scholarly journals Relevant but Delayed Information in Negotiated Audit Fees

2014 ◽  
Vol 33 (4) ◽  
pp. 95-117 ◽  
Author(s):  
Karl E. Hackenbrack ◽  
Nicole Thorne Jenkins ◽  
Mikhail Pevzner
Keyword(s):  
Information Asymmetry ◽  
Positive Association ◽  
Audit Fees ◽  
Data Availability ◽  
Bad News ◽  
Specific Knowledge ◽  
Delayed Information ◽  
Audit Fee ◽  
News Events ◽  
Jel Classifications

SUMMARY: Audit fee negotiations conclude with the signing of an engagement letter, typically the first quarter of the year under audit. Yet investors do not learn the audit fee paid until disclosed in the following year's definitive proxy statement. We conjecture that negotiated audit fees impound auditors' consequential private, client-specific knowledge about “bad news” events investors will learn eventually. We demonstrate that a proxy for the year-to-year change in the negotiated audit fee has an economically meaningful positive association with proxies for public realizations of “bad news” events that occur during the roughly 12-month period between the negotiation of the audit fee and the disclosure of the audit fee paid. Our results suggest that negotiated audit fees contain information meaningful to investors and that if disclosed proximate to the signing of the engagement letter instead of the following year, information asymmetry between managers and investors would be reduced. JEL Classifications: G19, D89, M40. Data Availability: Available from public sources identified in the text.

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.

Credit Default Swaps on Corporate Debt and the Pricing of Audit Services

2017 ◽  
Vol 37 (3) ◽  
pp. 117-144 ◽  
Author(s):  
Lijing Du ◽  
Adi Masli ◽  
Felix Meschke
Keyword(s):  
Positive Association ◽  
Audit Fees ◽  
Credit Default Swaps ◽  
Corporate Debt ◽  
Professional Skepticism ◽  
External Auditors ◽  
Corporate Default ◽  
Audit Fee ◽  
Credit Default ◽  
Jel Classifications

SUMMARY Previous studies document that lenders lack incentives to monitor borrowing firms or to make concessions during bankruptcy if these lenders insure against corporate default with credit default swaps (CDS). This article investigates whether external auditors increase their audit fees for those client firms that have their debt referenced by CDS. In a comprehensive sample of U.S. companies from 2001–2015, we find that CDS-referenced companies incur larger audit fees compared to companies without CDS. The economic magnitude of the audit fee increase ranges from 5.4 percent to 11 percent, depending on the econometric specification employed. Deteriorating corporate conditions or other observable characteristics do not explain the positive association between CDS trading and audit fees, or the increase in audit fees following CDS initiations. The findings suggest that auditors increase their professional skepticism and monitoring efforts of CDS-referenced clients; they might also expect higher liability losses. JEL Classifications: G10; G30; G33; G34.

CEO Behavioral Integrity, Auditor Responses, and Firm Outcomes

2019 ◽  
Vol 95 (2) ◽  
pp. 61-88 ◽  
Author(s):  
Shane S. Dikolli ◽  
Thomas Keusch ◽  
William J. Mayew ◽  
Thomas D. Steffen
Keyword(s):  
Audit Fees ◽  
Data Availability ◽  
Behavioral Integrity ◽  
The Public ◽  
Future Performance ◽  
Confidentiality Agreement ◽  
Audit Fee ◽  
Financial Misstatement ◽  
High Integrity ◽  
Jel Classifications

ABSTRACT We investigate the audit fee response to CEO behavioral integrity (BI). BI refers to the perceived congruence between an individual's words and deeds (Simons 2002). Because low word-deed congruence should result in more explanations when communicating, we use variation in explanations beyond firm fundamentals and CEO-specific characteristics in more than 30,000 shareholder letters to serve as a linguistic-based proxy for CEO BI. We find that audit fees increase as BI decreases, but BI is not associated with financial misstatement or litigation. These findings are potentially consistent with auditors undertaking additional work in response to low BI, which, in turn, mitigates the risk of restatements and lawsuits. The likelihood of option backdating increases as BI decreases, consistent with the contention that auditors lacked incentives to prevent backdating. Finally, BI is increasing in future performance, which suggests that CEOs partially underpin the returns to high-integrity corporate cultures. JEL Classifications: J24; L25; M14; M41; M42. Data Availability: Proprietary data from KRW International cannot be shared because of the terms of a confidentiality agreement. All other data are available from the public sources cited in the text.

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.

Auditors and the Principal-Principal Agency Conflict in Family Controlled Firms

2020 ◽  
Vol 39 (4) ◽  
pp. 31-55
Author(s):  
Chiraz Ben Ali ◽  
Sabri Boubaker ◽  
Michel Magnan
Keyword(s):  
Risk Assessment ◽  
Negative Relationship ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Risk ◽  
Controlling Shareholder ◽  
Voting Power ◽  
The Public ◽  
Agency Conflict ◽  
Jel Classifications

SUMMARY This paper examines whether multiple large shareholders (MLS) affect audit fees in firms where the largest controlling shareholder (LCS) is a family. Results show that there is a negative relationship between audit fees and the presence, number, and voting power of MLS. This is consistent with the view that auditors consider MLS as playing a monitoring role over the LCS, mitigating the potential for expropriation by the LCS. Therefore, our evidence suggests that auditors reduce their audit risk assessment and audit effort and ultimately audit fees in family controlled firms with MLS. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G32; G34; M42; D86.

Auditor Rotation and Perceived Competence and Independence: The Effect of Fees and Industry Specialization

2018 ◽  
Vol 17 (3) ◽  
pp. 153-175
Author(s):  
Roger Kamath ◽  
Ting-Chiao Huang ◽  
Robyn A. Moroney
Keyword(s):  
Audit Fees ◽  
Perceived Competence ◽  
Data Availability ◽  
Industry Specialization ◽  
Auditor Rotation ◽  
Jel Classifications ◽  
Attention To Detail ◽  
Industry Specialist

ABSTRACT Regulators and practitioners argue the relative merits of firm and partner rotation, while researchers report mixed results on the consequences of rotation. This study uses an experiment to examine the effect of an upcoming rotation on perceptions of auditor competence and independence and finds that participants appear to be indifferent to whether rotation is at the firm or partner level; they only react to concurrent changes in audit fees and the industry specialization status of the new auditor. Specifically, participants assess auditor competence and independence (specifically attention to detail, effort, and skeptical attitude) to be higher when fees increase rather than decrease significantly at the time of a rotation, and they assess auditor competence to be higher when rotation is to an industry specialist rather than a nonindustry specialist. These findings hold regardless of whether rotation is at the firm or partner level. JEL Classifications: M42. Data Availability: Data and the tasks used in this study are available on request.

Did the 2007 PCAOB Disciplinary Order against Deloitte Impose Actual Costs on the Firm or Improve Its Audit Quality?

2014 ◽  
Vol 90 (2) ◽  
pp. 405-441 ◽  
Author(s):  
Jeff P. Boone ◽  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Growth Rates ◽  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
The Other ◽  
Archival Studies ◽  
Big 4 ◽  
Audit Fee

ABSTRACT We examine whether the December 2007 PCAOB disciplinary order against Deloitte affected Deloitte's switching risk, audit fees, and audit quality relative to the other Big 4 firms over a three-year period following the censure. Our findings suggest that the PCAOB censure was associated with a decrease in Deloitte's ability to retain clients and attract new clients, and a decrease in Deloitte's audit fee growth rates. However, methodologies used in extant archival studies yield little or no evidence to suggest that Deloitte's audit quality was different from that of the other Big 4 firms during a three-year window either before or after the censure. Overall, our results suggest that the PCAOB censure imposed actual costs on Deloitte. Data Availability: All data are publicly available.

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.

Does Audit Fee Homogeneity Exist? Premiums and Discounts Attributable to Individual Partners

2011 ◽  
Vol 30 (4) ◽  
pp. 249-272 ◽  
Author(s):  
Stuart D. Taylor
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Market ◽  
Homogeneity Assumption ◽  
Audit Firms ◽  
Audit Fee ◽  
Using Data ◽  
The Individual ◽  
Made In

SUMMARY This paper investigates the implied assumption, made in many audit fee determination studies, that, within a given audit firm, all partners produce a statistically identical level of audit quality and earn a statistically identical level of audit fees. This is referred to as the “homogeneity assumption.” However, this is contradicted by the individual auditor behavioral literature, which shows that different individual auditor characteristics can have an impact on audit quality. Given the fact that audit partners differ in their quality, this paper hypothesizes that different audit partners will be able to earn differing levels of fees. This hypothesis is tested by estimating an audit fee model using data from 822 Australian publicly listed companies for the year 2005. Australia is an ideal audit market for this research, as the disclosure of the name of the audit engagement partner in the audit report is mandatory. The empirical results indicate that individual audit partners earn individual audit fee premiums (or discounts) that are not explainable by the audit firms of which they are members. Data Availability: All data have been extracted from publicly available sources.

scholarly journals The Information Content of Risk Factor Disclosures in Quarterly Reports

2015 ◽  
Vol 29 (4) ◽  
pp. 887-916 ◽  
Author(s):  
Joshua J. Filzen
Keyword(s):  
Risk Factors ◽  
Risk Factor ◽  
Abnormal Returns ◽  
Data Availability ◽  
Bad News ◽  
Filing Date ◽  
Unexpected Earnings ◽  
Disclosure Requirement ◽  
Jel Classifications ◽  
Negative Earnings

SYNOPSIS I examine whether recently required risk factor update disclosures in quarterly reports provide investors with timely information regarding potential future negative economic events. Specifically, I examine whether risk factor updates in 10-Q filings are associated with negative abnormal returns at the time the updates are disclosed and whether quarterly updates are followed by negative earnings shocks. I find that firms presenting updates to their risk factor disclosures have significantly lower abnormal returns around the filing date of the 10-Q relative to firms without updates. I also find that firms with updates to their risk factors section have significantly lower future unexpected earnings and are more likely to experience future extreme negative earnings shocks. These findings suggest that the recent disclosure requirement mandated by the SEC was successful in generating timely disclosure of bad news. JEL Classifications: M41; M48; D80; G18. Data Availability: Please contact the author for data availability.

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