Author: Jeffrey Coulton Publisher: ISBN: Category : Languages : en Pages : 67
Book Description
We provide evidence that distinguishes between competing production cost-based explanations of how to interpret unusually high (or low) audit fees and their expected relation with accounting quality. Abnormally high or low fees are typically proxied by the residuals obtained from fee models. Whereas prior research assumes these residuals are independent from one year to the next, we argue that the inherent “stickiness” in audit fee residuals also means that measures of unexpected fees will be serially correlated. Our results strongly support this view, and suggest that audit fee residuals reflect a limitation of the standard audit fee model in capturing attributes of the auditing environment that are not well captured at the client-firm level. However, we also argue that the extent to which residual fees differ from the recent past can clarify their relation to accounting quality. We show that the “jump” in fee residuals relative to their long-run “sticky” average is strongly associated with lower accounting quality. Hence, a “jump” in fee residuals is a suitable proxy for lower accounting quality, as it likely reflects reactive auditor effort and/or an additional risk premium. We then show that long-run fee residuals are also negatively associated with subsequent accounting quality, a result which further contradicts the argument that higher abnormal audit fees capture increased proactive effort and therefore reflect “investments in auditing”. Overall, our results suggest that risk, rather than proactive effort, is a better explanation for higher than expected audit production costs.
Author: Patrick Krauss Publisher: ISBN: Category : Languages : en Pages : 37
Book Description
This study investigates the economic auditor-client dependency issue by examining the association between abnormal audit fee pricing and audit quality. Our study is the first to analyze this phenomenon empirically for the institutional setting of German IFRS firms by using a sample of 2,334 firm-year observations for the period from 2005 to 2010. Our empirical results demonstrate that positive abnormal audit fees are negatively associated with audit quality and imply that the audit fee premium is a significant indicator of compromised auditor independence due to economic auditor-client bonding. Audit fee discounts generally do not lead to a reduced audit effort, or respectively, audit quality is not impaired when client bar-gaining power is strong. The association of positive abnormal audit fees and audit quality is robust to different audit quality surrogates such as absolute discretionary accruals, financial restatements, and meeting or beating analysts' earnings forecasts.
Author: John Daniel Eshleman Publisher: ISBN: Category : Languages : en Pages :
Book Description
Are high audit fees a signal that the auditor exerted more effort or a signal that the auditor may be losing her independence? Prior literature offers conflicting evidence. In this paper, we re-examine the issue on a sample of clients who have both the incentive and the ability to use discretionary accruals to meet or beat the consensus earnings forecast. We find a negative relationship between the level of abnormal audit fees paid by the client and the likelihood of using discretionary accruals to meet or beat the consensus analyst forecast. The evidence is consistent with the notion that abnormal audit fees are indicative of greater effort on the engagement. In other words, the results suggest a positive relationship between abnormal audit fees and audit quality. We show that the conflicting evidence in prior research was caused by research designs which did not consider the incentives of the manager.
Author: Ulf Mohrmann Publisher: Logos Verlag Berlin GmbH ISBN: 3832541853 Category : Business & Economics Languages : en Pages : 300
Book Description
The dissertation consists of four essays on the quality of audited financial statements. The first analysis investigates the association between several regulations of the audit market and earnings characteristics. The second essay differentiates between different drivers of audit quality after an auditor change by comparing the effects of voluntary and mandatory auditor changes. The third study analyses the different strategies of Big4 and non-Big4 auditors in dealing with Level 3 fair values. The fourth part examines banks' valuation behavior concerning Level 3 fair values.
Author: Jong-Hag Choi Publisher: ISBN: Category : Languages : en Pages : 57
Book Description
Using a sample of 9,820 firm-year observations over the 2000-2003 period, this paper examines whether, and how, audit quality proxied by unsigned discretionary accruals is associated with the abnormal audit fee, i.e., the difference between actual audit fee and auditors' expectation on the normal level of fee. The results of various regressions reveal that the association between the two is insignificant for the full sample, significantly positive for the subsample of clients with positive abnormal fees, and insignificantly negative for the subsample of clients with negative abnormal fees. The above results suggest that auditors' incentives to compromise audit quality differ systematically depending on whether the clients pay more than or less than the normal level of audit fees, which in turn leads to the audit fee-audit quality association being conditioned on the sign of abnormal audit fees. Our results are robust to a battery of sensitivity checks. Relevant implications of our results to policy makers and academic researchers are discussed.
Author: Xudong (Daniel) Li Publisher: ISBN: Category : Languages : en Pages : 50
Book Description
Prior research has intensively debated whether abnormal audit fees purely indicate audit effort or client-auditor economic bonding (Francis 2011). However, this empirical debate is mostly based on the findings of the associations between audit fees and accrual-based earnings management. Unlike accrual-based earnings management, earnings management through classification shifting does not change the bottom-line numbers and thus involves lower litigation costs. Given the difference in litigation costs between the two forms of earnings management, the effect of abnormal audit fees on the incentives of auditor in dealing with the behavior of earnings management could be different. It is thus interesting to examine how audit fees affect auditors' incentives on their clients' earnings management with potential lower litigation risks.Using data from years 2000-2010, we find a significant and positive cross-sectional association between the magnitude of abnormal audit fees and the level of classification shifting, a result supporting the notion that greater abnormal audit fees allow for more earnings management through classification shifting. This observed result further indicates that using abnormal audit fees to purely measure audit effort or economic bonding might be questionable as the effect of abnormal audit fees on opportunistic accounting practices could differ, depending on the specific form of earnings management activities associated with the level of potential litigation costs.
Author: Ariel J. Markelevich Publisher: ISBN: Category : Languages : en Pages : 36
Book Description
Our study examines fees paid to auditors for audit and non-audit services during the period 2000 to 2003. We document a statistically significant positive association between audit fees and the absolute value of performance-adjusted discretionary accruals over all years. We also identify a significant positive association between non-audit fees and discretionary accruals in years 2000 and 2001, but no such association in later years (after passage of the Sarbanes-Oxley Act). This lack of association in 2002 and 2003 may be a result of legislation that limits the types of non-auditing services that auditors can provide to audit clients. To address the potential impact of fee composition and client importance on auditor independence, we extend our empirical analysis by incorporating predictions of abnormal audit and non-audit fees. We derive abnormal fees using a fee estimation model drawn from prior literature. We find evidence consistent with the view that clients with higher abnormal fees are more apt to exert influence on their auditors, which in turn may lead to a breach in auditor independence. Overall, our results are most consistent with economic bonding being the primary determinant of auditor behavior.
Author: Jeffrey Coulton
Author: Patrick Krauss
Author: John Daniel Eshleman
Author: Ulf Mohrmann
Author: Jong-Hag Choi
Author: Xudong (Daniel) Li
Author: Ariel J. Markelevich
Author: 王旭升
Author: Sui-kwong Alan Ho
Author: Gary Previts