Fee pressure and the longitudinal dynamics of audit engagement budgeting and reporting

Abstract

Abstract Using longitudinal data from an international accounting firm, this paper investigates how budgeted and reported audit hours change in response to prior budget variances, fee pressure, and budget pressure imposed by audit firm management. This investigation is motivated by concern regarding the association between these factors and quality-reducing audit behaviors. The results for audit firm management budgeting show that budgets increase following unfavorable variances, and that fee pressure does not affect the budgeting process. Regarding engagement team reporting behavior, we find that both prior unfavorable variances and fee pressure are associated with subsequent reduction in reported audit hours. Further, when audit firm management imposes budget pressure on engagement teams, they respond by reducing reported hours. Overall, the results provide evidence on the interplay between audit firm management and engagement teams in responding to prior variances, fee pressure, and budget pressure during the period 2001–2003.