Abnormal Audit Fee and Audit Quality

2012 ◽  
Vol 31 (3) ◽  
pp. 1-22 ◽  
Author(s):  
Sharad C. Asthana ◽  
Jeff P. Boone
Keyword(s):  
Bargaining Power ◽  
Audit Quality ◽  
Earnings Forecasts ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Auditor Independence ◽  
Power Increase ◽  
Sarbanes Oxley ◽  
Audit Fee

SUMMARY This study tests the hypotheses that below-normal audit fees signal important nuances in the balance of bargaining power between the auditor and the client, and that such power may ultimately influence audit quality. We find that audit quality, proxied by absolute discretionary accruals and meeting or beating analysts' earnings forecasts, declines as negative abnormal audit fees increase in magnitude, with the effect amplified as proxies for client bargaining power increase. We find that this effect is dampened in years following the Sarbanes-Oxley Act (SOX), suggesting that SOX was effective in enhancing auditor independence.

scholarly journals Do Abnormally High Audit Fees Impair Audit Quality?

2010 ◽  
Vol 29 (2) ◽  
pp. 115-140 ◽  
Author(s):  
Jong-Hag Choi ◽  
Jeong-Bon Kim ◽  
Yoonseok Zang
Keyword(s):  
Financial Reporting ◽  
Normal Level ◽  
Audit Quality ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Negatively Associated ◽  
Audit Fee ◽  
The Difference

SUMMARY: This study examines whether and how audit quality proxied by the magnitude of absolute discretionary accruals is associated with abnormal audit fees, that is, the difference between actual audit fee and the expected, normal level of audit fee. The results of various regressions reveal that the association between the two is asymmetric, depending on the sign of the abnormal audit fee. For observations with negative abnormal audit fees, there is no significant association between audit quality and abnormal audit fee. In contrast, abnormal audit fees are negatively associated with audit quality for observations with positive abnormal audit fees. Our findings suggest that auditors’ incentives to deter biased financial reporting differ systematically, depending on whether their clients pay more than or less than the normal level of audit fee. Our results are robust to a variety of sensitivity checks.

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 Abnormal Audit Fees and Audit Quality: Evidence from the Korean Audit Market

2020 ◽  
Vol 19 (3) ◽  
pp. 37-60
Author(s):  
Matthew J. Behrend ◽  
Sarfraz Khan ◽  
Young Woo Ko ◽  
Sung-Jin Park
Keyword(s):  
Audit Quality ◽  
Earnings Forecasts ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Confounding Effect ◽  
Public Firms ◽  
Audit Market ◽  
Analyst Earnings ◽  
The Relationship ◽  
Quality Evidence

ABSTRACT Do abnormally high or low audit fees reflect audit quality? In this paper, we re-examine this issue after controlling for the confounding effect of audit hours by using a sample of public firms in the Korean audit market, which publicly discloses both audit fees and audit hour information. While we do not find a significant association between abnormally high audit fees and audit quality, we find that abnormally low audit fees are associated with larger discretionary accruals and a higher likelihood of meeting or beating analyst earnings forecasts. Further, we find that the relationship between abnormally low audit fees and audit quality indicators persists regardless of the level of audit hours. To the extent that audit hours represent audit effort, these findings suggest that greater audit effort alone may not lead to higher audit quality as fee pressure from abnormally low fees may discourage the provision of high-quality audit services. JEL Classifications: M42; M48.

Does Fee Disclosure Type Matter? Evidence from Price Adjustment in the Audit Market of Taiwan

2019 ◽  
Vol 18 (3) ◽  
pp. 41-61
Author(s):  
Jengfang Chen ◽  
Rong-Ruey Duh ◽  
Kuei-Fu Li
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Financial Statement ◽  
Price Adjustment ◽  
Regulatory Change ◽  
Public Companies ◽  
Audit Market ◽  
Audit Fee ◽  
The Impact

ABSTRACT While mandatory audit fee disclosure makes fee information transparent, there have been concerns about the impact of price adjustment on audit quality. Taking advantage of a regulatory change in Taiwan that required public companies to disclose audit fee but allowed two alternative disclosure forms (amount disclosure or range disclosure), this study investigates the impact of the fee disclosure form on price adjustment and the influence of such adjustment on audit quality. Using a dataset including audit fees under the two disclosure forms, we find that, for overcharged companies, the downward adjustment is larger for amount disclosure companies than range disclosure companies and such downward adjustment increase discretionary accruals in amount disclosure companies but not for range disclosure companies. Our study helps understand the impact of different fee disclosure forms on price adjustment and audit quality, which should be of interest to regulators and financial statement users in Taiwan and beyond.

Audit Fees and Investor Perceptions of Audit Characteristics

2013 ◽  
Vol 25 (2) ◽  
pp. 71-95 ◽  
Author(s):  
Allison K. Beck ◽  
Robert M. Fuller ◽  
Leah Muriel ◽  
Colin D. Reid
Keyword(s):  
Present State ◽  
Audit Quality ◽  
Contextual Information ◽  
Audit Fees ◽  
Auditor Independence ◽  
Data Availability ◽  
Additional Information ◽  
Audit Fee ◽  
Comparative Audit

ABSTRACT: We investigate how audit fee disclosures affect investor perceptions of audit characteristics. We find evidence that when audit fees are presented to investors with supplementary contextual information indicating that the fees are low, average, or high (as compared to industry averages), investors perceive audit quality and auditor effort as being low, average, or high, respectively. When not provided with any additional information concerning the audit fee (similar to the present state of disclosures), investors assess audit quality and auditor effort as being average. Surprisingly, we find that while investors perceive auditor independence as low, average, and high when fees are presented as high, average, or low, respectively, investors not provided with any relative fee information assess auditor independence as low, similar to the investors who are presented with high relative fees. This latter finding provides important insight regarding investors' current perceptions of auditor independence, particularly in the absence of relative or comparative audit fee information. Data Availability: Contact the authors.

The association between abnormal audit fees and audit quality after IFRS adoption

2016 ◽  
Vol 24 (3) ◽  
pp. 252-271 ◽  
Author(s):  
Soo-Jung Jung ◽  
Bum-Joon Kim ◽  
Ju-Ryum Chung
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Content Type ◽  
Discretionary Accrual ◽  
Ifrs Adoption ◽  
Audit Fee ◽  
The Impact ◽  
The Relationship

Purpose This paper aims to examine how the relationship between abnormal audit fees and audit quality changed after adoption of the International Financial Reporting Standards (IFRS) in Korea. Design/methodology/approach Using empirical data collected over the period from 2008 to 2013, this study analyzes the association between abnormally high/low audit fee and audit quality. This study uses linear regression to test the hypothetical relation using discretionary accrual as a proxy for audit quality. Findings This study finds that there exists no significant relationship between abnormally high audit fees and audit quality measured by the magnitude of discretionary accruals in the pre-IFRS adoption period. However, the relationship between abnormally high audit fees and the magnitude of discretionary accruals turns to be positive in the post-IFRS adoption period. These finding suggests that the IFRS enables some clients to engage more discretion in the choice of discretionary accruals and auditors charge higher audit fees in return for allowing the discretion for such clients. Practical implications This study provides insight to regulators of the need to review carefully the financial statements of firms with abnormally high audit fees, and to investors to be more cautious when using financial information about these firms. Originality/value To the best of authors’ knowledge, this is the first study to assess IFRS impact on audit fee-quality relation. Also, unique Korean audit market with intensifying competition and discounting audit fee provides interesting setting to review the impact of abnormal audit fee on audit quality.

scholarly journals HOW DECISION MAKING TO THE AUDIT FEE, AUDIT COMMITTEE ON A AUDIT QUALITY

2018 ◽  
Vol 15 (2) ◽  
pp. 45
Author(s):  
Aprilya Dwi Yandari ◽  
Erina Sudaryati
Keyword(s):  
Decision Making ◽  
Audit Committee ◽  
Audit Quality ◽  
Financial Statements ◽  
Audit Fees ◽  
Auditor Independence ◽  
Accounting Firm ◽  
Report Result ◽  
Audit Fee ◽  
Client Pressure

This article writes related the purpose of writing is to measure the extent of audit fees, audit committee on audit quality in a decision making. When to pay a fee should not be done by an auditee, because avoiding the existence of a form of problem to the loss of an auditor independence. Especially for clients who have opinions other than unqualified (WTP). It may also encourage an auditee to pressure the auditor, such as the form of pressure that will replace his or her public accounting firm with another accounting firm. Fee audit and audit committee are very influential in audit quality, when the actual audit cost is higher than normal audit cost. And then, audit fee of expensive can create an incentive to the auditor to agree on client pressure in a form of report result so that it can result to quality audit. In addition, audit fees also arise over a clients business risk relationship which has important implications for the obligation of an independent auditor for an audit that has been allegedly negligent in doing so, as well as on audit fees which theoretically relate to both an audit effort and a business's risk auditors. Keywords: Fee Audit, Audit Committee, Audit Quality, Financial Statements

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.

Who Did the Audit? Audit Quality and Disclosures of Other Audit Participants in PCAOB Filings

2014 ◽  
Vol 90 (5) ◽  
pp. 1939-1967 ◽  
Author(s):  
Carol Callaway Dee ◽  
Ayalew Lulseged ◽  
Tianming Zhang
Keyword(s):  
Audit Quality ◽  
Market Reaction ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Multivariate Model ◽  
Significant Decline ◽  
Earnings Response Coefficients ◽  
Absolute Value ◽  
Earnings Response ◽  
First Time

ABSTRACT We empirically test whether audit quality is affected when part of an SEC issuer's audit is outsourced to auditors other than the principal auditor (“participating auditors”). We find a significantly negative market reaction and a significant decline in earnings response coefficients (ERCs) for experimental issuers disclosed for the first time as having participating auditors involved in their audits. However, we find no market reaction and no decline in ERCs for a matching sample of issuers that are not disclosed as using participating auditors, nor for issuers disclosed for the second or third time as using participating auditors. We also find actual audit quality as measured by absolute value of performance-matched discretionary accruals is lower for the experimental issuers, although we find no difference in audit fees paid by the experimental and matching issuers in a multivariate model. Our findings suggest that the PCAOB's proposed rule requiring disclosure of the use of other auditors in addition to the principal auditor would provide information useful to investors in assessing audit quality for SEC issuers.

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.

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