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.

Family firms, political connections and audit fees: evidence from Malaysian firms

2018 ◽  
Vol 33 (6/7) ◽  
pp. 613-632 ◽  
Author(s):  
Chwee Ming Tee
Keyword(s):  
Family Firms ◽  
Audit Fees ◽  
Emerging Economy ◽  
Political Connections ◽  
Advanced Economy ◽  
Content Type ◽  
Self Selection ◽  
Institutional Feature

Purpose The purpose of this study is to examine the association between family firms and audit fees in an emerging economy setting. As family firms either face Type 1 or Type 2 agency problem, it seeks to gain a better understanding on family firms in an emerging economy such as Malaysia. Additionally, this study introduces political connections to investigate whether it can moderate the association between family firms and audit fees. Political connection is chosen as an important institutional feature because of its many and well-documented politically connected firms and pervasive political patronage system in Malaysia. Design/methodology/approach Based on a dataset of 750 firms or 7,848 firm-year observations from 2002 till 2015, panel regression analysis is used to investigate the research questions. As a robustness test, Heckman’s self-selection model is used to deal with the self-selection problem. Findings The results reveal that family firms are associated with higher audit fees, indicating that Type 2 dominates Type 1 agency problems in Malaysia. This positive relationship is stronger in family firms which are older and have higher family controlling shareholding. Further, the association is exacerbated if it is also connected to the ruling elite. Originality/value This study contributes to the literature by showing that institutional feature such as family firms and political connections can produce different firm outcomes between emerging and advanced economy, particularly in auditing. This study responds to calls for more research on auditing in family firms, particularly in emerging economy.

IT Does Matter: The Folly of Ignoring IT Material Weaknesses

2018 ◽  
Vol 32 (2) ◽  
pp. 37-55 ◽  
Author(s):  
Gene Kim ◽  
Vernon J. Richardson ◽  
Marcia Weidenmier Watson
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Negative Impact ◽  
Earnings Quality ◽  
Audit Fees ◽  
Data Availability ◽  
The Public ◽  
Material Weaknesses ◽  
Reporting Systems ◽  
Internal Control Weaknesses

SYNOPSIS Information technology (IT) has a large and growing impact on firms and executives. While there are questions about the ability of IT to create a competitive advantage, we make the case that ignoring IT may be to an organization's and its executives' peril. Using the lens of internal control issues associated with financial reporting systems, we illustrate how internal control weaknesses associated with IT (ITMWs) can have both a dramatic and negative impact on the firm and its leadership. ITMWs take longer to remediate; are associated with more subsequent restatements, less accurate forecasts, higher audit fees, and lower earnings quality; and are more likely associated with executives losing their positions than non-ITMWs. We argue that ITMW remediation requires more time to plan, rewrite, and implement IT changes than to implement non-IT changes. Extant literature suggests that executives should focus their efforts on IT vulnerabilities and risks rather than IT opportunities. Data Availability: Data are available from the public sources cited in the text.

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.

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.

Family ownership and financial reporting quality: Iranian evidence

2018 ◽  
Vol 8 (3) ◽  
pp. 339-356 ◽  
Author(s):  
Mahmoud Mousavi Shiri ◽  
Mahdi Salehi ◽  
Fatemeh Abbasi ◽  
Shayan Farhangdoust
Keyword(s):  
Financial Reporting ◽  
Family Firms ◽  
Stock Exchange ◽  
Accounting Information ◽  
Reporting Quality ◽  
Audit Fees ◽  
Financial Reporting Quality ◽  
Family Ownership ◽  
Content Type

PurposeIn the process of reporting accounting information, the auditor’s objective is to detect possible misstatements and errors in accounting information. Audit evidence aids auditors in providing reasonable assurance about the quality of financial reporting. Studying the quality of family firms’ financial reporting is of higher importance relative to non-family firms due to lower risk of accounting manipulation. Therefore, the purpose of this paper is to examine the relationship between family ownership structure and financial reporting quality from an auditing perspective.Design/methodology/approachTo analyze the research hypotheses, the authors use a sample data consisted of 221 companies listed on the Tehran Stock Exchange (including 52 family and 169 non-family firms) over a five-year span from 2011 to 2015.FindingsUsing multivariate regression analysis of panel data, our results indicate that audit risk in family firms is lower than their counterparts. Likewise, the findings are indicative of lower audit fees paid by family firms as compared to non-family ones. The authors also find that auditors put more effort in family firms and thus audit effort is more significant for these kinds of firms.Originality/valueThe study focuses on family ownership and financial reporting quality in a developing country like Iran and the results of the study may be beneficial to other developing nations, as Iran stock market possesses some unique features which are not normally prevailing in other equity markets, even in the Middle East.

The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and Evidence

2012 ◽  
Vol 87 (6) ◽  
pp. 2061-2094 ◽  
Author(s):  
Jeong-Bon Kim ◽  
Xiaohong Liu ◽  
Liu Zheng
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Financial Reporting Quality ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Audit Fee ◽  
European Union Countries ◽  
The Impact

ABSTRACT: This study examines the impact of International Financial Reporting Standards (IFRS) adoption on audit fees. We first build an analytical audit fee model to analyze the impact on audit fees for the change in both audit complexity and financial reporting quality brought about by IFRS adoption. We then test the model's predictions using audit fee data from European Union countries that mandated IFRS adoption in 2005. We find that mandatory IFRS adoption has led to an increase in audit fees. We also find that the IFRS-related audit fee premium increases with the increase in audit complexity brought about by IFRS adoption, and decreases with the improvement in financial reporting quality arising from IFRS adoption. Finally, we find some evidence that the IFRS-related audit fee premium is lower in countries with stronger legal regimes. Our results are robust to a variety of sensitivity checks. Data availability: Data are available from public sources identified in the paper.

Do Auditors Recognize the Potential Dark Side of Executives' Accounting Competence?

2018 ◽  
Vol 93 (6) ◽  
pp. 1-28 ◽  
Author(s):  
Anne Albrecht ◽  
Elaine G. Mauldin ◽  
Nathan J. Newton
Keyword(s):  
Financial Reporting ◽  
Prior Experience ◽  
Financial Statements ◽  
Audit Fees ◽  
Data Availability ◽  
Dark Side ◽  
Audit Fee ◽  
Aggressive Attitude ◽  
Jel Classifications

ABSTRACT Practice and research recognize the importance of extensive knowledge of accounting and financial reporting experience for generating reliable financial statements. However, we consider the possibility that such knowledge and experience increase the likelihood of material misstatement when executives have incentives to misreport. We use executives' prior experience as an audit manager or partner as a measure of extensive accounting and financial reporting competence. We find that the interaction of this measure and compensation-based incentives increases the likelihood of misstatements. Further, auditors discount the audit fee premium associated with compensation-based incentives when executives have accounting competence. Together, our results suggest that a dark side of accounting competence emerges in the presence of certain incentives, but auditors view accounting competence favorably despite the heightened risk. In further analyses, we demonstrate that executives' aggressive attitude toward reporting exacerbates the effect of accounting competence and compensation-based incentives on misstatements, but not on audit fees. JEL Classifications: M41; M42. Data Availability: Data are available from public sources identified in the text.

Organized Labor and Audit Fees

2017 ◽  
Vol 31 (4) ◽  
pp. 93-108 ◽  
Author(s):  
Lin Cheng ◽  
Santanu Mitra ◽  
Hakjoon Song
Keyword(s):  
Financial Reporting ◽  
Empirical Relationship ◽  
Negative Relationship ◽  
Audit Fees ◽  
Data Availability ◽  
Organized Labor ◽  
Firm Level ◽  
Unionization Rate ◽  
Reporting Decisions ◽  
The Impact

SYNOPSIS This study investigates the empirical relationship between organized labor and audit fees. We find that audit fees are negatively related to the firm-level unionization rate—the higher the unionization rate, the lower the audit fees. We further observe that the unionized firms are less likely to hire Big 4 or industry-specialist auditors. Additional analyses show that the negative relationship between the firm-level unionization rate and audit fees is significantly attenuated for unionized firms with poor financial performance. Our results are consistent with unionized firms preferring less audit scrutiny, which helps them maintain information asymmetry with the labor unions. The study facilitates our understanding of firms' demand for audit services and the consequential effect on audit fees when faced with strong organized labor, and adds to the extant literature investigating the impact of organized labor on various aspects of firms' financial reporting decisions. JEL Classifications: M41; M42. Data Availability: Data used in the analyses are obtained from public sources described in the text.

Auditor Choice and the Informativeness of 10-K Reports

2021 ◽  
pp. 0148558X2110624
Author(s):  
Karel Hrazdil ◽  
Dan A. Simunic ◽  
Nattavut Suwanyangyuan
Keyword(s):  
Financial Reporting ◽  
Audit Fees ◽  
Annual Reports ◽  
Client Characteristics ◽  
Cross Sectional ◽  
Accrual Quality ◽  
Auditor Choice ◽  
Joint Product ◽  
Big 4

This study provides new evidence on the influential role of external auditors in enhancing the informativeness of form 10-K annual reports to shareholders. Specifically, we find that the client’s choice of a Big 4 auditor (PwC, EY, KPMG, and Deloitte) versus a non-Big 4 auditor contributes to cross-sectional variations in 10-K disclosure volume. We also document that the benefit of enhanced disclosures provided by Big 4 auditors is more pronounced for audit clients with poorer accrual quality and those with higher information asymmetry. Furthermore, we introduce the portion of 10-K length unexplained by operating complexity and observable client characteristics as a new proxy for audit firm effort. Specifically, we find that abnormally long disclosures are associated with higher audit fees and longer audit report lag, which implies that an incremental level of audit effort can be inferred from the discretionary component of 10-K disclosures. As audit effort is costly, a greater volume of 10-K disclosures can be expected to be associated with an improvement in the quality of financial reporting. Overall, our findings show that auditors play more than a simple attestation role in the financial reporting process, and that the quality of financial reporting in a company’s 10-K annual report is a joint product of the effort and decisions of both a company’s managers and its auditors.

Auditor Choice and Audit Fees in Family Firms: Evidence from the S&P 1500

2013 ◽  
Vol 32 (4) ◽  
pp. 71-93 ◽  
Author(s):  
Joanna L. Ho ◽  
Fei Kang
Keyword(s):  
Family Firms ◽  
Agency Problems ◽  
Audit Fees ◽  
Additional Analysis ◽  
Audit Risk ◽  
Auditor Choice ◽  
Using Data

SUMMARY We examine auditor choice and audit fees in family firms using data from Standard & Poor's (S&P) 1500 firms. We find that, compared to non-family firms, family firms are less likely to hire top-tier auditors due to the less severe agency problems between owners and managers. Our results also show that family firms, on average, incur lower audit fees than non-family firms, which is driven by family firms' lower demand for external auditing services and auditors' perceived lower audit risk for family firms. Our additional analysis indicates that the tendency of family firms to hire non-top-tier auditors and to pay lower audit fees is stronger when family owners actively monitor their firms.

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