Abnormal Audit Fees Research Articles

Female CEOs’ name gender-neutralization and audit fees: Evidence from China

We focus on how inconsistency or conflict between actual biological sex and name gender-orientation affects CEO trustworthiness, and thus firm audit fees. This study of Chinese listed firms led by female CEOs finds that female CEOs’ name gender-neutralization significantly reduces audit fees, and the presence of female auditors mitigates the above negative relationship. Mechanism tests find that female CEOs’ name gender-neutralization reduces audit fees by adopting positive tone, enhancing TMT stability, and improving social image. Heterogeneity analysis from the perspectives of CEO and auditor traits demonstrate that when female CEOs were born before the 1970s, also serve as chairmen, and are non-family CEOs, as well as when auditors tenure is shortened, audit report time lag is decreased, and the audit team gender structure is singular, female CEOs’ name gender-neutralization reduces audit fees more significantly. We find no evidence that female CEOs with masculine or gender-neutral names perform better or worse than those with feminine names in any substantive way. Additionally, female CEOs’ name gender-neutralization does not have a consistent effect on positive and negative abnormal audit fees.

Impact of Audit Fees on Earnings Management and Financial Risk: An Analysis of Corporate Finance Practices

This study employs a robust quantitative ex post facto research design to investigate the complex relationship between audit fees and earnings management. The financial information of 164 firms admitted to the Tehran Stock Exchange (TSE) was used from 2010 to 2019 (pre-COVID period) to achieve the research goal. Analysing data from the Tehran Stock Exchange firms, the study uncovers an inverted U-shaped relationship between audit fees and earnings management. This suggests that moderate audit fees can lead to higher earnings management. Key contributions of this paper include highlighting the role of audit fees in influencing financial reporting quality and risk management, providing empirical evidence on the asymmetric effects of normal and abnormal audit fees on earnings management, and emphasising the need for balanced audit fee structures to ensure financial transparency and mitigate risk. The findings offer valuable insights for academics, practitioners, and policymakers in understanding the nuances of audit fees and their impact on corporate financial practices. This study advances the literature on financial risk management and corporate finance. It emphasises the importance of balanced audit fee structures for management teams, auditors, and policymakers to ensure transparent financial reporting practices.

Abnormal audit fees and financial reporting quality: A meta-analysis

Increasing levels of information disclosure and firm transparency are drawing researchers’ attention to abnormal audit fees (AAFs), and a growing body of literature is focused on the association between AAFs and financial reporting quality (FRQ). These studies use various FRQ constructs and theoretical lenses, and find contradictory results. Thus, it remains unclear whether AAFs are positively or negatively associated with FRQ. This meta-analysis of the literature assesses (a) the association between AAFs and FRQ; (b) the extent to which the FRQ proxies used in the literature are homogeneous; and (c) the different theoretical frameworks that are used to interpret the association between AAFs and FRQ. The results show that higher AAFs are associated with reduced FRQ, and this finding is robust to different FRQ constructs and theoretical frameworks.

The capital market consequence of sustained abnormal Audit fees: Evidence from stock price crash risk

Prior studies provide mixed interpretations for the effect of abnormal audit fees on audit quality. One interpretation is that abnormal audit fees reflect economic bonding which decreases audit quality, while the other interpretation is that they are associated with unobserved audit efforts and audit risk. We argue that long-term abnormal audit fees clarify mixed evidence, as they reflect the gradual formation and development of both economic bonding and sustained auditor efforts over time. We examine the effect of long-term abnormal audit fees on audit quality by focusing on client's future stock price crash risk. Using 42,604 firm-year observations of U.S. firms, we find that sustained positive abnormal audit fees (consistently positive long-term abnormal audit fees) are negatively associated with future stock price crash risk, supporting the auditor effort argument and negating the economic bonding argument. We also find weak evidence that current-period abnormal audit fees are positively associated with future stock price crash risk, supporting the audit risk argument. Overall, our evidence shows that the magnitude and the pattern of long-term abnormal audit fees jointly affect audit quality in mitigating a client's bad news hoarding behavior.

The Effect of Audit Fee Disclosure Regulation on Audit Fees: Korean Evidence

[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.

The effect of abnormal audit fees on audit quality: The moderating role of business characteristics: Empirical study on Egypt.

The effect of abnormal audit fees on audit quality: The moderating role of business characteristics: Empirical study on Egypt.

International accounting network memberships and audit fees: Evidence from China.

This paper investigates the international accounting network memberships' impact on audit fees. We find that, firstly, the audit fees charged by the member audit firms are significantly higher; secondly, if the revenue, ranking or audit and accounting business share of the international network the audit firm join is higher, the charge is also higher. Additional results show that economic policy uncertainty will intensify this positive relationship, and member audit firms charge higher fees by improving their overseas expertise. We also find that international network memberships will reduce abnormal audit fees, and improve the quality of financial reports.

중국기업에서 경영자 영향력이 비정상감사보수에 미치는 영향

중국기업에서 경영자 영향력이 비정상감사보수에 미치는 영향

Does ESG performance affect audit pricing? Evidence from China

In this paper, we find that better environmental, social, and governmental (ESG) performance is associated with lower audit pricing in terms of both raw and abnormal audit fees in China. But the environmental, social, and governmental pillars don't play the same role in driving that relationship. Our main findings are robust to a battery of sensitivity tests, including alternative measures of ESG performance and additional control variables, as well as different approaches to address potential endogeneity. Additional analyses indicate that reduced risk and increased information transparency might be channels by which ESG performance affects audit pricing while auditor industry expertise and independence moderate this impact. Overall, this paper reveals the importance of considering the dimensional ESG factors simultaneously instead of on a stand-alone basis to better understand ESG and promote balanced ESG development.

To switch or not to switch? The effect of audit firms’ economies of scale on audit firm switches after audit price deregulation in China

We exploit the unique setting of China’s 2014 audit price deregulation policy to examine whether audit firms use their economies of scale (EOS) to compete for clients. We find a significant increase in client firms switching from a non-EOS auditor to an EOS auditor after the audit price deregulation policy was implemented. The additional analyses show that EOS audit firms are more likely to offer audit fee discounts than non-EOS audit firms while retaining audit quality. We also find that the auditors’ EOS effect is more pronounced for highly homogeneous industries and firms paying high abnormal audit fees, firms in financial distress, and firms receiving less capital market attention than for less homogeneous industries and firms paying low abnormal audit fees, financially stable firms, and firms receiving more capital market attention. Finally, we find that the presence of state-owned enterprises and political connections both separately and jointly moderate the effect of audit firm–client realignments from a non-EOS auditor to an EOS auditor after the audit price deregulation. Overall, our study provides important insights for policymakers and regulators reviewing and developing new policies on audit services.

Are abnormal audit fees informative about audit quality? The moderating role of office resource availability

We contribute to the literature on the relation between client‐level abnormal (excess) audit fees and audit quality by offering a novel perspective. We posit that audit office‐level resource availability moderates the relation between client‐level audit fees and audit quality. This is because office‐level resources (audit partners, staff, technology and administrative support) are generally shared across engagements and can augment those engagements that are resource constrained. We first provide evidence that office‐level resource availability is informative about audit quality incremental to client‐level abnormal fees and several other client and auditor characteristics, including office size. More importantly, we find that client‐level abnormal fees are informative about audit quality only for audit offices that are resource‐constrained but not for offices that are not resource‐constrained.

Asymmetric reactions of abnormal audit fees jump to credit rating changes

Considering the inherent stickiness of abnormal audit fees, our study contributes to the literature by decomposing abnormal audit fees into a jump component and long-run sticky component. We investigate whether and how changes in credit ratings asymmetrically affect the jump component of abnormal audit fees. We document a positive association between rating downgrades and the jump component. We find that heightened bankruptcy risk and misstatement risk are the mechanisms that drive this relationship. Further analysis shows that firms experiencing rating downgrades are more likely to receive a going concern opinion and experience longer audit report lags. Taken together, our findings provide direct evidence that credit ratings are significantly associated with abnormal audit fees, particularly with the jump component. Given the serial correlation of abnormal audit fees, our study sheds light on the importance of disaggregation of the abnormal audit fee residuals into the jump and long-run sticky components.

The vanishing searches and audit fees: Evidence from Google's withdrawal from China

AbstractI investigate the impact of the disruption of free information access via search engines on audit fees using a quasi‐natural experiment provided by Google's withdrawal from China. Employing a difference‐in‐differences design, I document an increase in audit fees for firms with overseas business relative to firms without overseas business after Google's withdrawal. The results are robust to matched samples, placebo tests, alternative specifications, excluding alternative explanations and different event windows. This trend in audit fees suggests that Google's withdrawal hampers firms' foreign information streams and increases audit risk and audit effort. Consistent with this argument, after Google's withdrawal, firms with overseas business conduct more earnings management, pay more abnormal audit fees and experience longer audit report lags. Furthermore, the increase in audit fees is greater for firms with poor information environments, more retail investors or non‐Big 4 auditors. My findings suggest a potential auditing cost of restricting the free flow of public foreign information about firms.

The Relationship between Intellectual Capital and Audit Fees

The present study investigates whether intellectual capital (IC) is related to audit fees and financial statement restatements in companies listed on the Iraq Stock Exchange (ISE). The present study is a pioneer investigation of this topic in emerging markets. Using a sample of all listed companies on the ISE from 2014 to 2020, the research hypotheses are tested with multiple regression based on panel data and the fixed-effects model. The results demonstrate that intellectual capital is positively and significantly related to normal and abnormal audit fees. Moreover, findings indicate direct and significant relationships between intellectual capital components and normal and abnormal audit fees. This means investment in IC components is likely to determine the auditors’ evaluation of a given client’s riskiness. Thus, an efficient IC investment level might be considered a key factor that companies are expected to consider. The findings of this study provide valuable implications for users of financial statements, analysts, and policymakers with information regarding IC, risk determinants, and audit fees. Policymakers can improve market efficiency by implementing regulations that foster IC disclosure as a risk-determinant factor.

Determinants and Consequences of Audit Pricing for Charities, Including the Provision of Pro Bono Audits

SUMMARY Using unique Australian data, we first identify the determinants of the provision of pro bono audits to charities and examine their consequential audit quality. This advances our knowledge about how often and why auditors volunteer their services, and whether quality concerns are realized. Then, for non-pro bono audits, we calculate abnormal audit fees and examine their impact on audit quality. We find that pro bono audits are mainly supplied by Big 4 auditors to charities with greater public donations, a lower debt ratio, and operating in multiple locations. We are unable to identify evidence of impaired audit quality when comparing pro bono audits with non-pro bono audits. For non-pro bono audits, audit fees are significantly associated with size, complexity, and revenue sources, with premiums paid to larger audit firms. We find evidence consistent with reduced audit quality associated with negative abnormal audit fees for non-Big 4 audits.

Abnormal Audit Fees, Audit Market Concentration and Audit Quality

The problem of abnormal audit fees in the audit market is more prevalent. To study the impact on audit quality, China's A-share listed companies in Shanghai and Shenzhen from 2013 to 2020 were selected as the research objects, and the abnormal audit fees calculated using the pricing model were split into positive abnormal audit fees and negative abnormal audit fees, and the relationship between them and audit quality was analyzed using a regression model, and on this basis, the audit market was examined. The study also examines the mediating effect of concentration in the relationship between negative abnormal audit fees and audit quality. The study shows that abnormal audit fees are significantly and negatively related to audit quality regardless of whether they are high or low, and that audit market concentration plays a partially mediating role in the relationship between negative abnormal audit fees and audit quality, with the lower abnormal fees, the lower the audit market concentration and the higher the audit quality. The study provides new ideas and policy recommendations for the classic problem of abnormal audit fees and audit quality from the perspective of audit market concentration.

Abnormal audit fee assessment in manufacturing companies

The audit charge fee is one of the most crucial elements in the audit procedure. Audit fees that deviate from the usual either in higher or lower amounts are considered abnormal audit fees. Abnormal audit fees were found to affect final audit quality based on previous studies. The current study intends to analyze the elements that influence abnormal audit fees in Indonesia by focusing on how firm size, firm complexity, audit firm size, leverage, profitability, and family ownership affect abnormal audit fees. Thirty-two industrial companies represented on the Indonesia Stock Exchange (IDX) were selected as representative manifestations for the 2017–2021 period using a purposive sampling technique. Panel data regression is used to test secondary data that has been collected. This study found that firm size, leverage, profitability, and audit firm size have a positive effect on abnormal audit fees. However, this investigation did not find the effect of family ownership and firm complexity on abnormal audit fees. Therefore, clear and transparent procedures are required for the auditor in determining the optimal audit service fees to increase the credibility of financial reporting. In addition, the regulation is expected to be able to prevent unfair competition between public accounting firms.

Analysis of the Impact of Abnormal Audit Fees on Audit Quality

Analysis of the Impact of Abnormal Audit Fees on Audit Quality

Impact of Abnormal Audit Fees on Earnings Management Practices: Evidence from Non-Financial Listed Companies in Sri Lanka

Abnormal audit fees could be claimed to be an incentive to compromise the independence of an external auditor, which impairs the quality of an audit. Alternatively, some have argued that abnormal audit fees reflect the additional effort of the auditors to reduce earnings management practices. Hence, this study aimed to examine the relationship between abnormal audit fees and the degree of earnings management of non-financial listed companies in Sri Lanka. Using a quantitative approach in the positivistic paradigm, descriptive statistics, correlation analyses, regression analyses, and panel regression analyses were performed in assessing the level and identifying the relationship between abnormal audit fees and earnings management. Results indicated that the abnormal audit fees in the Sri Lankan context are comparatively higher than in selected developing and developed countries and that degree of earnings management vary over time. Moreover, none of the analyses performed showed a statistically significant relationship between abnormal audit fees and the degree of earnings management in Sri Lanka. The findings of this study are expected to provide insights to regulatory bodies, audit firms, investors, and other stakeholders. Regulators and policymakers could take steps to discourage excessive audit fees, as well as address the usage of unwarranted earnings management practices. Furthermore, external auditors' efforts to curtail excessive earnings management practices should be further examined. This study is a pioneering effort to identify whether there is a relationship between abnormal audit fees and earnings management in Sri Lanka, and thus it is expected to add to the extant literature, especially in a developing country context.

Abnormal audit fees and accounting quality: further evidence from audit hours

ABSTRACT This study examines whether auditors compromise accounting quality by charging abnormally high audit fees. In particular, by drawing on the audit pricing theory, we investigate the relationship between abnormal audit fees and accounting quality, using fee residuals derived from an audit fee model that includes audit hours and hourly fees. Using listed firms in the Korean stock market, we find that the negative relationship between abnormal audit fees and accounting quality does not hold when we use abnormal audit fees estimated after controlling for audit hours. In contrast, we find a negative association between abnormally high audit fees, estimated after controlling for hourly fees, and accounting quality. Collectively, these findings support the interpretation that the negative relationship between abnormal audit fees and accounting quality, identified in previous studies, is driven by increased audit hours owing to lower accounting quality. Furthermore, we find that these results are driven by audit partner hours and senior auditor hours rather than junior auditor hours. This suggests that audit firms impose higher-level audit hours in the presence of low accounting quality, which results in higher audit fees.