scholarly journals The Relationship Between Segment-Level Manipulations And Audit Fees

2013 ◽  
Vol 29 (4) ◽  
pp. 1243 ◽  
Author(s):  
David Hurtt ◽  
Bradley E. Lail ◽  
Jason MacGregor
Keyword(s):  
Financial Reporting ◽  
Firm Value ◽  
Accounting Standards ◽  
Positive Association ◽  
Audit Fees ◽  
Risk Assessments ◽  
Net Income ◽  
Bottom Line ◽  
Segment Reporting ◽  
The Relationship

We examine the auditorssensitivity to manipulative financial reporting by investigating the relationbetween audit fees and segment-level manipulations. Segment reporting provides an interestingsetting to examine auditor risk assessments because of the discretion affordedto management under existing regulations. Segment manipulations, a form of classificationsmoothing, are not in violation of accounting standards; nevertheless, thesemanipulations violate the spirit of faithful representation by distorting theperformance of a subset of the reporting unit at the expense of (or to thebenefit) of another subset. Because disaggregatedinformation is used by analysts and investors in bottom-upforecasting, these distortions can influence firm value even though they do notaffect bottom-line net income. Ourmeasure of classification smoothing measurescost shifting between core operating segments and non-core segments to proxyfor segment manipulation. We find thataudit fees, a proxy for the auditors risk assessment, have a positiveassociation with segment-level manipulations. Subsequent analyses suggest that higher auditfees are also due to the additional effort exerted in the presence of segment-levelmanipulations. Further, auditors appearjustified in charging higher fees to clients that engage in segmentmanipulations as we document evidence of a positive association betweenrestatements and segment-level manipulations. Collectively, these results suggest thatauditors are aware of the risk associated with companies that engage in segment-levelmanipulations and auditors respond appropriately by charging higher fees anddoing additional work.

scholarly journals Audit committee compensation, best practices and audit fees

2019 ◽  
Vol 50 (1) ◽  
Author(s):  
Bum-Jin Park
Keyword(s):  
Best Practices ◽  
Financial Reporting ◽  
Regression Models ◽  
Audit Committee ◽  
Best Practice ◽  
Audit Quality ◽  
Positive Association ◽  
Audit Fees ◽  
High Quality ◽  
The Relationship

Background: It is extremely important that an audit committee (AC) monitors a company’s financial reporting process, and that the committee engages a high-quality auditor to carry this out effectively. Prior research on ACs has paid much attention to the relationship between AC best practices and audit fees (AF). Although compensation is a means of aligning interests between ACs and stakeholders, previous studies have neglected the complementary interaction between AC compensation and compliance with best practices on audit quality.Objectives: The purpose of this study is to investigate how compensation for ACs affects AF, and how the association is moderated by compliance with best practices to capture effective monitoring.Method: The regression models are estimated to verify how the relationship between AC compensation and AF is moderated by AC compliance with best practice. Moreover, the logistic regression models are used to investigate how the relationship between AC compensation and the opportunistic achievement of earnings goals is moderated by AC compliance with best practice.Results: The findings show a positive association between the levels of compensation AC members receive and AF, which is reinforced in firms that have ACs that comply with all best practices.Conclusion: The results suggest that highly paid ACs engage high-quality auditors to complement their function of monitoring management and AC compensation and compliance with best practices are complementary to enhance audit quality. This study thus provides the interesting insights that can be applicable to countries with requirements relating to the compensation schemes for ACs or the formation of the AC.

Audit effort, materiality and audit fees: evidence from the adoption of IFRS in Australia

2020 ◽  
Vol 33 (1) ◽  
pp. 186-216 ◽  
Author(s):  
Muhammad Shahin Miah ◽  
Haiyan Jiang ◽  
Asheq Rahman ◽  
Warwick Stent
Keyword(s):  
Financial Reporting ◽  
Design Methodology ◽  
Accounting Standards ◽  
Positive Association ◽  
Financial Statements ◽  
Audit Fees ◽  
Content Type ◽  
Risk Levels ◽  
Financial Reporting Standards ◽  
Different Levels

Purpose This paper aims to investigate the association between International Financial Reporting Standards (IFRS) effort due to higher levels of material adjustments and audit fees. In addition, this paper tests whether these associations differ between industry specialist auditors and non-specialist auditors. Design/methodology/approach The authors measure IFRS effort by using differences between local GAAP and IFRS. More specifically, they measure the differences in the balances of accounts that are prepared under IFRS as opposed to the previously used Australian Accounting Standards Board (AASB) standards. They posit that higher material adjustments and more risk to fair presentation of financial statements require additional accounting and auditing effort (“IFRS effort”). Findings The authors find that audit fees are higher when accounting standards are more material and complex at an aggregate level. Nevertheless, not all standards are equally complex and/or material and not all individual standards contribute to higher audit fees. In addition, the results show that the positive association between IFRS effort and audit fees is more pronounced when firms are audited by city-level industry specialists than by non-industry specialists. Originality/value Overall, the results are consistent with the prediction of increasing audit fees for firms requiring higher levels of IFRS effort compared to firms requiring lower levels of IFRS effort. The results contribute to the understanding that not all IFRS are equally complex and, thereby, the standards require different levels of auditor effort. Isolating specific standards based on materiality/risk levels is informative to standard setters for standard setting, standard implementation and post-implementation review of standards.

scholarly journals Effect Of Corporate Governance On The Association Between Book-Tax Differences And Audit Quality: Evidence From Korea

2016 ◽  
Vol 32 (4) ◽  
pp. 1097-1114 ◽  
Author(s):  
Hyunmin Oh ◽  
Sambock Park ◽  
Soonwook Hong
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Interaction Effect ◽  
Audit Quality ◽  
Positive Association ◽  
Audit Fees ◽  
Negative Association ◽  
Significant Positive Association ◽  
Social Proof ◽  
The Relationship

We investigate whether auditors input additional audit hours according to the sizes of book-tax differences (hereinafter BTD) and request additional audit fees for additional audit hours. In addition, the interaction effects of corporate governance on the relationships between BTD and audit hours/audit fees are examined using the total corporate governance (TCG) scores, data from the Korea Corporate Governance Service (KCGS). We predict that since auditors have the incentive and ability to consider BTD, audit hours and audit fees will increase when BTD are larger. Empirical results of our study are as follows. First, BTD and audit hours (LnAH) show a negative (-) association that is not statistically significant. Second, audit fees (LnAF) were shown to increase along with BTD. This can be interpreted as a result of requests for additional audit fees for increased audit risks due to individual firms' BTD. Third, the interaction effect of corporate governance on the relationship between BTD and audit hours (LnAH) showed a positive (+) association, but the association was not statistically significant. Fourth, the interaction effect of corporate governance on the relationship between BTD and audit fees (LnAF) showed a statistically significant positive (+) association. This be understood as meaning that firms with better governance make more efforts for financial reporting in order to maintain their reliability in the market. This study contributes to the literature in several important aspects. First, it empirically demonstrates whether auditors properly reflect BTD on audit risks. Next, our study is analyzes the effects of corporate governance on the relationship between BTD and audit hours/audit fees using the total corporate governance (TCG) scores presented by the Korea Corporate Governance Service (KCGS). Finally, our findings empirically showed social proof function of accounting audits as a strategy to reduce information risks. 

Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective

2016 ◽  
Vol 36 (2) ◽  
pp. 21-43 ◽  
Author(s):  
Lucy Huajing Chen ◽  
Hyeesoo H. (Sally) Chung ◽  
Gary F. Peters ◽  
Jinyoung P. (Jeannie) Wynn
Keyword(s):  
Financial Reporting ◽  
Internal Audit ◽  
Positive Association ◽  
Audit Fees ◽  
Data Availability ◽  
Company Performance ◽  
Potential Threat ◽  
External Audit ◽  
Internal Auditors ◽  
Survey Responses

SUMMARY This paper considers the potential impact of internal audit incentive-based compensation (IBC) linked to company performance on the external auditor's assessment of internal audit objectivity. We posit that external auditors will view IBC as a potential threat to internal audit objectivity, thus reducing the extent of reliance on the work of internal auditors and increasing the assessment of control risk. The increase in risk and external auditor effort should result in higher audit fees. We hypothesize that the form of incentive-based compensation, namely stock-based versus cash bonuses, moderates the association between IBC and external audit fee. Finally, we consider whether underlying financial reporting risk mitigates the external auditor's potential sensitivity to IBC. We find a positive association between external audit fees and internal audit compensation based upon company performance. The association is acute to IBC paid in stock or stock options as opposed to cash bonuses. We also find evidence consistent with the IBC associations being mitigated by the company's financial reporting risks. Data Availability: Individual survey responses are confidential. All other data are derived from publicly available sources.

Audited Financial Reporting and Voluntary Disclosure of Corporate Social Responsibility (CSR) Reports

2016 ◽  
Vol 28 (2) ◽  
pp. 53-76 ◽  
Author(s):  
Long Chen ◽  
Bin Srinidhi ◽  
Albert Tsang ◽  
Wei Yu
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Financial Reporting ◽  
Voluntary Disclosure ◽  
Stock Price ◽  
Reporting Quality ◽  
Positive Association ◽  
Audit Fees ◽  
Csr Reporting ◽  
Corporate Social

ABSTRACT Prior studies show that corporate social responsibility (CSR) reporting is informative to investors but lacks credibility. This study examines whether a commitment to audits of financial outcomes, proxied by audit fees, is associated with greater CSR reporting credibility. We find that audit fees are positively associated with the likelihood of standalone CSR report issuance, and this positive association becomes stronger when managers perceive a greater need for credibility, i.e., when CSR reports are longer or issued with external assurance, when firms have strong CSR concerns, and when reports are issued sporadically. Corroborating our results, we find that CSR reports issued by firms committing to high audit fees accelerate the incorporation of future earnings information into current stock price. Taken together, our findings suggest that a commitment to higher financial reporting quality has the potential to bring positive externality to firms' nonfinancial disclosures and ultimately affects the issuance of CSR reports.

The Relationship between Aggressive Real Earnings Management and Current and Future Audit Fees

2016 ◽  
Vol 36 (1) ◽  
pp. 85-107 ◽  
Author(s):  
Adam Greiner ◽  
Mark J. Kohlbeck ◽  
Thomas J. Smith
Keyword(s):  
Earnings Management ◽  
Firm Value ◽  
Audit Fees ◽  
Cash Flows ◽  
Data Availability ◽  
Real Earnings Management ◽  
Increased Risk ◽  
Pricing Behavior ◽  
Reported Earnings ◽  
The Relationship

SUMMARY We examine the relationship between aggressive income-increasing real earnings management (REM) and current and future audit fees. Managers pursue REM activities to influence reported earnings and, as a consequence, alter cash flows and sacrifice firm value. We posit that the implications of REM are considered in auditors' assessments of engagement risk related to the client's economic condition and result in higher audit fees. We find that, with the exception of abnormal reductions in SG&A, aggressive income-increasing REM is positively associated with both current and future audit fees. Additional analyses provide evidence consistent with increased effort combined with increased risk contributing to the current pricing effect, with increased business risk primarily driving the future pricing effect. We, therefore, provide evidence that aggressive income-increasing REM activities have a significant influence on auditor pricing behavior, consistent with the audit framework associating engagement risk with audit fees. JEL Classifications: G21; G34; M41. Data Availability: The data in this study are available from public sources indicated in the paper.

scholarly journals Corporate Revenue Miscalculations & The Impact On Stakeholders

2014 ◽  
Vol 12 (2) ◽  
pp. 77
Author(s):  
Karen T. Cascini ◽  
Alan DelFavero ◽  
Ryan Bezner
Keyword(s):  
Multinational Corporations ◽  
Financial Reporting ◽  
Multinational Firms ◽  
Accounting Standards ◽  
Shareholder Wealth ◽  
Net Income ◽  
Accounting Systems ◽  
Generally Accepted Accounting Principles ◽  
Earnings Restatements ◽  
The Impact

Corporate earnings restatements are regarded as one of the most significant issues in accounting today. While there are various factors that can influence profitability, revenue is the key contributor to a business net income. During the 2000s, a multitude of domestic and multinational corporations faced significant issues with their revenue recognition practices. Although the investing public might regard any revenue restatement as laden with possible fraud, this is not always the case. Multinational firms face dual accounting systems, such as U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Currently, similarities and differences between the accounting systems exist. However, key differences between GAAP and IFRS may cease to exist in upcoming years due to the Financial Accounting Standards Boards (FASBs) and the International Accounting Standards Boards (IASBs) joint effort to converge the two systems. Throughout this paper, examples of revenue miscalculations will be presented as well any penalties levied by the U.S. Securities & Exchange Commission against implicated corporations. Accordingly, the impact that revenue blunders have on shareholder wealth will be examined. Finally, the authors will present recommendations for mitigating revenue errors in the future.

scholarly journals Keterbacaan Catatan Atas Laporan Keuangan dan Dampak Audit (Readability over Financial Reporting Footnotes and Audit Outcomes)

2021 ◽  
Vol 28 (2) ◽  
pp. 53
Author(s):  
Nadiah Bella Sagitarisma ◽  
Riesanti E. Wijaya
Keyword(s):  
Regression Analysis ◽  
Financial Reporting ◽  
Generalized Least Squares ◽  
Financial Statements ◽  
Audit Fees ◽  
Analysis Method ◽  
Data Regression ◽  
Audit Fee ◽  
Relationship Of ◽  
The Relationship

This study aims to find out the relationship of readability over financial reporting footnotes and audit outcomes. Audit outcomes are projected by audit fees and audit report lag.  Researchers used data from the company's financial statements listed on IDX in 2015-2018. Researchers used purposive sampling. From the copying, researchers processed 184 company data. This study used the panel's data regression analysis method. Data processing uses Generalized - least - squares.  This research proves that the worse the readability, the lower the audit fee.  Meanwhile, the worse the readability, the more time it takes the auditor to carry out an examination of the financial statements. This phenomenon occurs because the condition of the readability of notes to financial statements in Indonesia is still at a low level.

scholarly journals The role of Internet Financial Reporting (IFR) in mediating manufacturing firm value on Indonesia Stock Exchange (IDX)

2020 ◽  
Vol 2 (2) ◽  
pp. 169
Author(s):  
Khoirul Fuad ◽  
Nurlita Dwi Ariyani ◽  
Retno Tri Handayani
Keyword(s):  
Financial Reporting ◽  
Firm Value ◽  
Sampling Method ◽  
Stock Exchange ◽  
Institutional Ownership ◽  
Manufacturing Companies ◽  
Manufacturing Firm ◽  
Purposive Sampling ◽  
The Relationship

<p class="IABSSS"><strong>Purpose</strong> - This research aimed to determine the role of Internet Financial Reporting application for manufacturing companies on Indonesia stock exchange in the increase of firm value both directly and indirectly.</p><p class="IABSSS"><strong>Method </strong>- This research used a purposive sampling method. The number of data collected was 95 company samples. This research employed SPSS 25 for testing the data.  </p><p class="IABSSS"><strong>Result</strong> - The results of this study indicated that Internet Financial Reporting can mediate the relationship between institutional ownership and profitability on firm value.</p><p class="IABSSS"><strong>Implication</strong> - Internet Financial Reporting application for companies today attracts investors to invest their capital to the companies because of the ease in getting the information needed at any time.</p><strong>Originality</strong> - This study used Internet Financial Reporting as mediation and source of the data year 2018.

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