Politically Connected Boards and Audit Pricing: U.S. Evidence

2021 ◽  
Author(s):  
Keval Amin ◽  
Chansog Francis Kim ◽  
Zhifeng Yang ◽  
FeiTeng Ye
Keyword(s):  
Financial Reporting ◽  
Fixed Effects ◽  
Reporting Quality ◽  
Audit Fees ◽  
Political Connections ◽  
Fixed Effects Model ◽  
Audit Pricing ◽  
Audit Risk ◽  
Distressed Firms ◽  
The Impact

This study investigates the impact of political connections, as measured by having directors that previously held political positions, on the pricing of audits. We document that auditors charge higher fees to politically connected firms than to similar non-connected firms. Our findings are robust to a battery of additional analyses including (1) propensity score matching, (2) entropy balancing, (3) changes analysis, and (4) a fixed effects model with transaction-based measures of political connections (i.e., campaign contributions and lobbying expenditures) in the model. The effect of political connections on audit fees is mitigated by independent monitoring. Moreover, the main effect is stronger in firms with more complicated operational structures and higher litigation risk, but weaker for distressed firms. Although our findings suggest that auditors exert greater effort at politically connected clients, we show that connected clients report significantly higher discretionary accruals, consistent with auditors' incremental effort being insufficient to fully offset the audit risk inherent in these engagements. Collectively, our study sheds light on how auditors perceive political connections and their impact on financial reporting quality.

Accounting conservatism, capital structure, and global diversification

2015 ◽  
Vol 27 (1) ◽  
pp. 119-138 ◽  
Author(s):  
Feras M Salama ◽  
Karl Putnam
Keyword(s):  
Capital Structure ◽  
Financial Reporting ◽  
Fixed Effects ◽  
Reporting Quality ◽  
Accounting Conservatism ◽  
Fixed Effects Model ◽  
Financial Leverage ◽  
Content Type ◽  
The Impact ◽  
Global Diversification

Purpose – The purpose of this paper is to investigate the effect of accounting conservatism (as a proxy for financial reporting quality) on the degree of financial leverage. In addition, this paper examines the impact of global diversification (as a proxy for operational complexity) on the relationship between conservatism and financial leverage. Design/methodology/approach – A panel data regression analysis is conducted for the period 2000-2006. The authors utilized a two-way fixed-effects model to control for unobservable firm characteristics and time effects that may influence the firm’s decision to report conservatively. Findings – This paper provides empirical evidence that conservatism is positively associated with the degree of financial leverage, and the influence of conservatism on financial leverage is enhanced by the degree of global diversification. Originality/value – A major issue in corporate finance is the identification of variables that influence corporate capital structure choices. The evidence presented in this paper reveals that more conservative financial reporting is associated with a higher degree of financial leverage in the firm’s capital structure. This effect increases with the extent of global diversification, indicating that bondholders place a higher value on conservatism when there is more information asymmetry between stakeholders and managers caused by global diversification.

Financial reporting quality, audit fees and risk committees

2020 ◽  
Vol 28 (3) ◽  
pp. 423-444 ◽  
Author(s):  
Md. Borhan Uddin Bhuiyan ◽  
Ummya Salma ◽  
Jamal Roudaki ◽  
Siata Tavite
Keyword(s):  
Financial Reporting ◽  
Financial Risk ◽  
Investment Decision ◽  
Reporting Quality ◽  
Audit Fees ◽  
Financial Reporting Quality ◽  
Audit Pricing ◽  
Content Type ◽  
The Impact ◽  
Matching Techniques

PurposeThe purpose of this paper is to examine the association between the existence of a risk committee (RC) in a firm and financial reporting quality. We also investigate whether having an RC has an effect on audit pricing. We argue that the existence of an RC in a firm contributes to higher financial reporting quality and this, eventually, affects audit pricing.Design/methodology/approachThis study uses two different proxies for RC measures and investigates the impact on financial reporting quality and audit pricing. Multivariate regression analysis and propensity score matching techniques are both applied to data from the Australian Stock Exchange's listed companies for the years 2001–2013.FindingsThe results indicate that the existence of an RC reduces the discretionary accruals; this means the financial reporting quality improves when RCs are in operation. Our findings also indicate that the existence of an RC increases audit fees.Practical implicationsThe findings from this study will be beneficial to the regulatory authorities responsible for improving the compliance of corporate governance (CG). An RC can serve as a risk-mitigating tool in the investment decision-making process. Finally, the results are beneficial for the development of best practices in CG by promoting the existence of an RC.Originality/valueThis study goes beyond the traditional focus on CG as we use the existence of an RC as an indicator of better governance practices to mitigate financial and non-financial risk factors. To the best of our knowledge, this paper is among the first to investigate the consequences for firms operating with RCs. This issue has implications for investors, auditors, directors and regulators.

The Impact of Conservatism Accounting on Audit Fees

2021 ◽  
pp. 253-280
Author(s):  
Sandra Alves
Keyword(s):  
Fixed Effects ◽  
Positive Relationship ◽  
Audit Fees ◽  
Audit Pricing ◽  
High Quality ◽  
Audit Risk ◽  
Investor Confidence ◽  
Conservative Accounting ◽  
Big 4 ◽  
The Impact

For a sample of listed Portuguese and Spanish firms from 2010 to 2018, this study draws on audit pricing, substitution, signaling, and complementary theories to evaluate the impact of conservatism accounting on audit fees. Using fixed effects technique, the author finds a positive relationship between conservatism accounting and audit fees. The results suggest that firms with more conservative accounting (with strong internal corporate governance) could be more likely to demand high-quality audit to strengthen investor confidence in financial information and, thus pay higher audit fees. Therefore, this study supports signaling and complementary theories. The results also suggest that Big 4, growth, firm size, and leverage are positively related with audit fees. To Spain, audit risk and ROA are also positively related with audit fees.

CEO Financial Background and Audit Pricing

2016 ◽  
Vol 30 (3) ◽  
pp. 325-339 ◽  
Author(s):  
Rachana Kalelkar ◽  
Sarfraz Khan
Keyword(s):  
Financial Reporting ◽  
Chief Executive Officers ◽  
Work Experience ◽  
Audit Committee ◽  
Reporting Quality ◽  
Chief Executive ◽  
Audit Fees ◽  
Fixed Effect Model ◽  
Audit Pricing ◽  
Advantages And Disadvantages

SYNOPSIS Accounting scholars theorize that audit price is a function of a client's audit and business risk. Existing research finds that the functional expertise of Chief Executive Officers (CEOs) in finance improves financial reporting quality (Matsunaga, Wang, and Yeung 2013), increases profitability, and reduces the likelihood of firm failure (Custodio and Metzger 2014). These factors suggest that auditors' engagement risk decreases when incumbent CEOs possess financial expertise, raising the likelihood that auditors will charge these firms lower fees. In this study, we examine whether CEOs' work experience in accounting- and finance-related jobs affects audit fees. Using a panel of U.S. firms between 2004 and 2013, we find that firms that have a financial expert CEO pay lower audit fees. Our results are robust to various specifications, including firm-fixed effect model and specifications that control for other CEO- and Chief Financial Officer (CFO)-specific and audit committee characteristics. Our findings thus add to the literature on the advantages and disadvantages of a functional background of top managers and how this background can create value for a firm through savings in audit fees.

The impact of demographic characteristics of CEOs and directors on audit fees and audit delay

2015 ◽  
Vol 30 (8/9) ◽  
pp. 963-997 ◽  
Author(s):  
Maretno Agus Harjoto ◽  
Indrarini Laksmana ◽  
Robert Lee
Keyword(s):  
Ethnic Minority ◽  
Financial Reporting ◽  
Audit Committee ◽  
Reporting Quality ◽  
Audit Fees ◽  
Content Type ◽  
Top Executives ◽  
The Us ◽  
Female Ceos ◽  
The Impact

Purpose – The purpose of this study is to examine the impact of gender and ethnicity of CEO and audit committee members (directors) on audit fees and audit delay in the US firms. Design/methodology/approach – Audit-related corporate governance literature has extensively examined the determinants of audit fees and audit delay by focusing on board characteristics, specifically board independence, diligence and expertise. The authors provide empirical evidence that gender and ethnicity diversity in corporate leadership and boardrooms influence a firm’s audit fees and audit delay. Findings – This study finds that firms with female and ethnic minority CEOs pay significantly higher audit fees than those with male Caucasian CEOs. The authors also find that firms with a higher percentage of ethnic minority directors on their audit committee pay significantly higher audit fees. Further, the authors find that firms with female CEOs have shorter audit delay than firms with male CEOs and firms with a higher percentage of female and ethnic minority directors on their audit committee are associated with shorter audit delay. Results indicate that female CEOs and both female and ethnic minority directors are sensitive to the market pressure to avoid audit delay. Research limitations/implications – The results suggest that gender and ethnic diversity could improve audit quality and the firms’ overall financial reporting quality. Practical implications – This study provides insights to regulators and policy-makers interested in increasing diversity within a firm’s board and top executives. Recently, the US Securities and Exchange Commission (SEC) and the European Commission have been pressing publicly traded companies to improve diversity among their directors. This study provides evidence and perspective on how diversity can enhance financial reporting quality measured by audit fees and audit delay. Originality/value – Previous studies have not given much attention on the impact of racial ethnicity in addition to gender characteristics of top executives and audit committee directors on audit fees and audit delay.

The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and Evidence

2012 ◽  
Vol 87 (6) ◽  
pp. 2061-2094 ◽  
Author(s):  
Jeong-Bon Kim ◽  
Xiaohong Liu ◽  
Liu Zheng
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Financial Reporting Quality ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Audit Fee ◽  
European Union Countries ◽  
The Impact

ABSTRACT: This study examines the impact of International Financial Reporting Standards (IFRS) adoption on audit fees. We first build an analytical audit fee model to analyze the impact on audit fees for the change in both audit complexity and financial reporting quality brought about by IFRS adoption. We then test the model's predictions using audit fee data from European Union countries that mandated IFRS adoption in 2005. We find that mandatory IFRS adoption has led to an increase in audit fees. We also find that the IFRS-related audit fee premium increases with the increase in audit complexity brought about by IFRS adoption, and decreases with the improvement in financial reporting quality arising from IFRS adoption. Finally, we find some evidence that the IFRS-related audit fee premium is lower in countries with stronger legal regimes. Our results are robust to a variety of sensitivity checks. Data availability: Data are available from public sources identified in the paper.

Earnings management: do attendance and changes of audit committee members matter?

2018 ◽  
Vol 33 (8/9) ◽  
pp. 760-778 ◽  
Author(s):  
Murad Abdulsalam Qamhan ◽  
Mohd Hassan Che Haat ◽  
Hafiza Aishah Hashim ◽  
Zalailah Salleh
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Fixed Effects ◽  
Audit Committee ◽  
Reporting Quality ◽  
Securities Market ◽  
Annual Reports ◽  
Fixed Effects Model ◽  
Content Type ◽  
New Evidence

Purpose This paper aims to examine the association between new audit committee characteristics – attendance of audit committee members at meetings and changes of members through the demission or appointment of members of the audit committee during the year – and earnings management. Its objective is to contribute new evidence that extends studies on audit committee characteristics in reducing earnings management. Design/methodology/approach The sample comprises 370 observations obtained from the annual reports of 74 companies listed on the Muscat Securities Market for the years 2008-2012. The panel data are analysed using a fixed effects model to validate the hypotheses and model. Findings This study finds a negative association between earnings management and members’ attendance at the audit committee meetings. Additionally, there is a positive significant relationship between earnings management and changes to members through demission or appointment. Originality/value This study broadens the scope of audit committee characteristics by providing empirical evidence of the relationship between new audit committee characteristics and earnings management and may assist policymakers and regulators in determining ways to enhance audit committee characteristics and improve financial reporting quality.

Information Technology Controls Quality and Audit Fees: Evidence From Italy

2016 ◽  
Vol 33 (1) ◽  
pp. 123-146 ◽  
Author(s):  
Tatiana Mazza ◽  
Stefano Azzali
Keyword(s):  
Risk Assessment ◽  
Information Technology ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Fees ◽  
Listed Companies ◽  
Audit Risk ◽  
The Impact ◽  
Control Risk

This study analyzes the impact of Information Technology (IT) Controls quality on control risk and audit fees. The impact is expected to occur when regulation increases sensitiveness to audit risk assessment. The research focuses on IT Controls as part of Internal Control over Financial Reporting, particularly on scoping quality, segregation of duties, and Controls framework compliance. The research was conducted with a questionnaire on a population of Italian listed companies. We find that audit fees are lower for higher IT scoping quality, IT Controls segregation of duties, and IT Controls framework compliance. The overall conclusion is that IT Controls quality is related to lower control risk, audit fees, and audit effort.

scholarly journals Generalist CEOs and Audit Pricing

2021 ◽  
Author(s):  
Zhiming Ma ◽  
Rencheng Wang ◽  
Kaitang Zhou
Keyword(s):  
Path Analysis ◽  
Instrumental Variables ◽  
Fixed Effects ◽  
Audit Fees ◽  
Business Risk ◽  
Managerial Ability ◽  
Audit Pricing ◽  
Audit Risk ◽  
Ceo Characteristics ◽  
Shed Light

We analyze the consequences of a firm hiring a generalist CEO in terms of the audit fees paid by the firm. We find that audit fees of clients with generalist CEOs are higher than those of clients with specialist CEOs. This relation is robust to considering managerial ability, other CEO characteristics, various fixed effects, instrumental variables, and change analyses. We further show that fee differences are larger for firms with weaker monitoring and higher corporate litigation risks. Through path analysis, we find that both client business risk and misreporting risk contribute to the fee difference. Finally, we find that auditors are more likely to issue going-concern opinions to clients with generalist CEOs. Our study should be of interest to auditing standard setters who link management operating styles to audit risk. We shed light on how management operating styles associated with the CEOs' general or specialized skills affect audit pricing.

Boardroom Backscratching and Audit Fees

2018 ◽  
Vol 38 (2) ◽  
pp. 179-206 ◽  
Author(s):  
Dean Hanlon ◽  
Mehdi Khedmati ◽  
Edwin KiaYang Lim
Keyword(s):  
Financial Reporting ◽  
Policy Development ◽  
Audit Committee ◽  
Reporting Quality ◽  
Audit Fees ◽  
Financial Reporting Quality ◽  
Risk Premiums ◽  
Audit Opinion ◽  
Future Performance ◽  
The Impact

SUMMARY This study investigates the impact of backscratching between the CEO and directors on a firm's future performance, financial reporting quality, and audit fees. We find that the presence and extent of boardroom backscratching are associated with weaker future performance, poorer quality financial reporting, and higher audit fees. We attribute these findings to backscratching firms' increased business and information risks inducing auditors to exert greater effort and charge risk premiums in response to heightened audit engagement risks. We observe consistent results when extending our investigation to backscratching between the CEO and audit committee and between the CEO and the CFO, given that the audit committee and the CFO influence financial reporting quality. Finally, we provide evidence that backscratching firms display greater audit report lag and a higher likelihood of receiving a going concern audit opinion. Our study offers insights to regulators concerning policy development to strengthen board effectiveness and remuneration disclosures.

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