Convertible debt usage and the pricing of audit services

2021 ◽  
Author(s):  
Henri Akono ◽  
Heeick Choi ◽  
Khondkar Karim
Keyword(s):  
Functional Form ◽  
Positive Association ◽  
Audit Fees ◽  
Market Valuation ◽  
Litigation Risk ◽  
Business Risk ◽  
Convertible Debt ◽  
The Public ◽  
Earnings Per Share ◽  
Public Company

This study examines the association between convertible debt usage and the pricing of audit services. We test the (nondirectional) hypothesis that convertible debt usage is associated with audit effort and therefore fees, due to its association with client business risk and its dilutive effect on earnings per share. We find a positive association between audit fees and convertible debt, suggesting that auditors view convertible debt as a source of risk. We also find that audit fees related to convertible debt are sensitive to CEO bonus incentives and to market valuation incentives. Our results suggest that following the Public Company Accounting Oversight Board (PCAOB) regulation, auditors exert greater effort on convertible debt, but no additional effort on straight debt. Our inferences are robust to using a change in audit fees specification, controlling for litigation risk, and controlling for functional form misspecification.

The Impact of CEO and CFO Equity Incentives on Audit Scope and Perceived Risks as Revealed Through Audit Fees

2014 ◽  
Vol 33 (2) ◽  
pp. 111-139 ◽  
Author(s):  
Yezen H. Kannan ◽  
Terrance R. Skantz ◽  
Julia L. Higgs
Keyword(s):  
Executive Compensation ◽  
Positive Association ◽  
Audit Fees ◽  
Share Price ◽  
The Public ◽  
Audit Planning ◽  
Fraud Risk ◽  
Equity Incentives ◽  
Public Company ◽  
The Impact

SUMMARY: In 2013, the Public Company Accounting Oversight Board (PCAOB) proposed an amendment to Auditing Standard No. 12 (PCAOB 2010) that would require auditors to consider executive compensation in audit planning because of potential fraud risk associated with equity incentives. We use the association between audit fees and CEO and CFO equity incentives to infer whether auditors increase audit scope and perceive greater risk as equity incentives increase. Equity incentives are defined as the sensitivity of the value of executives' equity portfolios to changes in share price (delta incentive) and to changes in return volatility (vega incentive). We find a positive association between audit fees and vega, but not delta. However, when we interact vega with proxies for residual auditor business risk, we find that the fee premiums for risk decrease as vega increases. Our results suggest that auditors do consider executive compensation in audit planning.

Hiring Auditors with a Part II Quality Control Report: An Opportunity for Increased Earnings Management or Lower Audit Fees?

2020 ◽  
Vol 5 (1) ◽  
pp. 73-93
Author(s):  
Jared Eutsler ◽  
D. Kip Holderness ◽  
Megan M. Jones
Keyword(s):  
Quality Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Fiscal Year ◽  
The Public ◽  
Audit Firms ◽  
Public Company ◽  
General Demand ◽  
Systemic Quality

ABSTRACT The Public Company Accounting Oversight Board's (PCAOB) Part II inspection reports, which disclose systemic quality control issues that auditors fail to remediate, signal poor audit quality for triennially inspected audit firms. Auditors that receive a Part II inspection report typically experience a decrease in clients, which demonstrates a general demand for audit quality. However, some companies hire auditors that receive Part II inspection reports. We examine potential reasons for hiring these audit firms. We find that relative to companies that switch to auditors without Part II reports, companies that switch to auditors with Part II reports have higher discretionary accruals in the first fiscal year after the switch, which indicates lower audit quality and a heightened risk for future fraud. We find no difference in audit fees. Our results suggest that PCAOB Part II inspection reports may signal low-quality auditors to companies that desire low-quality audits. Data Availability: Data are available from the public sources cited in the text.

Financial Statement Disaggregation and Auditor Effort

2021 ◽  
Author(s):  
Matthew Beck ◽  
Matthew Glendening ◽  
Chris E. Hogan
Keyword(s):  
Positive Association ◽  
Financial Statements ◽  
Audit Fees ◽  
Financial Statement ◽  
Litigation Risk ◽  
Significant Positive Association ◽  
Material Line

We examine the consequences of firms' disaggregation choices for auditor effort and audited financial statements. We document a significant positive association between disaggregation and audit fees, our proxy for auditor effort. Using separate measures of disaggregation of smaller line items versus larger, obviously material, line items, we provide evidence that one of the avenues through which disaggregation may increase auditor effort is through changes in auditors' assessments of materiality for smaller line items, especially when financial statement scrutiny is high. We also find disaggregation (and the audit fees associated with disaggregation) constrain the ability of managers to manipulate earnings in the audited financial statements compared to the unaudited financial statements, suggesting the fee response to disaggregation is due to auditor effort. Lastly, we provide evidence that our results are not fully explained by client litigation risk or other client attributes driving disaggregation choices.

scholarly journals Auditor Fees and Going-Concern Reporting Decisions on Bankrupt Companies: Additional Evidence

2015 ◽  
Vol 9 (1) ◽  
pp. A13-A27 ◽  
Author(s):  
William J. Read
Keyword(s):  
Audit Fees ◽  
Auditor Independence ◽  
Data Availability ◽  
Audit Failure ◽  
The Public ◽  
Going Concern ◽  
Audit Firms ◽  
Public Company ◽  
Reporting Decisions ◽  
Auditor Fees

SUMMARY The recent growth in non-audit services (NAS) at the major audit firms has the attention of auditing regulators. On several occasions recently, board members of the Public Company Accounting Oversight Board (PCAOB) have indicated that the rise in NAS may place auditor independence at risk (Harris 2014; Tysiac 2014). Impaired independence can result in audit failure, which includes situations when auditors fail to issue going-concern (GC) audit opinions to soon-to-be bankrupt companies. In this paper, I examine the association between the propensity of auditors to issue GC opinions and NAS fees (and audit fees) to 203 bankrupt companies during 2002–2013. In analysis, I find no significant relation between GC decisions and NAS fees and audit fees. My results may interest U.S. regulators, who recently expressed concerns about the threat to auditor independence from the spike in NAS at the major firms. Data Availability: Publicly available from sources identified in the paper.

Is the Audit Fee Disclosure a Leading Indicator of Clients' Business Risk?

2011 ◽  
Vol 30 (3) ◽  
pp. 157-179 ◽  
Author(s):  
Jonathan D. Stanley
Keyword(s):  
Operating Performance ◽  
Audit Fees ◽  
Data Availability ◽  
Business Risk ◽  
Leading Indicator ◽  
Public Company ◽  
Audit Fee ◽  
One Year ◽  
The One ◽  
Performance Results

SUMMARY This study hypothesizes a link between observed audit prices and future reported changes in clients' economic condition. As predicted, results from a traditional audit fee model, estimated using a large sample of U.S. public company engagements spanning from 2000 to 2007, reveal a significant inverse relation between audit fees and the one-year-ahead change in a measure of clients' operating performance. Additional analysis indicates that the relation extends to more forward-looking changes (up to five years ahead) and is stronger for negative versus positive changes in performance. Results also indicate that audit fees reflect future changes in clients' earnings that are unaccounted for by analysts' forecasts. In contrast, the findings reveal little evidence of a relation between audit fees and future changes in clients' solvency, including bankruptcy status. Collectively, the study's results provide initial evidence suggesting that the audit fee disclosure is a leading indicator of the operating performance dimension of clients' business risk. Data Availability: Data are available from public sources cited in the text.

The Impact of PCAOB Auditing Standard No. 5 on Audit Fees and Audit Quality

2012 ◽  
Vol 26 (3) ◽  
pp. 493-511 ◽  
Author(s):  
Dechun Wang ◽  
Jian Zhou
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Test Sample ◽  
Large Sample ◽  
The Public ◽  
Public Company ◽  
The Impact ◽  
Jel Classifications

SYNOPSIS We investigate the impact of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5 (AS5) on audit fees and audit quality. AS5 supersedes Auditing Standard No. 2 (AS2), and became effective for audits for accelerated filers for fiscal years ending on or after November 15, 2007. Using a large sample of accelerated filers subject to AS5, we find evidence that audit fees decrease upon the adoption of AS5. More importantly, even though AS5 adoption reduces audit fees for our test sample, we find no evidence of a decrease in audit quality. In summary, we document evidence that AS5 improves the efficiency of internal control audits. JEL Classifications: M41.

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.

scholarly journals Evidence on the Impact of Internal Control over Financial Reporting on Audit Fees

2019 ◽  
Vol 9 (3) ◽  
pp. 1
Author(s):  
Mohamed Gaber ◽  
Samy Garas ◽  
Edward J. Lusk
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Public Information ◽  
Audit Fees ◽  
Stock Trading ◽  
Audit Opinion ◽  
The Public ◽  
Public Company ◽  
Effective Group ◽  
The Impact

Introduction: Circa 1992, the dot.com sector created an irrational stock-trading market where the usual “financial” profiles of: Liquidity, Cash Flow from Operations, and Revenue generation were replaced by Ponzi-esque mayhem. To stabilize the markets, the Public Company Accounting Oversight Board [PCAOB] required a second audit opinion: the COSO Opinion on the adequacy of management’s system of Internal Control over Financial Reporting: [ICoFR].Study Focus: Three COSO-[ICoFR] designations are now required as public information: (i) A “clean” opinion [Is Effective], (ii) Deficiencies are noted, and (iii) Weaknesses reported. Our research interest is to determine, for a panel of randomly selected firms traded on the S&P500 for a eleven-year period: 2005 to 2015, the nature of the effect that the COSO deficiency reporting protocol has on (i) Audit Fees and (ii) the Market Cap of traded firms.Method: To this end we collected, using the Audit Analytics Ô[WRDSÔ] database, various categories of reported Audit Fees and also Market Cap information. This random sample was classified into two sets: the first group: Is Effective SEC 302 Designation and No COSO issues & the second group: Is Not 100% Effective for which there were SEC 302 Deficiencies or Weaknesses noted.Results: Inferential testing indicates that failure to attend to the PCAOB-COSO imperatives results in a relational where there are higher Audit Fees and a slippage of the firm’s Market Cap compared to the Is Effective Group. The PCAOB’s protocol to require the Audit of the firm’s ICoFR system and make that evaluation public information seems to be an excellent corrective “Carrot and Stick”.

Audit Pricing of Terrorism

2019 ◽  
Vol 39 (2) ◽  
pp. 163-184
Author(s):  
William J. Moser
Keyword(s):  
Positive Association ◽  
Audit Fees ◽  
Theoretical Framework ◽  
Litigation Risk ◽  
Audit Pricing ◽  
Terrorism Risk ◽  
Country Level ◽  
Audit Fee ◽  
The World ◽  
Investor Protections

SUMMARY I examine whether terrorism or the risk of future terrorism affects audit fees paid by companies around the world. In the existing audit fee literature, it is unclear how terrorism risk enters the theoretical framework for audit fees. Using both a levels analysis and a changes analysis, I find a positive association between higher levels and higher increases in terrorism risk and increased audit fees. The positive association between audit fees and terrorism risk is strengthened in environments with greater litigation risk, i.e., in which the firm has a greater probability of corporate litigation, the firm is headquartered in a country with greater investor protections, or the firm is headquartered in a country that allows shareholders greater ease in filing a shareholder lawsuit. From these results, I conclude that auditors include the country-level terrorism risk in their pricing of audit fees.

The Impact of PCAOB Auditing Standard No. 5, the PCAOB Inspection Regime, and the Great Recession on Audit Fees and Audit Quality

2020 ◽  
pp. 0148558X2098220
Author(s):  
Elizabeth S. Johnson ◽  
Kenneth J. Reichelt ◽  
Jared S. Soileau
Keyword(s):  
Great Recession ◽  
Audit Quality ◽  
Audit Fees ◽  
The Public ◽  
The Great Recession ◽  
Audit Firms ◽  
Public Company ◽  
Audit Approach ◽  
The Impact

We investigate the coinciding effects of the implementation of Auditing Standard No. 5 (AS5), the change in the Public Company Accounting Oversight Board’s (PCAOB) inspection regime, and the Great Recession on the audit fees and audit quality of accelerated filers. AS5 took effect in November 2007 and promulgated a top-down, risk-based audit approach to SOX 404(b) audits of accelerated filers. Concurrently, the PCAOB adopted a stricter approach to its inspections of audit firms, which encouraged them to improve audit quality and reduce audit fees. Moreover, the Great Recession pressured audit firms to reduce fees. We find that, following the three events, audit fees decreased and quality increased for accelerated filers. We also find that audit fees and audit quality increased for non-accelerated filers, although these filers were not directly affected by AS5.

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