Firm Performance Following Auditor Changes For Audit Fee Savings

This study examines stock and earnings performance subsequent to auditor changes by firms specifically for audit fees savings without any other apparent regulatory or disclosure issues. Results show that there is mild evidence of positive stock return and earnings performance after changing auditors. There is also no significant difference in company performance among different types of auditor changes when looking at auditor changes among and between Big 4 and non-Big 4 auditors. Finally, we find that the positive firm performance is mainly among auditor changes made before 2003.

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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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Did the 2007 PCAOB Disciplinary Order against Deloitte Impose Actual Costs on the Firm or Improve Its Audit Quality?

The Accounting Review ◽

10.2308/accr-50867 ◽

2014 ◽

Vol 90 (2) ◽

pp. 405-441 ◽

Cited By ~ 56

Author(s):

Jeff P. Boone ◽

Inder K. Khurana ◽

K. K. Raman

Keyword(s):

Growth Rates ◽

Audit Quality ◽

Audit Fees ◽

Data Availability ◽

The Other ◽

Archival Studies ◽

Big 4 ◽

Audit Fee

ABSTRACT We examine whether the December 2007 PCAOB disciplinary order against Deloitte affected Deloitte's switching risk, audit fees, and audit quality relative to the other Big 4 firms over a three-year period following the censure. Our findings suggest that the PCAOB censure was associated with a decrease in Deloitte's ability to retain clients and attract new clients, and a decrease in Deloitte's audit fee growth rates. However, methodologies used in extant archival studies yield little or no evidence to suggest that Deloitte's audit quality was different from that of the other Big 4 firms during a three-year window either before or after the censure. Overall, our results suggest that the PCAOB censure imposed actual costs on Deloitte. Data Availability: All data are publicly available.

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Audit prices and Big 4 fee premiums: further evidence from Thailand

Journal of Accounting in Emerging Economies ◽

10.1108/jaee-07-2014-0039 ◽

2017 ◽

Vol 7 (1) ◽

pp. 2-15 ◽

Cited By ~ 6

Author(s):

Thanyawee Pratoomsuwan

Keyword(s):

Price Competition ◽

Stock Exchange ◽

Audit Fees ◽

Audit Pricing ◽

Content Type ◽

Audit Market ◽

Big 4 ◽

Audit Fee ◽

The Usa ◽

Using Data

Purpose Because there is mixed evidence regarding Big N fee premiums across countries, the purpose of this paper is to re-examine the phenomenon of audit price differentiations in the market for auditing services in Thailand. Although Hay et al. (2006) and Hay (2013) reviewed over 80 audit fee papers from 20 countries over 25 years, 13 of which were based in emerging economies, the understanding of the market for auditing services in Thailand remains limited. Because the Thai auditing market is also classified as a segmented market – i.e., a market that is less competitive for large-client firms and more competitive for small-client firms – this study tests audit price competition in an emerging audit market using Thailand as an example. Design/methodology/approach The traditional audit fee model is used to estimate audit fee premiums for a sample of over 300 non-financial companies listed on the Stock Exchange of Thailand in 2011. Findings Although the market for auditing services in Thailand is consistent with that described in Ferguson et al. (2013) – in which Big N audit firms dominate only the large-client segment – the results show that Big N auditors charge higher audit fees and earn higher fee premiums compared with non-Big N auditors in both the small- and large-client segments of the audit market. Research limitations/implications The evidence from this study reveals the existence of Big N fee premiums across market segmentations. Audit price differentials between Big N and non-Big N firms in both small- and large-client market segments might concern regulators regarding competition in the audit market with respect to whether the Big N firms are charging uncompetitive audit fees. These findings also imply that audit pricing varies across countries and the Big N price deferential is typically larger in emerging markets than in more developed audit markets and that it might be inadequate to study single-country audit pricing. However, the question whether the Big N fee premium results from Big N product differentiation is not directly investigated in this study. Originality/value Because earlier studies focusing on audit fee premiums have been conducted using data from the USA and Australia, the findings add to the limited evidence regarding audit fee premiums in an emerging country such as Thailand.

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Audit Research Summaries

Maandblad Voor Accountancy en Bedrijfseconomie ◽

10.5117/mab.91.24047 ◽

2017 ◽

Vol 91 (7/8) ◽

pp. 244-249

Author(s):

Philip Wallage

Keyword(s):

Audit Fees ◽

Audit Report ◽

Big 4 ◽

Audit Firms ◽

Audit Fee

Ook deze maand presenteren wij weer enkele Audit Research Summaries uit de database van de American Accounting Association (www.auditingresearchsummaries. org). De eerste samenvatting betreft een onderzoek van Sharma, Tanyi en Litt naar de kosten van verplichte audit partner-rotatie in de VS. Hiertoe wordt nagegaan of partner- rotatie gerelateerd is aan de hoogte van de audit fee en het tijdsverloop tussen einde boekjaar en datum afgifte van de controleverklaring (audit report lag). Uit het onderzoek blijkt onder andere dat een positieve en significante associatie bestaat tussen partner-rotatie en audit fees. Ook blijkt dat deze associatie met name bestaat voor grotere klanten en voor de niet-Big 4-audit firms. Een vergelijkbare associatie bestaat voor rotatie en de lengte van de audit report lag. De volgende samenvatting betreft een experiment van Kim en Harding onder Australische en Zuid Koreaanse accountants naar het effect dat gepercipieerde expertise van een leidinggevende heeft op de besluitvorming van een ondergeschikte. Uit het onderzoek blijkt dat de invloed van de vooraf bekende preferentie van de leidinggevende op een te nemen besluit groter is naarmate de leidinggevende meer deskundigheid wordt toegedicht. Er wordt geen verschil geconstateerd tussen Australische en Zuid Koreaanse accountants.

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Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees

The Accounting Review ◽

10.2308/accr-51228 ◽

2015 ◽

Vol 91 (3) ◽

pp. 767-792 ◽

Cited By ~ 40

Author(s):

Kenneth L. Bills ◽

Lauren M. Cunningham ◽

Linda A. Myers

Keyword(s):

Audit Quality ◽

Matched Control ◽

Audit Fees ◽

Discretionary Accruals ◽

Audit Firm ◽

Association Member ◽

Big 4 ◽

Audit Firms ◽

Audit Fee ◽

Control Samples

ABSTRACT In this study, we examine the benefits of membership in an accounting firm association, network, or alliance (collectively referred to as “an association”). Associations provide member accounting firms with numerous benefits, including access to the expertise of professionals from other independent member firms, joint conferences and technical trainings, assistance in dealing with staffing and geographic limitations, and the ability to use the association name in marketing materials. We expect these benefits to result in higher-quality audits and higher audit fees (or audit fee premiums). Using hand-collected data on association membership, we find that association member firms conduct higher-quality audits than nonmember firms, where audit quality is proxied for by fewer Public Company Accounting Oversight Board (PCAOB) inspection deficiencies and fewer financial statement misstatements, as well as less extreme absolute discretionary accruals and lower positive discretionary accruals. We also find that audit fees are higher for clients of member firms than for clients of nonmember firms, suggesting that clients are willing to pay an audit fee premium to engage association member audit firms. Finally, we find that member firm audits are of similar quality to a size-matched sample of Big 4 audits, but member firm clients pay lower fee premiums than do Big 4 clients. Our inferences are robust to the use of company size-matched control samples, audit firm size-matched control samples, propensity score matching, two-stage least squares regression, and to analyses that consider changes in association membership. Our findings should be of interest to regulators because they suggest that association membership assists small audit firms in overcoming barriers to auditing larger audit clients. In addition, our findings should be informative to audit committees when making auditor selection decisions, and to investors and accounting researchers interested in the relation between audit firm type and audit quality.

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How do audit fees change? Effects of firm size and section 404(b) compliance

Managerial Auditing Journal ◽

10.1108/maj-07-2018-1938 ◽

2019 ◽

Vol 34 (4) ◽

pp. 393-437

Author(s):

Alexey Lyubimov

Keyword(s):

Audit Fees ◽

Section 404 ◽

Content Type ◽

Control Effectiveness ◽

Big 4 ◽

Audit Firms ◽

Audit Fee ◽

Second Tier ◽

Changes Over Time ◽

Over Time

Purpose The purpose of this paper is to investigate the effect of the size of the audit firm and compliance with Section 404(b) on how audit fees change over time. Design/methodology/approach This study uses panel data and an OLS regression to examine the relationship between audit fee changes, firms’ size and Section 404(b) compliance. Findings Section 404(b)-compliant companies experience a larger change in audit fees if they are audited by Big 4 firms than second-tier firms. Second-tier audit firms increase the fees primarily for the companies which do not comply with Section 404(b). Practical implications Regulators have been concerned with the Big 4 fee premium for four decades. This study informs regulators that the Big 4 continue increasing their fees at a higher rate than second-tier firms for their Section 404(b)-compliant clients (even though recent research shows that second-tier firms have increased quality to match the Big 4). This suggests that the Big 4 fee premium increases for this subset of clients, adding to the regulatory concerns. Originality/value While prior research has established the existence of the Big 4 fee premium, little is known about how this premium changes over time. Prior research shows that audit fees increase when internal controls are weak; however, little is known about how Section 404(b) compliance (once control effectiveness is controlled) affects fee changes. This paper addresses these voids in research.

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The impact of non-timely 10-Q filings and audit firm size on audit fees

Managerial Auditing Journal ◽

10.1108/maj-10-2017-1673 ◽

2018 ◽

Vol 33 (5) ◽

pp. 503-516 ◽

Cited By ~ 2

Author(s):

Tiffany Chiu ◽

Feiqi Huang ◽

Yue Liu ◽

Miklos A. Vasarhelyi

Keyword(s):

Regression Model ◽

Firm Size ◽

Audit Fees ◽

Audit Risk ◽

Content Type ◽

Audit Firm ◽

Big 4 ◽

Audit Firms ◽

Audit Fee ◽

The Impact

Purpose Prior studies suggest that non-timely 10-Q filings indicate higher potential risks than non-timely 10-K filings. Furthermore, larger audit firms tend to be more risk-averse and conservative about reporting. Inspired by these research streams, this paper aims to investigate the influence of non-timely 10-Q filings on audit fees and the impact of audit firm size on this association. Design/methodology/approach The cross-sectional audit fee regression model used in this study is similar to that used in prior audit fee research (Simunic, 1980; Francis et al., 2005; Hay et al., 2006; Wang et al., 2013). The model includes the following five major characteristics that would influence auditors’ fee decisions: auditee size (LNAT), complexity (REIVAT, FOREIGN, SEG), financial condition (LOSS, ROA, GROWTH, ZSCORE), special events (ICW, RESTATE, INITIAL, GC) and auditor type (BIG4). To examine the effect of non-timely 10-Q filings on audit fees, the variable NT10Q is included in the audit fee model. Findings The results indicate that when both non-timely 10-K and non-timely 10-Q filings are included in the regression model, only non-timely 10-Q filings are significantly associated with higher audit fees, suggesting that the presence of non-timely 10-Q filings signals more serious underlying problem than non-timely 10-K filings in the audit fees decision processes. In addition, we find that audit fees for firms audited by Big 4 auditors are 26.4 per cent higher when those firms file non-timely 10-Q reports, whereas there is no significant association between non-timely 10-Q filings and audit fees for firms audited by non-Big 4 auditors. Practical implications As no attention has been paid to the investigation of the impact of non-timely 10-Q filings on audit fees, with the aim of filling the gap of this specific research area, this study examines the association between non-timely 10-Q filings and audit fees and the influence of audit firm size on this association. Originality/value The contribution of this paper is threefold: first, it is the first study to examine the association between non-timely 10-Q filings and audit fees. The results show that non-timely 10-Q filings are a better and earlier indicator of audit risk than non-timely 10-K filings. Second, the results reveal that the relationship between non-timely 10-Q filings and audit fees is affected by audit firm size. Specifically, Big 4 auditors tend to charge higher audit fees in the presence of non-timely 10-Q filings, reflecting that they are more sensitive to audit risk than smaller audit firms are. Third, an examination of the quarterly effect of non-timely 10-Q filings on audit fees indicates a stronger effect from the first quarter’s non-timely 10-Q filings, compared to the second or third quarter.

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Original and Revised Auditor Fee Data

Current Issues in Auditing ◽

10.2308/ciia-50015 ◽

2011 ◽

Vol 5 (1) ◽

pp. A54-A69 ◽

Cited By ~ 5

Author(s):

Rebecca L. Rosner ◽

Ariel Markelevich

Keyword(s):

Audit Committee ◽

Audit Fees ◽

Securities And Exchange Commission ◽

Accounting Firms ◽

Reporting Requirements ◽

Disclosure Requirements ◽

Big 4 ◽

Audit Fee ◽

Nonaudit Services ◽

Auditor Fees

SUMMARY: A significant number of companies report revised auditor fees (audit, nonaudit services, and total) in subsequent Securities and Exchange Commission (SEC) filings. We find that, on average, revised audit fees and total fees are significantly higher, and nonaudit services (NAS) fees are significantly lower than the originally reported fees. The occurrence of fee revisions decreases significantly after 2006 and does not appear to be concentrated in specific industries. In addition, we find that larger clients are more likely to report fee revisions, while clients of Big 4 auditors and clients that file late are less likely to report fee revisions. We also examine the magnitude of upward and downward fee revisions. The fee revisions likely result from the changes in the SEC's fee disclosure reporting requirements from 2001 to 2003, as well as ambiguity related to the new requirements. In addition, they also may stem from estimated billing by accounting firms prior to filing with the SEC, followed by more precise billing after the filing. Our objective is to alert managers and practitioners to the subtleties of the fee disclosure requirements relative to fees billed/paid, the disparity in fee reporting, and the necessity for reporting revised fees if appropriate. We advise audit committee members, analysts, researchers, and other users of audit fee data to use revised fee numbers and exercise caution when using originally reported fees, as they often are revised.

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Audit fees via an indirect payment channel and professional skepticism

Managerial Auditing Journal ◽

10.1108/maj-12-2016-1490 ◽

2018 ◽

Vol 33 (5) ◽

pp. 517-534 ◽

Cited By ~ 1

Author(s):

Sanghun Kim ◽

Taewoo Kim ◽

Sujin Pae ◽

Sangphill Kim

Keyword(s):

Audit Fees ◽

Payment System ◽

Future Research ◽

Systematic Change ◽

Content Type ◽

Professional Skepticism ◽

Scarce Resources ◽

Big 4 ◽

Audit Fee ◽

Auditor Judgments

Purpose This paper aims to examine the merit of an indirect payment system for audit fees, a system where an intermediary collects fees from the auditee and then pays this audit fee to the auditor. Design/methodology/approach Big 4 auditors and professional analysts in South Korea participated in an experiment and survey to investigate whether the change in the payment channel (from direct to indirect) of audit fees positively impacts auditors’ decision-making. Findings The authors find evidence that the indirect payment of audit fees is positively associated with professional skepticism. Research limitations/implications This paper, by highlighting the potential for alternate auditor payment channels to improve the quality of auditor judgments, motivates future research in this area. Practical implications Qualified by the need for further research, the potential merit in an indirect payment system may have implications for audit regulators. Social implications An indirect payment channel has the potential to improve public perceptions of the audit function, thereby elevating society’s confidence in auditor opinions and improving the effectiveness and efficiency with which scarce resources are distributed within society. Originality/value This study is one of the first that looks into a systematic change in audit fee payment channel and how an indirect payment system of audit fees impacts professional skepticism.

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The Effect Of Auditor Change On Initial Audit Fee Discount And Non-Audit Services

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v33i1.9870 ◽

2016 ◽

Vol 33 (1) ◽

pp. 95-106

Author(s):

Hong-jo Park ◽

Jeong-un Choi ◽

Joonhei Cheung

Keyword(s):

Audit Fees ◽

External Audit ◽

Accounting Firm ◽

Big 4 ◽

Audit Fee ◽

Auditor Change ◽

Non Audit Services

The purpose of this research is to verify whether non-audit services are provided without additional fees at the initial audit as a strategy to win an external audit contract, which could give the appearance of initial audit fee discount. From the results, non-audit services are provided at the initial audit, and the initial audit fee is discounted accordingly, only when the independent auditor is changed from a Big 4 accounting firm to a non-Big 4 accounting firm. However, there is no meaningful relevance in any other types of changes. Therefore, if the auditor is changed from a Big 4 accounting firm to a non-Big 4 accounting firm, non-audit services are provided without additional fees in order to win an external audit contract, and the publication of audit fees with a division between the audit service fee and the non-audit service fee may give the appearance of a discounted audit service fee.

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