The Effects of Voluntary Interim Auditor Reviews on Audit Fees and Earnings Quality

2013 ◽  
Author(s):  
Balthasar Hoehn
Keyword(s):  
Earnings Quality ◽  
Audit Fees

U.S.-Listed Foreign Companies' Choice of a U.S.-Based versus Home Country-Based Big N Principal Auditor and the Effect on Audit Fees and Earnings Quality

2015 ◽  
Vol 29 (3) ◽  
pp. 631-666 ◽  
Author(s):  
Sharad C. Asthana ◽  
K. K. Raman ◽  
Hongkang Xu
Keyword(s):  
Financial Reporting ◽  
Home Country ◽  
Earnings Quality ◽  
Audit Fees ◽  
Foreign Companies ◽  
Two Factors ◽  
Just Price ◽  
Reporting Environment ◽  
The U.S

SYNOPSIS We examine why U.S.-listed foreign companies choose to have a U.S.-based (rather than home country-based) Big N firm as their principal auditor for SEC reporting purposes and the effects of that choice for audit fees and earnings quality. We find that the likelihood of the Big N principal auditor being U.S.-based is decreasing in client size and the level of investor protection in the home country, and increasing in the proportion of income earned outside the home country. We also find compelling evidence that U.S.-based Big N auditors are associated with higher-quality earnings (albeit for a higher fee), despite two factors—the greater distance between the U.S.-based (vis-à-vis home country-based) Big N auditor and the client, and the likelihood that much of the audit work is done outside the U.S.—which potentially could lower the earnings quality of the U.S.-listed foreign client when the Big N principal auditor is U.S.-based. Overall, our study suggests that the higher fees associated with a U.S.-based Big N principal auditor is not just price protection; rather, U.S.-based Big N principal auditors are also improving the financial reporting environment by reporting higher-quality audited earnings for their U.S.-listed foreign clients. JEL Classifications: L11; L15; M42.

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

2015 ◽  
Vol 35 (2) ◽  
pp. 121-145 ◽  
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.

Audit and Nonaudit Fees and the Market's Reaction to Earnings Announcements

2006 ◽  
Vol 25 (1) ◽  
pp. 1-26 ◽  
Author(s):  
Julia L. Higgs ◽  
Terrance R. Skantz
Keyword(s):  
Earnings Quality ◽  
Earnings Announcements ◽  
Positive Association ◽  
Audit Fees ◽  
Continuous Variable ◽  
Auditor Independence ◽  
Negative Association ◽  
Forecast Errors ◽  
Unexpected Earnings ◽  
Nonaudit Services

Effective February 05, 2001, publicly traded companies are required to disclose audit and nonaudit fees paid to their external auditors. These fee data have been used to test whether auditor independence is impaired when the external auditor provides nonaudit services to a client, usually by examining whether certain earnings characteristics are related to nonaudit fees in ways that suggest impairment. This paper follows in that tradition by testing whether the earnings response coefficient (ERC), a proxy for earnings quality, is associated with engagement profitability. Residual fees derived from a two-stage regression model that prices audit and nonaudit services simultaneously are used to proxy for engagement profitability. If the market perceives abnormally profitable engagements as a threat to auditor independence, then we would expect the ERC to be lower for firms with positive fee residuals. The paper examines the residual fee-ERC relation for annual earnings announcements immediately before and after first-time fee disclosure. We report results for alternative measures of unexpected earnings (I/B/E/S forecast errors and deviations from a seasonal random walk), different formulations of residual fees (as a dichotomous and continuous variable) and different samples. For total fees and audit fees, there is a positive association between ERCs and the level of residual fees. For nonaudit fees, there is only one combination of unexpected earnings and residual fee formulation where we observe a significantly negative association between ERCs and residual fees. The findings for audit fees are consistent with a market that interprets abnormally high audit fees as a signal of a firm's commitment to high earnings quality. The restrictive conditions under which we find a negative association between nonaudit fees and ERCs provide limited support for the contention that perceived auditor independence is impaired by abnormally high nonaudit fees.

The Effect of Governance on Specialist Auditor Choice and Audit Fees in U.S. Family Firms

2014 ◽  
Vol 89 (6) ◽  
pp. 2297-2329 ◽  
Author(s):  
Bin N. Srinidhi ◽  
Shaohua He ◽  
Michael Firth
Keyword(s):  
Financial Reporting ◽  
Family Firms ◽  
Earnings Quality ◽  
Agency Problem ◽  
Audit Fees ◽  
Data Availability ◽  
Board Governance ◽  
Auditor Choice

ABSTRACT Family firms are characterized by less separation between ownership and control (Type 1 agency problem), but greater conflict of interest between controlling insiders and non-controlling outside investors (Type 2 agency problem). Although strong board governance is known to decrease the Type 1 agency problem, its effectiveness in mitigating the adverse consequences of the Type 2 agency problem has not been well documented in the literature. We show that strongly governed family firms are more likely to choose specialist auditors and exhibit higher earnings quality than nonfamily firms. Weakly governed family firms demand lower audit effort and exhibit earnings quality that is no different from that of nonfamily firms. Within family firms, we show that strongly governed family firms choose higher quality audits in the form of a greater use of specialist auditors and higher audit efforts, and exhibit higher earnings quality than other family firms. These findings provide consistent evidence that strong board governance can effectively mitigate the adverse consequences of the Type 2 agency problem on financial reporting and transparency in family firms. Data Availability: The data used are available from the public sources identified in the study.

Internal audit use, earnings quality and external audit fees

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nishaal Prasad ◽  
David Hay ◽  
Li Chen
Keyword(s):  
New Zealand ◽  
Earnings Quality ◽  
Internal Audit ◽  
Audit Fees ◽  
Black Box ◽  
Value Proposition ◽  
Value Drivers ◽  
External Audit ◽  
Content Type ◽  
Sourcing Decisions

Purpose The purpose of this study is to examine the effect of internal audit function (IAF) use on earnings quality and external audit fees using empirical data collected from the New Zealand (NZ) setting. Design/methodology/approach Applying institutional theory as the underlying framework, this study examines an IAF’s ability to demonstrate legitimacy, which will shed light to the functions long-term survival. Using a unique data set from the NZ setting, which combines information obtained from “The Institute of Internal Auditors of New Zealand” with empirical firm data collected from publicly available sources, multivariate analysis is performed to test the prediction that IAF use is associated with earnings quality, measured using discretionary accruals, and external audit fees. Findings There is strong positive association between IAF use and external audit fees, which supports the complementary controls view, where better internal controls increase audit fees by increasing the demand for scope of external audit work. The authors find no significant relationship between IAF use and earnings quality, which is not entirely surprising. Research limitations/implications The aim is to empirically test the IAF value proposition and to delve deeper into the black box of IAF value drivers. Given the size of the NZ economy and limitations of data availability, total sample size used in this study is relatively modest. However, the analysis does yield significant results. Apart from academic contribution to knowledge, this study offers a profound list of practical contributions. Practitioners will be interested to learn about the IAF value proposition from an empirical viewpoint. Senior management (SM) will obtain value from the outcomes when contemplating IAF investment and sourcing decisions. Regulators will be inherently interested in whether IAFs should be mandated. Originality/value The aim is to empirically test IAF value proposition and to delve deeper into the black box of IAF value drivers. To the best of the authors’ knowledge, this is the first NZ-based academic investigation which examines the relationship between IAF use and earnings quality. Apart from academic contribution to knowledge, this study offers a profound list of practical contributions. Practitioners will be interested to learn about the IAF value proposition from an empirical viewpoint. SM will obtain value from the outcomes when contemplating IAF investment and sourcing decisions. Regulators will be inherently interested in whether IAFs should be mandated.

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