On the Relationship between Audit Tenure and Fees Paid to the Audit Firm and Audit Quality

Abstract

We investigate the impact of audit firm tenure, partner tenure, audit fees, fees for non-audit services and total fees on audit quality, as measured by discretionary accruals. Our sample consists of Spanish non-financial public companies for the years between 2006 and 2013. Results indicate that audit quality increases with audit firm tenure but decreases with partner tenure. Moreover, the level of fees paid to the audit firm seems to have a negative impact on audit quality, which is mainly driven by fees for audit services. In this regard, we do not observe any significant relationship between fees for non-audit services and audit quality. Our results also show that the negative relationship between either long partner tenures or high fees and audit quality does not occur when the tenure with the audit firm is long. Therefore, long audit firm tenures do not only seem to involve higher audit quality ‘per se’, but also moderate the negative effects of partner tenure and audit fees on audit quality. The results of this study, which are robust to several sensitivity checks, may be relevant for the current debate on auditor rotation and the joint provision of audit and non-audit services.     

Cointegration Analysis of Audit Pricing Model: A Panel Unit Root Test Approach

In this study, we provide evidence on the stationarity of real audit fees and the major explanatory variables frequently used in the audit pricing models from a pooled data set, using panel unit root tests developed by Im et al. (1997). The panel unit root test supports the hypothesis of non‐stationarity of audit fees and their major determinants. We demonstrate that variables in the audit pricing model that were previously found to have impact on audit fees may turn out to be useless when more powerful tests like panel tests are applied to these variables. Our evidence implies that failing to employ appropriate procedure to test cointegration and to specify the appropriate model for audit fees and their determinants would generate results that may have exaggerated the effects of some variables on audit fees.     

Auditor Fees, Market Microstructure, and Firm Transparency

Abstract:  Auditors, as corporate insiders, have access to private information regarding the firm's financial and business opacity that is unavailable to outside investors. We test whether auditors price their knowledge of firm opacity in their audit fees by examining two competing hypotheses. The first states that higher audit fees may reflect the greater risk that the auditor faces in auditing an opaque firm. Under this hypothesis, market based measures of opacity will be positively correlated with higher fees. The second hypothesis states that firms buy reputational capital from their auditor by paying high fees in an attempt to improve the market's perception of the firm's transparency. In this case, higher audit fees are negatively correlated with market based measures of opacity. Our results are consistent with the first hypothesis, that auditors price opacity risk into their fees.     

Auditor specialization, perceived audit quality, and audit fees in the local government audit market

Prior governmental research implies a positive relation between auditor specialization and audit quality, but the effect of specialization on audit fees is mixed. However, no single governmental study investigates the effect of auditor specialization on both audit quality and audit fees. Also, prior studies focus on either large- or small audit firms and often employ indirect proxies for audit quality. We study the effects of auditor specialization on perceived audit quality and audit fees. Our data represent both Big 5 and smaller audit firms and include three market-based measures of specialization. We survey 241 Florida local government finance directors and find that specialization is positively associated with perceived audit quality but not with audit fees. We also find that Big 5 auditors, often used as a proxy for higher audit quality in prior research, are not uniformly associated with increased perceived audit quality but consistently charge higher audit fees. Our results confirm a relation between measures of audit firm specialization and audit quality and raise questions regarding audit firm size and audit quality in the municipal sector. Our findings suggest that engaging specialized auditors may be good policy for many local governments.     

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 effect of seasonal variations in auditor workload on local government audit fees and audit delay

Prior studies of government audit fees and audit delay (elapsed time from fiscal year end (FYE) to date of the audit report) employ a dichotomous variable to control for seasonality. However, a single variable does not appear to fully capture the effects of seasonality on audit fees or audit delay in the US local government sector. We compare the effects of FYEs commonly observed by US local governments (i.e., June 30, September 30, and December 31) on the audit fees and audit delay of 302 cities and counties for fiscal 1993. Our findings indicate that governments with June FYEs incur lower fees than do governments with either September or December FYEs. We also find that June and December governments sustain equivalent (and maximal) audit delay, and that September governments experience minimal delay. The results show that, in terms of fees and delay, December 31 is the least desirable of the FYE dates commonly found in the US local government arena. Our findings further suggest that audit fees may influence audit delay, when considered in a seasonal context.     

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.     

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.     

融资约束、审计费用与现金持有价值

审计费用和现金持有价值是公司财务审计研究领域的两个重要话题。审计费用高低所隐含的公司风险程度影响着投资者对公司增加现金持有量将产生积极还是消极效应的判断,会导致公司股票超额回报率的变化,进而也可能影响其现金持有价值,目前尚无相关的研究。本文以现金持有的边际价值模型为基础,引入审计费用和融资约束变量,对融资约束条件下审计费用与公司现金持有价值的关系进行研究后发现,过高的审计费用会降低公司的现金持有价值,审计费用增加得越多,公司的现金持有价值越低。进一步的分析发现,相对于其面临较高程度的融资约束时,公司面临较低程度的融资约束时审计费用对其现金持有价值的负向影响更为显著。     

国际金融危机、审计费用溢价与审计质量

以2003-2017年我国A股上市公司为样本,考量当企业受到金融危机冲击时,审计费用与审计质量之间关系的变化。研究结果表明,金融危机期间存在审计费用溢价现象,然而更多的收费却伴随着审计质量的下降。研究结论对于在市场危机环境下进行审计风险管控和审计市场的规范具有一定的借鉴意义。     

Governance regulatory changes,International Financial Reporting Standards adoption,and New Zealand audit and non‐audit fees: empirical evidence

This study examines the association between overseas and New Zealand governance regulatory reforms and New Zealand companies’ audit and non‐audit fees. Our models use temporal and International Financial Reporting Standards (IFRS) indicator variables to relate the timing of the fee changes to the incidence of the overseas and local reforms. We find that audit fees increased in New Zealand over 2002–2006. Such increases associate reliably with the transition to and adoption of NZ IFRS and not with earlier overseas governance reforms. Our study also documents a decrease in non‐audit fees over the same period, but we find no IFRS effect for non‐audit fees.     

Audit Firm Tenure,Non‐Audit Services,and Internal Assessments of Audit Quality

We use data from internal assessments of audit quality in a Big 4 firm to investigate the impact of audit firm tenure and auditor‐provided non‐audit services (NAS) on audit quality. We find that first‐year audits receive lower assessments of audit quality and that quality improves shortly thereafter and then declines as tenure becomes very long. Partitioning our sample between SEC registrants and private clients, we find that the decline in audit quality in the long tenure range is attributable to audits of private clients. For audits of SEC registrants, the probability of a high quality audit reaches its maximum with very long tenure. We also find that audit fees are discounted for first‐year audits but auditor effort is higher than in subsequent years. We find no association, on average, between total NAS fees and audit quality in the full sample but observe that total NAS fees are positively associated with quality for SEC registrants and negatively associated with quality for privately held clients. Our findings are important for regulatory policies related to audit firm tenure and auditor‐provided NAS.     

Changes in audit effort and changes in auditors’ disclosures of risks of material misstatement

This paper investigates whether auditors' year-to-year modification to risks of material misstatements (RMMs) in extended auditors' reports (EARs) are associated with changes in underlying audit effort, as proxied by changes in audit fees. We examine the dynamics of RMMs over time in terms of adding or dropping specific RMMs. Our main results show that, on average, audit fees increase more from the previous year's fees when more RMMs are added to the current year's EAR. This increase is partially offset by dropping RMMs that were disclosed in the previous year, but changes in audit fees are not significantly affected by dropping RMMs without adding new RMMs. Further analysis suggests the effect of added RMMs is attributable to “new” RMMs originating with the auditor and that added RMMs that were previously known, based on related disclosures in the prior year's audit committee report, do not significantly impact on changes in audit fees. Overall, our results suggest that changes in the choice of RMMs included in EARs reflect changes in underlying audit effort.     

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.     

Auditor–Provided Consultancy Services and their Associations with Audit Fees and Audit Opinions

This study examines the relationships between non–audit services fees (consultancy fees) paid to auditors and (1) audit fees, and (2) the occurrence of qualified audit opinions. The positive association between consultancy fees and audit fees is shown to be due to certain company specific events that generate a demand for consultancy services as well as requiring additional audit effort. Identified company specific events are mergers and acquisitions, new share issues, new accounting and information systems, new CEOs, and corporate restructurings. When these events are absent, there is no statistically significant relationship between audit fees and consultancy fees after controlling for company size. Companies that have relatively high consultancy fees are more likely to receive a clean audit opinion. This may be due to the non–audit work clearing up problem areas at the client company or it may be due to high consultancy fees impairing auditor independence. With the available data it is not possible to distinguish between these two reasons.     

AUDIT FEES AND AUDITOR CHANGE; AN INVESTIGATION OF THE PERSISTENCE OF FEE REDUCTION BY TYPE OF CHANGE

Despite concern expressed over 'low-balling' or competitive price reduction in the market for audit services, the only empirical investigation of the relationship between initial audit fees, fee recovery and auditor change which has been carried out is by Simon and Francis (1988) using US cross-sectional data, although Pong and Whittington (1994, forthcoming) examine the impact on first year fees. We investigate the impact of auditor change on cross-sectional UK data for 1991 with the aim of discovering whether there is any evidence of price cutting and subsequent price recovery in a European, rather than a US context. We find that there is evidence of such a phenomenon, and investigate further to see whether this effect is robust with respect to the definition used of 'auditor change', and whether the effect varies according to whether the old auditor was a 'Big Six' or 'non-Big Six' firm. We find that the largest reductions (controlling for auditor size) are experienced by firms changing to 'Big Six' firms. We further show that involuntary changes (by auditor acquisition) are associated with positive (although statistically insignificant) increases in fees, whereasvoluntary changesare associated with negative (andsignificant) feereductions. These effects are shown to be robust with respect to model specification. This suggests that fee reductions cannot be ascribed to economies of scale or scope, but is consistent with a 'low-balling' model of behaviour.     

The Unintended Consequences of the Frequency of PCAOB Inspection

After more than 50 years of self‐regulation of the US auditing profession, the Sarbanes‐Oxley Act of 2002 (SOX) created the Public Company Accounting Oversight Board (PCAOB) as a quasi‐governmental entity with statutory authority to inspect accounting firms that audit public clients. The frequency of this inspection is annual or triennial, based upon the number of public clients the firm audits. We examine the effects of these two levels of inspection frequency on financial reporting quality and audit fees for clients of small and midsize public accounting firms. Our findings provide evidence of significantly higher audit quality and audit fees for clients of annually inspected firms relative to clients of triennially inspected firms. These findings are robust to auditor‐client alignment analyses, propensity score matching, time‐series analyses, examination of firms that have changed from triennial to annual inspection, and particular examination of firms with inspection deficiencies. Overall, our study suggests that the two‐tier frequency system of PCAOB inspection may have also resulted in two‐tier audit quality and audit fee systems for small and midsize public accounting firms, with more frequent inspection leading to more rigorous and informed auditor decisions. We discuss the implications of our results for the Board and the profession at large.     

Auditor quality,audit fees,organizational structure,and risk taking in the US life insurance industry

Using a system of simultaneous equations, this study examines the relation among external audit monitoring, in the US life insurance industry. We find insurers with higher leverage risk and surplus risk are more likely to use Big‐4 auditors and to pay higher fees. In return, insurers hiring Big‐4 auditors and paying higher audit fees have lower leverage risk and surplus risk. Second, the results suggest that mutual life insurers have a higher leverage risk and surplus risk than stock life insurers. This evidence is in contrast to that for property–liability insurance companies. Third, we find insurers are less likely to hire Big‐4 auditors and to pay higher audit fees after implementation of the Sarbanes–Oxley Act (SOX). Finally, life insurers with Big‐4 auditors or paying higher audit fees are more likely to take lower risks after the implementation of SOX.     

Audit Pricing of Shared Leadership

This study explores audit implications of shared leadership in client firms. Analyzing data from 2002 to 2013 of Korean listed companies, we find that auditors spend fewer audit hours and charge lower audit fees for clients with multiple CEOs. Additional tests reveal that the lower audit fees for co-CEO clients are likely attributable to reduced audit effort rather than to reduced hourly rates. We also document that firms with co-CEOs exhibit better-reporting quality than do firms with a solitary CEO. In sum, this article presents evidence that mutual monitoring via co-CEO appointments assures high-quality financial reporting of audit clients, and thus leads to reduced audit fees.     

Public Attention and Auditor Behavior: The Case of Hurun Rich List in China

Adverse client publicity can entail regulatory scrutiny over audited financial statements and impose political costs on auditors. We use the changes in client publicity caused by their controlling owners’ presence on the Hurun Rich List (the rich listing) in China to test the hypothesis that auditor conservatism increases with client publicity. Our evidence indicates auditors issue more adverse audit opinions to clients and charge higher fees following the rich listing events. Moreover, we observe that auditors strategically respond to clients with different attributes—for clients whose owners accumulated wealth in a more questionable manner, auditors choose more stringent audit reporting to better defend themselves from regulatory scrutiny; for clients without such attributes, auditors primarily rely on increasing audit fees to cope with any post-listing increase in audit risks. Our analyses also suggest the impacts of rich listings tend to be concentrated among large audit firms with stronger reputation concerns or among engagement auditors with more conservative reporting styles. By showing how auditors manage political risks associated with heightened public scrutiny, we contribute to both the auditing and political cost literature.