pricing market should be of interest to audit pricing policymakers.

Originality/value

This paper is one of the first to study audit fee discounting outside the realm of initial audit engagements.

Details

Managerial Auditing Journal, vol. 32 no. 7
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 11 September 2017

Fakhroddin MohammadRezaei and Norman Mohd-Saleh

The purpose of this paper is to examine the impact of auditor switching on audit fee discounting in Iran. The increased competition in the Iranian audit market following…

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Abstract

Purpose

The purpose of this paper is to examine the impact of auditor switching on audit fee discounting in Iran. The increased competition in the Iranian audit market following audit market liberalization in 2001 has resulted in a rapid increase in auditor switching and reduces the relative bargaining power of auditors compared to the clients. It is expected that auditor switching results in fee discounting because the relative bargaining power of an auditor (client) is likely to be at the minimum (maximum) point during the initial period of engagement. Since the increased bargaining power of a client in initial year seems to be different in the case of different type of auditor switching (from a state auditor to a private and from a private auditor to another), the magnitude of fee discounting is expected to be different.

Design/methodology/approach

The objective is tested using a sample of 1,022 firm-year observations between 2001 and 2010. This study applies the multivariate regression model using the first difference specification of audit fee as a dependent variable.

Findings

Multivariate analysis reveals that auditor switching results in 14 percent of fee discounting. In addition, the results show that 18 and 13 percent of fees discounting during the initial year of engagement arise from cases of auditor switching involving a change from state auditors to private auditors, and a change from one private auditor to another, respectively. The findings support bargaining power view explanation in relation to audit fees discounting in initial year engagement.

Originality/value

This study is the first to examine the impact of auditor switching (and analyzed different types of auditor switching) on audit fee discounting using the bargaining power view.

Details

Asian Review of Accounting, vol. 25 no. 3
Type: Research Article
ISSN: 1321-7348

Keywords

Abstract

Details

Rutgers Studies in Accounting Analytics: Audit Analytics in the Financial Industry
Type: Book
ISBN: 978-1-78743-086-0

Article
Publication date: 3 February 2014

Claus Holm and Frank Thinggaard

The authors aim to exploit a natural experiment in which voluntary replace mandatory joint audits for Danish listed companies and analyse audit fee implications of using…

1968

Abstract

Purpose

The authors aim to exploit a natural experiment in which voluntary replace mandatory joint audits for Danish listed companies and analyse audit fee implications of using one or two audit firms.

Design/methodology/approach

Regression analysis is used. The authors apply both a core audit fee determinants model and an audit fee change model and include interaction terms.

Findings

The authors find short-term fee reductions in companies switching to single audits, but only where the former joint audit contained a dominant auditor. The authors argue that in this situation bargaining power is more with the auditors than in an equally shared joint audit, and that the auditors' incentives to offer an initial fee discount are bigger.

Research limitations/implications

The number of observations is constrained by the small Danish capital market. Future research could take a more qualitative research approach, to examine whether the use of a single audit firm rather than two has an effect on audit quality. The area calls for further theory development covering audit fee and audit quality in joint audit settings.

Practical implications

Companies should consider their relationship with their auditors before deciding to switch to single auditors. Fee discounts do not seem to reflect long-lasting efficiency gains on the part of the audit firm.

Originality/value

Denmark is the first country to leave a mandatory joint audit system, so this is the first time that it is possible to study fee effects related to this.

Details

Managerial Auditing Journal, vol. 29 no. 2
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 19 April 2013

Bill Dimovski

This is the first REIT paper to seek to empirically examine potential influencing factors on the discounts and underwriting fees of Australian REIT rights issues.

Abstract

Purpose

This is the first REIT paper to seek to empirically examine potential influencing factors on the discounts and underwriting fees of Australian REIT rights issues.

Design/methodology/approach

Using a methodology similar to Owen and Suchard, and Armitage, a sample of 62 A‐REIT rights issues during 2001‐2009 is analyzed. A variety of potential factors influencing discounts and underwriting fees are explored.

Findings

Over A$20 billion was raised by A‐REIT rights issues during 2001‐2009 (this around three times that raised through A‐REIT initial public offerings during the same period). The mean offer price was discounted around 9.5 percent from the current market price and underwriting fees averaged 2.9 percent of gross proceeds raised – both substantially less than for industrial rights issues. The standard deviation of daily returns for the past year appears to influence the percentage discount offered to subscribers. This volatility was particularly noticeable in 2008 and 2009, during the global financial crisis, where new issues were discounted substantially so as to raise equity to repay debt. This historical risk variable appears paramount in determining the discounts to subscribers and fees to underwriters.

Practical implications

A‐REITs seeking to minimize the discounts offered to subscribers and to minimize their underwriting costs with rights issue equity capital raisings must first minimize their share price volatility.

Originality/value

This paper adds to the international costs of capital raising literature of REITs by examining such costs with A‐REIT rights issues and is the first paper to examine factors influencing these costs.

Details

Journal of Property Investment & Finance, vol. 31 no. 3
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 30 August 2013

Effiezal Aswadi bn Abdul Wahab and Mazlina Mat Zain

The purpose of this study is to investigate whether fees discounting exists in Malaysia and whether such a practice impairs auditor independence.

1773

Abstract

Purpose

The purpose of this study is to investigate whether fees discounting exists in Malaysia and whether such a practice impairs auditor independence.

Design/methodology/approach

The paper employs a panel least regression of 3,003 firm‐year observations of firms listed on Bursa Malaysia for the period between 1996 and 2006. The paper collects the audit fees, auditor's identity and other firms' characteristics data from Compustat Global, Stock Performance Guide Handbook and annual reports. The annual reports are obtained from the Bursa Malaysia's web site and Mergent Online database. The paper removes initial public offering (IPO) firms, firms involved with PriceWaterhouse and Coopers and Lybrand merger and firms forced to switch auditor during the Arthur Andersen implosion in 2002.

Findings

The analysis shows that price cutting occurs on initial audit engagements even when audit fees are publicly disclosed. Further tests suggest that the auditor recovers the “sunk cost” invested during the initial engagement only during the fourth year of their audit engagement. Further, the paper finds price recovery is not significantly different from normal audit fees charged for the continuing audit engagement during the first three year period of engagement, as the audit firms will only recover the cost on the fourth year of engagement. Overall, this finding has an important implication for regulators, as it suggests that price recovery due to “lowballing” does not impair auditor independence.

Research limitations/implications

Due to data unavailability, this study does not consider other unique factors that determine audit fees in Malaysia. Among them are political connections, institutional investors and ethnicity.

Originality/value

This is the first study that examines audit pricing during an initial engagement in Malaysia.

Details

Managerial Auditing Journal, vol. 28 no. 8
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 13 February 2017

Yutao Li and Yan Luo

This study examines whether auditors’ pricing decisions on managerial ability are affected by auditor litigation risk (financial distress or financial crisis), auditor’s…

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Abstract

Purpose

This study examines whether auditors’ pricing decisions on managerial ability are affected by auditor litigation risk (financial distress or financial crisis), auditor’s familiarity with their client or regulatory changes in the post-Sarbanes–Oxley Act of 2002 (SOX) era.

Design/methodology/approach

Building on the extant audit fee literature, this study constructs an audit fee determinants model to examine how context affects auditors’ pricing of managerial ability.

Findings

Auditors offer a larger fee discount to more able client management teams when auditors face lower litigation risks or are more familiar with the client. Furthermore, managerial ability has a more pronounced effect on audit fees in the post-SOX era when managers are mandated to play more active roles in financial reporting (i.e. certification of financial statements required by SOX 302).

Research limitations/implications

Based on the audit risk model (Simunic, 1980), Krishnan and Wang (2015) show that the managerial ability of an audit client is relevant and important to auditors’ pricing decisions. This study demonstrates that managerial ability exhibits a non-linear relationship with audit fees and contextual factors, such as litigation risk, and that auditors’ familiarity with managers can alter the negative association between audit fees and managerial ability. This study extends Krishnan and Wang’s study by offering additional insights into auditors’ use of soft information such as managerial ability. Furthermore, the findings add to the literature on the impact of SOX on audit fees by suggesting that SOX has not only increased overall audit fees (Ghosh and Pawlewicz, 2009; Huang et al., 2009), it has also increased auditors’ price sensitivity to soft information (e.g. managerial ability).

Practical implications

This study provides insights for audit firms and client companies who are interested in understanding audit fee-pricing decisions. The findings also suggest that auditors need to be sensitive and responsive to various contextual factors when making pricing decisions.

Originality/value

Previous studies have not addressed the non-linear relationship between audit fees and soft information about managerial ability.

Details

Review of Accounting and Finance, vol. 16 no. 1
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 26 August 2014

Jackson Galloway and Nicole Griffin

To review SEC enforcement action taken against an adviser over: failure to grant advisory fee breakpoint discounts based on the aggregation of related accounts requested…

Abstract

Purpose

To review SEC enforcement action taken against an adviser over: failure to grant advisory fee breakpoint discounts based on the aggregation of related accounts requested by clients and related deficiencies in the adviser’s administration of the account aggregation feature.

Design/methodology/approach

Review and summarize the SEC’s finding’s regarding the adviser’s advisory fee breakpoint discount program, deficiencies in the program identified in SEC examinations, resulting violations of the Investment Advisers Act and its rules, the adviser’s remedial efforts and undertakings, and the sanctions imposed.

Findings

This settlement provides an important reminder for registered investment advisers of the need to fully address deficiencies identified in SEC examinations and of the attention paid by SEC inspection staff to client fees as a core examination area.

Originality/value

Practical explanation from experienced financial services lawyers.

Details

Journal of Investment Compliance, vol. 15 no. 3
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 30 July 2018

Martin Falk and Miriam Scaglione

The purpose of this paper is to provide a first evaluation of the effectiveness of the early bird discount on ski lift tickets by estimating the impact on hotel overnight…

Abstract

Purpose

The purpose of this paper is to provide a first evaluation of the effectiveness of the early bird discount on ski lift tickets by estimating the impact on hotel overnight stays of the Saas-Fee destination.

Design/methodology/approach

The difference-in-differences (DID) approach is used to compare winter sport destinations with and without the price reduction before and after the introduction of the price discount. The sample is composed of the 54 largest Swiss winter sport destinations for the seasons 2013/2014 and 2016/2017.

Findings

DID estimations show an increase in overnight stays of Swiss residents by 50 per cent as compared to the control group. Quantile regression estimations for the conditional upper part of the overnight stays distribution reveal a lower average treatment effect of 38 per cent. However, DID estimates for total overnight stays (domestic and foreign) are much smaller – about 17 per cent – indicating that the price reductions are not effective in attracting foreign visitors. Results are not sensitive when taking into account a large number of control variables (elevation, size and snow making capacity).

Research limitations/implications

As tourists visiting winter sport destinations are interested in a mix of activities, lift ticket revenues or number of skier days should be used as an alternative outcome measure.

Practical implications

As positive effects on local tourism demand are mainly limited to Swiss tourists, such price strategies should be carefully considered. In the long term, the skiing market will stagnate or even shrink for several reasons (population ageing, climate change and changes in leisure preferences).

Originality value

This paper provides a first quantitative evaluation of price discounts in tourism research. Knowledge about the discounts and consumers reactions to sales promotions are of great interest to marketing managers in today’s competitive ski market.

Details

Tourism Review, vol. 73 no. 4
Type: Research Article
ISSN: 1660-5373

Keywords

Article
Publication date: 14 June 2011

Lucia Gibilaro and Gianluca Mattarocci

The aim of the paper is to study the degree of independence of customers' portfolio concentration measure from the pricing policy adopted by rating agencies.

Abstract

Purpose

The aim of the paper is to study the degree of independence of customers' portfolio concentration measure from the pricing policy adopted by rating agencies.

Design/methodology/approach

The paper tests different measures of customers value (revenues or profits and customer lifetime value) and different concentration measure (top customer or Herfindahl‐Hirschman index) on the customers' portfolio of rating agencies in the time period 1999‐2008. Simulating different pricing models, the paper tests the sensitivity of these measures to discounted fees applied to best customers and identifies measures that are more and less sensitive to the discount applied.

Findings

Concentration measures that consider all the customers' portfolios and look at both cost and revenues related to the service on a multi‐period time horizon (CLV) are less sensitive to the discount policy respect to the others.

Research limitations/implications

Results point out some opportunities related to apply more complete approaches defined by marketing science on the financial service industry in order to construct better measures for the economic independence. The paper works only with publicly available data and more details about the fee applied to each customer could increase the significance of the results achieved.

Practical implications

The paper contributes to the current debate on the economic independence of rating agencies stressing the opportunity of rethinking the measures on economic independence that are currently considered by supervisory authorities.

Social implications

The paper is the first empirical application of standard marketing concepts of customers' concentration measure to the rating industry.

Originality/value

The paper studies the pricing policies adopted by ratings agencies.

Details

International Journal of Bank Marketing, vol. 29 no. 4
Type: Research Article
ISSN: 0265-2323

Keywords

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