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.     

Independent audit committee members’ board tenure and audit fees

An independent audit committee is an audit committee on which all members are independent directors. This study examines whether independent audit committee members’ board tenure affects audit fees. On the basis of the prior literature, we formulate an unsigned hypothesis. This is because on the one hand, long board tenure audit committee members (defined as members with board tenure of 10 or more years) have greater incentives to protect their reputational capitals by purchasing increased audit effort, which positively affects audit fees. On the other hand, audit pricing reflects audit committee quality. Long board tenure audit committee members may have less need for increased audit effort because they can effectively oversee the financial reporting process themselves, which negatively affects audit fees. We find that audit fees are negatively associated with the proportion of long board tenure directors on the independent audit committee, consistent with the notion that audit committee members’ long board tenure results in lower audit effort.     

The effects of corporate governance and audit and non-audit fees on IPO Value

This paper examines the effects of non-executive board members, audit committee composition and financial expertise, and fees paid to audit firms on the value of 375 UK initial public offerings (IPOs). Empirical findings show that underpricing decreases in audit fees whereas it increases in non-audit fees. A higher proportion of non-executive directors on the firm’s board and audit committees with a higher proportion of non-executive directors and financial accounting expertise of their members positively moderate the inter-relationships between underpricing and both audit and non-audit fees paid by companies going through an IPO. Further investigations using the adjusted price-to-book value as a proxy for firm value at IPO confirm our main findings that internal governance mechanisms may complement services provided by the auditors in terms of generating higher valuations. Controlling for the simultaneous determination of audit and non-audit fees, our results remain consistent.     

The association between audit committees,compensation incentives,and corporate audit fees

This study uses audit fee data from the 2001–2003 reporting periods to examine the relationship between measures of audit committee effectiveness and compensation incentives with corporate audit fees. Our results suggest that audit committee size, committee member expertise, and committee member independence are positively associated to audit fee levels, consistent with the notion that audit committees serve as a complement to external auditors in monitoring management. In contrast, CEO long-term pay and insider ownership are inversely related to audit fee levels, substituting for external audit effort in motivating management. Notwithstanding results on the full sample of firm-years, we uncover significant differences in the determinants of audit fees between the years examined. An important implication of these results is that explaining the intra-firm variation in audit fees over time is clearly necessary in order to understand the antecedents and consequences of audit fees.

Code of ethics quality and audit fees

Using a sample of U.S. firms from 2003 to 2018, we examine the effect of an audit client’s code of ethics quality on audit fees. We find that clients with a lower code of ethics quality pay significantly higher audit fees, suggesting that auditors perceive such clients as riskier and charge greater risk premiums. We also find that such clients have higher litigation risk and auditors spend greater effort when auditing such clients. Our study is among the first to demonstrate the role of a client’s code of ethics quality in audit pricing. Overall, our findings are consistent with codes of ethics being useful to auditors in assessing managers’ financial representations and providing value to firms.     

The impact of PCAOB international registration on audit quality and audit fees: Evidence from China

Despite the importance of registration with the PCAOB, there is surprisingly little academic research on the registration process and its impact on audit outcomes (Abernathy et al., 2013). The PCAOB allows registration of audit firms from non-US countries. However, China and a few other countries do not allow the PCAOB to conduct inspections of audit firms. We take advantage of this setting to investigate whether PCAOB-registered audit firms improve audit quality in the absence of inspections and whether they charge an audit fee premium. Our findings indicate that audit quality increases following PCAOB registration and that clients pay higher audit fees for audits by PCAOB-registered firms.     

The association between characteristics of audit committee accounting experts,audit committee chairs,and financial reporting timeliness

We investigate the association between audit committee (AC) members' financial expertise and financial reporting timeliness, and extend the discussion by investigating how the source of accounting expertise (e.g., public accounting or CFO) differentially influences financial reporting timeliness. We predict and find that AC accounting financial expertise is associated with timelier accounting information. Further, we find that accounting expertise gained from public accounting experience is associated with timelier financial reporting; however, accounting expertise gained from CFO experience is not. We also find that AC chairs (ACCs) with accounting expertise from public accounting experience are significantly associated with timelier financial reporting while ACCs with CFO-sourced accounting expertise are not. Our results are important for two reasons. First, our results suggest that AC accounting financial expertise contributes to AC effectiveness by improving the timeliness of financial information. Second, our findings highlight how personal characteristics of accounting financial experts influence contributions toward AC effectiveness.     

Earnings conservatism and audit committee financial expertise

Using an Australian sample of 494 firm‐year observations, this study finds that accounting financial expertise is the primary type of expertise that influences earnings conservatism, rather than nonaccounting financial expertise. The association between accounting financial expertise and conservatism holds only when the accounting financial expert(s) on audit committees is (are) independent. Overall, results suggest that audit committee accounting financial expertise is important in recognising the asymmetrical timeliness of losses. Findings provide a better understanding of the dynamics between audit committee financial expertise and earnings conservatism and demonstrate the importance of accounting financial expertise in improving financial reporting quality.     

Audit effort and fees under concentrated client ownership: Evidence from four international audit firms

Using proprietary audit hour and fee data from the internal records of four Big Six firms in Finland, this study examines the influence of audit client ownership type on audit effort and fees. The primary argument is that there are differential effects of ownership concentration depending on the particular nature of concentrated ownership (i.e., firms in which the majority of shares are manager-owned versus foreign-owned versus state-owned). Consistent with this, the paper documents that audit hours and fees are lower for companies majority-owned by their management and higher for subsidiaries of foreign companies than for other firms. However, no difference between companies owned by the state or municipalities and companies with a more diverse ownership structure can be found. This suggests that governmental ownership is actually closer to a dispersed than a concentrated ownership structure in terms of audit quality.The results show that replacing the variable indicating majority-ownership with the variables capturing the type of a controlling owner increases the explanatory power of the models significantly, which demonstrates the importance of ownership type in the production and pricing of an audit. The findings have important implications for those examining audit markets with client firms owned by different types of controlling shareholders.     

Effect of regulatory oversight on the association between internal governance characteristics and audit fees

We examine the relationship between internal governance, external audit monitoring and regulatory oversight for a sample comprising industrial companies and financial/utility companies subject to additional industry‐specific regulation. Our results indicate that the association between audit fees and board/audit committee independence and size are weaker for regulated companies. These observations are consistent with the notion that regulatory oversight partially substitutes the external audit as a monitoring mechanism. However, boards/audit committees with more multiple directorships demand a more extensive audit in the presence of regulatory oversight to protect their reputation capital. Our study enhances our understanding of the complex relationships among the major corporate governance elements.     

Board, audit committee and restatement-induced class action lawsuits

We examine the influence of monitoring provided by the board and audit committee on the probability of restatement-induced securities class action lawsuits using a sample of firms that have restated earnings in the period of 1997-2002. Logistic regression of the probability of restatement-induced class action lawsuits indicates a negative association between proportion of independent board members and the likelihood of restatement-induced class action lawsuits. We also find that when the market reacts more negatively to restatement announcements, shareholders are more likely to initiate a class action lawsuit. Finally, we document that restatement of revenues is positively associated with the likelihood of restatement-induced shareholder litigation. Our results are robust after controlling for the restatement initiator, restatements categorized as irregularities and Blue Ribbon Recommendations.     

不利意见、审计费用与意见购买

本文进一步区分上年度不利审计意见的具体类型、审计费用的升降以及审计意见的改善与恶化。研究证实:(1)上年度被出具不利审计意见虽然可能增加本年度收到不利审计意见的可能性,但是亦可能提高审计意见改善的可能性,并和审计意见出现恶化的可能性显著负相关。(2)如果上年度被出具不利审计意见,则异常审计费用与审计意见改善的可能性显著正相关。(3)审计费用的增加能显著降低被出具不利审计意见的可能性,并可有效防止年报审计意见出现恶化。可见,公司管理层可以通过提高审计费用成功地实现审计意见购买动机,在一定程度上规避不利审计意见。     

Audit committee composition and the use of an industry specialist audit firm

Independent, competent boards of directors and audit committees are said to be important mechanisms of corporate governance. The purpose of the present study is to empirically examine the association between audit committee composition and audit quality. Specifically, the link between the proportion of non‐executive directors on an audit committee, financial qualifications of directors and the number of audit committee meetings held in a year are investigated and expected to have a positive association with the quality of the audit firm used. Audit quality is proxied by industry specialization. The results support the link between a higher proportion of non‐executive directors on an audit committee and use of an industry specialist audit firm. Other measures of audit committee quality (those with a higher proportion of directors with financial qualifications and those that meet more frequently) are not significantly associated with the use of an industry specialist audit firm. Sensitivity analysis shows that the presence of an audit committee is linked to use of an industry specialist audit firm.     

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.     

The association between audit committee effectiveness and audit risk

Audit committees (ACs) are expected to play a key role in improving financial statement integrity and as a consequence reduce audit risk. Companies reporting conformity with regulations can have an AC that appears effective but is not actually effective in substance. We surveyed audit partners and managers to identify their indicators of actual AC effectiveness (auditor‐chosen list). We hypothesize a negative association between AC effectiveness and audit risk, only when an auditor‐chosen list, rather than extent of conformity with regulations, is used to measure effectiveness. Results support our expectations.     

Internal audit: A comfort provider to the audit committee

This study, based upon four Belgian case studies, provides insights on (1) what drives the audit committee to look for the support of the internal audit function; and (2) what makes the internal audit function an expert at providing comfort to the audit committee [Pentland, B.T., 1993. Getting comfortable with the numbers: auditing and the micro-production of macro-order. Accounting, Organizations and Society 18 (7–8), 605–620; Carrington, T., Catasús, B., 2007. Auditing stories about discomfort: becoming comfortable with comfort theory. European Accounting Review 16 (1), 35–58]. We found that audit committees seek comfort, with respect to the control environment and internal controls, two areas in which they confront considerable discomfort. Besides the internal audit function's traditional assurance role, its involvement in improving internal controls provides a significant level of comfort to the audit committee. Internal auditors' unique knowledge about risk management and internal control, combined with appropriate inter-personal and behavioural skills, enables them to provide this comfort. Besides, their internal position, their familiarity with the company, and their position close to people across the company facilitate internal auditors being a major source of comfort for the audit committee. Formal audit reports and presentations, together with informal contacts, seem to be important symbols of comfort [Power, M., 1997. The Audit Society: Rituals of Verification. Oxford University Press, Oxford]. In addition, we found that the overall level of comfort to the audit committee can be enhanced via collaboration between internal and external auditing (the so-called ‘joint audit approach’).     

The impact of the Multi-jurisdiction Disclosure System on audit fees of cross-listed Canadian firms

The Multi-jurisdiction Disclosure System (MJDS), a treaty between Canada and the United States (U.S.), was intended to facilitate the cross-listing of a firm's securities in the neighboring country. Under this system, eligible Canadian companies are allowed to use home-country documents to meet U.S. disclosure requirements and these documents are generally not reviewed by the Securities and Exchange Commission (SEC). We posit that the single-reporting requirement and lower SEC scrutiny may result in lower audit fees for MJDS firms. Based on audit-fee disclosures mandated by the SEC rule-making authority granted by the Sarbanes-Oxley Act of 2002, we find a negative association between audit fees paid by U.S. cross-listed Canadian companies and their use of the MJDS. This result suggests that the lower audit fees provide an economic incentive to use the MJDS. Thus, our study provides evidence that the implementation of the MJDS may help facilitate cross-border listings by reducing audit costs. Additionally, this study confirms, for Canadian firms, some of the audit-fee determinants reported in earlier studies.     

The empirical relationship between ownership characteristics and audit fees

The present study examines the empirical relationship between ownership characteristics and audit fees. The basic premise is that the level of ownership sophistication and the extent to which ownership is large and substantial impact the effectiveness of stockholder monitoring on corporate affairs including the financial reporting process. Furthermore, high managerial ownership firms may experience a decline in agency problems in financial reporting due to a decrease in managerial propensity to misreport financial results. By employing a cross-sectional least squares regression analysis for a sample of 358 New York Stock Exchange-listed firms audited by the Big Five auditors, we find evidence of a significantly positive relationship between diffused institutional stock ownership (i.e., having less than 5% individual shareholding) and audit fees, and a significantly negative relationship between institutional blockholder ownership (i.e., having 5% or more individual shareholding) and audit fees. Finally, we document that managerial stock ownership is negatively associated with audit fees. We do not, however, find evidence of any relationship between noninstitutional blockholder ownership (with at least 5% individual stock ownership) and audit fees. The study's main results hold in various specification tests including when the effects of board-related and audit committee variables are factored in the analysis. Based on the observed relationship between the ownership variables and audit fees, we suggest that the ownership characteristics of a firm as a part of its governance mechanism constitute an important determinant of audit fees.

Effects of SOX 404(b) implementation on audit fees by SEC filer size category

This study provides novel information about the consequences of the Sarbanes-Oxley Act (SOX) by documenting differential audit fee shocks accompanying implementation of SOX 404(b) internal control tests and reports for clients in three size categories: large accelerated filers (LAFs), small accelerated filers (SAFs), and non-accelerated filers (NAFs). First, we find that although both LAFs and SAFs experience audit fee shocks attributable to 404(b), SAFs on average experience relatively greater fee shocks than LAFs (107.8% versus 84.6%; Table 6). Second, even though NAFs are not subject to 404(b) procedures, we document a 42.7% fee shock for NAFs. Our interpretation is that 404(b) generated an immediate increase in demand for audit services with no corresponding sudden increase in supply of experienced audit personnel, enabling audit firms to charge higher prices for all filers including NAFs. We find that audit fee shocks attributable to 404(b) are positively associated with audit offices’ bargaining power relative to clients, and that the effect of offices’ bargaining power is strongest for SAFs and weakest for NAFs. Although higher audit fees (with client characteristics held constant) are often considered an indicator of better audit quality, we find virtually no evidence that the massive fee increases in 2004 are accompanied by improvements in same-year or next-year audit quality, measured as decreases in discretionary accruals and a lower likelihood of subsequent restatements of audited financial reports.     

Large audit firm premium and audit specialisation in the public sector

The outsourcing of public‐sector audits to the private sector is an important issue. This study examines the fee premium in the public sector by comparing audit fees between the government auditor and the Big5. The study (i) statistically adjusts for self‐selection bias, (ii) allows the slope coefficients in the audit fee model to vary between the Big5 and the government audit and (iii) estimates the counterfactual audit fee premium. The Big5 premium is around 23 percent. However, the variation in premium depends on whether the Big5 auditor is an industry or city specialist.