The Impact of CEO and CFO Equity Incentives on Audit Scope and Perceived Risks as Revealed Through Audit Fees

2014 ◽  
Vol 33 (2) ◽  
pp. 111-139 ◽  
Author(s):  
Yezen H. Kannan ◽  
Terrance R. Skantz ◽  
Julia L. Higgs
Keyword(s):  
Executive Compensation ◽  
Positive Association ◽  
Audit Fees ◽  
Share Price ◽  
The Public ◽  
Audit Planning ◽  
Fraud Risk ◽  
Equity Incentives ◽  
Public Company ◽  
The Impact

SUMMARY: In 2013, the Public Company Accounting Oversight Board (PCAOB) proposed an amendment to Auditing Standard No. 12 (PCAOB 2010) that would require auditors to consider executive compensation in audit planning because of potential fraud risk associated with equity incentives. We use the association between audit fees and CEO and CFO equity incentives to infer whether auditors increase audit scope and perceive greater risk as equity incentives increase. Equity incentives are defined as the sensitivity of the value of executives' equity portfolios to changes in share price (delta incentive) and to changes in return volatility (vega incentive). We find a positive association between audit fees and vega, but not delta. However, when we interact vega with proxies for residual auditor business risk, we find that the fee premiums for risk decrease as vega increases. Our results suggest that auditors do consider executive compensation in audit planning.

Convertible debt usage and the pricing of audit services

2021 ◽  
Author(s):  
Henri Akono ◽  
Heeick Choi ◽  
Khondkar Karim
Keyword(s):  
Functional Form ◽  
Positive Association ◽  
Audit Fees ◽  
Market Valuation ◽  
Litigation Risk ◽  
Business Risk ◽  
Convertible Debt ◽  
The Public ◽  
Earnings Per Share ◽  
Public Company

This study examines the association between convertible debt usage and the pricing of audit services. We test the (nondirectional) hypothesis that convertible debt usage is associated with audit effort and therefore fees, due to its association with client business risk and its dilutive effect on earnings per share. We find a positive association between audit fees and convertible debt, suggesting that auditors view convertible debt as a source of risk. We also find that audit fees related to convertible debt are sensitive to CEO bonus incentives and to market valuation incentives. Our results suggest that following the Public Company Accounting Oversight Board (PCAOB) regulation, auditors exert greater effort on convertible debt, but no additional effort on straight debt. Our inferences are robust to using a change in audit fees specification, controlling for litigation risk, and controlling for functional form misspecification.

The Impact of PCAOB Auditing Standard No. 5 on Audit Fees and Audit Quality

2012 ◽  
Vol 26 (3) ◽  
pp. 493-511 ◽  
Author(s):  
Dechun Wang ◽  
Jian Zhou
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Test Sample ◽  
Large Sample ◽  
The Public ◽  
Public Company ◽  
The Impact ◽  
Jel Classifications

SYNOPSIS We investigate the impact of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5 (AS5) on audit fees and audit quality. AS5 supersedes Auditing Standard No. 2 (AS2), and became effective for audits for accelerated filers for fiscal years ending on or after November 15, 2007. Using a large sample of accelerated filers subject to AS5, we find evidence that audit fees decrease upon the adoption of AS5. More importantly, even though AS5 adoption reduces audit fees for our test sample, we find no evidence of a decrease in audit quality. In summary, we document evidence that AS5 improves the efficiency of internal control audits. JEL Classifications: M41.

The Influence of Documentation Specificity and Priming on Auditors' Fraud Risk Assessments and Evidence Evaluation Decisions

2010 ◽  
Vol 85 (2) ◽  
pp. 547-571 ◽  
Author(s):  
Jacqueline S. Hammersley ◽  
E. Michael Bamber ◽  
Tina D. Carpenter
Keyword(s):  
Unintended Consequence ◽  
Risk Assessments ◽  
Planning Stage ◽  
The Public ◽  
Audit Planning ◽  
Fraud Risk ◽  
Support Theory ◽  
Public Company ◽  
Evidence Evaluation ◽  
Fraud Risk Assessments

ABSTRACT: The Public Company Accounting Oversight Board (PCAOB) recently suggested that auditors' lack of specific fraud planning documentation has led auditors to devote insufficient attention to fraud risks in subsequent audit work. Guided by Support Theory, we experimentally investigate how the specificity of fraud risk documentation during audit planning influences auditors' subsequent audit work. We also examine the effect of priming auditors about the fraud risks identified during planning before they begin subsequent evidence evaluation. We find that auditors' planning stage efforts affect subsequent fraud risk assessments and evidence evaluation decisions. Unprimed auditors who receive more specific documentation increase their fraud risk assessments and evidence requests. Priming's effects are more complex. Priming auditors who receive summary documentation also increases fraud risk assessments and evidence requests; however, priming auditors who receive specific documentation reduces these judgments because the priming makes the client-specific risks seem less typical. Accordingly, the PCAOB's call for more documentation can have the unintended consequence of reducing auditors' sensitivity to fraud.

scholarly journals Evidence on the Impact of Internal Control over Financial Reporting on Audit Fees

2019 ◽  
Vol 9 (3) ◽  
pp. 1
Author(s):  
Mohamed Gaber ◽  
Samy Garas ◽  
Edward J. Lusk
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Public Information ◽  
Audit Fees ◽  
Stock Trading ◽  
Audit Opinion ◽  
The Public ◽  
Public Company ◽  
Effective Group ◽  
The Impact

Introduction: Circa 1992, the dot.com sector created an irrational stock-trading market where the usual “financial” profiles of: Liquidity, Cash Flow from Operations, and Revenue generation were replaced by Ponzi-esque mayhem. To stabilize the markets, the Public Company Accounting Oversight Board [PCAOB] required a second audit opinion: the COSO Opinion on the adequacy of management’s system of Internal Control over Financial Reporting: [ICoFR].Study Focus: Three COSO-[ICoFR] designations are now required as public information: (i) A “clean” opinion [Is Effective], (ii) Deficiencies are noted, and (iii) Weaknesses reported. Our research interest is to determine, for a panel of randomly selected firms traded on the S&P500 for a eleven-year period: 2005 to 2015, the nature of the effect that the COSO deficiency reporting protocol has on (i) Audit Fees and (ii) the Market Cap of traded firms.Method: To this end we collected, using the Audit Analytics Ô[WRDSÔ] database, various categories of reported Audit Fees and also Market Cap information. This random sample was classified into two sets: the first group: Is Effective SEC 302 Designation and No COSO issues & the second group: Is Not 100% Effective for which there were SEC 302 Deficiencies or Weaknesses noted.Results: Inferential testing indicates that failure to attend to the PCAOB-COSO imperatives results in a relational where there are higher Audit Fees and a slippage of the firm’s Market Cap compared to the Is Effective Group. The PCAOB’s protocol to require the Audit of the firm’s ICoFR system and make that evaluation public information seems to be an excellent corrective “Carrot and Stick”.

The Impact of PCAOB Auditing Standard No. 5, the PCAOB Inspection Regime, and the Great Recession on Audit Fees and Audit Quality

2020 ◽  
pp. 0148558X2098220
Author(s):  
Elizabeth S. Johnson ◽  
Kenneth J. Reichelt ◽  
Jared S. Soileau
Keyword(s):  
Great Recession ◽  
Audit Quality ◽  
Audit Fees ◽  
The Public ◽  
The Great Recession ◽  
Audit Firms ◽  
Public Company ◽  
Audit Approach ◽  
The Impact

We investigate the coinciding effects of the implementation of Auditing Standard No. 5 (AS5), the change in the Public Company Accounting Oversight Board’s (PCAOB) inspection regime, and the Great Recession on the audit fees and audit quality of accelerated filers. AS5 took effect in November 2007 and promulgated a top-down, risk-based audit approach to SOX 404(b) audits of accelerated filers. Concurrently, the PCAOB adopted a stricter approach to its inspections of audit firms, which encouraged them to improve audit quality and reduce audit fees. Moreover, the Great Recession pressured audit firms to reduce fees. We find that, following the three events, audit fees decreased and quality increased for accelerated filers. We also find that audit fees and audit quality increased for non-accelerated filers, although these filers were not directly affected by AS5.

CEO and CFO Equity Incentives and the Pricing of Audit Services

2013 ◽  
Vol 33 (2) ◽  
pp. 1-25 ◽  
Author(s):  
B. Anthony Billings ◽  
Xinghua Gao ◽  
Yonghong Jia
Keyword(s):  
Positive Association ◽  
Audit Fees ◽  
Internal Controls ◽  
Audit Risk ◽  
Pricing Decisions ◽  
Equity Incentives ◽  
Accounting Scandals ◽  
Using Data ◽  
Distinctive Role

SUMMARY: The alleged perverse role of managerial incentives in accounting scandals, and the distinctive role of auditors in identifying and intervening in attempted earnings manipulation, highlight the importance of explicitly considering executive incentive plans by auditors in the auditing process. By empirically testing auditors' responses to CEO/CFO equity incentives in planning and pricing decisions using data from 2002 through 2009, we document compelling evidence that CFO equity incentives are positively associated with audit fees and CEO equity incentives are not statistically related to audit fees, suggesting that auditors perceive heightened audit risk associated with CFO equity incentives. Our further analyses reveal that the positive association between CFO equity incentives and audit fees is more pronounced in firms with weak internal controls, indicating heightened risk associated with CFO equity incentives in this setting perceived by auditors. JEL Classifications: G30, G34, M42, M52.

The Impact of the PCAOB Triennial Inspection Process on Inspection Year and Non-Inspection Year Audits

2021 ◽  
Author(s):  
Lawrence J. Abbott ◽  
William L Buslepp
Keyword(s):  
Audit Quality ◽  
The Public ◽  
Learned Behavior ◽  
Public Company ◽  
Inspection Process ◽  
One Year ◽  
The Impact

The Public Company Accounting Oversight Board (PCAOB) inspects auditors with fewer than 100 publicly held clients, once every three years (i.e., triennial inspection). In doing so, the PCAOB may inspect any audit engagement within the three-year window, including audits completed only months earlier ("inspection year" audits) and audits with at least a one-year, if not two-year lag ("non-inspection year" audits). We theorize the triennial inspection process affects audit quality levels, whereby auditors impose higher (lower) audit quality during inspection years (non-inspection years). We find clients of triennially inspected auditors have significantly lower levels of accruals during inspection years. Further, this change can be attributed to additional audit effort expended during inspection years. Finally, we find some evidence this is a learned behavior developed after the initial round of inspections. Our evidence suggests auditors opportunistically increase (decrease) audit quality during inspection (non-inspection) years in response to the triennial inspection process.

Integration of Fraud Risk in the Risk of Material Misstatement and the Effect on Auditors' Planning Decisions

2018 ◽  
Vol 3 (1) ◽  
pp. A52-A79
Author(s):  
Velina K. Popova
Keyword(s):  
Data Availability ◽  
Risk Environment ◽  
Major Area ◽  
Audit Planning ◽  
Fraud Risk ◽  
Planning Decisions ◽  
Public Company ◽  
Study Participants ◽  
Audit Program ◽  
Planning Judgments

ABSTRACT Prior research finds that although auditors assess fraud risk accurately, they generally fail to adjust audit procedures appropriately. The most recent Public Company Accounting Oversight Board (PCAOB) inspections in 2016 still identify response to risks of material misstatement (RMM) as a major area of inspection focus and cite it as a recurring audit deficiency. In this study, participants assess RMM and make audit-planning judgments in a high/low fraud risk environment using either a traditional source-based representation of RMM (i.e., based on inherent, control, and fraud risk) or a newer type-based representation of RMM (i.e., based on error and fraud risk). The results indicate that while auditors in both groups show similar sensitivity to risk, the type-based group of auditors are better able modify their audit plans by using more procedures that are new to a standard audit program and assigning more experienced staff to address high fraud risk. Data Availability: Contact the author.

Hiring Auditors with a Part II Quality Control Report: An Opportunity for Increased Earnings Management or Lower Audit Fees?

2020 ◽  
Vol 5 (1) ◽  
pp. 73-93
Author(s):  
Jared Eutsler ◽  
D. Kip Holderness ◽  
Megan M. Jones
Keyword(s):  
Quality Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Fiscal Year ◽  
The Public ◽  
Audit Firms ◽  
Public Company ◽  
General Demand ◽  
Systemic Quality

ABSTRACT The Public Company Accounting Oversight Board's (PCAOB) Part II inspection reports, which disclose systemic quality control issues that auditors fail to remediate, signal poor audit quality for triennially inspected audit firms. Auditors that receive a Part II inspection report typically experience a decrease in clients, which demonstrates a general demand for audit quality. However, some companies hire auditors that receive Part II inspection reports. We examine potential reasons for hiring these audit firms. We find that relative to companies that switch to auditors without Part II reports, companies that switch to auditors with Part II reports have higher discretionary accruals in the first fiscal year after the switch, which indicates lower audit quality and a heightened risk for future fraud. We find no difference in audit fees. Our results suggest that PCAOB Part II inspection reports may signal low-quality auditors to companies that desire low-quality audits. Data Availability: Data are available from the public sources cited in the text.

Impact of Corporate Citizenship on Organizational Citizenship Behaviour of Managers: A Study from Selected Indian Banks

2018 ◽  
Vol 21 (1) ◽  
pp. 294-311
Author(s):  
Neena R. Jain ◽  
Irfan A. Rizvi
Keyword(s):  
Organizational Citizenship ◽  
Demographic Variable ◽  
Corporate Citizenship ◽  
Positive Association ◽  
Significant Positive Association ◽  
Cross Sectional ◽  
Public And Private ◽  
The Public ◽  
Indian Banks ◽  
The Impact

The primary aim of this research article is to explore the relationship between corporate citizenship (CC) and organizational citizenship behaviour (OCB), specific to selected banks in India. The article has used multi-cross-sectional descriptive empirical data collected from a sample of 430 managers from selected banks in the public and private sectors. The instruments used are a scale developed by Maignan and Ferrell (2000) for CC and a scale developed by Lee and Allen (2002) for OCB. The results show a significant positive association between CC and OCB. Findings also reveal that the ethical and discretionary dimensions of CC are significant predictors of employee OCB. The article draws upon the data to see the impact of demographics on CC and OCB. The demographic variable of age in the organizations is found to have an impact on the employee perception of CC and also OCB demonstrated by them. The results highlight the need for strengthening CC practices in the organization and the role of managers in communicating strongly the citizenship practices adopted by the organization to foster positive work attitudes.

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