Affect Audit Fees Research Articles

Why Do ESG Rating Differences Affect Audit Fees?—Dual Intermediary Path Analysis Based on Operating Risk and Analyst Earnings Forecast Error

As environmental, social, and governance (ESG) issues become increasingly important, ESG ratings have become a significant factor influencing audit fees for businesses. However, ESG ratings are typically assessed by multiple agencies or rating firms and, due to differences in evaluation criteria, methodologies, and data sources, the ratings provided by different institutions may vary considerably. Therefore, research on the impact of discrepancies in ESG ratings on audit fees is of great significance. This paper examines this phenomenon by analyzing a sample of Chinese listed companies from 2015 to 2022, yielding 3056 observational values through various methodologies. The study employs two-way fixed effects methods. The findings indicate that discrepancies in ESG ratings significantly elevate enterprises’ audit expenses, with operating risk and analyst earnings forecast errors serving as intermediary factors. Additionally, media attention intensifies these effects by increasing corporate disclosure, intensifying regulatory pressure, and heightening reputational risks for the company, and the positive impact of ESG rating discrepancies on audit fees is more significant when the “Big 4” accounting firms are involved in the audit. The research offers insights for enterprises, auditors, and regulatory bodies, contributing to the enhanced implementation of the ESG concept and fostering sustainable enterprise development.

Does financial asset allocation term structure affect audit fees? Evidence from China.

The financialization of real enterprises presents a dilemma for China's economic development. This study examines the impact of the financial asset allocation term structure on audit fees using a sample of Chinese A-share listed companies from 2009 to 2019. It also investigates the mediating role of financial risk and the moderating role of independent director characteristics. The results indicate that higher long-term financial assets is associated with higher audit fees, while short-term financial assets show no significant relationship with audit fees. These findings remain robust after several tests. Financial risk mediates the relationship between long-term financial assets and audit fees. Furthermore, among the characteristics of independent directors, the proportion of female independent directors and those with a financial background negatively moderate the relationship between long-term financial assets and audit fees, while independent directors with an overseas background and academic credentials positively moderate this relationship. Additional analysis reveals that firm size and financing constraints exhibit heterogeneity in their effects. This study contributes to the literature by enhancing our understanding of the factors influencing firms' financial asset allocation and audit fees, and by expanding the literature on the financial risk and characteristics of independent directors.

Unveiling Factors Affecting Audit Fees: Characteristics Of Firms And Public Accounting Firms

This study examines the effect of leverage, firm size, profitability, audit firm size, and audit tenure on audit fees. Using quantitative analysis, cross-sectional data from 281 companies listed on the IDX in 2022 were analyzed through purposive sampling and multiple linear regressions. The results show that firm size and audit firm size positively impact audit fees. Due to their operational complexity and higher audit risks, more prominent firms tend to incur higher fees as they require more detailed audit procedures. Similarly, firms audited by more prominent audit firms pay higher fees, as they are known for their strong reputation and ability to provide comprehensive, high-quality audit services, enhancing the credibility of the financial statements. However, leverage, profitability, and audit tenure do not affect audit fees. Theoretically, this study contributes to the audit fee literature by confirming the significant role of firm characteristics and audit firm size in determining audit costs. Practically, the findings offer insights for companies to strategically manage their audit fees by considering these factors, allowing them to maintain financial statement reliability while potentially optimizing audit costs. This balance is critical for firms seeking to manage resources efficiently without compromising the quality of their financial reporting

AUDIT FEES DETERMINANTS: THE IMPACT OF FIRM COMPLEXITY, MANAGERIAL OWNERSHIP, AND PARTNER ROTATION

The objective of this study is to understand the impact of firm complexity, managerial ownership, and audit partner rotation on audit fee simultaneous or partial of sector energy for the period of 2018-2022 listed on the Indonesia Stock Exchange. This research uses one of the latest IDX IC sector classifications for research objects, namely the energy sector with the latest year from 2018-2022. A quantitative method was employed in this study, utilizing 22 companies for five years, yielding 110 samples that were used. To determine the sample, in this study a method termed purposive sampling is employed. Methods that are used in this research are data panel regression using the Eviews 12 software application. According to the research's findings the firm complexity, managerial ownership, and audit partner rotation simultaneously affect audit fees in sector energy for the period of 2018-2022. Partially, in sector energy for the period of 2018-2022 the audit fee is positively affected by the complexity of the company; the audit fee is negatively affected by managerial ownership; and the audit fee is unaffected by audit partner rotation.

The impact of internal control of non-financial reporting-related weaknesses on audit fees: does external audit size matter?

This study intends to examine the impact of internal control of non-financial reporting-related weakness on the audit fees of corporations. To pursue the research objectives, two research questions are formalized: (i) How does internal control over non-financial reporting-related weakness (ICWN-FR) affect audit fees (ADF)?; (ii) What is the effect of external audit size on the link between ICWN-FR and ADF ?. Multiple regression models with 82 listed Jordanian companies from 2014 to 2020 used as the study sample reveal the following findings. Our findings underscore the importance of considering the characteristics of the audit firm when analyzing the relationship between ICWN-FR and audit fees. Companies audited by Big 4 firms may face greater scrutiny and potentially higher fees for ICWN-FR compared to those audited by non-Big 4 firms. While prior studies have explored various factors influencing audit fees and the impact of internal controls on audit costs, this research uniquely delves into the differential effects observed when companies are audited by different categories of audit firms. The study accentuates the significance of impeccable internal controls within non-financial reporting procedures and their far-reaching consequences on audit fees, thereby highlighting the imperative for corporations to give precedence to augmenting their internal control mechanisms.

ADRs and Audit Pricing: Influence of disclosure and legal environment regime

AbstractCross‐listed firms natively operate in countries where regulations are less enforced, disclosure requirements and the legal environment are laxer than in the US. Thus, cross‐listed firms typically pay lower audit fees than US peer groups. Based on reported audit data of the cross‐listed firms in the US, this study explores how their home country's regulatory environment affects audit fees when they cross‐list on US stock exchanges. The empirical results indicate that the cross‐listed firms pay lower audit fees than their US counterparts. However, other regulatory environments in the home country, like disclosure requirements or anti‐director dictatorship, may require more audit efforts. Further, the cross‐listed firms that prepare reconciliation to US GAAP pay lower audit fees than other ADR firms that are using IFRS or US GAAP. However, still most of ADR firms pay lower audit fees than US counterpart firms.

How Did the COVID-19 Pandemic Affect Audit Fees and Filing Delays?

How Did the COVID-19 Pandemic Affect Audit Fees and Filing Delays?

Lead independent director reputation incentives and audit fees

AbstractAlthough prior research has recently begun to examine the effects of independent director reputation incentives and the benefits of having a lead independent director, no study has considered the combined impact: the reputation incentives of lead independent directors. This study integrates these emerging streams of research to investigate whether the reputation incentives of lead independent directors affect audit fees. We find that firms with a lead independent director who has relatively low reputation incentives are associated with audit fees that are 4.39% higher than firms with a lead independent director who has neutral reputation incentives, consistent with auditors viewing these firms as riskier. We also find that this association is driven by auditors who are not industry specialists. Our results continue to hold when using an entropy balancing approach and when conducting other robustness tests.

Informal Institutions and Audit Pricing: Cross-Country Evidence of National Culture and Audit Fees

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.

The Influence of Company Profitability, Corporate Risk, Audit Report Lag, and CEO Gender on Audit Fee

This research aims to examine the influence of company profitability, company risk, audit report lag, and CEO gender on audit fees and to test the differences in independent variables and dependent variables before and during the COVID-19 pandemic. The object of this research is non-financial sector companies listed on the Indonesia Stock Exchange in 2018–2021. This research uses secondary data. The number of samples in this research was 75. The sample selection technique used is purposive sampling. Data analysis was done using panel data analysis, paired sample t-tests, and Wilcoxon tests. Results show that the audit report lag variable has a positive effect on audit fees. In contrast, the variables of company profitability, company risk, and CEO gender do not affect audit fees. Based on the results of the average difference test, the profitability and audit report lag variables experienced significant changes before and during the COVID-19 pandemic, while the audit fee, company risk, and CEO gender variables did not experience significant changes before and during the COVID-19 pandemic. Keywords: audit fee, company profitability, company risk, audit report lag, CEO gender

The impact of critical audit matters on audit report lag and audit fees: evidence from the United States

Purpose This paper aims to investigate the impact of the implementation of the critical audit matters (CAMs) disclosure requirement and the subsequent relationship between CAM disclosures and audit report lag, as well as audit fees in the USA. Design/methodology/approach This study used difference-in-differences analyses to investigate the impact that the implementation of the requirement for auditors to report CAMs on their audit report has on the audit process. It also used levels regression models to examine the relationship that CAM disclosures have with audit report lag and audit fees. Findings This study found that the implementation of the CAM disclosure requirement in the USA reduced audit report lag while not significantly affecting audit fees. This suggests that the CAM disclosure requirement may increase the cooperation between auditors and managers and improve the efficiency of the audit process. Practical implications This study’s results are informative for assessing the economic impact of requiring CAM disclosures, which should be of importance to regulators, auditors and accounting researchers. Originality/value This study used different approaches to investigate two aspects of the CAM disclosure requirement – the effect of the implementation of the disclosure requirement and the subsequent effects related to CAM reporting outcomes. Unlike many previous studies investigating CAM disclosures, which relied on experiments and questionnaires, this study used actual CAM disclosure data in the USA to investigate the impact on audit report lag and audit fees.

The effect of environmental credit rating on audit fees: A quasi-natural experiment from China

Environmental credit rating (ECR) is a new policy that deeply integrates the construction of ecological civilisation and the social credit system in China; however, there is a paucity of research on the response of external auditors to the ECR. This study takes the environmental credit evaluation policy implementation as a quasi-natural experiment, using China's A-share listed companies in heavily polluting industries from 2008 to 2019 as samples. We construct a heterogeneous timing difference-in-differences model to empirically explore the impact of ECR on audit fees. The results show that the ECR significantly reduces companies' audit fees. Importantly, our analysis suggests that the ECR improves environmental information transparency and enhances sustainable operation ability, thereby reducing audit fees. Further analysis shows that the negative correlation between the ECR and audit fees is more obvious in non-state enterprises, in poor legal environments and low levels of trust. Our study provides scientific evidence for the economic consequences of the environmental credit evaluation policy and enriches the literature on the factors affecting audit fees. It has revelatory significance for China and other developing countries to implement and improve the environmental credit evaluation policies and better guide enterprises to fulfil their environmental responsibilities.

Stock market openness and audit fees: evidence from the inclusion of China A-shares in the MSCI emerging markets index

This study examines how China’s stock market openness affects audit fees. In May 2018, Morgan Stanley Capital International (MSCI) announced the first wave of listing of large-cap China A-shares in the MSCI Emerging Markets (EM) Index, which marked China’s grand entrance into the global investment benchmark, and sharply expanded its stock market investor base. Using a difference-in-differences approach, we find that audit fees for constituent stocks decrease after the index inclusion. Further analyses suggest that foreign investors can reduce the risk of expropriation by controlling shareholders and mitigate agency conflicts. Our results also show that the effect is more pronounced for firms with weaker internal controls, lower levels of domestic institutional ownership, and those located in less developed markets. Our findings highlight the monitoring effect of stock market openness in improving corporate governance and advance our understanding of the key drivers of audit fees in emerging markets.

Association between executives’ foreign background and audit fees

PurposeThis study aims to investigate the association between executives with foreign backgrounds and the audit fees paid by the Chinese-listed firms over the period from 2010 to 2020.Design/methodology/approachTo examine the association between executives’ foreign experience and audit fees, this study constructs the following empirical model: Lnfeei,t = β0 + β1Foreign backgroundi,t + ∑βj Controli,t + YearFE + IndFE + εi,t (1).FindingsThis study finds that auditors charge higher fees for firms hiring more executives with foreign backgrounds. The results are robust to a battery of robustness checks, including fixed effects, alternative measures of independent variable, controlling for other characteristics of executives and auditors and entropy balancing method.Originality/valueThis study sheds light on how executives’ foreign backgrounds affect audit fees, enriching the literature on executive heterogeneity and audit fees and providing important implications for audit practitioners.

Determinants of audit fees in the consumer goods industry listed on the Indonesia stock exchange

This paper aims to demonstrate the effects of company size, public accounting firm size, independence of the board of commissioners, size of the board of commissioners, and company risk on audit fees. The population used in this study are companies in the consumer goods industry sub-sector listed on the IDX in 2019-2022. Sample withdrawal using a purposive sampling technique with certain criteria then the data was analyzed by multiple linear regression. It is clear from the result of the analysis that the independence of the board of commissioners and the size of the board of commissioners have a positive effect on audit fees. While other variables such as company size, public accounting firm size, and company risk do not affect audit fees.

Disentangling stock return synchronicity from the auditor's perspective

AbstractThis paper investigates a firm's stock return asynchronicity through the auditor's perspective to distinguish whether this asynchronicity can proxy for the company's firm‐specific information or the quality of its information environment. We find a significant and positive association between asynchronicity and audit fees after controlling for auditor quality and other factors that affect audit fees, suggesting that stock return asynchronicity is more likely to capture a company's firm‐specific information than its information environment. We also find that asynchronous firms are more likely to receive adverse opinions on their internal controls over financial reporting, but are associated with lower costs of capital and auditor litigation, providing further evidence in support of the firm‐specific information argument. Asynchronicity's positive association with audit fees is driven by firms with higher accounting reporting complexity, suggesting stock return asynchronicity captures a firm's complexity, resulting in more significant efforts by the auditor.

All my rowdy friends: the effect of Super Bowl hosting on audit and financial reporting timeliness

PurposeThe purpose of this paper is to examine the impact hosting the Super Bowl has on audit completion and financial reporting timeliness for companies headquartered in Super Bowl hosting cities.Design/methodology/approachUsing 16 years of financial reporting data, this study uses the Super Bowl and related activities, combined with required filings during “busy season,” as a natural experiment to examine how audit firms navigate short-term, exogenously imposed but anticipated, audit team capacity constraints.FindingsCompanies headquartered in a city hosting the Super Bowl, during busy season, have longer audit report lags (by approximately three days, in comparison to non-hosting busy season audits) and less timely securities and exchange commission (SEC) (10-K) filings. The authors find no evidence that Super Bowl hosting affects audit fees or earnings announcement timeliness.Practical implicationsWhen confronted with anticipated capacity shocks, audit firms take longer to complete the audit, absorbing the financial costs of the delay and maintaining audit quality, resulting in less timely financial reporting.Originality/valueThis study demonstrates the costs of Super Bowl-related inefficiencies and contributes to our understanding of how auditors navigate capacity shocks. This study provides evidence that auditors can effectively manage business risk and continue to facilitate providing timely and accurate information to financial statement users in the face of a capacity shock.

Family ownership and audit fees in emerging countries: the moderating role of political connections

PurposeThis study aims to examine the effect of family ownership on audit fees and whether political connections moderate the causal relationship. Indonesia, as emerging countries, arguably offers appropriate research setting for this research because most Indonesian firms are family owned and exhibit weak investor protection. The authors predict that family ownership positively affects audit fees, and political connections strengthen this influence.Design/methodology/approachThis study uses 98 listed manufacturing firms on Indonesia Stock Exchange (IDX) in 2018–2020, resulting in 279 firm-year observations. Panel data regression used to test the hypothesis. Family ownership is divided into direct and indirect ownership while audit fees are measured by the natural logarithm of audit fees paid by the firms.FindingsThe results show that the greater total and direct family ownerships imply lower audit fees, while indirect family ownership does not affect audit fees. The finding is contrary to the alleged hypothesis. Further, political connections only strengthen direct family ownership's negative impact on audit fees.Originality/valueThis study's findings support the alignment effect hypothesis arguing that controlling shareholders, in this case, families, align their interests with non-controlling shareholders. These findings provide a different perspective from various empirical studies conducted in Asian countries where the majority of companies are also controlled.

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

This study examines how oil price uncertainty, measured by implied volatility, affects audit fees. Using samples from the energy industry, we find that oil price uncertainty increases audit fees. Furthermore, the mechanism analyses demonstrate that the increase in audit fees is driven by the increased audit effort rather than a higher audit risk premium. Additionally, the positive impact of oil price uncertainty on audit fees is more pronounced for non-state-owned firms, firms with weaker corporate governance, and firms with greater earnings manipulation risks. Finally, our main finding remains robust for oil price uncertainty measured by Shanghai Crude Oil Futures and West Texas Intermediate.

The impact of customer firm data breaches on the audit fees of their suppliers

This study investigates whether audit risks that accompany data breaches of major customer firms can spillover into the supply chain and affect audit fees of their suppliers. Based on the economic bond that exists between supplier firms and their major customers, we predict that data breach incidents of customer firms will lead to higher audit fees for their respective suppliers. Consistent with customer breaches increasing the audit risk to the supplier, we observe a positive association between breach disclosures made by major customers and audit fees of the supplier firm. This association exists for both internal and external data breaches. We further find that audit fees are increasing with the number of major customers disclosing a breach in a given year. Our results are robust to both a matched sample design and a difference-in-difference approach. Interestingly, we find that while supplier auditors appear to price the risks associated with customer breaches, the breaches do not appear to affect audit quality. The findings of this study are timely and relevant to academics, practitioners, and regulators as supply chains continue to become larger and more complex.