Auditor independence, executive pay and firm performance

This paper investigates whether compensation committees actively intervene to adjust accounting performance‐based incentive schemes for the real, or perceived, reduced earnings credibility signalled by the purchase of non‐audit services. Using a nonlinear, two‐stage least‐squares method that accounts for the simultaneity of executive pay, firm performance and non‐audit fees, we find a significant negative relationship between non‐audit fees and the sensitivity of chief executive officer (CEO) pay to firm performance. Point estimates suggest that the reduced weight applied to accounting performance lowers the incentive component of executive pay between roughly 5 and 8 per cent for the CEO of the ‘average firm’.     

Non-audit services provided to audit clients,independence of mind and independence in appearance: latest evidence from large UK listed companies

This paper investigates whether the provision of non-audit services (NAS) to audit clients impairs auditor independence of mind and independence in appearance. The main contributions of this paper are in terms of its timeliness with respect to regulatory changes, the simultaneous examination of both forms of auditor independence and the methodological innovation whereby it uses a variable derived from the level of abnormal audit fees as a moderating variable in order to capture the direct impact of the NAS fee level on auditor independence as well as how its influence is moderated by the level of unexpected audit fees. Our results indicate that auditor independence of mind is compromised by the size of NAS fees, particularly for clients who pay below the level of expected audit fee. The stock market perceives that auditor independence is compromised by NAS fees but, at the same time, additional tests indicate that there are benefits that accrue from NAS and, in particular, the relation between return and non-discretionary net income is increasing in NAS fees. The balance of evidence suggests that the European Union is correct in undertaking some reform of the auditing market.     

The effect of mandatory auditor assignment and non-audit service on audit fees: Evidence from Korea

In Korea, regulators could assign auditors to firms. We investigate the relationship among audit fees, mandatory auditor assignment, and the joint provision of non-audit and auditor services in Korea. We find that assigned auditors charge significantly higher audit fees than freely selected auditors. We also find that the joint provision of non-audit and audit services does intensify the relation between auditor assignment and audit fees. Combined with the results of other studies that have shown that firms audited by assigned auditors report smaller amounts of discretionary accruals than firms audited by freely selected auditors, our results suggest the possibility that mandatory auditor assignment may improve auditor independence.     

Non-audit Services and Auditor Independence: New Zealand Evidence

Abstract:  This paper examines evidence in New Zealand about whether auditors providing more non-audit services are less independent. Three sets of tests are used to address the issue. The first examines whether there is a relation between non-audit fees and audit fees, the second examines whether there is a relation between non-audit fees and audit report qualification or modification, and the third examines whether there is a relation between non-audit fees and stability of audit tenure. The results suggest a potential for the impairment of auditor independence in appearance when auditors provide non-audit services but no evidence of any impact on independence of mind.     

Effects of audit committee chair characteristics on auditor choice,audit fee and audit quality

We investigate whether the characteristics of audit committee (AC) chairs are associated with decisions about auditor choice, audit fees and audit quality. Using hand-collected Australian data, firms with AC chairs who have longer tenure and multiple AC memberships across several boards are found to be more likely to choose Big 4 and/or industry specialist auditors, pay higher audit fees and have lower discretionary accruals. Those AC chairs with higher business qualifications are more likely to hire a Big 4 auditor, pay higher audit fees and have lower discretionary accruals, while AC chairs with professional qualifications are more likely to hire a Big 4 and/or industry specialist auditor. In contrast, firms with AC chairs who are executive directors are less likely to hire a Big 4 auditor and have higher discretionary accruals. Our findings contribute to the literature by documenting that various characteristics of AC chairs are important for enhancement of auditor selection and audit quality.     

Choices in IFRS Adoption in Spain: Determinants and Consequences

New Spanish GAAP based on IFRS came into force for separate financial statements in 2008. Companies were allowed to choose between 1 January 2007 and 1 January 2008 as their transition date. The first option commits companies to presenting comparative statements while the second allows them to disclose only the adjustments in equity. We analyze the determinants of companies that decided to choose early transition and also the consequences of this choice on the main accounting figures and ratios. Our results show that the determinants of the early transition date are size and growth. As for the consequences, there is a significant change in the accounting figures and ratios and therefore comparability may be impaired.     

The effects of audit firm rotation on perceived auditor independence and audit quality

Our study explores loan officers’ perceptions of auditors’ independence and audit quality under three experimental audit firm rotation scenarios. We use a case experiment with a between-subjects design to determine whether rotation of the audit firm impacts financial statement users’ perceptions of auditor’s independence and quality. Findings based on 212 useable responses indicate that loan officers do perceive an increase in independence when the company follows an audit firm rotation policy. However, the length of auditor tenure within rotation fails to significantly change loan officers’ perceptions of independence. Findings also indicate that neither the presence of a rotation policy nor the length of the auditor tenure within rotation significantly influences the loan officers’ perceptions of audit quality.     

Independent director reputation incentives,accruals quality and audit fees

While prior research provides abundant evidence that independent directors are associated with favorable outcomes, researchers have only recently started to investigate the impact of independent director reputation incentives. This study examines whether the reputation incentives of independent directors are associated with accruals quality and audit fees. The results reveal a negative relationship between the proportion of independent directors with relatively low reputation incentives and accruals quality. Further, the proportion of independent directors with relatively low reputation incentives is positively associated with audit fees, suggesting that auditors view lower reputation incentives as increasing risk. We also find that Big 4/5 auditor office size moderates the relationship between independent director reputation incentives and audit fees. Specifically, our results indicate that audit fees increase less in response to lower reputation incentives as office size increases, suggesting that larger offices respond to the risks associated with lower reputation incentives more efficiently than smaller offices.     

Money laundering and audit fees

We investigate the association between state-level money laundering sentences and audit fees in the US. Money laundering measures a broad category of offenses involving financial transactions using funds or monetary instruments gained through criminal activities and tax evasion. We find that firms headquartered in US states with high rates of money laundering sentences pay more audit fees. Our results suggest that auditors incorporate, as a fee premium, the higher risks involved when clients operate in those states. Our result remains robust to alternative specifications of money laundering proxies, and to the inclusion of a number of firm-level and state-level control variables. We also conduct two-stage least squares and propensity score matching analysis to mitigate the endogeneity problem that might arise from omitted variables, reverse causality, or model misspecification problems.     

The determinants of audit fees—evidence from the voluntary sector

Given the growing demand for accountability in the public sector, there is a need to begin to investigate audit pricing issues in this sector. This study makes three contributions. First, it develops and estimates, for the first time, a model of audit fee determinants for the charity sector. As in previous private sector company studies, size, organisational complexity and audit firm location are the major determinants. A positive association between audit fees and fees for non-audit services is also observed. Charity sector factors of empirical significance include the nature of the charity (i.e., grant-making or fund-raising), its area of activity and the importance of trading income. Separate models for grant-making and fund-raising charities reflect the relative complexity of the audit of fund-raising charities. Second, the lower auditor concentration in the charity sector market, compared to the private sector market, permits a more powerful test of whether large firms and/or auditor expertise are rewarded with a fee premium. In the more complex audit environment of fund-raising charities, the results show that Big Six audit firms receive higher audit fees (18.5%, on average) than non-Big Six firms. Also, non-Big Six audit firms with charity expertise are rewarded with a fee premium over other non-Big Six firms. Finally, the study demonstrates that the charity audit fee rate is significantly lower than that of private sector companies; in fact it is approximately half. A change in the reporting of charity audit fees is proposed to reflect any element of ‘charitable giving’ by the audit firm.     

Audit and non-audit fees and capital market perceptions of auditor independence

This study provides evidence on whether auditor independence-in-appearance, proxied by earnings response coefficients, is related to the non-audit fee ratio (non-audit to total fees from a client) or client importance (total fees from a client as a percentage of the total revenues of the audit firm). The results from large samples over the period 2001–2006 show, contrary to popular belief and the findings of some prior studies, that there is no evidence of a relation between perceived auditor independence and the non-audit fee ratio. However, perceived auditor independence is negatively associated with client importance, consistent with the economic theory of auditing. Our paper adds to the literature by examining the relative importance of non-audit fee ratios and client importance as determinants of independence-in-appearance.     

The Provision of Non-audit Services and the Pricing of Audit Fees

There have been a number of studies examining audit fees and this research has covered various nations. Recent legislation in Norway requires a company to disclose information on the audit fee and the fees for non-audit services paid to its auditor. Using this data, models of audit fee structure are developed. As with other studies, the size of the company is a major determinant of the audit fee. Payments for non-audit services are positively and significantly associated with audit fees; this relationship is difficult to explain although it parallels some research in the United States. Overall, the models explain about 75 per cent of the variability in audit fees.     

Relation between external audit fees, audit committee characteristics and internal audit

This study examines whether the existence of an audit committee, audit committee characteristics and the use of internal audit are associated with higher external audit fees. Higher audit fees imply increased audit testing and higher audit quality. We find that the existence of an audit committee, more frequent committee meetings and increased use of internal audit are related to higher audit fees. The expertise of audit committee members is associated with higher audit fees when meeting frequency and independence are low. These findings are consistent with an increased demand for higher quality auditing by audit committees, and by firms that make greater use of internal audit.     

Audit market concentration,audit fees,and audit quality: A cross-country analysis of complex audit clients

Regulators around the world are concerned about the potentially harmful effects of high audit market concentration on audit pricing and quality. However, results in the overall literature have failed to reach consensus on this issue. We contribute to this debate by arguing that the audit market is segmented and that concentration in the Big 4 segment of the market leads to higher audit pricing. Accordingly, our analyses use international data and focus on concentration within the Big 4 group of firms across countries. We find that audit fees are increasing in our concentration measure for clients where the barriers to entry by competing auditors are higher, as proxied by client size, international operations, and IFRS use. Finally, we find evidence that audit quality is decreasing in Big 4 market concentration for these types of engagements. This indicates a wealth transfer from shareholders to audit firms when auditor concentration is high because these complex clients are charged more, but receive audits that are of lower quality.     

The pricing of audit and non-audit services in a regulated environment: a longitudinal study of the UK life insurance industry

This paper studies the relationship between audit and non-audit service fees paid to the statutory auditor by UK life insurance firms, utilising an extensive panel-data sample set for the period 1999–2009. Consistent with a knowledge spillover (impairment of independence) hypothesis, we predict and find that audit fees are positively (negatively) associated with actuarial (tax service) fees. Additionally, our results indicate that regulatory changes enforced after 2004 deterred UK life insurance firms from purchasing non-audit services that are perceived to impair auditor independence. Finally, we find evidence concerning the inter-temporal determination of audit fees.     

Workforce environment and audit fees: International evidence

Using a dataset from 30 countries over the period from 2002 to 2017, we examine the effects of auditing clients’ workforce environment on audit fees as well as the role that national labor market flexibility plays in this relationship. We find evidence that audit fees are significantly lower for firms with a good workforce environment, suggesting that auditors perceive such clients as less risky; as a result, auditors expend less effort and/or charge a lower risk premium. Furthermore, we find this effect to be stronger for firms in countries with a more flexible labor market. Our mediation test results indicate that the relationship between the audit client workforce environment and audit fees is mediated by media coverage of workforce controversies. Our study contributes to the international audit fee literature by identifying employee welfare as a distinct audit pricing factor, above and beyond the effects of overall corporate social responsibility practices.     

The vanishing searches and audit fees: Evidence from Google's withdrawal from China

I investigate the impact of the disruption of free information access via search engines on audit fees using a quasi-natural experiment provided by Google's withdrawal from China. Employing a difference-in-differences design, I document an increase in audit fees for firms with overseas business relative to firms without overseas business after Google's withdrawal. The results are robust to matched samples, placebo tests, alternative specifications, excluding alternative explanations and different event windows. This trend in audit fees suggests that Google's withdrawal hampers firms' foreign information streams and increases audit risk and audit effort. Consistent with this argument, after Google's withdrawal, firms with overseas business conduct more earnings management, pay more abnormal audit fees and experience longer audit report lags. Furthermore, the increase in audit fees is greater for firms with poor information environments, more retail investors or non-Big 4 auditors. My findings suggest a potential auditing cost of restricting the free flow of public foreign information about firms.     

Audit fees and audit adjustments: evidence from Welsh local authorities

This paper exploits the availability of pre-audit financial statements to investigate the scale and incidence of audit adjustments and their impact on audit fees in Welsh local authorities. Adjustments to the politically-sensitive general fund, which represent a significant proportion of all adjustments, are associated with increased audit fees. The authors also found that audit adjustments on average result in more conservative reporting of the surplus/deficit and the balance on the general fund, with the number and value of downward adjustments exceeding those of upward movements.     

审计委员会与外部审计独立性

本文首先从完全信息动态博弈的视角出发,推导得出,强化外部审计独立性是审计委员会的基本职能之一.然而,接下来的实证检验结果却与前述的理论预期相悖,即实证检验结果表明,我国上市公司审计委员会制度在实际运行中,并不具有强化外部审计独立性的功能.接下来的分析表明,由于缺乏"独立人"的资格,导致我国审计委员会很难打破原有的均衡,从而很难强化外部审计独立性.     

The impact of MAS on perceived auditor independence-some evidence from Denmark

The Enron case has highlighted that the provision of management advisory services (MAS) can endanger auditor independence. Recently, a number of changes have not only been made to the relevant international and US regulations, but also to the Danish regulations in this area. Theoretical research explains the emergence of non-independence and demonstrates that the provision of MAS can decrease independence. According to the economic model of DeAngelo, the existence of client-specific quasi-rents impairs auditor independence. The provision of MAS increases quasi-rents and thus, is a threat to independence. Antle used an agency theoretical approach. Information asymmetries between auditor and client could lead to a moral hazard risk, i.e. the auditor could give up independence from client's management and accept payments for withholding detected errors and irregularities. The client's management could also use MAS to legally compensate the auditor for giving away independence.A large number of empirical studies have investigated the influence of MAS on the perceived independence of the auditor. Most of these studies were performed in English speaking countries and the majority found a negative impact. Sociological research reveals cultural differences between English speaking and Nordic countries, e.g. concerning the dimension ‘masculinity’. Thus, an empirical investigation of the impact of MAS on perceived auditor independence in Denmark is promising. It was found that shareholders, bank loan officers and journalists perceive a negative effect on auditor independence if MAS are provided. The recent liberalization in Denmark is inconsistent with this finding. Furthermore, it was shown that the type of MAS influences the degree to which auditor independence is perceived to be impaired. Thus, independence rules related to MAS should be differentiated. Additionally, the study ascertained that perceived auditor independence does not increase if MAS are provided by a separate department of the audit firm. An internal separation of the auditing and the consulting function within the same audit firm is not viewed as being beneficial in Denmark.