Investigating the influence of rank-and-file employees’ equity incentives on audit pricing: evidence from stock options

Since the listed companies were required to disclose audit fees in 2001, executive incentive is considered to be an important measure to improve corporate performance and reduce audit fees. There are different conclusions on the correlation between the two. In this paper, the mechanism of the impact of executive incentive on audit fees in listed companies is reviewed. It is found that under the influence of audit cost and risk premium, executive compensation and equity incentive have an impact on audit fees through audit risk. This paper selects A-share listed companies in Shanghai and Shenzhen of guotai'an database from 2013 to 2017 as research samples, and makes an empirical analysis on the relationship between executive incentive and audit fees. The results show that: there is a significant positive correlation between executive compensation level and audit fees; there is a significant negative correlation between executive equity incentive level and audit fees. According to this, this paper puts forward some suggestions, such as improving the company's salary system, improving the level of equity incentive, adopting a variety of equity incentive combinations, giving full play to the supervision role of internal governance institutions, etc., to provide reference suggestions for improving the incentive mechanism of senior executives and reducing audit fees.

This study examines the influence of CEO accounting expertise and audit committee independence on audit fees, with a focus on listed firms in the Sultanate of Oman. Drawing on audit risk and corporate governance theories, the research investigates both the individual and interactive effects of these governance mechanisms on audit pricing. While previous studies have explored these relationships in developed economies, limited empirical evidence exists for emerging markets, particularly in the Gulf Cooperation Council (GCC) region. This study addresses this gap by analyzing a sample of 1,313 firm-year observations from companies listed on the Muscat Stock Exchange. Using multiple linear regression models, the analysis tests the direct effects of CEO accounting expertise and audit committee independence, as well as their interaction, on audit fees. The results reveal that CEO accounting expertise is negatively associated with audit fees, suggesting that CEOs with financial knowledge reduce auditors' perceived engagement risk. In contrast, audit committee independence shows a marginally positive relationship with audit fees, indicating a demand for higher audit assurance. Importantly, the interaction between CEO expertise and audit committee independence is positively and significantly related to audit fees, implying that auditors respond to dual-layered governance strength with increased audit effort and cost. This study contributes to the literature by offering new insights into how governance dynamics influence audit pricing in an emerging market context. The findings have implications for auditors, boards, and policymakers seeking to enhance audit quality and governance effectiveness within Oman and similar institutional settings.

SUMMARY: In 2013, the Public Company Accounting Oversight Board (PCAOB) proposed an amendment to Auditing Standard No. 12 (PCAOB 2010) that would require auditors to consider executive compensation in audit planning because of potential fraud risk associated with equity incentives. We use the association between audit fees and CEO and CFO equity incentives to infer whether auditors increase audit scope and perceive greater risk as equity incentives increase. Equity incentives are defined as the sensitivity of the value of executives' equity portfolios to changes in share price (delta incentive) and to changes in return volatility (vega incentive). We find a positive association between audit fees and vega, but not delta. However, when we interact vega with proxies for residual auditor business risk, we find that the fee premiums for risk decrease as vega increases. Our results suggest that auditors do consider executive compensation in audit planning.

Agency Problems, Auditing, and the Theory of the Firm: Some EvidenceAuthor(s): Ross L. Watts and Jerold L. ZimmermanSource: Journal of Law and Economics, Vol. 26, No. 3, (Oct., 1983), pp. 613-633Published by: The University of Chicago PressStable URL: http://www.jstor.org/stable/725039Accessed: 29/06/2008 23:14

Objective: The purpose of this study is to critically examine and test the factors that determine audit fees, with a particular focus on the roles of corporate governance mechanisms, executive compensation, audit risk, and the fair value of non-current assets. By analyzing these factors, the study aims to provide deeper insights into the complex drivers of audit pricing and contribute to the ongoing discourse on audit quality and financial transparency. Theoretical Framework: Agency theory emphasizes the conflicts of interest between principals (investors) and agents (management) arising from information asymmetry, which results in audit fees that confirm the accuracy of financial statements. Additionally, corporate governance mechanisms, executive compensation, audit risk, and fair value influence this dynamic. Method: This study investigates manufacturing companies in the consumer goods sub-sector listed on the Indonesia Stock Exchange from 2018 to 2022. A purposive sampling method was used to select 42 companies each year, totaling 210 annual reports obtained from the IDX website and the companies' websites. Results and Discussion: The research findings show that a higher number of independent commissioners, a higher number of audit committees, higher executive compensation, and the use of fair value of non-current assets can increase the cost of an external audit. However, this study has yet to be able to prove that managerial ownership and audit risk can affect audit fees. Research Implications: This research offers insights for auditors, management, and regulators. Auditors should align fees with audit quality, factoring in business complexity and risk. Reasonable fees reflect management's investment in internal controls, enhancing financial statement credibility. Regulators must ensure fees support high-quality audits to prevent failures. Originality/Value: This study contributes to the literature by highlighting how corporate governance factors independent commissioners, audit committees, executive compensation, and fair value of non-current assets impact audit fees. It emphasizes their role in enhancing audit quality and offers valuable insights for auditors, management, and regulators in justifying audit fee structures.

Purpose Existing research on stock price manipulation driven by equity incentives has mainly focused on earnings management, without considering other potential manipulation methods. Therefore, we examine whether management engages in tone management during earnings communication conference following equity incentives. Design/methodology/approach Using Chinese A-share listed companies from 2006 to June 2023 as the sample, we explore the impact mechanism of equity incentives on the tone of earnings communication conference. Findings Equity incentives are found to increase abnormal tone in earnings communication conferences. The characteristics of equity incentives themselves affect tone management. For instance, equity incentives based on stock options, as well as those within the exercise feasibility year, have a more pronounced effect on facilitating tone management. The mechanisms through which equity incentives affect different tones vary: the increase in positive tone is associated with improved financial performance, while the increase in abnormal tone is linked to executives reducing their holdings to obtain cash. Further discussions reveal that the impact of equity incentives on abnormal tone is weaker when there is a higher degree of real or accrual-based earnings management, suggesting a possible substitution relationship between earnings management and abnormal tone. Additionally, when a company experiences low investment efficiency, high executive compensation and a lower proportion of negative news coverage in the external information environment, the impact of equity incentives on abnormal tone becomes more pronounced. Research limitations/implications Our study primarily focuses on conducting exploratory research into the mechanism, purpose, timing and alternative selection of tone management in the year following the grant of equity incentives. We have not provided a detailed theoretical explanation regarding the transmission channels or mechanisms through which tone management affects investor sentiment and trading behavior. Practical implications We provide valuable insights for identifying the quality of information disclosure in earnings communication conference. Originality/value We clarify the mechanism of equity incentives on management’s tone, reveals the timing preferences of tone management during the earnings communication conference.

PurposeThis study investigates whether listed firms using equity incentive plans (EIPs) adopt more conservative accounting in China's unique corporate setting.Design/methodology/approachBased on a sample of 2,243 listed firms and 9,950 firm-year observations for the period of 2008–2017, this study employs piecewise cross-sectional regression models with year and industry fixed effects to examine the associations proposed in the research hypotheses.FindingsThis study finds a positive relationship between the adoption of EIPs and accounting conservatism in listed Chinese firms. Further analyses reveal that this positive relationship is more pronounced when listed Chinese firms use restricted stock units (RSUs), instead of stock options, in their EIPs.Research limitations/implicationsUnlike many early studies, this paper empirically investigates the impacts of two different types of equity incentives – stock options and RSUs – and thus contributes to accounting and corporate governance literature by providing a better understanding of the impacts of different types of equity incentives on financial reporting quality. However, this study does not consider other alternative equity incentive measurements because of the limited data regarding Chinese firm's executive compensation.Practical implicationsThis study offers investors and policymakers in China some insight into how accounting conservatism in listed firms might be shaped by equity incentives used in their managerial compensation schemes.Originality/valueThis study is one of the few that examines the effects of using equity incentives in a large emerging market. It offers support for the view that the recent introduction of policies on EIPs by the Chinese government has an overall positive impact on listed firm's financial reporting quality, as reflected by greater degrees of accounting conservatism.

For modern enterprises, equity incentive is an important means to solve the principal-agent problem, the choice of incentive mode and the source of the incentive is an inevitable issue in the implementation of an equity incentive scheme. Based on the sample data of A-share listed companies from 2010 to 2020, this paper constructs a panel two-way fixed effect model, combining regression analysis and three interactions with differential equations (PDE), which empirically explores the relationship between two incentive models of stock option and restricted stock, the source of subject matter and enterprise performance. The study shows that the restricted stock incentive model significantly improved the performance of enterprises, and the intensity of incentives played a significant inverted U-shaped moderating role between the enterprise’s performance and the different incentive models. After adding the subject matter incentive source, it is further found that repurchase, as the source of subject matter, has a positive moderating effect on restricted stock and a negative moderating effect on stock option. The intensity of equity incentives moderates the relationship between stock option incentive models and enterprise performance when enterprises use repurchases as the source. The results of the above-given research provide some reference for enterprises to give appropriate incentive intensities, objective selection of the subject matter source under different equity incentive models based on their characteristics, and facilitation of more efficient use of equity incentive tools.

We examine the effects of different types of executive incentives on technological innovation of declining firms and the moderating effects of the degree of decline and organisational slack on executive incentives and enterprise technological innovation. We also assess the synergetic effects of different types of executive incentives on technological innovation of declining enterprises. We find the following: first, executive compensation incentive, equity incentive and control incentives are beneficial to promote technological innovation in declining enterprises. Second, the degree of decline negatively moderates the relationship between equity incentive and technological innovation. Third, organisational slack positively moderates the relationship between equity incentive and technological innovation, as well as the relationship between control incentives and technological innovation, especially for severely declining enterprises. Fourth, there are synergistic effects between executive control incentive and compensation incentive, control incentives and equity incentive on technological innovation. The contributions are as follows: first, taking declining enterprises as sample, we suggest that to increase the role of compensation incentive and equity incentive in promoting technological innovation in declining enterprises, the control incentives should be strengthened. Second, organisational slack should be fully exploited for severely declining enterprises so that executives should have the motivation and conditions to carry out technological innovation and further help declining enterprises to turnaround successfully.

Against the backdrop of global attention to sustainable development, in-depth research on the relationship between executive equity incentives and sustainable financial growth holds significant theoretical and practical value. Based on agency theory, this paper utilizes a long-term sample of Chinese A-share listed companies from 2006 to 2023 and employs a combined research method of propensity score matching (PSM) and difference-in-differences (DID) to conduct theoretical analysis and empirical testing. Theoretical analysis shows that equity incentives promote sustainable financial growth in companies by aligning the residual control rights of executives with the residual claim rights, and that two mainstream modes of equity incentive differ in their effects due to distinct contractual arrangements for human capital and physical capital investment by executives. Empirical results indicate that executive equity incentive events have a significant positive effect on corporate sustainable financial growth, both in the short and long term. Among these, restricted stock exhibits a significantly better incentive effect than stock options, performing better in both intensity and duration of the incentive effect. This study expands the research perspective on executive incentives and corporate sustainability and provides critical insights and recommendations for corporate governance practices, policy-making, and academic research.

International Developments in Executive Compensation

Internal control level directly affects the quality of financial report of a firm and CPA's audit input and risk. Do CPAs take such a relation into account when they decide the level of audit fees charged to firms? In this paper, the author conducts an empirical study on the relationship between the internal control quality, audit risk and audit fees, using a sample of 1395 companies listed on Shanghai and Shenzhen Stock Exchange in China. The results show that CPAs issue more non-standard unqualified opinions to the companies with higher control risk, and there is a statistically significant correlation between the audit fees of companies and their internal control quality. Furthermore, by analyzing the incremental model, the author finds that CPAs adjust the level of audit fees accordingly when the internal control quality of companies' changes.

Purpose The various factors influencing audit fees are still unclear, which may undermine the possibility of attaining fair audit pricing. Against this concern, this study aims to investigate the relationship between the auditee’s corporate characteristics and audit fees. In addition, it reveals if accounting comparability, as a proxy for financial reporting quality, mediates such a relationship by bringing evidence from an emerging market. Design/methodology/approach This study depends on data from nonfinancial companies listed on the Egyptian stock exchange from 2016 to 2019. It adopts multiple regression models to test the impact of corporate characteristics and accounting comparability on audit fees and uses path analysis to test the indirect effect of the audit clients’ characteristics on audit fees through accounting comparability. Findings The authors found a significant positive (negative) effect of firm profitability on audit fees (accounting comparability). Further, accounting comparability has a significant negative effect on audit fees. The authors also found that accounting comparability partially mediates the significant relationship between profitability and audit fees. However, the authors found no significant association between leverage and audit fees. Finally, the authors found that accounting comparability does not mediate the relationship between leverage and audit fees. Practical implications This study’s findings can benefit audit practitioners in Egypt by showing the main factors affecting audit fees, especially audit clients’ attributes. The current findings also guide professional bodies responsible for issuing accounting and audit standards regarding the importance of financial reporting quality for audit pricing decisions. Originality/value This study contributes to the literature by examining the mediating effect of accounting comparability concerning the corporate characteristics-audit fees relationship in developing African countries such as Egypt. This study’s findings can benefit audit practitioners in Egypt by showing the main factors affecting audit fees, especially audit clients’ attributes. The current findings also guide professional bodies responsible for issuing accounting and audit standards regarding the importance of financial reporting quality for audit pricing decisions.

PurposeThis study aims to examine how auditors respond to the revelation of clients’ corporate fraud.Design/methodology/approachThis study uses an ordinary least squares estimation to examine how audit fees and audit turnover change after the revelation of corporate fraud.FindingsAfter a client discloses fraudulent activities, average audit fees significantly increase due to an increase in audit hours, rather than in audit premiums. Both new and continuing auditors increase audit hours for fraud firms, but only new auditors charge higher audit fees for the increased effort. In addition, when auditors are designated by regulators following the revelation of fraud, audit fees and premiums increase, but audit hours do not. Finally, auditor turnover becomes more frequent after the revelation of fraud. Overall, the findings suggest that auditors update their assessment of audit risks after fraud revelation and, thus, adjust their audit pricing and client acceptance decisions.Practical implicationsThe study provides regulators and audit practitioners with insights into how to audit contract characteristics and regulatory intervention (auditor designations) affect auditors’ response to increased audit risks.Originality/valueThe study contributes to the auditing literature and practice by providing evidence on how auditors respond to the revelation of fraudulent activities and how their response depends on their ability to determine audit fees. Moreover, we provide novel evidence that audit contracting characteristics and regulatory requirements result in different responses of auditors toward changes in audit risks.

PurposeThis paper aims to investigate the effects of some corporate governance mechanisms and executive compensation on audit fees in an emerging market.Design/methodology/approachThe study population consists of 540 observations and 90 listed companies on the Tehran Stock Exchange during the years 2009-2014. The statistical model used in this study is a multivariate regression model; besides, the statistical technique used to test the hypotheses proposed in this research is panel data.FindingsThe changes in the value of a CEO’s own firm stock option portfolio, in thousands of rials (Iran’s currency), for a 0.01 change in stock return volatility and stock price are defined as Vega and Delta, respectively. The results demonstrated that there is a positive association between audit fees and delta, but not Vega; this means that a fee premium is linked to CEO Delta incentives. The findings show that Iranian companies pay more audit fees when they give managers more rewards. In addition, the results show that there is not a significant relationship between fees resulting from audit risk and Delta and Vega incentives of the board. Inconsistent with agency theory, the authors found that the independence of board members did not have any effect on audit fees. As a final point, the outcomes of the paper demonstrate that managers who invest in companies under their own management do not have any impact on the amount of audit fee. To put it another way, there is not any significant connection between the board ownership and audit fees.Practical implicationsThis is one of the most important studies that simultaneously surveys the impacts of corporate governance mechanisms and executive compensation in the Iranian audit market. The results of this study will reveal more than the role of corporate governance mechanisms for society and users of financial statements because as tools on the CEO actions, they always have to pay attention to the implementation of corporate principles in the economic entity’ operation.Originality/valueThe present study has examined the relationship between two cases of corporate governance mechanisms named the board independence and the board ownership with audit fees in a country where, to the authors’ knowledge as in most other developing markets, such a relationship has not been a subject of empirical research. Moreover, the use of a two-dimensional measure of executive compensation, namely, Delta and Vega incentives, primarily considering research undertaken in an emerging market, as a valuable contribution may be observed.