Price discrimination strategy in oligopoly market: evidence from auditors

PurposeRegulators treat all non-audit services the same by using a broad-brush approach which is reflected in the study of total non-audit fees in the same analyses or different non-audit fees in isolation by prior studies. To know whether the non-audit services have different effects and hence, should be regulated separately, this paper compares their effects on audit report lag and examines whether they follow the implied hierarchy of the Securities and Exchange Commission.Design/methodology/approachThe effects of audit-related non-audit fees, tax fees and other non-audit fees are compared in an audit report lag model to determine whether they are the same statistically. Supporting tests for audit quality use discretionary accruals and the reporting of a small profit or small positive change in profit.FindingsThis paper finds that different non-audit fees do not have the same effects on report lag and partial support for the implied hierarchy of the Commission. Specifically, for large accelerated filers, audit-related fees and tax fees have the same negative effects on report lag but other non-audit fees are unrelated to report lag. Tests of audit quality suggest that auditors do not compromise audit quality.Research limitations/implicationsDifferent non-audit services are unique in their spillover effects and deserve individual attention. Audit practitioners could be more comfortable in providing audit-related non-audit or tax services for audit clients since these services could facilitate audit work without compromising independence. On the other hand, they should be cautious about the provision of other non-audit services because the services do not enhance the efficiency of audit work and without such a benefit to audit clients, the provision may create issues of perceived independence.Practical implicationsInsight is limited by the types of disclosure of non-audit fees available and the lack of internal measures of audit efficiency.Originality/valueThe results provide deeper insight into the knowledge spillover theory and prior studies which implicitly assume all non-audit services having the same effect. The results suggest that the services should be regulated each on its own but not in a bundle. Last, this paper provides the first evidence that audit-related non-audit fees reduce report lag.

Purpose – The purpose of this paper is to explore whether the provision of non-audit services (NAS) by public accounting firms undermines audit quality. The study addresses this question by testing for an association between the provision of consulting services and auditor independence in listed companies. Design/methodology/approach – The authors study if the magnitude of non-audit fees explains variations in earnings management by looking at the joint determination of non-audit fees, audit fees, and abnormal accruals using the SURE-regression estimation method. Findings – Evidence from tested models suggests that audit services quality is uncompromised by the provision of NAS. In other words, high non-audit fees do not necessarily result in poor quality financial reporting. Research limitations/implications – A different research methodology and a different sample (e.g. non-listed companies) may lead to differing results. As the paper analyses only one country, generalizability of the results might be a limitation. There is no need to increase legal restrictions on the provision of consulting services by public accounting firms in order to better safeguard audit quality. Practical implications – Consulting clients may be more confident to hire both audit and NAS with the same firm and can make a case before the general Shareholders’ meeting. By providing both audit and NAS, consulting firms obtain knowledge spillovers and synergies while appealing highly qualified professionals. Originality/value – The use of simultaneous equations (SURE-regression) to establish the auditor-client relation allows us to better model theoretical relations between audit fees, non-audit fees, and abnormal accruals. Likewise, joint modeling takes account of correlations between the error terms of the individual models, yielding more efficient estimates than ordinary least squares. Performing this analysis in a non-Anglo-American country with low litigation risk is also a valuable contribution to extant literature.

Non-audit Services and Auditor Independence: New Zealand Evidence

In this study we investigate whether the characteristics of clients, auditors, and the auditor‐client relationship simultaneously determine audit and non‐audit fees. As done in prior studies, we maintain that fees proxy for the level of service provided and follow the physical flow of knowledge. Estimating single‐equation models of audit and non‐audit fee models, we confirm prior findings of an association between audit and non‐audit fees. Studies conclude that such evidence is consistent with knowledge spillovers between the two services. However, we document empirically that audit and non‐audit fees are simultaneously determined. Because the data indicate audit and non‐audit fees are jointly determined, we then investigate whether previously documented associations between audit and non‐audit fees are the result of biased estimation induced by using endogenous variables in single‐equation models. In contrast to results from single‐equation estimations, we find no association between audit and non‐audit fees using a simultaneous specification of the fee system, suggesting that single‐equation estimations suffer from simultaneous‐equations bias. In sum, the findings are not consistent with the existence of economies of scope from the joint performance of audit and non‐audit services after controlling for the joint behavior of audit and non‐audit fees. Given the ongoing debate over the level of allowed non‐audit services by auditors, the argument for the joint provision of audit and non‐audit services is less justified than if joint‐supply benefits had been documented.

Based on the data of A share listed companies that ever clearly disclosed audit and nonaudit fees in annual report from 2004 to 2007, this paper investigates the association between nonaudit services and audit quality using financial restatements as the proxy of audit quality. Empirical evidence shows that audit fees, nonaudit fees and total fees will not make companies restate financial reports, but nonaudit fees ratio increase the companies' propensity to restate financial statements. Offering nonaudit services may make auditors ignore the quality of financial reports and help companies manage earning, Which make restatements become easy. So it provides support for the nonaudit service impairing audit quality. Regulators should strenghen management and supervision, and emphasize the responsibility of external auditors.

PurposeMotivated by concerns and the ongoing debate regarding auditors’ independence and impartiality, this paper aims to examine the impact of the financial crisis on non-audit services (NAS) provision and audit quality (main and robust variables) in the four largest Eurozone countries together during the global financial crisis (GFC).Design/methodology/approachThe authors used a time trend OLS model with a dummy variable as well as a baseline model with a dummy and control variables accounting for multicollinearity, considering the characteristics of the GFC.FindingsIt documented a positive (negative) relationship between NAS provision (audit quality) and crisis in four Eurozone countries, Germany, France, Italy and Spain, in the context of a baseline approach, supporting the hypotheses that there are higher non-audit fees and a lower audit quality. Moreover, it is revealed that NAS provision and audit quality behave similarly, using a time trend approach, during the GFC. Considering the role of the auditor specialization or not (Big4 vs non-Big4) in companies, a significant effect from crisis on non-audit fees and audit quality for the four countries under the baseline approach is found. In general, the findings persist for NAS provision and audit quality using the robust methods of the time trend and panel OLS approaches. Multicollinearity was not found to affect the findings of the regressions.Practical implicationsThe study provides important implications for firm managers, auditors and regulatory authorities.Originality/valueTo the best of the author’s knowledge, it is the first time that the impact of the crisis on non-audit fees and audit quality is investigated during the GFC with two sets of OLS models (a time trend OLS with a dummy and a panel OLS with a dummy and control variables) in four largest Eurozone countries together.

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

Purpose This study aims to examine the association between non-audit fees and audit quality by using the context of gender-diverse audit committees. Further, the authors assess whether this link is moderated by industry-specialist auditors. Design/methodology/approach This study used non-financial FTSE-350 firms over the period of seven years. In addition, the authors use ordinary least squares regression to test the research hypotheses. Findings The authors find that female directors on audit committees are negatively related to non-audit fees, suggesting that non-audit fees reduce audit quality. Moreover, the results indicate that industry-specialist auditors positively moderate the link between gender-diverse audit committees and non-audit fees. This suggests that non-audit fees improve audit quality when the auditor is an industry-specialist. Practical implications The study does not support blanket restrictions on non-audit fees. It recommends regulators to consider industry expertise of auditors when devising non-audit fee restrictions. Moreover, the findings of this study have implications for firms aiming to understand whether non-audit fees could be used for enhancing audit quality. Originality/value By using the context of female directors on audit committees, the authors conclusively assess the link between non-audit fees and audit quality. Further, this study provides a more robust evidence on whether industry-specialist auditors affect the relationship between non-audit fees and audit quality.

Purpose: Studies have relied on full-time non-managerial employees’ average compensation to measure pay disparities. However, this approach can be distorted by outliers. Instead, median compensation has the potential to more accurately reflect employee compensation. This study examines how the gap between full-time non-managerial time employees’ average compensation and executive compensation affects Taiwanese public companies’ audit quality. Additionally, it analyzes how this relationship is influenced by the type of accounting firm and management team stability. Design/methodology/approach: This study focuses on publicly listed companies in Taiwan from 2019 to 2023. It investigates whether a greater gap between the median compensation of full-time NMEs and executive compensation—indicating a compensation structure favoring higher-level employees—correlates with higher audit and non-audit fees. Data were obtained from the Market Observation Post System and Taiwan Economic Journal financial database. For STATA statistical software to simplify the computations in ordinary least squares. Findings: In companies audited by the Big 4 accounting firms, a wider gap between full-time non- managerial employees’ median compensation and executive compensation is associated with higher audit fees. Thus, such companies have greater operational complexity and more advanced risk management, which in turn raises audit costs. Specifically, these companies may have higher earnings management risk, thus necessitating more extensive audit resources. Furthermore, the Big 4 firms’ strong brand reputation, higher audit quality, and larger market share allow them to charge premium rates. This illustrates the differentiated pricing strategies and competitive dynamics within this market segment. Additionally, companies with stable management teams—where executives have remained in position for at least three years—tend to more effectively implement professional development programs. They also demand a higher level of both audit and non-audit services, demonstrating a willingness to invest in substantial audit and non-audit fees to ensure professionalism and integrity in the auditing process. Research limitations/implications: The findings carry significant practical implications for audit firm pricing strategies, and for companies in choosing auditors and allocating resources. Companies should consider their own operational complexity, risk management level, and management stability to select the most suitable audit services and Big 4 accounting firm. Originality/value: This study offers several key contributions. It innovatively uses median, not average, non- managerial employee compensation to measure the pay gap, thus avoiding distortion from outliers. The impact of this refined measure on both audit and non-audit fees is examined, providing a more comprehensive understanding of audit pricing. Furthermore, it distinguishes between Big 4 and non-Big 4 firms, revealing firm-specific pricing strategies. Finally, management stability is included as a moderator, highlighting its role in the relationship between compensation structure, audit quality, and organizational stability. The findings offer valuable insights for audit firms, companies, and stakeholders concerning pricing, auditor selection, and the importance of fair compensation for corporate social responsibility.

THE IMPACT OF NON-AUDIT SERVICE FEE DISCLOSURE REQUIREMENTS ON AUDIT FEE AND NON-AUDIT SERVICE FEE IN THE UNITED KINGDOM: AN EMPIRICAL ANALYSIS

Independent and joint effects of audit partner tenure and non-audit fees on audit quality

Do Non-Audit Fees Impair Auditor Independence? Using Goodwill Accounting to Help Reconcile the Debate

The paper gives an overview of the results of a structured literature review. It covers archival studies on the relationship between non-audit services (NAS) fees and factual as well as perceived audit quality published in journals included in the accounting subject category of the SCImago Journal Ranking. It also includes a critical evaluation of the research methods applied in prior research and offers avenues for future research. The provision of NAS to audit clients creates threats to auditor independence. Consequently, regulators have focused on the simultaneous provision of audit and NAS for many years and restricted it over time. This paper aims to assess which regulatory actions are justified in light of related archival research findings. Overall, prior research does not clearly prove a negative impact of non-audit services on factual audit quality. However, it demonstrates a negative relationship between non-audit fees and audit quality perceptions. Moreover, it also reveals that tax consulting fees are less problematic

K rishnan, Visvanathan, and Yu (2013) (hereafter, KVY) fill a relevant gap in the burgeoning auditor-provided tax services (ATS) literature by examining investor perception of the costs and benefits of ATS. Prior and contemporaneous studies have investigated the influence of ATS on tax avoidance, financial statement quality, and creditor perception, but a study of the influence of ATS on value relevance was missing from the literature until now. KVY provide evidence that the value relevance of earnings is positively associated with the ratio of tax fees to total fees paid to auditors.

The Joint Determination of Audit Fees, Non-Audit Fees, and
 Abnormal Accruals