The effect of Legal Entity Identifiers on audit fee changes

2021 ◽  
Author(s):  
Ju-Chun Yen
Keyword(s):  
Empirical Evidence ◽  
Learning Effect ◽  
Audit Fees ◽  
Policy Implications ◽  
Brand Name ◽  
Legal Entity ◽  
Audit Firms ◽  
Audit Fee ◽  
Legal Entities ◽  
Industry Expertise

This study investigates whether a client's use of a Legal Entity Identifier (LEI) is associated with audit fee changes. An LEI uniquely identifies different legal entities worldwide, making audit clients' transactions and related parties more transparent and traceable, potentially reducing auditors' costs and audit risks, as reflected in audit fee changes. Using a sample of U.S. firms, I find that audit fees increase more for LEI firms than for non-LEI firms within the first few years of LEI registration, but they increase less for LEI firms than for non-LEI firms afterward. The results support a reduction in audit costs due to LEIs, with a learning effect. I also find that audit firms' brand name and industry expertise strengthen this association. This study provides initial empirical evidence of the effects of LEI and policy implications.

scholarly journals The Awareness of External Auditors and the Management of Kuwaiti Listed Companies on Determinants of Audit Fees: An Exploratory Study

2015 ◽  
Vol 11 (1) ◽  
pp. 108 ◽  
Author(s):  
Faisal Alanezi ◽  
Mishari Alfraih
Keyword(s):  
Stock Exchange ◽  
Audit Fees ◽  
Brand Name ◽  
Audit Firm ◽  
External Auditors ◽  
Audit Market ◽  
Factors Influencing ◽  
Audit Firms ◽  
Kuwait Stock Exchange ◽  
Audit Fee

<p>This paper explored the factors that influence audit fees determinants in the Kuwait audit market. A questionnaire was distributed to a number of audit firms operating in the Kuwaiti market and Kuwaiti companies listed on the Kuwait Stock Exchange (KSE). The results indicated that all factors show a Likert-scale score of greater than 2.5, suggesting that all the factors included in the questionnaire influence the audit fee determinants. Among the 25 factors included in this study, audit firm brand name, time spent completing a given job and auditors experience were the most important factors influencing audit fees determinants in the Kuwait audit market from audit firm and companies perspective. In contrast, company age, client company location and audit firm location were the least important factors influencing the determinants of audit fee in Kuwait from audit firm and companies perspectives. The results of the t-test revealed that there are significant differences in the mean ranking of some of the factors assumed to determinant the audit fee in Kuwait audit market between the two groups of respondents (audit firms and companies). The findings presented in this study may help professional accounting associations and both audit firms and companies to better understand the factors influencing audit fee determinants in Kuwait audit market.<strong></strong></p>

The Effect of Office Changes within Audit Firms on Clients' Audit Quality and Audit Fees

2020 ◽  
Vol 39 (1) ◽  
pp. 71-99
Author(s):  
Carl W. Hollingsworth ◽  
Terry L. Neal ◽  
Colin D. Reid
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Additional Analysis ◽  
Audit Firm ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact ◽  
Audit Partner Rotation

SUMMARY While prior research has examined audit firm and audit partner rotation, we have little evidence on the impact of within-firm engagement team disruptions on the audit. To examine these disruptions, we identify a unique sample of companies where the audit firm issuing office changed but the audit firm did not change and investigate the effect of these changes on the audit. Our results indicate that companies that have a change in their audit firm's issuing office exhibit a decrease in audit quality and an increase in audit fees. In additional analysis, we partition office changes into two groups—client driven changes and audit firm driven changes. This analysis reveals that client driven changes are more likely to result in a higher audit fee while audit quality is unchanged. Conversely, audit firm driven changes do not result in a higher audit fee but do experience a decrease in audit quality.

Effect of Client Reputation on Audit Fees at the Office Level: An Examination of S&P 500 Index Membership

2013 ◽  
Vol 33 (1) ◽  
pp. 1-27 ◽  
Author(s):  
Sharad C. Asthana ◽  
Rachana Kalelkar
Keyword(s):  
Stock Prices ◽  
Reporting Quality ◽  
Audit Fees ◽  
Brand Name ◽  
Rent Extraction ◽  
Auditor Switching ◽  
Market Shares ◽  
Audit Fee ◽  
Office Level

SUMMARY Prior studies have examined the effect of a decline in the auditor's or client's reputation on auditor switching, market shares, and stock prices. We extend these studies by examining the effect of an unexpected increase in a client's reputation on audit fees at the office level. We argue that association with a reputed client will enhance the auditor's reputation and establish a brand name, thus enabling the auditor to charge higher fees from other clients. Using a client's inclusion into the prestigious S&P 500 index as a proxy for the client's change in reputation, we find that the audit fees are discounted for this S&P client when it enters the index. The audit fee for this client increases following its exit from the index. We posit that changes in the audit fees for the S&P 500 clients are attributable to the changes in the reporting quality of these firms following their entry to and exit from the index. We also find increases in the audit fees of non-S&P clients of the audit office around such events. We argue that the presence of S&P clients helps auditors differentiate themselves from other auditors and allows them to extract rents from non-S&P clients. Last, we find no evidence of improvement in the reporting quality of other non-S&P clients, supporting our rent-extraction story.

Does Audit Fee Homogeneity Exist? Premiums and Discounts Attributable to Individual Partners

2011 ◽  
Vol 30 (4) ◽  
pp. 249-272 ◽  
Author(s):  
Stuart D. Taylor
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Market ◽  
Homogeneity Assumption ◽  
Audit Firms ◽  
Audit Fee ◽  
Using Data ◽  
The Individual ◽  
Made In

SUMMARY This paper investigates the implied assumption, made in many audit fee determination studies, that, within a given audit firm, all partners produce a statistically identical level of audit quality and earn a statistically identical level of audit fees. This is referred to as the “homogeneity assumption.” However, this is contradicted by the individual auditor behavioral literature, which shows that different individual auditor characteristics can have an impact on audit quality. Given the fact that audit partners differ in their quality, this paper hypothesizes that different audit partners will be able to earn differing levels of fees. This hypothesis is tested by estimating an audit fee model using data from 822 Australian publicly listed companies for the year 2005. Australia is an ideal audit market for this research, as the disclosure of the name of the audit engagement partner in the audit report is mandatory. The empirical results indicate that individual audit partners earn individual audit fee premiums (or discounts) that are not explainable by the audit firms of which they are members. Data Availability: All data have been extracted from publicly available sources.

The Large Audit Firm Fee Premium: A Case of Selectivity Bias?

2002 ◽  
Vol 17 (1) ◽  
pp. 73-91 ◽  
Author(s):  
Jen C. Ireland ◽  
Clive S. Lennox
Keyword(s):  
Adverse Selection ◽  
Selection Bias ◽  
Audit Fees ◽  
Selectivity Bias ◽  
Big 5 ◽  
Audit Firm ◽  
Auditor Choice ◽  
Audit Firms ◽  
Audit Fee ◽  
Analytical Research

Audit fee studies often find large (Big 5) audit firms earn significantly higher fees than small (non-Big 5) firms, but they treat auditor choice as exogenous. In contrast, this paper takes into account that companies are not randomly assigned to audit firms. We find the effects of auditor selection bias on audit fees are statistically and economically significant. Consistent with the predictions of analytical research, our results suggest large (small) audit firms experience advantageous (adverse) selection in attracting high (low) quality companies. Our results indicate the premium earned by large audit firms is more than twice as large when selectivity effects are taken into account (53.4% compared to 19.2%).

scholarly journals Audit Research Summaries

2017 ◽  
Vol 91 (7/8) ◽  
pp. 244-249
Author(s):  
Philip Wallage
Keyword(s):  
Audit Fees ◽  
Audit Report ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee

Ook deze maand presenteren wij weer enkele “Audit Research Summaries” uit de database van de American Accounting Association (www.auditingresearchsummaries. org). De eerste samenvatting betreft een onderzoek van Sharma, Tanyi en Litt naar de kosten van verplichte audit partner-rotatie in de VS. Hiertoe wordt nagegaan of partner- rotatie gerelateerd is aan de hoogte van de audit fee en het tijdsverloop tussen einde boekjaar en datum afgifte van de controleverklaring (audit report lag). Uit het onderzoek blijkt onder andere dat een positieve en significante associatie bestaat tussen partner-rotatie en audit fees. Ook blijkt dat deze associatie met name bestaat voor grotere klanten en voor de niet-Big 4-audit firms. Een vergelijkbare associatie bestaat voor rotatie en de lengte van de audit report lag. De volgende samenvatting betreft een experiment van Kim en Harding onder Australische en Zuid Koreaanse accountants naar het effect dat gepercipieerde expertise van een leidinggevende heeft op de besluitvorming van een ondergeschikte. Uit het onderzoek blijkt dat de invloed van de vooraf bekende preferentie van de leidinggevende op een te nemen besluit groter is naarmate de leidinggevende meer deskundigheid wordt toegedicht. Er wordt geen verschil geconstateerd tussen Australische en Zuid Koreaanse accountants.

Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees

2015 ◽  
Vol 91 (3) ◽  
pp. 767-792 ◽  
Author(s):  
Kenneth L. Bills ◽  
Lauren M. Cunningham ◽  
Linda A. Myers
Keyword(s):  
Audit Quality ◽  
Matched Control ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Audit Firm ◽  
Association Member ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
Control Samples

ABSTRACT In this study, we examine the benefits of membership in an accounting firm association, network, or alliance (collectively referred to as “an association”). Associations provide member accounting firms with numerous benefits, including access to the expertise of professionals from other independent member firms, joint conferences and technical trainings, assistance in dealing with staffing and geographic limitations, and the ability to use the association name in marketing materials. We expect these benefits to result in higher-quality audits and higher audit fees (or audit fee premiums). Using hand-collected data on association membership, we find that association member firms conduct higher-quality audits than nonmember firms, where audit quality is proxied for by fewer Public Company Accounting Oversight Board (PCAOB) inspection deficiencies and fewer financial statement misstatements, as well as less extreme absolute discretionary accruals and lower positive discretionary accruals. We also find that audit fees are higher for clients of member firms than for clients of nonmember firms, suggesting that clients are willing to pay an audit fee premium to engage association member audit firms. Finally, we find that member firm audits are of similar quality to a size-matched sample of Big 4 audits, but member firm clients pay lower fee premiums than do Big 4 clients. Our inferences are robust to the use of company size-matched control samples, audit firm size-matched control samples, propensity score matching, two-stage least squares regression, and to analyses that consider changes in association membership. Our findings should be of interest to regulators because they suggest that association membership assists small audit firms in overcoming barriers to auditing larger audit clients. In addition, our findings should be informative to audit committees when making auditor selection decisions, and to investors and accounting researchers interested in the relation between audit firm type and audit quality.

How do audit fees change? Effects of firm size and section 404(b) compliance

2019 ◽  
Vol 34 (4) ◽  
pp. 393-437
Author(s):  
Alexey Lyubimov
Keyword(s):  
Audit Fees ◽  
Section 404 ◽  
Content Type ◽  
Control Effectiveness ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
Second Tier ◽  
Changes Over Time ◽  
Over Time

Purpose The purpose of this paper is to investigate the effect of the size of the audit firm and compliance with Section 404(b) on how audit fees change over time. Design/methodology/approach This study uses panel data and an OLS regression to examine the relationship between audit fee changes, firms’ size and Section 404(b) compliance. Findings Section 404(b)-compliant companies experience a larger change in audit fees if they are audited by Big 4 firms than second-tier firms. Second-tier audit firms increase the fees primarily for the companies which do not comply with Section 404(b). Practical implications Regulators have been concerned with the Big 4 fee premium for four decades. This study informs regulators that the Big 4 continue increasing their fees at a higher rate than second-tier firms for their Section 404(b)-compliant clients (even though recent research shows that second-tier firms have increased quality to match the Big 4). This suggests that the Big 4 fee premium increases for this subset of clients, adding to the regulatory concerns. Originality/value While prior research has established the existence of the Big 4 fee premium, little is known about how this premium changes over time. Prior research shows that audit fees increase when internal controls are weak; however, little is known about how Section 404(b) compliance (once control effectiveness is controlled) affects fee changes. This paper addresses these voids in research.

The effect of changing fiscal year-ends on audit fees and audit quality

2019 ◽  
Vol 12 (3) ◽  
pp. 365-382
Author(s):  
Angel Arturo Pacheco Paredes ◽  
Clark Wheatley
Keyword(s):  
Design Methodology ◽  
Audit Quality ◽  
Audit Fees ◽  
Policy Implications ◽  
Fiscal Year ◽  
Content Type ◽  
Audit Firms ◽  
Negative Effect ◽  
Practical Implications

Purpose This study aims to extend recent research analyzing the effect of auditor busyness on audit quality. Specifically, this study explores the effect on audit quality of a change of fiscal year-end to or from an audit firm’s busy period. Design/methodology/approach Empirical archival. Findings When firms change their fiscal year-end to a period when the auditor is less busy, client firms are rewarded with lower audit fees and auditors are rewarded with a reduction in required effort. This study finds no difference in the level of audit quality after a change in fiscal year-end. Practical implications There are significant implications for audit firms as they may gain cost advantages by successfully promoting off-season fiscal year-ends, and reduce the negative effect on employees associated with “busy season” stress. Similarly, client firms may find that audit costs are reduced when they adopt a less “busy” fiscal year-end. Social implications These results have policy implications for regulators because regulators often dictate the fiscal year-end for certain industries or traded securities. Such dictates may thus introduce inefficiencies into the market for audit services. Originality/value These results should guide regulators in their decisions to dictate fiscal year-ends and firms in their choice of reporting periods.

The impact of non-timely 10-Q filings and audit firm size on audit fees

2018 ◽  
Vol 33 (5) ◽  
pp. 503-516 ◽  
Author(s):  
Tiffany Chiu ◽  
Feiqi Huang ◽  
Yue Liu ◽  
Miklos A. Vasarhelyi
Keyword(s):  
Regression Model ◽  
Firm Size ◽  
Audit Fees ◽  
Audit Risk ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact

Purpose Prior studies suggest that non-timely 10-Q filings indicate higher potential risks than non-timely 10-K filings. Furthermore, larger audit firms tend to be more risk-averse and conservative about reporting. Inspired by these research streams, this paper aims to investigate the influence of non-timely 10-Q filings on audit fees and the impact of audit firm size on this association. Design/methodology/approach The cross-sectional audit fee regression model used in this study is similar to that used in prior audit fee research (Simunic, 1980; Francis et al., 2005; Hay et al., 2006; Wang et al., 2013). The model includes the following five major characteristics that would influence auditors’ fee decisions: auditee size (LNAT), complexity (REIVAT, FOREIGN, SEG), financial condition (LOSS, ROA, GROWTH, ZSCORE), special events (ICW, RESTATE, INITIAL, GC) and auditor type (BIG4). To examine the effect of non-timely 10-Q filings on audit fees, the variable NT10Q is included in the audit fee model. Findings The results indicate that when both non-timely 10-K and non-timely 10-Q filings are included in the regression model, only non-timely 10-Q filings are significantly associated with higher audit fees, suggesting that the presence of non-timely 10-Q filings signals more serious underlying problem than non-timely 10-K filings in the audit fees decision processes. In addition, we find that audit fees for firms audited by Big 4 auditors are 26.4 per cent higher when those firms file non-timely 10-Q reports, whereas there is no significant association between non-timely 10-Q filings and audit fees for firms audited by non-Big 4 auditors. Practical implications As no attention has been paid to the investigation of the impact of non-timely 10-Q filings on audit fees, with the aim of filling the gap of this specific research area, this study examines the association between non-timely 10-Q filings and audit fees and the influence of audit firm size on this association. Originality/value The contribution of this paper is threefold: first, it is the first study to examine the association between non-timely 10-Q filings and audit fees. The results show that non-timely 10-Q filings are a better and earlier indicator of audit risk than non-timely 10-K filings. Second, the results reveal that the relationship between non-timely 10-Q filings and audit fees is affected by audit firm size. Specifically, Big 4 auditors tend to charge higher audit fees in the presence of non-timely 10-Q filings, reflecting that they are more sensitive to audit risk than smaller audit firms are. Third, an examination of the quarterly effect of non-timely 10-Q filings on audit fees indicates a stronger effect from the first quarter’s non-timely 10-Q filings, compared to the second or third quarter.

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