Characteristics of Managerial Tone Priced by Auditors: Evidence Based on Annual Letters to Shareholders of Large U.S. Firms

2019 ◽  
Vol 39 (2) ◽  
pp. 139-161
Author(s):  
Adam Greiner ◽  
Lorenzo Patelli ◽  
Matteo Pedrini
Keyword(s):  
Source Credibility ◽  
Audit Fees ◽  
Data Availability ◽  
Evidence Based ◽  
Change Analysis ◽  
Audit Pricing ◽  
Client Risk ◽  
The Relationship ◽  
Jel Classifications ◽  
Corporate Disclosures

SUMMARY We examine the relationship between audit pricing and managerial tone as a proxy of source credibility. Prior research shows that source credibility influences auditors' perceptions of client risk. Textually analyzing annual letters to shareholders, we find that characteristics of managerial tone that reflect impaired source credibility are associated with higher audit fees. Additional tests, including a change analysis and controls for other managerial characteristics, future client performance, and aggressive accounting choices, corroborate and build on our inferences that managerial tone proxies for source credibility. Our study extends literature that uses corporate disclosures to measure managerial characteristics by showing that auditors price source credibility reflected in managerial tone. These findings are important because they empirically confirm that source credibility affects auditors' assessments of engagement risk and that analysis of tone can inform researchers, auditors, and investors who seek to enhance effectiveness and objectivity in assessing source credibility based on managerial tone. JEL Classifications: G21; G34; M41. Data Availability: The data in this study are available from public sources indicated in the paper.

CEO Turnover and Audit Pricing

2014 ◽  
Vol 28 (2) ◽  
pp. 297-312 ◽  
Author(s):  
Hua-Wei Huang ◽  
Robert J. Parker ◽  
Yun-Chia Anderson Yan ◽  
Yi-Hung Lin
Keyword(s):  
Voluntary Turnover ◽  
Audit Fees ◽  
Ceo Turnover ◽  
Data Availability ◽  
Predictor Variables ◽  
Audit Pricing ◽  
Audit Firm ◽  
Audit Firms ◽  
And Control ◽  
The Relationship

SYNOPSIS This study examines the relationship between CEO turnover in client companies and the fees charged by their audit firms. We propose that forced CEO turnover (such as dismissals) pose higher business and audit risks for the audit firm than voluntary turnover (such as retirements); further, greater risk leads to higher audit prices. We develop a regression model of audit fees that includes, as predictor variables, type of CEO turnover and control variables identified in prior studies (e.g., ROA, total assets, and corporate governance). Results reveal that companies with forced CEO turnover have significantly higher audit fees than companies with either voluntary turnover or no turnover. Further, we find no difference in audit fees between firms with voluntary turnover and firms without turnover. Data Availability: The data used in this study are publicly available.

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.

The Relationship between Aggressive Real Earnings Management and Current and Future Audit Fees

2016 ◽  
Vol 36 (1) ◽  
pp. 85-107 ◽  
Author(s):  
Adam Greiner ◽  
Mark J. Kohlbeck ◽  
Thomas J. Smith
Keyword(s):  
Earnings Management ◽  
Firm Value ◽  
Audit Fees ◽  
Cash Flows ◽  
Data Availability ◽  
Real Earnings Management ◽  
Increased Risk ◽  
Pricing Behavior ◽  
Reported Earnings ◽  
The Relationship

SUMMARY We examine the relationship between aggressive income-increasing real earnings management (REM) and current and future audit fees. Managers pursue REM activities to influence reported earnings and, as a consequence, alter cash flows and sacrifice firm value. We posit that the implications of REM are considered in auditors' assessments of engagement risk related to the client's economic condition and result in higher audit fees. We find that, with the exception of abnormal reductions in SG&A, aggressive income-increasing REM is positively associated with both current and future audit fees. Additional analyses provide evidence consistent with increased effort combined with increased risk contributing to the current pricing effect, with increased business risk primarily driving the future pricing effect. We, therefore, provide evidence that aggressive income-increasing REM activities have a significant influence on auditor pricing behavior, consistent with the audit framework associating engagement risk with audit fees. JEL Classifications: G21; G34; M41. Data Availability: The data in this study are available from public sources indicated in the paper.

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.

The Cost of Compliance: FIN 48 and Audit Fees

2015 ◽  
Vol 38 (2) ◽  
pp. 67-85 ◽  
Author(s):  
Matthew J. Erickson ◽  
Nathan C. Goldman ◽  
James Stekelberg
Keyword(s):  
Audit Fees ◽  
Temporary Increase ◽  
Audit Pricing ◽  
Fin 48 ◽  
Disclosure Requirements ◽  
Implementation Costs ◽  
Potential Benefits ◽  
The Cost ◽  
Jel Classifications

ABSTRACT Effective for fiscal years beginning after December 15, 2006, FIN 48 significantly altered uncertain tax benefit (UTB) recognition and disclosure requirements relative to its predecessor standard, FAS 5. We examine the effect of the new standard on audit pricing. We first document that UTB-related audit fees increased following the implementation of FIN 48. However, we also find that this increase is primarily driven by a spike in the audit pricing of UTBs in 2007. Indeed, we find that the audit pricing of UTBs in the 2008–2012 period is not significantly different from that of the 2002–2006 period. We interpret these results to indicate that although firms incurred significant FIN 48 implementation costs, the ongoing audit pricing of UTBs under FIN 48 is similar to that of FAS 5. Our findings suggest that any potential benefits of FIN 48 may outweigh associated costs related to a temporary increase in audit fees. JEL Classifications: H25; M40; M41; M42; M48.

The Effect of Supply Chain Knowledge Spillovers on Audit Pricing

2013 ◽  
Vol 26 (1) ◽  
pp. 83-100 ◽  
Author(s):  
Jengfang Chen ◽  
Hsihui Chang ◽  
Hsin-Chi Chen ◽  
Sungsoo Kim
Keyword(s):  
Supply Chain ◽  
Knowledge Spillovers ◽  
National Level ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Pricing ◽  
Audit Firm ◽  
Audit Firms ◽  
Negative Effect ◽  
Office Level

ABSTRACT We present evidence on the effect of audit firms' supply chain knowledge spillover on audit pricing. Analyzing data from Audit Analytics and Compustat for the seven-year period from 2003 to 2009, we find that audit firms' supply chain knowledge has a negative effect on audit fees. Specifically, an audit firm with more supply chain knowledge charges lower audit fees to its clients when the firm also audits its clients' major buyers. In addition, we find that the fee discount is greater when the audit firm possesses major buyer-related supply chain knowledge at the office level compared to the national level. Our findings are consistent, albeit weaker, to an expanded sample of companies that voluntarily disclose their major buyers. Data Availability: The data are publicly available.

Customer-Base Concentration: Implications for Audit Pricing and Quality

2018 ◽  
Vol 31 (1) ◽  
pp. 129-152 ◽  
Author(s):  
Gopal V. Krishnan ◽  
Panos N. Patatoukas ◽  
Annika Yu Wang
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Customer Relationships ◽  
Data Availability ◽  
Audit Process ◽  
Audit Pricing ◽  
External Auditors ◽  
Customer Base ◽  
Conventional View ◽  
Audit Fee

ABSTRACT What are the implications of major customer dependency, i.e., the degree of a supplier firm's dependency on its major customers, for external auditors? While the conventional view emphasizes the negatives of major customer dependency for client business risk, we find that suppliers with more concentrated customer bases spend less on audit fees. The evidence is consistent with reduced audit effort due to efficiency gains in the audit process, especially when suppliers with more concentrated customer bases share the same auditors with their long-standing major customers. The audit fee discount we identify does not imply that audit quality declines with customer-base concentration. In fact, we find that suppliers with more concentrated customer bases are less likely to experience material restatements of previously audited financial statements. Taking the external auditors' perspective, our study provides new managerial insights on the costs and benefits of major customer relationships for supplier firms. Data Availability: All data are available from sources identified in the text.

Client Risk Management: A Pecking Order Analysis of Auditor Response to Upward Earnings Management Risk

2012 ◽  
Vol 32 (2) ◽  
pp. 147-169 ◽  
Author(s):  
Gopal V. Krishnan ◽  
Lili Sun ◽  
Qian Wang ◽  
Rong Yang
Keyword(s):  
Risk Management ◽  
Earnings Management ◽  
Internal Control ◽  
Audit Fees ◽  
Risk Management Strategy ◽  
Audit Pricing ◽  
Pecking Order ◽  
Order Analysis ◽  
Auditor Resignation ◽  
Client Risk

SUMMARY: This study examines Big N auditors' client risk management strategy in response to the risk of upward (i.e., income-increasing) earnings management in the post-SOX era. Specifically, we empirically study the relation between clients' signed discretionary accruals and subsequent audit pricing and auditor resignation decisions. We find that audit fees and resignations are positively associated with the risk of upward earnings management. We document a pecking order of auditor responses and find that auditors are more likely to respond in the order of charging higher abnormal audit fees if the trade-off between upward earnings management risk and return is within an acceptable level, and then resign if the risk is more severe and exceeds the auditors' tolerance level. Our results are robust to alternative accruals measures, controlling for clients' internal control quality and corporate governance characteristics.

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