Abnormal Fees and Timely Loss Recognition—A Long-Term Perspective

2018 ◽  
Vol 38 (3) ◽  
pp. 1-22 ◽  
Author(s):  
Eli Amir ◽  
Yanling Guan ◽  
Gilad Livne
Keyword(s):  
Audit Fees ◽  
Auditor Independence ◽  
Negative Association ◽  
Sarbanes Oxley ◽  
External Funds ◽  
Timely Loss Recognition ◽  
Non Audit Services ◽  
Industry Specialist

SUMMARY We examine the relation between timely loss recognition and abnormal audit, non-audit, and total fees over a period of thirteen years. We use positive abnormal audit (non-audit) fees as a measure of abnormal audit effort (economic bond). We report some evidence suggesting audit effort is associated with slower loss recognition in accruals before the Sarbanes-Oxley Act (SOX) became effective. We find stronger evidence that audit effort is associated with slower loss recognition post-SOX when clients raise substantial external funds or when the auditor is not an industry specialist. Using C_Score, we find a negative association between changes in abnormal audit fees and total fees, and changes in C_Score only post-SOX. We do not find abnormal non-audit fees are associated with the speed of loss recognition. Collectively, the results suggest post-SOX auditors exert more effort when losses are delayed and that non-audit services do not compromise auditor independence.

scholarly journals Characteristics of auditors’ non-audit services and accruals quality in Malaysia

2020 ◽  
Vol 32 (2) ◽  
pp. 147-175
Author(s):  
Wahab Effiezal Aswadi Abdul ◽  
Wan Zurina Nik Abdul Majid ◽  
Iman Harymawan ◽  
Dian Agustia
Keyword(s):  
Stock Exchange ◽  
Descriptive Analysis ◽  
Audit Fees ◽  
Potential Effect ◽  
Auditor Independence ◽  
Related Services ◽  
Content Type ◽  
Accruals Quality ◽  
The Relationship ◽  
Non Audit Services

Purpose The purchase of non-audit services from incumbent auditors has generated considerable attention. This study aims to examine the relationship between characteristics of non-audit services, namely, the recurrence and types of services, and accruals quality in Malaysia. Design/methodology/approach This study analyzed hand-collected audit and non-audit fees of 1,117 observations from Malaysian firms from 2009 to 2011. This study used descriptive analysis, univariate tests and multivariate regression to investigate the potential effect of non-audit services on accruals quality. Findings Non-audit services are associated with lower accruals quality. Recurring and non-recurring non-audit service fees are detrimental to the quality of accruals, as are all types of recurring non-audit services. Only non-recurring audit-related services decrease accruals quality. The results demonstrate that provisions of non-audit services create economic bonding, and thus a threat to auditor independence. Results remain robust with the inclusion of corporate governance and institutional variables. Research limitations/implications The sample period might represent a limitation as it only covers three years of data. This limitation is mainly because of the nature of data collection of the non-audit services fees. Practical implications The findings could suggest a refinement on the Malaysian Institute of Accountants (MIA) by-laws focusing on auditor independence, and it could assist other regulative bodies such as the Securities Commission, the stock exchange (Bursa Malaysia) in ensuring better governance on the provision of non-audit services. Originality/value This study is the first that provides evidence on the relationship between non-audit services, types, and recurring and non-recurring non-audit services and accruals quality in Malaysia.

Audit and Nonaudit Fees and the Market's Reaction to Earnings Announcements

2006 ◽  
Vol 25 (1) ◽  
pp. 1-26 ◽  
Author(s):  
Julia L. Higgs ◽  
Terrance R. Skantz
Keyword(s):  
Earnings Quality ◽  
Earnings Announcements ◽  
Positive Association ◽  
Audit Fees ◽  
Continuous Variable ◽  
Auditor Independence ◽  
Negative Association ◽  
Forecast Errors ◽  
Unexpected Earnings ◽  
Nonaudit Services

Effective February 05, 2001, publicly traded companies are required to disclose audit and nonaudit fees paid to their external auditors. These fee data have been used to test whether auditor independence is impaired when the external auditor provides nonaudit services to a client, usually by examining whether certain earnings characteristics are related to nonaudit fees in ways that suggest impairment. This paper follows in that tradition by testing whether the earnings response coefficient (ERC), a proxy for earnings quality, is associated with engagement profitability. Residual fees derived from a two-stage regression model that prices audit and nonaudit services simultaneously are used to proxy for engagement profitability. If the market perceives abnormally profitable engagements as a threat to auditor independence, then we would expect the ERC to be lower for firms with positive fee residuals. The paper examines the residual fee-ERC relation for annual earnings announcements immediately before and after first-time fee disclosure. We report results for alternative measures of unexpected earnings (I/B/E/S forecast errors and deviations from a seasonal random walk), different formulations of residual fees (as a dichotomous and continuous variable) and different samples. For total fees and audit fees, there is a positive association between ERCs and the level of residual fees. For nonaudit fees, there is only one combination of unexpected earnings and residual fee formulation where we observe a significantly negative association between ERCs and residual fees. The findings for audit fees are consistent with a market that interprets abnormally high audit fees as a signal of a firm's commitment to high earnings quality. The restrictive conditions under which we find a negative association between nonaudit fees and ERCs provide limited support for the contention that perceived auditor independence is impaired by abnormally high nonaudit fees.

Control Self-Assessment and Costs of Compliance with Sarbanes-Oxley Section 404

2019 ◽  
Vol 31 (3) ◽  
pp. 5-24 ◽  
Author(s):  
Lawrence J. Abbott ◽  
Susan Parker ◽  
Gary F. Peters ◽  
Theresa J. Presley
Keyword(s):  
Control Systems ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Fees ◽  
Negative Association ◽  
Management Control ◽  
Section 404 ◽  
Self Assessment ◽  
Internal Auditor ◽  
Sarbanes Oxley

ABSTRACT Control self-assessment (CSA) represents the practice of making operational-level managers responsible for internal control monitoring. We investigate the association between the use of CSA and certain costs incurred in maintaining internal control systems and complying with regulatory requirements. We find a negative association between CSA and external audit fees paid for the audit of internal control over financial reporting. Moreover, we find an incremental fee reduction resulting from the interaction between CSA and Section 404 assistance provided to the external auditor by the internal auditor. Additionally, we find a negative association between the use of CSA and some costs of the internal audit's own evaluation of operational and financial controls for managerial purposes. In sum, our study suggests that CSA can lessen at least some internal control costs while reducing control risk as proxied by external costs of internal control compliance. We discuss implications for broader management control systems.

scholarly journals Disproportionate Insider Control and the Demand for Audit Quality

2018 ◽  
Vol 38 (1) ◽  
pp. 171-191 ◽  
Author(s):  
Arno Forst ◽  
Barry R. Hettler
Keyword(s):  
Firm Value ◽  
Audit Quality ◽  
Audit Fees ◽  
Auditor Independence ◽  
Negative Association ◽  
External Monitoring ◽  
Big 4 ◽  
Cash Flow Rights ◽  
Dual Class ◽  
The Relationship

SUMMARY We examine the relationship between disproportionate insider control, enabled through dual-class share structures, and the demand for audit quality. Using a comprehensive hand-collected sample of U.S. dual-class firms, we find that, consistent with outside shareholders' increased demand for external monitoring, as well as self-bonding by entrenched insiders, disproportionate insider control is positively associated with the propensity to hire a Big 4 or industry specialist auditor, auditor independence, and audit fees. Corroborating a self-bonding explanation, additional analyses show that audit quality mitigates the negative association of disproportionate insider control and firm value. In expanded analyses, we also investigate the separate effects of insider voting and cash flow rights on the demand for audit quality in dual-class firms. Consistent with general agency theory, we find a decreased (increased) demand for audit quality from incentive-alignment (entrenchment) effects of ownership.

scholarly journals The role of auditors in detecting creative accounting: Singaporean and Australian evidence

2011 ◽  
Vol 8 (3) ◽  
pp. 124-144
Author(s):  
Rusmin Rusmin
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Discretionary Accruals ◽  
Auditor Independence ◽  
Negative Association ◽  
Creative Accounting ◽  
Auditor Quality ◽  
Auditor Specialization ◽  
Non Audit Services

This study examines the association between the magnitude of earnings management and two characteristics of auditor value - auditor independence and auditor quality. As earnings management, auditor independence and auditor quality are unobservable the study uses absolute discretionary accruals, the ratio of non-audit to total fees and auditor industry specialisation as respective proxies. This study finds no empirical evidence that non-audit services are associated with firms’ discretionary accruals. This result suggests that the provision of non-audit services by the incumbent auditor does not compromise independence. This study presents evidence of a negative association between auditor specialization and the earnings management indicator. This finding infers that the magnitude of earnings management amongst firms engaging the services of a specialist is significantly lower than firms purchasing audit services from a non-specialist auditor

A Reexamination of Audit Fees for Initial Audit Engagements in the Post-SOX Period

2013 ◽  
Vol 33 (2) ◽  
pp. 59-78 ◽  
Author(s):  
Rosemond Desir ◽  
Jeffrey R. Casterella ◽  
Julia Kokina
Keyword(s):  
Audit Fees ◽  
Auditor Independence ◽  
Data Availability ◽  
Sample Period ◽  
Accounting Firms ◽  
The Public ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Public Company ◽  
Client Relationships

SUMMARY: On August 16, 2011, the Public Company Accounting Oversight Board (PCAOB) issued a concept release seeking comments on ways to enhance auditor independence. The Board notes that higher failure rates in new audit engagements might be linked to unrealistic pricing. The Board's concern is that a new auditor might be more susceptible to management pressure if initial-year audit fees are set artificially low. Prior to the Sarbanes-Oxley Act (SOX) of 2002, empirical evidence shows that auditors discounted their initial-year audit fees. This practice, known as lowballing, was expected to decrease significantly after the enactment of SOX. Indeed, findings in Huang, Raghunandan, and Rama (2009) seem to confirm that Big 4 auditors charged a fee premium on new auditor-client relationships in 2006. However, it is not clear if more recent post-SOX initial-year audits are free of lowballing. We investigate whether lowballing exists in new auditor-client relationships in an “extended” post-SOX environment for the years 2007 to 2010. Our results suggest that both Big 4 and non-Big 4 accounting firms discounted their initial-year audit fees during our sample period (2007–2010). These findings should be of interest to the PCAOB as it searches for ways to bolster auditor independence. Data Availability: Available from public sources.

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 The Impact Of Non-Audit Fees Disclosures On Company Value Following The Enron Collapse

2011 ◽  
Vol 1 (6) ◽  
Author(s):  
Marcelo Eduardo ◽  
Tao Zhang
Keyword(s):  
Firm Value ◽  
Abnormal Returns ◽  
Financial Statements ◽  
Audit Fees ◽  
Auditor Independence ◽  
Financial Statement ◽  
Font Size ◽  
Publicly Traded ◽  
The Impact ◽  
Non Audit Services

<p class="MsoBodyTextIndent2" style="text-align: justify; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-style: normal; font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;">Investor confidence regarding the reliability of financial statements is absolutely critical for publicly traded companies. The bankruptcy of Enron has brought to the forefront the issue of auditor independence and financial statement reliability. As a response to the criticism that the growth in consulting services by CPA firms was leading to a conflict of interest and significantly hindering auditor independence, the SEC approved new auditor independence regulations that required publicly traded firms to disclose the level of fees that were paid to their external auditor for non-audit services.<span style="mso-spacerun: yes;">&nbsp; </span></span></span></p><p class="MsoBodyTextIndent2" style="text-align: justify; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-style: normal; font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;">&nbsp;</span></span></p><p class="MsoBodyTextIndent" style="text-align: justify; line-height: normal; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;">This paper investigates the impact that the Enron collapse has had on investor perceptions about auditor independence and financial statement reliability. Using data from proxy statements concerning non-audit fees paid to external auditors, we find evidence that auditor independence and therefore financial statement reliability are compromised by the provision of these non-audit services. The results indicate that in the wake of the Enron revelations, investors perceive financial statements as being less reliable and thus require an additional risk premium, which translates into lower stock prices and a loss of firm value. We also find that there is negative relationship between the extent to which firms use non-audit services and the negative abnormal returns they suffered during the Enron collapse.</span></span><span style="font-size: 10pt; mso-bidi-font-size: 12.0pt;"></span></p>

scholarly journals Non-Audit Services And Audit Quality: Blessing Or Curse?

2013 ◽  
Vol 29 (2) ◽  
pp. 305 ◽  
Author(s):  
Patrick Krauss ◽  
Henning Zulch
Keyword(s):  
Audit Quality ◽  
Spillover Effects ◽  
Audit Fees ◽  
Auditor Independence ◽  
Working Capital ◽  
Estimation Model ◽  
Empirical Results ◽  
Audit Market ◽  
High Knowledge ◽  
Non Audit Services

This study investigates whether and how audit quality is associated with the provision of non-audit services by the statutory auditor. Using a sample of 1,008 firm observations of major German listed companies for the sample period 2004-2011, our study is one of the first to thoroughly analyze this issue empirically for the German audit market. Consistent with prior studies we choose discretionary working capital accruals as our proxy for audit quality. Our empirical results demonstrate that total non-audit fees in general and audit related fees in particular are negatively associated with audit quality, while provided tax and other advisory services have an insignificant impact on audit quality. Our results imply that non-audit fees are a significant factor with regard to auditor independence and economic auditor-client bonding while we are not able to detect compensating high knowledge spillover effects from these services. The empirical results are robust to alternative accrual measures and estimation model specifications, while our empirical evidence is not robust with regard to alternative fee measures.

Non-Audit Services and Auditor Independence: Evidence from 1978-1980*

2007 ◽  
Author(s):  
Kevin Koh ◽  
Shivaram Rajgopal ◽  
Suraj Srinivasan
Keyword(s):  
Auditor Independence ◽  
Non Audit Services
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