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

2014 ◽  
Vol 90 (4) ◽  
pp. 1517-1546 ◽  
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.

The Effect of Office Changes within Audit Firms on Clients' Audit Quality and Audit Fees

2020 ◽  
Vol 39 (1) ◽  
pp. 71-99
Author(s):  
Carl W. Hollingsworth ◽  
Terry L. Neal ◽  
Colin D. Reid
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Additional Analysis ◽  
Audit Firm ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact ◽  
Audit Partner Rotation

SUMMARY While prior research has examined audit firm and audit partner rotation, we have little evidence on the impact of within-firm engagement team disruptions on the audit. To examine these disruptions, we identify a unique sample of companies where the audit firm issuing office changed but the audit firm did not change and investigate the effect of these changes on the audit. Our results indicate that companies that have a change in their audit firm's issuing office exhibit a decrease in audit quality and an increase in audit fees. In additional analysis, we partition office changes into two groups—client driven changes and audit firm driven changes. This analysis reveals that client driven changes are more likely to result in a higher audit fee while audit quality is unchanged. Conversely, audit firm driven changes do not result in a higher audit fee but do experience a decrease in audit quality.

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

2015 ◽  
Vol 91 (3) ◽  
pp. 767-792 ◽  
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.

scholarly journals Auditing and earnings management in New Zealand

2021 ◽  
Author(s):  
◽  
Nam Hoai Le
Keyword(s):  
Earnings Management ◽  
Significant Relationship ◽  
Audit Quality ◽  
Auditor Independence ◽  
Audit Opinion ◽  
Audit Firm ◽  
Empirical Results ◽  
Dummy Variable ◽  
Audit Fee ◽  
Client Firm

<p>The research summarised in this thesis focuses on two research issues of particular importance to the New Zealand economy. First, the thesis examines the impact of audit factors on the level of earnings management. Second, the thesis empirically assesses the relationship between the level of earnings management and the audit fees charged by audit firms. In the empirical work summarised in this thesis I use the absolute value of discretionary accruals (DACCs) as a proxy for earnings management. I estimate DACCs for each sample firm by using the modified Jones (1991) model. Moreover, several auditor characteristics have been employed in the thesis as proxies for auditor quality and independence. I use a BIG4 dummy variable (that equals 1 if the auditor is a Big 4 audit firm and 0 otherwise), an AOFFICE dummy variable (that equals 1 if the audit firm’s office is located in Wellington or Auckland and 0 otherwise), an AO dummy variable (that equals 1 if the client firm receives a qualified or conditional audit opinion and 0 otherwise) and a FISCAL dummy variable (that equals 1 if the client firm’s fiscal year-end falls in the period from March to June and 0 otherwise) as proxies for audit quality. I also use a RNAF variable (as measured by the ratio of non-audit fees to total fees paid) and a C_AUDITOR dummy variable (that equals 1 if a client firm changes its audit firm and 0 otherwise) as proxies for auditor independence in relation to the level of DACCs. The empirical results summarised in the thesis show that the level of DACCs is significantly and negatively associated with the BIG4 and AOFFICE variables. This result is consistent with the common perception that higher quality auditors will lead to a higher audit quality and that this in turn will reduce level of DACCs. I also find a positive and statistically significant relationship between the FISCAL variable and the level of DACCs. This result indicates that DACCs are likely to be higher if the audit is conducted during the busy audit season. The empirical results summarised in the thesis also show a positive and significant relationship between the audit opinion (AO) variable and the level of DACCs. This means that a qualified or conditional audit opinion is more likely to occur if the financial statements involve a relatively higher level of DACCs. However, the empirical results summarised in the thesis report an insignificant relationship between the level of DACCs and the C_AUDITOR and RNAF variables. These results mean that auditor independence does not appear to have any impact on the level of DACCs. In part two of this thesis, I examine whether the level of DACCs in the current year is associated with the level of the audit fee in the next ensuing year. Here it is well known that each year the auditor will review both the general and specific factors affecting their audit responsibilities in relation to a particular audit client. Hence, the agreed audit fee for the next ensuing year is likely to reflect information about the level of earnings management in prior years and of how the issues arising out of these earnings management procedures have been resolved between the client firm and the audit firm. In order to test this hypotheses, I employ the audit fee model of Simunic (1980) as refined by Choi et al. (2009), Francis and Simon (1987), Hay et al. (2006b) and Menon and Williams (2001). As expected, the second set of empirical results summarised in the thesis show a positive and statistically significant relationship between the level of DACCs in the current year and the level of the audit fee in the next ensuing year. This means that a high level of DACCs in the current year will impact positively on the level of the audit fee in the next ensuing year.</p>

scholarly journals Additional Evidence On The Large Audit-Firm Fee Premium As An Indication Of Auditor Quality

2011 ◽  
Vol 13 (4) ◽  
pp. 21 ◽  
Author(s):  
Daniel T. Simon
Keyword(s):  
Audit Quality ◽  
Strong Relationship ◽  
Audit Fees ◽  
Accounting Firms ◽  
Audit Firm ◽  
Audit Firms ◽  
Auditor Quality ◽  
Audit Fee ◽  
Big Six ◽  
Big Eight

<span>Several studies of the U.S. market for audit services have found evidence of a large audit-firm fee premium. This premium has been interpreted as an indication that large audit firms (typically defined as the Big Eight, now the Big Six), considered as a group, receive higher fees than non-Big Eight firms and thus are perceived to provide higher quality audit services. A common interpretation has been that there is a strong relationship between audit firms size and audit quality. That is, the observed Big Eight fee premium has been interpreted as evidence that this group of large auditors, as a whole, is perceive to provide higher quality audits. Using larger samples than previous studies, this paper decomposes the large auditor fee premium into a separate fee premium effect for each auditor. The results suggest that the observed fee premium is attributable to a subset of large auditors, and therefore it is possible that not all of this group of large audit firms are perceived as offering significantly different audit products, at least when differential audit fees and used as a measure of product differentiation. In addition, when observed audit fee premiums are related to other proxies for auditor quality, there is confirming evidence that large accounting firms are not perceived as a homogeneous group with respect to audit quality.</span>

scholarly journals Is Enhanced Audit Quality Associated with Greater Real Earnings Management?

2011 ◽  
Vol 25 (2) ◽  
pp. 315-335 ◽  
Author(s):  
Wuchun Chi ◽  
Ling Lei Lisic ◽  
Mikhail Pevzner
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Audit Fees ◽  
Unintended Consequence ◽  
Real Earnings Management ◽  
Audit Firm ◽  
Management Incentives ◽  
Auditor Tenure ◽  
Earnings Benchmarks ◽  
Jel Classifications

SYNOPSIS We examine whether firms resort to real earnings management when their ability to manage accruals is constrained by higher quality auditors. In settings involving strong upward earnings management incentives, i.e., for firms that meet or just beat earnings benchmarks and firms that issue seasoned equities, we find that city-level auditor industry expertise and audit fees are associated with higher levels of real earnings management. We find similar, albeit weaker, results for the Big N auditors. Our paper suggests an unintended consequence of higher quality auditors constraining accrual earnings management, namely, firms resorting to potentially even more costly real earnings management. We also find that longer auditor tenure is associated with greater real earnings management, which could suggest merits of mandating audit firm rotation. JEL Classifications: M40; M41.

scholarly journals PERAN AUDIT FEE DAN FAKTOR YANG MEMPENGARUHI KUALITAS AUDIT

2021 ◽  
Vol 13 (1) ◽  
pp. 32-45
Author(s):  
Zalfa Shafira Qatrunnada ◽  
Siti Sundari
Keyword(s):  
Audit Quality ◽  
Hypothesis Test ◽  
Sampling Technique ◽  
Audit Fees ◽  
Firm Reputation ◽  
Quality Audit ◽  
Audit Firm ◽  
Purposive Sampling ◽  
Auditor Switching ◽  
Audit Fee

Abstract: This research purpose to obtain empirical evidence regarding factor that has an influence on audit quality, such as the audit firm reputation, audit tenure and auditor switching with audit fees as the moderating. Company of manufacturing consumer goods industry sector listed on the Indonesia Stock Exchange (IDX) in 2015-2019 are used as the population in this study. Used 115 samples wich determined by purposive sampling technique. This study used logistic regression analysis with SPSS v.26 as an analysis technique. The result of hypothesis test showed that audit firm reputation has no significant effect on audit quality, audit tenure has a positive and significant effect on audit quality, auditor switching has no significant effect on audit quality, audit fees are not moderate the effect of audit firm reputation on audit quality, audit fees are weaken the effect of audit tenure on audit quality, and audit fees are not moderate the effect of auditor switching on audit quality. Abstrak: Tujuan dari penelitian berikut untuk memperoleh bukti empiris mengenai sejumlah faktor yang memberikan pengaruh terhadap kualitas audit seperti reputasi KAP, audit tenure dan auditor switching dengan audit fee sebagai pemoderasi pada perusahaan manufaktur bidang industri barang konsumsi yang terdaftar pada Bursa Efek Indonesia periode tahun 2015-2019. Sampel penelitian berjumlah 115 pengamatan yang ditetapkan dengan metode purposive sampling. Analisis data menggunakan regresi logistic dengan memanfatkan perangkat lunak SPSS v.26. Hasil penelitian menunjukkan audit tenure berpengaruh positif dan signifikan terhadap kualitas audit, sedangkan reputasi KAP dan auditor switching tidak berpengaruh signifikan terhadap kualitas audit. Selain itu, audit fee memperlemah pengaruh audit tenure terhadap kualitas audit, namun audit fee tidak mampu memoderasi pengaruh auditor switching dan reputasi KAP terhadap kualitas audit.

scholarly journals Auditing and earnings management in New Zealand

2021 ◽  
Author(s):  
◽  
Nam Hoai Le
Keyword(s):  
Earnings Management ◽  
Significant Relationship ◽  
Audit Quality ◽  
Auditor Independence ◽  
Audit Opinion ◽  
Audit Firm ◽  
Empirical Results ◽  
Dummy Variable ◽  
Audit Fee ◽  
Client Firm

<p>The research summarised in this thesis focuses on two research issues of particular importance to the New Zealand economy. First, the thesis examines the impact of audit factors on the level of earnings management. Second, the thesis empirically assesses the relationship between the level of earnings management and the audit fees charged by audit firms. In the empirical work summarised in this thesis I use the absolute value of discretionary accruals (DACCs) as a proxy for earnings management. I estimate DACCs for each sample firm by using the modified Jones (1991) model. Moreover, several auditor characteristics have been employed in the thesis as proxies for auditor quality and independence. I use a BIG4 dummy variable (that equals 1 if the auditor is a Big 4 audit firm and 0 otherwise), an AOFFICE dummy variable (that equals 1 if the audit firm’s office is located in Wellington or Auckland and 0 otherwise), an AO dummy variable (that equals 1 if the client firm receives a qualified or conditional audit opinion and 0 otherwise) and a FISCAL dummy variable (that equals 1 if the client firm’s fiscal year-end falls in the period from March to June and 0 otherwise) as proxies for audit quality. I also use a RNAF variable (as measured by the ratio of non-audit fees to total fees paid) and a C_AUDITOR dummy variable (that equals 1 if a client firm changes its audit firm and 0 otherwise) as proxies for auditor independence in relation to the level of DACCs. The empirical results summarised in the thesis show that the level of DACCs is significantly and negatively associated with the BIG4 and AOFFICE variables. This result is consistent with the common perception that higher quality auditors will lead to a higher audit quality and that this in turn will reduce level of DACCs. I also find a positive and statistically significant relationship between the FISCAL variable and the level of DACCs. This result indicates that DACCs are likely to be higher if the audit is conducted during the busy audit season. The empirical results summarised in the thesis also show a positive and significant relationship between the audit opinion (AO) variable and the level of DACCs. This means that a qualified or conditional audit opinion is more likely to occur if the financial statements involve a relatively higher level of DACCs. However, the empirical results summarised in the thesis report an insignificant relationship between the level of DACCs and the C_AUDITOR and RNAF variables. These results mean that auditor independence does not appear to have any impact on the level of DACCs. In part two of this thesis, I examine whether the level of DACCs in the current year is associated with the level of the audit fee in the next ensuing year. Here it is well known that each year the auditor will review both the general and specific factors affecting their audit responsibilities in relation to a particular audit client. Hence, the agreed audit fee for the next ensuing year is likely to reflect information about the level of earnings management in prior years and of how the issues arising out of these earnings management procedures have been resolved between the client firm and the audit firm. In order to test this hypotheses, I employ the audit fee model of Simunic (1980) as refined by Choi et al. (2009), Francis and Simon (1987), Hay et al. (2006b) and Menon and Williams (2001). As expected, the second set of empirical results summarised in the thesis show a positive and statistically significant relationship between the level of DACCs in the current year and the level of the audit fee in the next ensuing year. This means that a high level of DACCs in the current year will impact positively on the level of the audit fee in the next ensuing year.</p>

Impact of firm’s specific factors on audit fee of quoted consumer goods firms

2020 ◽  
Vol 4 (1) ◽  
pp. 47-55
Author(s):  
Wasiu Ajani Musa ◽  
Ramat Titilayo Salman ◽  
Ibrahim Olayiwola Amoo ◽  
Muhammed Lawal Subair
Keyword(s):  
Consumer Goods ◽  
Audit Quality ◽  
Audit Fees ◽  
Ordinary Least Squares ◽  
P Value ◽  
Chi Square ◽  
Ifrs Adoption ◽  
Audit Fee ◽  
Specific Factors ◽  
The Impact

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.

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

2016 ◽  
Vol 36 (2) ◽  
pp. 1-19 ◽  
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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