CSR‐Linked Compensation Contract and Audit Pricing

Purpose This study aims to examine the impact of mandatory corporate social responsibility (CSR) regulations on audit fees, using Section 135 of India’s Companies Act, 2013, as a quasi-natural experiment. The regulation mandates firms exceeding specific financial thresholds to allocate 2% of their net profits to CSR. Unlike voluntary CSR, which often signals strong governance, mandatory CSR imposes compliance obligations that may increase audit complexity, risk and costs. While prior research has focused on voluntary CSR’s impact on audit fees, this study explores how mandatory CSR influences firm level outcomes, offering insights into the distinct effects of regulatory compliance on audit practices. Design/methodology/approach The study uses a quasi-natural experimental design, using difference-in-differences (DiD), instrumental variable (IV) and regression discontinuity (RD) methodologies to analyze the impact of Section 135. Firms subject to the regulation were compared to unaffected firms, while accounting for prior CSR engagement. The analysis identifies audit fee changes attributable to mandatory CSR, distinguishing them from voluntary CSR effects. Robustness checks ensure reliability of the results across various methodological frameworks. Findings Mandatory CSR significantly increased audit fees for newly compliant firms due to heightened compliance and agency costs. Firms already engaged in voluntary CSR before the regulation showed no significant fee changes, underscoring the regulatory driven nature of the audit fee premium. These findings highlight that mandatory CSR imposes external obligations that increase audit complexity, unlike voluntary CSR, which signals governance strength and reduces audit risk. The study offers valuable insights for policymakers and auditors navigating the compliance challenges of CSR mandates. Research limitations/implications This study focuses on India’s Section 135 CSR mandate, making it a single country case study. While this provides a unique regulatory context to examine mandatory CSR, it limits the generalizability of findings to other institutional settings. In addition, the study centers specifically on audit fees, leaving other firm-level outcomes unexplored. Future research should investigate broader consequences of CSR mandates, such as their impact on operational efficiency and stakeholder relationships. Social implications This research highlights the social implications of mandatory CSR regulations, emphasizing their role in promoting corporate accountability and societal welfare. By identifying the compliance costs associated with mandatory CSR, such as increased audit fees, the study underscores the need for balanced regulations that achieve social goals without imposing excessive burdens on firms. It also raises awareness of the challenges faced by newly compliant firms, encouraging policymakers to support smoother transitions. The findings contribute to understanding how regulatory mandates can shape corporate behavior, fostering a more sustainable and socially responsible business environment. Originality/value This research provides original insights into the under explored area of mandatory CSR and its implications for audit fees. While prior studies primarily focus on voluntary CSR and its signaling effects on governance and risk, this study highlights the distinct compliance driven costs of mandatory CSR. By leveraging India’s Section 135 CSR mandate as a quasi-natural experiment, the research identifies significant audit fee premiums for newly compliant firms, offering a nuanced understanding of regulatory impacts. The study contributes to both stakeholder and agency theory, providing valuable implications for policymakers, auditors and firms navigating the challenges of CSR regulations.

[Purpose]This paper examines how audit fees change in response to mandated audit fee disclosure in Korea. [Methodology]We use the difference－in－differences approach by comparing changes in audit fees of listed firms who are required to disclose the fees with changes in the fees of unlisted firms who are exempt from the requirement between 1999 and 2002. [Findings]Difference－in－difference analyses show that audit fees of listed firms increase following the disclosure mandate relative to the fee of unlisted firms. Additional analyses show that the overall increase in audit fees is driven by the decrease in negative abnormal audit fees (i.e., reduction in undercharges), not by the increase in abnormal audit fees. Lastly, cross－sectional analyses reveal that the increase in audit fees after the adoption of the disclosure requirement is smaller for larger firms and firms audited by big N auditors, but more pronounced for initial audit engagement. [Implications]This study adds to the literature on how disclosure affects contracts between audit firms and clients by showing a clear causal link between audit fee disclosure and audit fees. We also provide regulatory implications by documenting the consequences of the disclosure regulation.

Synopsis The research problem In this study, we examined the effect of an important informal institution, namely, national culture, on audit fees in an international context. Motivation In recent years, extant literature has increasingly focused on country-level differences in the audit environment, as these might have a significant influence on how financial statement audits are conducted across the globe. We contribute to this stream of literature by investigating the impact of national culture on audit fees. The test hypotheses Based on the demand- and supply-side perspectives of audit fees, we hypothesized that national culture dimensions — namely, uncertainty avoidance, power distance, individualism versus collectivism, and masculinity versus femininity — affect audit fees. Target population We used a sample of 27,670 firm-year observations across 22 countries over the 2002–2019 period. Adopted methodology We used ordinary least squares (OLS) regressions as baseline technique and entropy-balanced method (EBM) and system-generalized method of moments (GMM) to address endogeneity concerns. Analyses We examined the impact of Hofstede’s four national culture dimensions — uncertainty avoidance, power distance, individualism versus collectivism, and masculinity versus femininity — on audit fees. We also tested the robustness of results using alternative measures of national culture, subsample analyses, and additional firm-level factors. Findings Consistent with our hypotheses, we find that audit fees are higher (lower) in countries with higher uncertainty avoidance, individualism, and masculinity (power distance) scores. Our further analyses reveal that earnings management proxied by abnormal accruals does not impact the relationship; however, country-level creditor rights influence audit fees in high power distance and masculine cultures. We also note that national culture influences auditor choice and audit opinion. Our main findings are robust to alternate proxies and subsample analysis, as well as to address potential endogeneity concerns. Overall, our findings offer important implications for firms operating in global markets and for the audit profession.

Using a sample of US firms from 2003–2014, this study examines how the executive pay gap affects audit fees for firms with different levels of R&D investment and institutional ownership. Consistent with managerial power theory, we find that the executive pay gap is positively associated with audit fees, and that the positive association is attenuated by intense R&D investment and higher institutional ownership. We also find that the executive pay gap more strongly affects audit fees after the passage of the 2010 Dodd–Frank Act and the PCAOB's 2012 call to identify the audit risk related to executive incentive compensation. Additional analyses show that the moderating effects of R&D investment and institutional ownership on the pay gap–audit fees association are not conditional on auditor tenure, but the moderating effect of institutional ownership is stronger for firms hiring specialist auditors. Collectively, our findings suggest that auditors consider the business context, such as innovation initiative and external monitoring, when assessing audit risk related to the executive pay gap.

The impact of client information technology capability on audit pricing

The reform of accounting standards and audit pricing

Oil price uncertainty and audit fees: Evidence from the energy industry

We investigate two competing perspectives as to how institutional ownership, analyst following, and equity incentives moderates the effect of short interest on the behavior of auditors. It is unclear how information signal embedded in short interest affects the audit process for companies of different characteristics. In this paper, Wwe investigate two competing perspectives as to how external monitoring and managerial incentives affect the association between short interest and audit risk. The supply side perspective (i.e. labeled signaling) argues that if there is strong external monitoring and managerial incentives, short interests will not lead to greater amount of audit effort because auditor’s of auditors’ self-interest in minimizing costs, self-interest largely drives audit effort, while the demand side perspective argues that the same factors (i.e. institutional ownership, analyst following, and equity incentives) will lead to a greater demand for audit effort. Using audit fees as a proxy for audit risk, we find that an increase in short interest is associated with an increase in audit fees for companies that have weak external monitoring (i.e. low institutional ownership, low analyst following) and weak managerial incentives (i.e. compensation is less sensitive to stock price movements). In contrast, an increase in short interest is not associated with an increase in audit fees for companies that have a high institutional ownership, large analyst following, or managerial incentives that are more sensitive to stock price movements. Our results provide support for the signaling perspective, but not for the demand perspective.

Multiple large shareholders （MLS） are a general ownership phenomenon in the global capital market. In the traditional context of corporate governance, non-controlling large shareholders are the key guardians of the interests of small and medium shareholders. They can not only supervise the controlling shareholders, but also enhance the value of companies. However, in recent years, the events that MLS of family companies unite to infringe the interests of small and medium investors are increasing. Therefore, in the special case of the typical nepotism of MLS in family companies, it is worth further testing whether the supervision and balance function of large shareholders still exists. Audit pricing has always been the focus of the audit theory and practice. The principal-agent problem between internal large shareholders and external investors has a crucial impact on audit pricing. Audit pricing also provides a good external perspective for us to explore whether there is any collusion motivation between large shareholders of family companies or not. Under the special circumstances of typical nepotism among the major shareholders of family companies, this paper examines whether the supervision and balance function of MLS still exists from the perspective of audit pricing. Based on the data of Shanghai and Shenzhen A-share family listed companies from 2007 to 2017, we find that the existence of MLS stimulates a significant increase in audit fees. This phenomenon exists only when the controlling shareholders of family companies pledge their shares and the market is undeveloped. Moreover, the equity pledge will significantly enhance the promotion effect of MLS on audit fees in undeveloped areas. The channel effect test shows that MLS stimulates the stock price through earnings management, stock dividends and strategic stock change. These three ways can lead to the increase of audit risk and auditing institutions always choose to charge a premium to compensate the risk. This paper scrutinizes the possible collusion motivation of MLS in family companies from the perspective of audit pricing, which provides a new “puzzle” for the research of economic consequences of MLS. It also provides some empirical evidence for understanding auditors’ dereliction of duty regarding the encroachment on the interests of small and medium shareholders in the capital market. And through the research of whether MLS in family companies contribute to higher audit fees, this paper also provides a supplement for the risk compensation theory of the audit pricing theory. The policy suggestions of this paper are mainly reflected as follows: （1） As for the collusion among MLS in family companies, investors should strengthen the relevant protection consciousness. （2） In China’s capital market, there are so many accidents that large shareholders of family companies empty the wealth of small shareholders. The external independent auditor is indeed responsible for dereliction of duty. The research has certain enlightenment for the regulatory authorities to regulate the professional ethics of auditing institutions and protect the interests of external investors.

This paper explores the question: “How does a client’s information technology (IT) capability influence audit pricing?” Company data from 2004 to 2012 is employed. Firms appearing on the InformationWeek 500 (IW 500) yearly list of U.S. organizations with superior IT functions, serve as a proxy for companies with superior IT capability. Our findings suggest that companies with superior IT capability incur higher levels of audit fees. These findings contrast with prior research by Chen et al. (2014) that found in the immediate post-Sarbanes-Oxley Act (SOX) period, 2004-2007, client IT capability reduced audit fee increases. We replicate the Chen et al. (2014) results and find that the observed effect attenuated during the subsequent recession and recovery periods. These results suggest a revised interpretation of Chen et al. (2014) may be warranted. It appears that clients with superior IT capability incur on average higher levels of audit fees than companies with less advanced IT; they are better positioned to adapt to external shocks, such as, SOX regulations. Therefore, these clients also see smaller audit fee increases when these exogenous events occur. This study contributes to prior literature by providing a more complete picture of how client IT capability affects audit fees.

The purpose of this article is to provide a comparison of the impact on audit pricing of the Sarbanes–Oxley Act of 2002 to that of the 2008 financial collapse and the resulting Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010. While prior studies have documented increased audit costs due to SOX, they have not found such increases related to the other two events. We extend this research into the subsequent two events by focusing on audit pricing in the banking industry since that industry was most directly impacted by the financial crisis and Dodd–Frank. In contrast to the prior literature based on industrial firms, we find banks experienced significant increases in audit fees related to Dodd–Frank that were unexplained by traditional control variables. Finally, we find mixed evidence of economies of scale in dealing with the costs of implementing the legislation. While only smaller banks had a significant increase in audit fees as a percentage of total assets for Dodd–Frank, larger banks experienced significantly higher audit costs due to SOX. © 2019 Wiley Periodicals, Inc.

The paper examines the extent which risk management committee and corporate governance committee predict audit fees in Nigeria. We employed random panel data (unbalance) regression analysis to establish whether risk management committee and corporate governance committee affect audit fees. We obtained the data used for this study from the annual reports of public listed companies on the Nigerian Stock Exchange for the periods 2008-2013. Our results indicate a positive relationship between establishment of risk management committee and audit fees while the establishment of corporate governance committee has an insignificant relationship with audit fees. The findings provide evidence to inform policy makers and corporation in Nigeria on how their governance structure affects audit fees. Firms with a strong governance structure have the incentive to improve the quality of their financial report. Therefore, such firms will increase the scope of auditor's work. This result has implication for policy makers because it suggests that corporate governance mechanisms are important in ensuring a quality audit. The paper contributes to literature on audit pricing in the context of the Nigerian audit market that is currently under-researched. The study provides additional theoretical insights by investigating the impact of risk management committee and corporate governance committee on audit fees, which to the best of the researcher's knowledge, have not been tested in the audit fees model.

Purpose This study aims to investigate the impact of the COVID-19 pandemic on audit fees in Indonesia’s financial sector. It explores how increased audit risk, regulatory demands and organizational changes influenced audit pricing during a period of global disruption. Design/methodology/approach The study employs panel data from 88 financial companies listed on the Indonesia Stock Exchange over the period 2018–2022. A two-stage least squares (2SLS) regression model is used to address potential endogeneity in auditor selection, particularly the engagement of Big 4 firms. Findings The results show a significant increase in audit fees during the COVID-19 pandemic, especially among companies audited by Big 4 accounting firms and those with greater financial complexity. These firms likely required more extensive audit procedures due to higher risk exposure and regulatory scrutiny. The findings support the view that audit pricing is sensitive to external shocks, with auditors adjusting their fees to reflect the additional effort and professional judgment required in uncertain environments. Research limitations/implications The analysis is limited to Indonesia’s financial sector and may not be directly generalizable to other industries or countries. However, it offers a foundation for comparative studies and encourages further research on audit fee behavior in crisis settings, particularly in emerging markets. Practical implications The findings provide valuable insights for auditors, regulators and firms by highlighting how audit practices and pricing respond to crisis conditions. Regulators may use these insights to consider more flexible audit oversight, while audit firms can better anticipate resource allocation during periods of heightened uncertainty. Social implications This study highlights the broader societal importance of maintaining audit quality and transparency during times of crisis. As financial sector institutions play a key role in economic recovery and public trust, ensuring that their financial reporting is thoroughly audited helps safeguard investor confidence and market stability. By showing that auditors responded to increased risk and complexity with greater audit effort – reflected in higher fees – this study reinforces the role of auditors in upholding public accountability. In emerging markets like Indonesia, where regulatory oversight and audit capacity are still developing, these findings underline the need for strong institutional support to ensure audit resilience during systemic shocks such as the COVID-19 pandemic. Originality/value This study contributes to the limited literature on audit fees in emerging markets, particularly during global crises. It offers an integrated theoretical framework combining auditing theory, risk management theory and organizational change theory, providing new perspectives on how external shocks influence audit pricing dynamics.

This study investigates what happens to audit fees after audit firms merge. In particular, we examine whether pre-merger fee premiums of the strong brand name auditor spread to the other auditor. Using data from Hong Kong we analyse the 1997 merger between Kwan Wong Tan & Fong (KWTF) and Deloitte Touche & Tohmatsu (DTT) to become DTT, and the 1998 merger between Coopers & Lybrand (CL) and Price Waterhouse (PW) to form PricewaterhouseCoopers (PwC). We find that DTT audit fees are 55% higher than KWTF prior to the merger and this premium falls to 41% in 1998 and to 34% in 1999. However, we find no increase in audit fees for incumbent property company clients, a sector where KWTF is the leading supplier. Prior to its merger. PW earned audit fees 16.4% higher than those earned by CL and the premium is even larger for clients in the consolidated enterprises and property companies sectors. We find no change in audit fees after the PwC merger. This result suggests that the PwC merger is a response to increased competition and clients are unwilling to pay higher fees for within-Big 5 re-branding.

PurposeThis study aims to examine whether the impact of international financial reporting standards (IFRS) on audit fees differs between early and late adopters.Design/methodology/approachThe authors use robust econometric estimation on a sample of 314 firms from both early and late IFRS adopting countries.FindingsThe authors find that IFRS is positively and significantly associated with an increase in audit fees for early adopters, but the impact is very weak for late adopters and insignificant in some cases. The results on auditing time suggest that increase in audit fees around IFRS adoption is due to an increase in audit reporting lags. After accounting for pre- and post-years, the authors find that the relationship between IFRS and audit fees, as well as audit time for late adopters, is significant only in the adoption year. However, early adopters experience a significant increase in audit fees and audit time in the transition year to one-year post-adoption.Practical implicationsThe findings imply that countries that are yet to adopt IFRS are less likely to experience a significant increase in audit fees audit time. Hence, is probable that the benefit of IFRS will outweigh the cost.Originality/valueThe results, therefore, suggest that early adopters paid a premium for been the first users of IFRS, which is consistent with any innovation. The study provides new insights by demonstrating that the consequences of IFRS differ between early and late adopters.