Involvement of Component Auditors in Multinational Group Audits: Determinants, Audit Quality and Audit Fees

Greater pricing presume on audit service has been put by the regulations of the auditing and accounting practices for the disclosure of audit fees, since audit fee is directly related to audit quality. However, the audit fees perceived by the client is often different from the amount charged by the auditors. Hence, this study investigated the impact of firm-specific characteristics on audit fees of quoted consumer goods firms in Nigeria using a purposive sampling technique. Secondary data were obtained from annual reports of the companies for the period from 2009-2016. The empirical result from Breusch-Pagan Lagrange Multiplier Test (BP-LM) produced a chi-square value of 13.94 with p-value of 0.0001 indicating that pooled ordinary least squares (OLS) will not be appropriate for the study. The Hausman test showed a chi-square of 23.55 with a p-value of 0.001 indicating that the null hypothesis is strongly rejected. Thus, the only estimate from the fixed effect model was interpreted to explain the relationship between firm-specific characteristics and audit fees of quoted consumer goods firms in Nigeria. The result revealed that auditee size, auditee risk, auditee profitability and IFRS adoption are the firm specific characteristics that impact on audit fees with only auditee size and IFRS adoption being positively related to audit fees while the other factors are negatively related to audit fees. Based on this finding, this study concluded that the firm’s specific factors are the major drivers of audit fees in Nigeria consumer goods firms. This study recommends among others that companies should implement corporate governance principles that address issues relating to board independence and committee sizes to guide activities in the consumer goods sector since profitability behave negatively with audit fees.

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Who Did the Audit? Audit Quality and Disclosures of Other Audit Participants in PCAOB Filings

The Accounting Review ◽

10.2308/accr-50968 ◽

2014 ◽

Vol 90 (5) ◽

pp. 1939-1967 ◽

Cited By ~ 40

Author(s):

Carol Callaway Dee ◽

Ayalew Lulseged ◽

Tianming Zhang

Keyword(s):

Audit Quality ◽

Market Reaction ◽

Audit Fees ◽

Discretionary Accruals ◽

Multivariate Model ◽

Significant Decline ◽

Earnings Response Coefficients ◽

Absolute Value ◽

Earnings Response ◽

First Time

ABSTRACT We empirically test whether audit quality is affected when part of an SEC issuer's audit is outsourced to auditors other than the principal auditor (“participating auditors”). We find a significantly negative market reaction and a significant decline in earnings response coefficients (ERCs) for experimental issuers disclosed for the first time as having participating auditors involved in their audits. However, we find no market reaction and no decline in ERCs for a matching sample of issuers that are not disclosed as using participating auditors, nor for issuers disclosed for the second or third time as using participating auditors. We also find actual audit quality as measured by absolute value of performance-matched discretionary accruals is lower for the experimental issuers, although we find no difference in audit fees paid by the experimental and matching issuers in a multivariate model. Our findings suggest that the PCAOB's proposed rule requiring disclosure of the use of other auditors in addition to the principal auditor would provide information useful to investors in assessing audit quality for SEC issuers.

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Fee Discounting and Audit Quality Following Audit Firm and Audit Partner Changes: Chinese Evidence

The Accounting Review ◽

10.2308/accr-50958 ◽

2014 ◽

Vol 90 (4) ◽

pp. 1517-1546 ◽

Cited By ~ 34

Author(s):

Hua-Wei Huang ◽

K Raghunandan ◽

Ting-Chiao Huang ◽

Jeng-Ren Chiou

Keyword(s):

Earnings Management ◽

Audit Quality ◽

Audit Fees ◽

Audit Firm ◽

Audit Fee ◽

Significant Attention

ABSTRACT Issues related to low-balling of initial year audit fees and the resultant impact on audit quality have received significant attention from regulators in many countries. Using 9,684 observations from China during the years 2002–2011, we find that there is a significant initial year audit fee discount following an audit firm change when both of the signing audit partners are different from the prior year. The evidence is mixed if one or both of the signing partners from the prior year also moves with the client to the new audit firm. We find evidence of audit fee discounting in our analysis of fee levels, but not in our analysis of changes in audit fees from the prior year. Sanctions for problem audits and greater earnings management are more likely when there is an audit firm change that involves two new signing partners together with initial year audit fee discounting.

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Spatial Competition in Local Audit Markets and the Fallout on Deloitte from the 2007 PCAOB Censure

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-51571 ◽

2016 ◽

Vol 36 (2) ◽

pp. 1-19 ◽

Cited By ~ 5

Author(s):

Jeff P. Boone ◽

Inder K. Khurana ◽

K. K. Raman

Keyword(s):

Market Power ◽

Audit Quality ◽

Spatial Competition ◽

Spatial Location ◽

Audit Fees ◽

Audit Market ◽

Big 4 ◽

Audit Fee ◽

The Face ◽

Market Leader

SUMMARY We examine whether Deloitte's spatial location in local audit markets affected the firm's adverse fallout—in terms of decreased ability to retain new clients and maintain audit fees—from the 2007 PCAOB censure. We motivate our inquiry by the notion that auditor-client alignment and auditor-closest-competitor distance can help differentiate the incumbent Big 4 auditor from other Big 4 auditors and thus provide market power, i.e., inhibit clients from shopping for another supplier because of the lack of a similar Big 4 provider in the local audit market. Consequently, it seems reasonable that the increase in switching risk and loss of fee growth suffered by Deloitte following the 2007 PCAOB censure will be lower in local markets where Deloitte was the market leader and its market share distance from its closest competitor was greater. Our findings suggest that the decline in Deloitte's audit fee growth rate following the 2007 PCAOB censure was concentrated in the pharmaceutical industry, although the client loss rate appears to have occurred more broadly (across all cities and industries). Collectively, our findings suggest that audit quality issues override auditor market power, i.e., differentiation does not provide Big 4 firms market power in the face of adverse regulatory action. JEL Classifications: G18; L51; M42; M49.

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Audit Market Concentration, Audit Fees, and Audit Quality: Evidence from China

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-51299 ◽

2015 ◽

Vol 35 (2) ◽

pp. 121-145 ◽

Cited By ~ 23

Author(s):

Ting-Chiao Huang ◽

Hsihui Chang ◽

Jeng-Ren Chiou

Keyword(s):

Indirect Effect ◽

Audit Quality ◽

Earnings Quality ◽

Audit Fees ◽

Developed Countries ◽

Market Concentration ◽

Legal Environment ◽

Positive Relation ◽

Audit Market ◽

Lower Likelihood

SUMMARY We investigate the effects of audit market concentration on audit fees and audit quality in China, where competition is intense and the legal environment is relatively weak compared with developed countries. Analyzing 12,334 firm-year observations for the period 2001 to 2011, we find a significant positive relation between concentration and audit fees. Path analysis shows that concentration improves client earnings quality and reduces the need for auditors to issue modified audit opinions through increased audit fees. Additional analysis indicates that the increased audit fees and client earnings quality resulting from increased concentration are associated with a lower likelihood of executives and auditors being sanctioned by regulators for audit failures. Together, our results suggest that concentration improves audit quality indirectly through increased audit fees and this positive indirect effect offsets the negative direct effect of concentration on audit quality. By separating the direct and the indirect effect of concentration on audit quality, our study would explain why previous studies that do not have a separation document mixed evidence. Our findings inform regulators that actions taken to eliminate the indirect effect of concentration, for example restricting the upper bound of audit fees, could produce unintended outcomes such as decreased audit quality.

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Did the 2005 Deferred Prosecution Agreement Adversely Impact KPMG's Audit Practice?

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-52015 ◽

2018 ◽

Vol 38 (1) ◽

pp. 77-102 ◽

Cited By ~ 3

Author(s):

Matthew Baugh ◽

Jeff P. Boone ◽

Inder K. Khurana ◽

K. K. Raman

Keyword(s):

Service Provider ◽

Audit Quality ◽

Spillover Effect ◽

Audit Fees ◽

Data Availability ◽

Department Of Justice ◽

Big 4 ◽

Tax Shelters

SUMMARY We examine the consequences of misconduct in a Big 4 firm's nonaudit practice for its audit practice. Specifically, we examine whether KPMG's audit practice suffered a loss of audit fees and clients and/or a decline in factual audit quality following the 2005 deferred prosecution agreement (DPA) with the Department of Justice for marketing questionable tax shelters. We find little evidence that the DPA adversely impacted KPMG's audit practice by way of either audit fees or the likelihood of client gains/losses, suggesting little or no harm to KPMG's audit reputation. We also find that the DPA had no effect on the firm's factual audit quality, even for those audit clients that dropped KPMG as their tax service provider. Collectively, our findings suggest that there was no spillover effect from the DPA to KPMG's audit practice. Data Availability: All data are publicly available.

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An Analysis of Cross-Sectional Differences in Big and Non-Big Public Accounting Firms' Audit Programs

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2006.25.1.27 ◽

2006 ◽

Vol 25 (1) ◽

pp. 27-48 ◽

Cited By ~ 70

Author(s):

Hans Blokdijk ◽

Fred Drieenhuizen ◽

Dan A. Simunic ◽

Michael T. Stein

Keyword(s):

Risk Assessment ◽

Empirical Evidence ◽

Audit Quality ◽

Audit Fees ◽

Public Accounting ◽

Accounting Firms ◽

Big 5 ◽

Public Accounting Firms ◽

Audit Approach ◽

Control Risk

A significant body of prior research has shown that audits by the Big 5 (now Big 4) public accounting firms are quality differentiated relative to non-Big 5 audits. This result can be derived analytically by assuming that Big 5 and non-Big 5 firms face different loss functions for “audit failures” and is consistent with a variety of empirical evidence from studies of audit fees, auditor changes, and the stock price reaction to audited earnings. However, there is no existing evidence (of which we are aware) concerning the underlying production differences between Big 5 and non-Big 5 audits. As a result, existing empirical evidence cannot distinguish between the possibility that Big 5 audits are simply perceived to be different (e.g., by investors) or actually differ in how they are produced. Our research objective is to identify the production characteristics of audit engagements that may explain the differences in expected audit quality between Big 5 and non-Big 5 firms. In this archival study, we examine the total audit effort and the allocation of effort to four audit phases—planning, (control) risk assessment, substantive testing, and completion—for a cross-section sample of 113 audits of Dutch companies in 1998/99 by 14 public accounting firms. We find that, after controlling for client characteristics: (1) both types of auditors exert about the same amount of total audit effort; (2) Big 5 auditors allocate relatively more effort to planning and (control) risk assessment, and relatively less to substantive testing and completion; and (3) client size, use of the business-risk-based audit approach, and reliance on client internal controls affect audit hours differently for the two auditor types. We conclude that the Big 5 firms actually produce a higher audit quality level, and that this quality difference is related to how audit hours are deployed in a more contextual and less procedural audit approach.

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