Audit fees during initial engagement in Malaysia

Abstract

Purpose – The purpose of this study is to investigate whether fees discounting exists in Malaysia and whether such a practice impairs auditor independence.Design/methodology/approach – The paper employs a panel least regression of 3,003 firm‐year observations of firms listed on Bursa Malaysia for the period between 1996 and 2006. The paper collects the audit fees, auditor's identity and other firms' characteristics data from Compustat Global, Stock Performance Guide Handbook and annual reports. The annual reports are obtained from the Bursa Malaysia's web site and Mergent Online database. The paper removes initial public offering (IPO) firms, firms involved with PriceWaterhouse and Coopers and Lybrand merger and firms forced to switch auditor during the Arthur Andersen implosion in 2002.Findings – The analysis shows that price cutting occurs on initial audit engagements even when audit fees are publicly disclosed. Further tests suggest that the auditor recovers the “sunk cost” invested during the initial ...