The Association between Financial Reporting Risk and Audit Fees before and after the Historic Events Surrounding SOX

2010 ◽  
Vol 29 (1) ◽  
pp. 15-39 ◽  
Author(s):  
Shannon L. Charles ◽  
Steven M. Glover ◽  
Nathan Y. Sharp
Keyword(s):  
Financial Reporting ◽  
Risk Measures ◽  
Risk Measure ◽  
Financial Statements ◽  
Audit Fees ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Time Period ◽  
Audit Fee ◽  
Before And After

SUMMARY: This study investigates whether the association between financial reporting risk and audit fees changed during 2000–2003: a time period marked by momentous and historic events for auditors. We find a positive statistically and economically significant relationship between financial reporting risk and audit fees paid to Big 4 auditors. More importantly, we predict and find that the relation between financial reporting risk and audit fees strengthened significantly in 2002 and 2003, consistent with a shift in the way auditors priced risk, likely in response to the events surrounding the Sarbanes-Oxley Act of 2002. Finally, we provide evidence that a commercially developed, comprehensive risk measure effectively proxies for an element of risk beyond what has traditionally been captured by various risk measures in audit fee models: namely, the risk that financial statements have been intentionally misstated. We believe this risk measure will be of interest to future researchers.

The Impact of Client and Misstatement Characteristics on the Disposition of Proposed Audit Adjustments

2011 ◽  
Vol 30 (2) ◽  
pp. 103-124 ◽  
Author(s):  
Jennifer Joe ◽  
Arnold Wright, and ◽  
Sally Wright
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Data Availability ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Time Period ◽  
Confidentiality Agreement ◽  
Financial Scandals ◽  
The Impact

SUMMARY We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several U.S. financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX). During this period, auditors and their clients faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB), and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments, including the effect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find that 24.2 percent of proposed adjustments were subsequently waived. The results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. Data Availability: Due to a confidentiality agreement with the participating audit firm the data are proprietary.

scholarly journals Keterbacaan Catatan Atas Laporan Keuangan dan Dampak Audit (Readability over Financial Reporting Footnotes and Audit Outcomes)

2021 ◽  
Vol 28 (2) ◽  
pp. 53
Author(s):  
Nadiah Bella Sagitarisma ◽  
Riesanti E. Wijaya
Keyword(s):  
Regression Analysis ◽  
Financial Reporting ◽  
Generalized Least Squares ◽  
Financial Statements ◽  
Audit Fees ◽  
Analysis Method ◽  
Data Regression ◽  
Audit Fee ◽  
Relationship Of ◽  
The Relationship

This study aims to find out the relationship of readability over financial reporting footnotes and audit outcomes. Audit outcomes are projected by audit fees and audit report lag.  Researchers used data from the company's financial statements listed on IDX in 2015-2018. Researchers used purposive sampling. From the copying, researchers processed 184 company data. This study used the panel's data regression analysis method. Data processing uses Generalized - least - squares.  This research proves that the worse the readability, the lower the audit fee.  Meanwhile, the worse the readability, the more time it takes the auditor to carry out an examination of the financial statements. This phenomenon occurs because the condition of the readability of notes to financial statements in Indonesia is still at a low level.

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.

scholarly journals Auditor Compensation Pattern Of S&P 500 Corporations Before And After The Passage Of Sarbanes-Oxley Act

2011 ◽  
Vol 23 (2) ◽  
Author(s):  
Ganesh M. Pandit ◽  
Vijaya Subrahmanyam ◽  
Allen Rubenfield
Keyword(s):  
Audit Fees ◽  
Audit Process ◽  
Public Companies ◽  
Publicly Traded Companies ◽  
Corporate Scandals ◽  
Cpa Firms ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Before And After ◽  
Different Sources

<p class="MsoBodyTextIndent" style="text-align: justify; text-indent: 0in; margin: 0in 34.2pt 0pt 0.5in;"><span style="font-family: Times New Roman; font-size: x-small;">The years 2001-02 were marked with an outburst of huge corporate financial failures that eroded billions of dollars from the stockholders&rsquo; equity and shook the confidence of the investor community. One of the issues that rose to the surface was the payment of huge nonaudit service fees by publicly traded companies to their auditors.<span style="mso-spacerun: yes;">&nbsp; </span>In response to the outcry against the alleged role of the auditors in the corporate scandals, Congress passed Sarbanes-Oxley Act of 2002 (SOX), which imposed a prohibition on the supply of certain nonaudit services by a CPA firm to its audit clients in order to reduce the suspected<span style="mso-spacerun: yes;">&nbsp; </span>revenue-dependence of auditors on their audit clients.<span style="mso-spacerun: yes;">&nbsp; </span>The study described in this paper examines the pattern of auditor compensation in the years 2001 and 2004 (i.e., pre- and post-SOX periods), for a sample of large public companies, to determine how the auditor compensation has changed during this three-year period and whether the new regulations have decreased such revenue-dependence of the auditor. The study also examines if each of the Big 4 CPA firms that dominate the audit market for large public companies have experienced a change in the pattern of their revenues drawn from different sources of auditor compensation. The results show that not only the composition of auditor compensation has changed after the passage of SOX but also the overall compensation paid by the sampled companies to their auditors has gone up noticeably in many cases, primarily due to a phenomenal rise in audit fees, which still may continue to threaten the auditor&rsquo;s independence in the audit process.<span style="mso-spacerun: yes;">&nbsp; </span>Further, during this three-year period, each of the Big 4 CPA firms has shifted its emphasis on the different sources of its revenues from these large public companies.</span></p>

Audit Fees for Initial Audit Engagements Before and After SOX

2009 ◽  
Vol 28 (1) ◽  
pp. 171-190 ◽  
Author(s):  
Hua-Wei Huang ◽  
K. Raghunandan ◽  
Dasaratha Rama
Keyword(s):  
Empirical Evidence ◽  
Audit Quality ◽  
Audit Fees ◽  
Pricing Decisions ◽  
Big 4 ◽  
Audit Fee ◽  
Auditor Change ◽  
Before And After ◽  
The Media ◽  
Client Acceptance

SUMMARY: Legislators, regulators, and the media have expressed concerns that auditors “lowball” the fees for initial-year audits and that such fee discounts can lead to reduced audit quality. We hypothesize that initial-year audit fee discounts will be less likely in the post-SOX period than in the pre-SOX period. Using both fee-levels and fee-changes models, we find that Big 4 clients receive initial-year audit fee discounts of about 24 percent in 2001; this finding is consistent with results from many prior studies that have examined various periods prior to SOX. However, we find that in 2005–2006 Big 4 clients pay an initial-year audit fee premium of around 16 percent. We also document that the Big 4 are much less likely to serve as a successor, following an auditor change, in 2005–2006 than in 2001. Overall, the findings suggest that concerns about initial-year audit fee discounts are not supported by empirical evidence in the post-SOX period. The results also suggest that the Big 4 have become more conservative in the post-SOX period with respect to client acceptance and pricing decisions.

scholarly journals PENGARUH NARSISME KLIEN, AUDIT FEE, INDEPENDENSI, SKEPTISME PROFESIONAL, DAN INTERLOCK AUDITOR EKSTERNAL TERHADAP AUDIT JUDGEMENT DALAM PENDETEKSIAN KECURANGAN LAPORAN KEUANGAN (STUDI KASUS PADA KAP DI MANADO)

2017 ◽  
Vol 12 (2) ◽  
Author(s):  
Claudia Wanda Melati Korompis ◽  
Lady Diana Latjandu
Keyword(s):  
Financial Reporting ◽  
Linear Regression Analysis ◽  
Personal Characteristic ◽  
Financial Statements ◽  
Audit Fees ◽  
Multiple Linear Regression Analysis ◽  
Professional Skepticism ◽  
External Auditors ◽  
Audit Judgment ◽  
Audit Fee

A material misstatement is the beginning of a fraud that can not be detected by an auditor and may have negative effects on the financial reporting process. The Internal factors related to the audit work environment in this research are audit fees, Independence, professional skepticism and Auditor Interlock. Sometimes, the amount of audit fee makes an auditor in a dilemma position on giving the opinion about the fairness of financial statements relating to the interests of many parties. The other factor which making a dilemma problem is Independence. Independence should be maintained by an auditor to provide a neutral assessment of the financial statements. Researchers also choose professional skepticism as things that need to be developed in order to reduce the adverse effects of fraudulent financial statement. The last Internal factor in this research is Auditor Interlock that may help auditor to get all disclosure that they’re needed. The unique external factor is client narcissism. Narcissism is known as a distorted personal characteristic that may obstruct an auditor's opinion statement according to the scope of the examination.The samples are all external auditors in KAP which operating in Manado area. Multiple linear regression analysis is an analysis thecnique that used in this research. Instrument in this research is questionnaire and processed using SPSS program.The results of this study indicate that the Audit fee and Independence have a significant effect on audit judgment. While Client Narsism, Professional Skepticism, and Interlock external auditors have no significant effect on audit judgment. Key Words: Narcissism, Fee, Independence, Skepticism, Interlock, Judgment

Spatial Competition in Local Audit Markets and the Fallout on Deloitte from the 2007 PCAOB Censure

2016 ◽  
Vol 36 (2) ◽  
pp. 1-19 ◽  
Author(s):  
Jeff P. Boone ◽  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Market Power ◽  
Audit Quality ◽  
Spatial Competition ◽  
Spatial Location ◽  
Audit Fees ◽  
Audit Market ◽  
Big 4 ◽  
Audit Fee ◽  
The Face ◽  
Market Leader

SUMMARY We examine whether Deloitte's spatial location in local audit markets affected the firm's adverse fallout—in terms of decreased ability to retain new clients and maintain audit fees—from the 2007 PCAOB censure. We motivate our inquiry by the notion that auditor-client alignment and auditor-closest-competitor distance can help differentiate the incumbent Big 4 auditor from other Big 4 auditors and thus provide market power, i.e., inhibit clients from shopping for another supplier because of the lack of a similar Big 4 provider in the local audit market. Consequently, it seems reasonable that the increase in switching risk and loss of fee growth suffered by Deloitte following the 2007 PCAOB censure will be lower in local markets where Deloitte was the market leader and its market share distance from its closest competitor was greater. Our findings suggest that the decline in Deloitte's audit fee growth rate following the 2007 PCAOB censure was concentrated in the pharmaceutical industry, although the client loss rate appears to have occurred more broadly (across all cities and industries). Collectively, our findings suggest that audit quality issues override auditor market power, i.e., differentiation does not provide Big 4 firms market power in the face of adverse regulatory action. JEL Classifications: G18; L51; M42; M49.

scholarly journals Reliability of Financial Information from the Perspective of Benford’s Law

Entropy ◽  
2021 ◽  
Vol 23 (5) ◽  
pp. 557
Author(s):  
Ionel Jianu ◽  
Iulia Jianu
Keyword(s):  
Financial Reporting ◽  
Capital Market ◽  
Financial Statements ◽  
Financial Information ◽  
Benford’S Law ◽  
Professional Judgment ◽  
Reporting Standards ◽  
Financial Reporting Standards ◽  
Benford's Law ◽  
Before And After

This study investigates the conformity to Benford’s Law of the information disclosed in financial statements. Using the first digit test of Benford’s Law, the study analyses the reliability of financial information provided by listed companies on an emerging capital market before and after the implementation of International Financial Reporting Standards (IFRS). The results of the study confirm the increase of reliability on the information disclosed in the financial statements after IFRS implementation. The study contributes to the existing literature by bringing new insights into the types of financial information that do not comply with Benford’s Law such as the amounts determined by estimates or by applying professional judgment.

scholarly journals The Effect of Disclosure and Transparency Criteria In Saudi Banks on The Financial Ratios Indicators

2019 ◽  
Vol 25 (116) ◽  
pp. 290-303
Author(s):  
Mohammad Kamal Kamel Afaneh
Keyword(s):  
Performance Indicators ◽  
Banking Sector ◽  
Saudi Arabian ◽  
Financial Statements ◽  
Monetary Authority ◽  
Financial Indicators ◽  
Return On Assets ◽  
Time Period ◽  
Before And After ◽  
The Impact

The study aimed to measure the effect of applying the disclosure and transparency standards criteria adopted by the Saudi Arabian Monetary Authority on improving performance indicators in the Saudi banking sector, by measuring the extent of the impact of the bank's financial indicators represented by liquidity, profitability and return on assets in Saudi banks by applying the criteria of disclosure and transparency, which is one of the Main principles in the list of governance, which was approved by the Saudi Arabian Monetary Authority. The analytical approach was followed to achieve the goal of the study, as the financial statements of Saudi banks were analyzed during a period of 8-year to test four hypotheses related to measuring the presence of statistically significant differences between the performance indicators of banks before and after applying the disclosure and transparency standards imposed on Saudi banks. The results of the research confirmed the existence of an inverse relationship between the bank’s liquidity and the percentage of Saudi banks ’profits. The more liquidity, the lower the profitability level of banks, which indicates that the high liquidity in Saudi banks has led to a low profitability in this time period, and the study recommended that The need to pay attention to the concept of disclosure and transparency among all related parties in Saudi banks, and banks should find a balance between liquidity and profitability  

The efficiency of corporate boards and firms’ audit fees: the case of the FTSE financial institutions

2018 ◽  
Vol 30 (3) ◽  
pp. 297-317 ◽  
Author(s):  
Rabih Nehme ◽  
Mohammad Jizi
Keyword(s):  
Financial Institutions ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Financial Statements ◽  
Audit Fees ◽  
Governance Structure ◽  
Negative Consequences ◽  
Reverse Causality ◽  
Content Type

Purpose The quality of financial reporting for the financial institutions is vital for the public, as the negative consequences of manipulated financial statements will not only affect shareholders but also the regulators’ reputation and the society at large. The purpose of this paper is to assess the association between different corporate governance mechanisms and their impact on audit and reporting quality. The gender factor is introduced from a diverse boards’ perspective to highlight any impact of female presence on the quality of financial statements. Design/methodology/approach The authors examine a sample of financial institutions listed on the FTSE-350 index for the years 2011 to 2015. The financial sector has its own and different regulations, and financial reporting framework and auditors are expected to behave into more scrutiny. Bloomberg database is used to obtain governance and financial data, while firms’ annual reports are used to collect audit fees and audit committee information. A panel data regression is used to test hypotheses. The authors also control for unobservable heterogeneity, reverse causality and endogeneity. Findings The results suggest that boards with larger size and higher independence pay higher audit fees to enhance the monitoring capacity and protect the wider group of stakeholders. The results also show that women on boards are likely to reduce the risk of manipulated financial statements, as women are more inclined toward truthfulness, cautiousness and conservatism. In addition, the reported results show that audit committees with more independent members are more inclined toward obtaining higher quality audit to enhance firm’s reporting quality. Originality/value Given the recent governments’ intervention to avoid financial institutions’ negative impact on the economy, this study is relevant and provide policymakers insights into the existing relationships between audit fees and financial institutions’ governance structure.

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