The Role of Auditee Profitability in Pricing New Audit Engagements

2000 ◽  
Vol 19 (1) ◽  
pp. 157-167 ◽  
Author(s):  
Paul L. Walker ◽  
Jeffrey R. Casterella
Keyword(s):  
Audit Fees ◽  
Audit Risk ◽  
Cpa Firms

This paper examines the role of auditee profitability in pricing new audit engagements. Changes in the auditing environment are noted that suggest that auditors are managing their practices differently than they did in prior years. Audit fees are examined to answer two questions: (1) whether CPA firms still discount fees for new engagements in the current audit environment; (2) whether such fee discounts are dependent upon auditee profitability. The results suggest that auditors still discount new engagements in the 1990s, but that they are less willing to offer discounts when auditees show losses in the year prior to the new audit engagement. Further, this result is stronger for companies that switch from non-Big 6 firms to Big 6 firms than it is for intra-Big 6 switches. These findings suggest that auditors are managing their exposure to audit risk by adjusting audit fees.

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.

scholarly journals Fair Value Information, Audit fees and Audit Committee in Taiwan

2017 ◽  
Vol 8 (2) ◽  
pp. 124
Author(s):  
Shu-Hsing Wu ◽  
Tsung-Che Wu ◽  
Kun-Lin Yang
Keyword(s):  
Audit Committee ◽  
Cost Model ◽  
Audit Fees ◽  
Fair Value ◽  
Regulatory Requirements ◽  
Audit Risk ◽  
Level 3 ◽  
Voluntary Choice ◽  
Value Model

Regulatory requirements to adopt IFRS and to disclose audit fees make it possible to examine association between audit fees and proportion of fair-valued assets among firms in Taiwan. A voluntary choice of adding audit committee in the firm for monitoring purpose also helps to examine the association further. Empirical results indicate that lower audit fees is related to higher proportion of (Level 2) fair-valued assets, a finding consistent to Goncharov et al.’s (2014) suggestion that firms pay lower audit fees with fair-value model than with cost model. Insignificant association is found for proportion of Level 3 fair-valued assets, which is similar to Glover et al.’s (2014) suggestion that firm’s reluctant attitude in adopting Level 3 assets. Last of all, when audit committee is added, firm’s audit fees is negatively associated with Level 1 and 2 fair-valued assets, implying audit committee’s role of monitoring and further reducing audit risk and audit fees among Taiwanese firms.

Conditional Conservatism and Audit Fees

2014 ◽  
Vol 29 (1) ◽  
pp. 83-113 ◽  
Author(s):  
Hye Seung (Grace) Lee ◽  
Xu Li ◽  
Heibatollah Sami
Keyword(s):  
Corporate Governance ◽  
Potential Benefit ◽  
Audit Fees ◽  
Accounting Conservatism ◽  
Audit Risk ◽  
Debt Contracting ◽  
Conditional Conservatism ◽  
Governance Quality ◽  
Corporate Governance Quality ◽  
The Impact

SYNOPSIS In this study, we examine the impact of conditional conservatism on audit fees and, more importantly, the influence of corporate governance on this relationship. Prior literature presents evidence regarding explanations for the existence and pervasiveness of accounting conservatism such as compensation and debt contracting, shareholder litigation, taxation, and accounting regulation. However, there is very limited evidence or discussion of the potential benefit of accounting conservatism on audit risk and thus audit fees, and how the potential benefit can be attenuated by corporate governance quality. Using a sample of firm-year observations over the period of 2004–2009, we provide evidence consistent with conditional conservatism and firms' commitment to such conservatism reducing their audit fees. However, our evidence shows that this reduction in audit fees is moderated by higher corporate governance quality. These results have implications for auditors, regulators, standard setters, and firms' managers. In addition, our study extends the literature on the determinants of audit fees. JEL Classifications: M41; M42; D81; D22.

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.

scholarly journals Audit Quality, Joint-Auditors and Game Theory: Empirical Validation in the French Context

2016 ◽  
Vol 11 (7) ◽  
pp. 292
Author(s):  
Abdelhakim Ben Ali
Keyword(s):  
Game Theory ◽  
Business Performance ◽  
Audit Quality ◽  
Audit Fees ◽  
Scientific Discipline ◽  
Debt Ratio ◽  
Complex Relationships ◽  
High Level ◽  
Gains And Losses

<p>The objective of our research is to show the role of “game theory” as a scientific discipline permitting better explanation of the nature of complex relationships between the different stakeholders of the company. Motivated by the current discussions on the choice of the composition of the college auditors, we try to study the combination of auditors to ensure a better audit quality; and to demonstrate the gains and losses of the two players in the game studied during the period 2005-2010.</p>The empirical results reveal that the best audit quality is conditioned by the presence of pair heterogeneous auditors (Big4_Non Big4). Added to that, the audit quality is affected by a high level of audit fees, minimizing the debt ratio, a large reflection of the business performance and financial means to enable it to meet the economic crises that surround it.

scholarly journals Kualitas Audit: Ditinjau dari Fee Audit, Risiko Audit dan Skeptisme Profesional Auditor sebagai Variabel Moderating

2020 ◽  
Vol 8 (1) ◽  
pp. 9
Author(s):  
Muslim Muslim ◽  
Syamsuri Rahim ◽  
Muhammad Faisal AR Pelu ◽  
Alma Pratiwi
Keyword(s):  
Regression Analysis ◽  
Audit Quality ◽  
Audit Fees ◽  
Public Accounting ◽  
Audit Risk ◽  
Accounting Firms ◽  
Professional Skepticism ◽  
Audit Fee ◽  
The Relationship ◽  
Positive Effect

The purpose of this study was to determine the effect of audit fees and audit risk on audit quality with auditor professional skepticism as a moderating variable. This research was conducted at 8 public accounting firms in Makassar city with 40 respondents. The analytical method used is multiple regression analysis (Moderated Regression Analysis) which is used to measure the strength of the relationship between two or more variables. The results of this study found that the audit fee variable had a negative and not significant effect on audit quality. These results illustrate that the higher the audit fee received by the auditor, the audit quality will decrease. While audit risk is not a significant positive effect on audit quality. The results of this study illustrate that the higher the audit risk, the audit quality will decrease. The auditor's professional skepticism as a moderating variable is not able to strengthen the effect of audit fees on audit quality. Furthermore, auditor professional skepticism as a moderating variable is also unable to strengthen the effect of audit risk on audit quality

The Market for Audit Services: The Role of Market Power

2020 ◽  
Vol 19 (3) ◽  
pp. 3-8
Author(s):  
Tracy Ti Gu ◽  
Dan A. Simunic ◽  
Michael T. Stein ◽  
Minlei Ye ◽  
Ping Zhang
Keyword(s):  
Market Power ◽  
Firm Size ◽  
Academic Research ◽  
Audit Fees ◽  
Local Market ◽  
Capital Investments ◽  
Audit Firm ◽  
Big 4 ◽  
The Subject

ABSTRACT The market for audit services has been the subject of extensive academic research since the 1970s. The prevailing view is that audit markets are characterized by tiers of suppliers (Big 4 versus non-Big 4, and industry specialists versus non-specialists) where the upper tier suppliers produce and sell a systematically higher level of assurance, while competition among suppliers within tiers is essentially perfect and a uniform price prevails within the submarkets. We discuss three papers that challenge this orthodoxy. These papers argue and find that the price of an audit is essentially unique to each (auditor, client) pair and that this price depends on both audit firm size and client size. Furthermore, audit firm size is linked with the firm's capital investments, which enhance auditor efficiency and market power. We conclude that audit markets are atomistic and that local market power is an important determinant of audit prices and audit fees.

Does environmental disclosure have an auditing effect?

2019 ◽  
Vol 35 (1) ◽  
pp. 43-66
Author(s):  
Sheng Yao ◽  
Lingling Pan ◽  
Zhipeng Zhang
Keyword(s):  
Internal Control ◽  
Audit Fees ◽  
Environmental Information ◽  
Environmental Disclosure ◽  
Audit Risk ◽  
Content Type ◽  
Media Attention ◽  
Environmental Disclosures ◽  
Audit Opinions ◽  
High Level

Purpose The purpose of this paper is to investigate whether firms with high environmental disclosure have a low possibility of non-standard audit opinions and audit fees and whether this trend is more obvious after than prior to the Measures for the Disclosure of Environmental Information (Measure) implemented in 2008. Design/methodology/approach Based on the Measures implemented in 2008, the authors select data for the listed manufacturing firms from 2004 to 2006 (Pre-Measure) and from 2009 to 2011 (Post-Measure) as research samples to investigate the relationships between environmental disclosures, audit opinions and audit fees with difference in difference models. In addition, we also consider the influence of media attention, the polluting industry and internal control on the audit effect of environmental disclosure. Findings The results show that the level of environmental disclosure is significantly negatively correlated with the possibility of issuing non-standard audit opinions and audit fees after measure is implemented, especially hard environmental information. Further evidence indicates that the auditing effect of environmental disclosures is stronger on firms that receive less media attention, in firms with better internal controls, and in firms belonging to industries with heavy pollution. Originality/value In the Chinese setting, a high level of environmental information disclosures can effectively reduce the audit risk and lead to a high possibility of standard audit opinions and low audit fees. This effect is pronounced after issuing Measure. The conclusions suggest that measure and increasing environmental disclosure have an obvious positive audit effect and that firms should be forced or encouraged to disclose more environmental information from the perspective of auditors in China.

scholarly journals Political connections: a threat to auditor independence?

2015 ◽  
Vol 5 (2) ◽  
pp. 222-246 ◽  
Author(s):  
Effiezal Aswadi Abdul Wahab ◽  
Mazlina Mat Zain ◽  
Rashidah Abdul Rahman
Keyword(s):  
Design Methodology ◽  
Institutional Environment ◽  
Audit Fees ◽  
Auditor Independence ◽  
Political Connections ◽  
Panel Regression ◽  
Data Set ◽  
Content Type ◽  
The Relationship

Purpose – The purpose of this paper is to examine whether political connections further impair auditor independence by investigating the relationship between non-audit fees and audit fees and as to whether political connections moderate such relationship. Design/methodology/approach – This study employs panel regression analysis. The panel data set consists of 379 firm-year observations for three years from year 2001 to 2003. Findings – Based on 379 firm-year observations for the period of 2001-2003, grounded on two proxies of political connections namely politically connected firms and the proportion of Bumiputras directors, the authors find a positive and significant relationship between non-audit fees and audit fees, and the relationship becomes weaker, only for Bumiputra-dominated firms connected firms. Originality/value – This study contributes to the extant literature by examining the role of political connections in the context of auditor independence. In addition, this study is conducted in Malaysia, which provides a unique institutional environment with the existence of political connections that is built on ethnic grounds.

Product Market Competition and Audit Fees

2014 ◽  
Vol 34 (4) ◽  
pp. 139-156 ◽  
Author(s):  
Yuequan Wang ◽  
Andy C. W. Chui
Keyword(s):  
Financial Reporting ◽  
Market Competition ◽  
Product Market ◽  
Audit Fees ◽  
Product Market Competition ◽  
Business Risk ◽  
Audit Risk ◽  
Competitive Industry ◽  
The One ◽  
Jel Classifications

SUMMARY Existing theories posit two contradictory predictions on the relation between product market competition and audit fees. On the one hand, product market competition can mitigate agency problems between shareholders and managers and increase the accuracy of financial reporting, thus decreasing auditors' assessments of audit risk. Hence, auditors tend to charge lower fees to firms in a more competitive industry. On the other hand, product market competition can increase auditors' assessments of business risk. Therefore, audit fees are expected to increase with industry competitiveness. This study empirically tests the relation between product market competition and audit fees and finds that auditors charge more to firms in a more competitive industry. JEL Classifications: D4, G30, M41, M42.

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