Auditors' Perceived Business Risk and Audit Fees: Analysis and Evidence

This study analyzes the relation between auditors' perceived business risk and audit fees to determine whether audit firms or their clients bear the expected legal costs of business risk. We predict that hourly audit fees and the number of audit hours are increasing in business risk. Using confidential survey data collected by a large international accounting firm for 422 audits, we find that high business risk increases the number of audit hours, but not the fee per hour. This implies that firms perceive firm-level differences in business risk and obtain compensation through billing additional hours, not by raising the hourly charge.     

关系型交易对审计费用的影响——基于经营风险理论视角

关系型交易模式可能会在议价能力、关系专用性投资成本转换等方面加剧上市公司的经营风险,进而影响审计费用。已有研究主要集中于关系型交易对审计行为的影响,鲜有文献关注其中的作用机制。本文基于经营风险理论视角,选取2008~2017年沪深A股制造业上市公司的相关数据,实证分析了关系型交易对审计费用的影响,结果表明:关系型交易显著加剧了企业经营风险的集聚,进而提升审计费用,即经营风险在关系型交易对审计费用的影响中起到了中介作用。进一步研究,在区分了产权性质以及耐用品特征后,实证结果显示关系型交易与审计费用的正相关关系在非国有企业以及耐用品行业的企业中较为显著,为审计师进行合理审计定价提供了经验证据支持。     

Audit Labor Usage and Fees under Business Risk Auditing

The adoption of business risk audit (BRA) approaches during the 1990s by several leading audit firms has been the subject of considerable scrutiny and commentary. Under BRA, the auditor responds to the increasing complexity of auditee financial reports by acquiring a deep and comprehensive understanding of the auditee's industry, strategy, business models, and processes—tasks best accomplished by higher-ranked labor—and by employing this understanding to make audit labor allocations. Using proprietary data for 165 audits conducted in 2002, we investigate three propositions about audit labor use under BRA. First, relative to pre-BRA benchmarks for the same auditor, we expect BRA audits to use a greater proportion of higher-ranked labor. Second, we expect engagements with high assessed auditor business risk (ABR), a summary risk assessment that reflects the BRA auditor's rich understanding of the auditee, to be allocated more labor and more higher-ranked labor than pre-BRA benchmarks. Third, at all ranks of labor, we expect a positive association between assessed ABR and levels of labor use. We find empirical evidence consistent with these propositions. We also find that total labor use in our sample is only modestly lower than pre-BRA norms. Analysis of fee data from these engagements suggests that audit fees in 2002 are substantially less than would be expected under pre-BRA benchmarks. After controlling for audit labor use, both total fees and fees per hour increase with assessed ABR for first-year auditees but not for continuing auditees. Overall, our results provide evidence on the impact of the BRA audit regime and speak to the likely impact of BRA on audit effectiveness and efficiency.     

Public Disclosure of Audit Fees and Bargaining Power between the Client and Auditor: Evidence from China

Before the public disclosure of audit fees was mandated, it was unlikely for an audit client to have accurate information about how much other companies were charged by their auditors. Public fee disclosure decreases the cost of auditees' access to audit fee information for the auditor's portfolio of clients and is thus likely to increase the relative bargaining power of auditees over auditors when they negotiate audit fees. Using both proprietary and public audit fee data before and after public fee disclosure was mandated in China, we provide evidence consistent with the preceding conjecture. We find that public fee disclosure reinforces the magnitude of audit fee decreases for overcharged clients and weakens auditors' ability to raise audit fees for undercharged clients. These findings suggest the existence of unintended consequences of public fee disclosure regulation, the original rationale of which was a concern about audit pricing practices that could undermine auditor independence.     

制度变迁、集团客户重要性与非标准审计意见

客户重要性是否影响审计师独立性,是审计理论界和实务界都非常关注的话题。本文以企业集团作为一个整体来研究集团客户重要性对审计师独立性的影响,发现集团客户经济依赖性会损害审计师的独立性,这种现象对于小规模事务所而言尤为严重。此外,本文还进一步考察了2007年新会计准则、审计准则及事务所民事诉讼风险加强等制度环境变化对审计师行为的影响。研究发现,在制度环境改善之后,审计师执业总体上变得更加谨慎,大规模事务所尤其如此。     

Auditor's Engagement Risk and Audit Fees: The Role of Audit Firm Alumni

Abstract:  This study explores the effect of the association of audit firm alumni with their alma mater on audit prices. The tests indicate that there is a moderate reduction of up to 21% in the level of audit fee when alumni (i.e., former employees) of the incumbent audit firm sit on the client board of directors which is consistent with the engagement risk theory. This suggests that there is an 'alumni effect' in the market for audit services. The findings hold only in the large company segment of the market. The results are robust to different model specifications and alternative samples. The sample comprises all executive and non-executive directors who run the UK quoted companies and are simultaneously ICAEW qualified chartered accountants. The study's implications for the accounting profession and the regulators are also discussed.     

异常审计收费与审计质量的损害——来自中国审计市场的证据

中国上市公司是否成功地通过许以更高的审计收费购买审计意见呢？本文以2001--2002年上市公司作为研究样本,考察了这些上市公司随后年度审计意见的改善情况与异常审计收费的关联关系,结果发现：异常审计收费与上市公司不利审计意见的改善显著正相关,不过,与预期相反,在上市公司提高审计收费的情况下,内资会计师事务所相比外资会计师事务所更少的允许上市公司改善审计意见。同时,异常审计收费的存在显著损害了会计盈余的价值相关性,上述证据意味着中国上市公司成功的通过审计收费的提升购买了审计意见。     

审计市场供需不平衡、事务所选聘与审计收费

从审计市场供需双维视角,基于2007-2013年沪深两市A股上市公司样本,观察我国省级层面审计市场供需不平衡1对事务所选聘及审计收费的影响。结果表明,当省级审计市场存在供需不平衡时,会计师事务所供给每增加1个标准单位,客户选聘当地事务所的可能性增加1.4%,其中国际"四大"、本土"六大"及其他小所供给每增加1个标准单位,客户选聘当地事务所的可能性增加1.6%、1.2%和2.7%,审计费用将分别增加近2%、降低1.5%和9.9%。论文首次从我国省级层面较好地解释了审计市场供求关系变化对事务所选聘及审计收费的影响,丰富了审计相关理论,也为会计师事务所在不同省域开展业务、监管者评估不同地域间审计市场发展状况提供新的依据。     

Corporate Governance and Audit Fees: Evidence of Countervailing Relations

This study documents that audit fees, and hence audit quality, and governance reflect two countervailing relations, namely, a fee increase because of exogenous changes in expected liability that require greater auditing and other mechanisms to attain better governance, and a fee reduction because auditors reduce the price of risk to reflect the benefits of better governance. The study period provides an interesting setting to test these relations because it covers the passage of the Sarbanes-Oxley legislation, which imposed a substantial cost on many companies to strengthen governance, including increased auditing and internal control spending. Yet, after controlling for such increased spending, our results also suggest that better governance reduces the cost of auditing.     

The Business Risk Audit Approach and Audit Production Efficiency

Essentially, this study asks: Does the business risk audit (BRA) approach increase audit production efficiency? To answer this question empirically, direct and indirect tests are employed using proprietary, working paper data from the larger clients of a major Australian public sector audit provider and an efficiency frontier analytic methodology, data envelopment analysis (DEA). Results based on this proprietary, audit hours data for audit engagements carried out just after BRA approach implementation show that they have high levels of production efficiency and are risk-adjusted, with no significant difference in production efficiency between higher and lower business risk audit engagements. Results based on audit fees data for audit engagements carried out shortly before and after BRA approach implementation show that overall production efficiency significantly improves. Importantly, while this improvement is significant for lower-risk audit engagements, there is no significant improvement for higher-risk audit engagements. In the context of this study's research site, this is consistent with the BRA approach addressing inefficiencies created when lower-risk audit engagements are being over-audited. That is, the BRA approach can result in both risk-adjusted and more efficiently produced audits. With the re-emergence of the BRA approach in the literature and in practice, this study provides empirical evidence to support the claim that this audit approach can lead to ‘creating auditing efficiencies’ (Bell et al., 1997, p. 1).     

The Association Between Client Factors and Audit Fees: a Comparison by Country and by Firm

This study investigates whether the factors identified by prior research as being associated with intra-country Big Eight audit fees are consistent (i) among countries (across the Big Eight) and (ii) among Big Eight auditing firms (across countries). Fees from 410 audits in five countries were analysed. Results indicate a similarity in the influence of client size and complexity variables among four of the five country audit-fee models and among seven of the Big Eight audit-fee models.     

客户规模与审计费用溢价的研究:来自2001—2004年沪市的初步证据

本文以2001—2004年我国沪市上市公司为研究对象,利用修正的Simunic模型对不同资产规模的客户支付给"五大"的费用溢价进行研究。结果表明:大型客户向国内"五大"支付审计费用溢价,而小客户则不支付溢价。这与早先Francis和Stokes提出的论断不相符合,说明中国审计市场的内在运行机理可能在某些方面异于海外市场,这可能是因为在两种不同的经济体中,"五大"的市场地位、战略以及上市公司的需求各不相同所导致的。     

The Effect of Corporate Status on External Audit Fees: Evidence From the UK

Abstract:  This paper simultaneously examines, for the first time, the determinants of external audit fees of UK companies drawn from the quoted sector (Main Market, the Alternative Investment Market and Ofex), and the unquoted sector (public and private limited companies). The paper also provides new evidence on the effects of corporate failure and the persistence of the big four and mid-tier auditor premiums across the public and private corporate sectors. After controlling for firm size, audit risk and complexity, we find that quoted and unquoted public limited companies have significantly higher audit fees than their private limited counterparts. Our estimates imply that relative premiums for market/corporate form are as follows: Main Market over AIM, 6.8%; AIM over Ofex, 19.5%; Ofex over unquoted plc, 15.5%; and unquoted plc over private, 16.7%. However, despite indications in prior US research to the contrary, we find no evidence that insolvent firms that failed were charged higher audit fees in the year preceding failure. A positive relationship is also found between audit and consultancy fees – a result that persists using an instrumental variables approach to control for endogeneity.     

The Effects of Business Risk on Audit Pricing

This paper examines the pricing of business risk by homogeneous auditors in a two period model. Incumbent auditors learn the client's business risk type during the course of the engagement. They subsequently compete in prices with prospective auditors. In such an environment, we show that equilibrium audit fees do not fully reflect the cost of business risk. Moreover, there exists differential auditor turnover between high and low risk firms; cross-subsidization of the audit fees of high risk firms by low risk firms; and low-balling by auditors.     

Evidence on the Joint Determination of Audit and Non-Audit Fees

In this study we investigate whether the characteristics of clients, auditors, and the auditor‐client relationship simultaneously determine audit and non‐audit fees. As done in prior studies, we maintain that fees proxy for the level of service provided and follow the physical flow of knowledge. Estimating single‐equation models of audit and non‐audit fee models, we confirm prior findings of an association between audit and non‐audit fees. Studies conclude that such evidence is consistent with knowledge spillovers between the two services. However, we document empirically that audit and non‐audit fees are simultaneously determined. Because the data indicate audit and non‐audit fees are jointly determined, we then investigate whether previously documented associations between audit and non‐audit fees are the result of biased estimation induced by using endogenous variables in single‐equation models. In contrast to results from single‐equation estimations, we find no association between audit and non‐audit fees using a simultaneous specification of the fee system, suggesting that single‐equation estimations suffer from simultaneous‐equations bias. In sum, the findings are not consistent with the existence of economies of scope from the joint performance of audit and non‐audit services after controlling for the joint behavior of audit and non‐audit fees. Given the ongoing debate over the level of allowed non‐audit services by auditors, the argument for the joint provision of audit and non‐audit services is less justified than if joint‐supply benefits had been documented.     

Do Non–Audit Service Fees Impair Auditor Independence? Evidence from Going Concern Audit Opinions

We find no significant association between non–audit service fees and impaired auditor independence, where auditor independence is surrogated by auditors' propensity to issue going concern audit opinions. We also find no association between going concern opinions and either total fees or audit fees. In addition, our findings are robust to controlling for unexpected fees, to controlling for endogeneity among our variables, and to several alternative research design specifications. Our results are consistent with market–based incentives, such as loss of reputation and litigation costs, dominating the expected benefits from compromising auditor independence.     

金融危机下审计收费风险溢价的研究

基于2008年金融危机这一外生冲击,本文考察了公司风险与审计收费间的关系。研究发现,当危机下公司的经营风险提高时,会计师事务所的审计收费增加,表明公司审计费用存在风险溢价。针对不同行业的分析显示,对于出口型企业,因受危机的影响严重,公司审计收费与经营风险显著正相关;基于不同性质公司的研究表明,由于政府的隐形担保,危机下国有公司的审计费用并未随经营风险的增加而提高;最后,金融危机下审计收费风险溢价现象主要存在于非四大审计的公司。     

Responsiveness of Auditors to the Audit Risk Standards: Unique Evidence from Big 4 Audit Firms

We examine the effect of changes in audit risk standards on the conduct of financial statement audits in a European setting. We investigate this by analysing the audit hours and audit fees for clients of Big 4 audit firms in Finland in 1996 and 2010. Our results show that audit firms became more sensitive to clients’ business risk due to the introduction of the new audit risk standards, with more audit hours allocated to owner-managed companies in 2010 than in 1996, and fewer audit hours allocated to low-risk clients in 2010 than in 1996. Also, the labour mix in the audit team changed for owner-managed companies, with a greater work load carried by junior auditors in 2010 than in 1996. Regarding the price of audit, we find an increase in audit fees for clients with high business risk, while audit fees remained at roughly the same level for low-risk clients. These findings should be of interest to the auditing profession and those involved in the development of auditing regulations.     

Fair Value Exposure,Changes in Fair Value and Audit Fees: Evidence from the Australian Real Estate Industry

This paper investigates the relationship between audit fees and both fair value exposure and changes in fair value of investment properties. The study is motivated by the limited and inconclusive evidence on the effect on audit fees of full fair value reporting for illiquid assets. Using hand‐collected data from the Australian real estate industry, we find a negative (positive) association between audit fees and fair value exposure (changes in fair value of investment properties). Our findings also indicate that the use of unobservable inputs in fair value estimates for investment properties does not significantly increase audit risk and audit fees. Further, we find that audit fees are higher for firms with fair values of investment – properties estimated by external and mixed valuers – compared to firms with fair values estimated by directors alone. This study enriches the audit fee literature by documenting auditors’ pricing decisions in an area that involves significant estimation and valuation risks.