Audit Fee Premium Research Articles

Why do female lead auditors charge a fee premium? evidence from the UK audit market

Existing research documents a fee premium for audits led by female partners (Ittonen & Peni, 2012; Hardies et al., 2015; Burke et al., 2019; Lee et al., 2019; Hardies et al., 2021). We take this work forward by investigating a possible justification for the observed premium by examining how auditor gender is related to audit report lag and whether the female partner audit fee premium is driven by audit report lag. We find that United Kingdom companies audited by a female lead auditor have a significantly shorter audit report lag but pay a significantly higher audit fee. In further analysis, we find that the fee premium for female partner–led audits is higher for clients receiving a more timely audit opinion. Our findings are consistent with female lead auditors delivering more timely audits and with audit clients being prepared to pay a premium for such timeliness. Our study extends our understanding of the importance of gender in the auditing process and the value clients see in audits led by female auditors. Given the relatively low proportion of female lead auditors, our findings should also encourage audit firms to appreciate the economic value of female lead auditors and to actively facilitate their progression to senior roles.

Is there a gender gap in audit fees in Spain? Explaining the variables involved in audit fees

Purpose The main objective of this study is to analyse the impact of auditor gender on audit fees, with a view to establishing whether there are any differences in audit price depending on the gender of the auditor. Motivation The existence of a gender gap in audit fees is a problem. In order to try to reduce this gap, it is necessary to understand the determinants of audit fees according to gender. Design/Methodology/Approach The sample under analysis is made up of 3217 unlisted Spanish companies. In order to fulfil our aim, an audit fee model is put forward, applying a multiple linear regression analysis differentiated by auditor gender. Main findings The results point to an absence of any statistically significant association between audit fees and auditor gender. In contrast to other countries within the same context, Spanish female audit partners do not generate higher audit fees than their male counterparts; there is no female audit fee premium as there seems to be in other countries such as Belgium, France, Finland, China or the USA. Practical implications Differences were found among the factors which determine audit fees; there tend to be fewer factors considered in audits signed by female auditors, with indicators related to the economic and financial situation of the company under audit excluded from the fees model. These results could be justified by differences between male and female auditors with respect to audit planning and efficiency. Novelty/Contribution This paper is a contribution to the literature on gender in auditing, and offers up evidence on the impact of auditor gender on audit fees within a specific context that has not been studied in any depth, namely the Spanish auditing market for unlisted companies.

Are there audit fee premiums for client portfolio management?

Are there audit fee premiums for client portfolio management?

How female leadership and auditor affiliations shape audit fees: evidence from Egypt

Purpose This study aims to examine how female directors on corporate boards and audit committees, and auditor affiliations (Big 4 versus Egyptian firms affiliated with foreign auditors), influence audit fees. This examination is driven by the global call for increased female representation in leadership roles and its potential implications for audit quality and financial transparency. Design/methodology/approach A sample of non-financial companies listed on the Egyptian Stock Exchange is used for the period 2011–2020. The authors used multivariate regression models, the Heckman two-stage and tokenism to support the analysis. Findings The results are threefold. First, this analysis reveals that female directors, whether on corporate boards or audit committees, are more likely to choose higher-quality audits in the form of high audit fees. Second, both Big 4 firms and Egyptian audit firms affiliated with foreign auditors are positively associated with audit fees and earn significant audit fee premiums. Third, a minor difference in audit fee premiums could be attributed to the existence of female directors. Research limitations/implications Future research may expand the analysis performed in this study by investigating the characteristics related to female directors (e.g. education, experience and age) on audit fees. Practical implications This study suggests insights for regulatory bodies, corporate decision-makers, auditors and corporate governance researchers. For instance, this study reveals that the Big 4 are not homogenous and provide different audit quality levels along with significant audit fee premiums. Originality/value This study extends and contributes to the growing literature on female representation in corporate leadership. First, this study adds to the limited research in Egypt by examining the effect of female board representation on audit quality. Second, this study adds to the extant literature on the gender of financial experts by demonstrating that female financial expert is more likely to demand high-quality audits. Finally, the results have significant implications for policymakers. For instance, this study reveals that the Big 4 are not homogenous and provide different audit quality levels along with significant audit fee premiums.

The Effect of Audit Partner Digitalization Expertise on Audit Fees

This study focuses on the effects of digitalization on the auditing industry and the impact of audit partner expertise in digitalization on audit fees. Using data from listed U.S. companies between 2016 and 2021, we document a statistically and economically significant audit fee premium for audit partners who specialize in digitalization. This premium is separate from the partner’s industry specialization and is strongest in industries with a high level of digitalization, especially during the first half of the sample period. Our subsample analysis shows that, while the premium appears to be diminishing in less digitalized industries, it remains significant in highly digitalized industries. This change may be due to the general increase in digitalization expertise among audit partners, leading to diminishing returns to specialization for less digitalized audits.

China’s audit market competition and the competitive strategies of the international Big 4 audit firms

ABSTRACT This study investigates the competitive strategies of the international Big 4 audit firms when faced with regional competition from the local Big 6 audit firms. We find that for the Big 4, competition reduces their audit fee premiums and forces them to recruit high-risk clients, while does not affect their audit quality. In further analyses, we find that competition led to greater changes for the Big 4 after the CICPA’s proposal in 2007 and when the local Big 6 are in leading positions. We also find that the local Big 6 compromise on audit quality in addition to audit fee premiums and client criteria when faced with competition from small local audit firms. Overall, this study reveals the competitive strategies of the Big 4 under competitive pressure from the local Big 6, which suggests that local audit firms can compete with international audit firms for audit services by scale development.

Climate risk and audit fees: An international study

AbstractUsing a comprehensive global sample, we find that climate risk positively relates to audit fees. Specifically, auditors charge higher fee premiums when firms are located in countries with more stringent auditing regulations, higher information opacity and less adaptive capacity for climate risk. Audit fee premiums are also higher when firms are incentivised to manipulate earnings, less important to auditors, and audited by short‐tenured and industry‐specialised auditors. Our study provides worldwide evidence that climate risk induces more earnings management and increases the efforts of auditors in the auditing process, resulting in higher audit fees.

An analysis of audit effort/hour demand based on shareholder ownership power

PurposeAudit hour reporting is rare internationally. Thus, to what extent shareholders have the power to influence audit effort/hour demand is a question left unanswered. This study aims to use unique South Korean data to determine whether the increasing power of the largest foreign/domestic shareholders and blockholders can influence audit hour demand.Design/methodology/approachIn this study ordinary least squares (OLS) regression analysis is conducted using a sample of Korean listed firms over the 2004–2018 sample period.FindingsThe results show: as the percentage equity holding of the largest foreign shareholder and blockholder (>5%) increases, audit hour demand increases. As the shareholding of the largest domestic shareholder increases, audit hour demanded decreases. The association between audit fees/hours is not qualitatively indifferent, after controlling for the audit fee premium effect. Furthermore, the largest foreign shareholder is shown to demand increasingly higher levels of audit hours from Big4 auditors, relative to NonBig4. All results are consistent with audit demand theory.Originality/valueWhilst previous studies offer audit fee/risk interpretations, this study extends the literature by developing a framework to explain why audit hour demands differ for specific groups. Because audit hour information is rare internationally, the study has important policy implications.

Audit pricing puzzle: Do audit firm industry specialization and audit report lag matter?

This study examines whether audit firm industry specialization and audit report time lag (ARL) matter in the audit fees puzzle. Specifically, we examine the moderating effect of audit time lag on the audit firm industry specialization and audit fees nexus. We use dataset from 100 quoted and unquoted Ghanaian firms from 2008 to 2018. We find that audit firm industry specialization exhibits a significant positive impact on audit fees and a significant negative effect on ARL. The results of the interaction between audit firm industry specialization and ARL also display a negative association with audit fee, signifying that specialization significantly reduces audit fee premium paid provided these experts produce the financial report in a short time. Further analysis on large and small companies, state-owned and private companies, weak and strong internal controls also indicate the significance of audit firm industry specialization and reporting time lag in explaining audit pricing puzzle. The novelty aspect of this study is the analysis of the moderation effect of audit timeliness on the audit firm industry specialization and audit fees nexus in the context of a lax enforcement of Generally Accepted Accounting Principles environment.

Does signing auditors’ communist party membership shape audit quality? Evidence from China

In this article, we investigate the effect of signing auditors’ communist party membership on audit quality. Relying on a sample of Chinese listed firms from the period 2001 to 2019, we find that firms with signing auditors who have communist party membership conduct less earnings management, indicating that signing auditors with party membership provide high level of audit quality. Moreover, the above relationship is more pronounced in small audit firms. We also find that firms who are audited by signing auditors with party status have lower likelihood of financial statements and loss avoidance. Further analyses suggest that signing auditors with party status can earn audit fee premium. The positive relationship between signing auditors with party membership and audit quality is more pronounced in non-specialists auditors and high client importance.

Excess cash holding and audit pricing: a further consideration of precautionary motives and other factors

PurposeThis paper aims to investigate auditors’ pricing of excess cash holdings and the variation in their pricing decisions in light of the precautionary motives of cash holdings and certain firm-specific conditions and during periods of crisis.Design/methodology/approachThe authors conduct the two-stage-least-squares multivariate analysis using a sample of publicly listed non-financial US firms for the period 2003 to 2021 (42,413 firm-year observations).FindingsThe findings show a significant positive relationship between excess cash and audit fee. Next, the authors find that audit pricing of excess cash is significantly higher for firms with lower financial constraints. However, the authors do not find evidence to suggest that auditors price excess cash significantly higher for firms with lower hedging needs. In additional analysis, the authors find evidence to suggest that auditors charge significantly less for excess cash in firms that report financial loss and firms operating in industries with high litigation risk. The additional analysis also reveals excess cash is not positively and significantly priced by auditors as a result of the global financial crisis and Covid-19 pandemic.Originality/valueMost researchers have analyzed excess cash holding from the perspective of managers, i.e. agency conflict or managerial prudence, while somewhat neglecting auditors’ perception of the embedded risk of excess cash holdings. The authors provide new insights on auditors’ perspective of excess cash holding and identify certain factors/situation/conditions that cause variation in the audit fee premium. The findings offer useful insights for managers and shareholders who are interested in assessing the effects of excess cash holdings policies on the audit fee premium.

Sustainable Development of Audit Market: Benefits of Audit Price Deregulation in China

Utilizing a unique audit price deregulation policy in China, we examine industry-specialized auditors’ competing strategies in different markets. Our results from the difference-in-difference model reveal that after audit price deregulation, audit fees of industry-specialized auditors in less developed markets become significantly lower than other auditors. Furthermore, we find the decreased audit fees of the industry specialists are not due to the reduced audit effort, and the audit quality is not impaired. On the other hand, industry specialists cannot keep their audit fee premium in more developed markets after the policy. These results indicate that audit price deregulation makes industry-specialized auditors more available, which benefits the market’s sustainable development. Our study contributes significantly to the industry specialized auditor literature by providing novel evidence that industry specialists’ competing strategies could depend on the market’s development.

Audit fee premium for national and local level of industry expertise in Italy

PurposeThis study aims to examine whether national industry expertise in Italy is more dominant than local expertise. Prior studies from Australia, USA and UK show that audit fees for industry experts are priced at a higher premium at the local level than the national level. These countries have voluntary audit firm rotation, while Italy has mandatory audit firm rotation (MAFR). The authors predict that Italy has a stronger national than local level of industry expertise, to better retain and transfer industry expertise.Design/methodology/approachThe authors compare audit fee premiums of national industry experts to local levels, using quantitative (multivariate tests) and qualitative (interviews) methodology.FindingsUsing hand-collected audit fees, the authors find that the audit fee premium for industry expertise is greater at the national level than the local level. The authors find corroborating results with audit hours. To provide further support, the authors conduct analysis for a neighboring country that does not have audit firm rotation. Using hand-collected data from Germany, the authors find that audit fee premiums from national industry expertise are no different from local industry expertise.Originality/valueThe present study study has theoretical and practical implications, for European Union countries, which recently adopted MAFR and for countries considering adoption in the future.

사회자본이 감사보수와 감사시간, 감사품질에 미치는 영향

This study examines the effect of social capital on audit fees, audit hours, and audit quality. Using a sample of Korean public firms for the period of 2013-2017, we find that firms headquartered in areas with high social capital pay less audit fees and spend less audit hours. However, we observe that audit quality does not change. Thus, we document that auditors charge a premium when firms are headquartered in areas with low social capital, indicating that the audit fee premium is due to the tendency to maintain the reasonable level of assurances in areas with low social capital. In addition, the negative relation between social capital and audit fees is stronger for firms located in metropolitan areas. Overall, this study contributes to our understanding in the currently growing audit literature by documenting how social capital affects auditors’ decision in audit fees, audit hours, and audit quality.

When Good Balance Goes Bad: A Discussion of Common Pitfalls When Using Entropy Balancing

ABSTRACT For many accounting research questions, empirical researchers cannot randomly assign observations to treatment conditions or identify a quasi-experimental setting. In these cases, entropy balancing (Hainmueller 2012) is an increasingly popular statistical method for identifying a control sample that is nearly identical to the treated sample with respect to observable covariates. In this paper, we compare entropy balancing's approach of reweighting control sample observations to ordinary least squares and propensity score matching. We demonstrate that researchers applying entropy balancing in empirical settings involving panel data with features common in accounting research may encounter implementation issues that render the resulting estimates sensitive to relatively minor changes in the control sample or the research design. Using the setting of estimating the Big-N audit fee premium, we empirically demonstrate these issues and propose solutions. Data Availability: Data are available from public sources cited in the text. JEL Classifications: C18; M4.

The impact of PCAOB international registration on audit quality and audit fees: Evidence from China

Despite the importance of registration with the PCAOB, there is surprisingly little academic research on the registration process and its impact on audit outcomes (Abernathy et al., 2013). The PCAOB allows registration of audit firms from non-US countries. However, China and a few other countries do not allow the PCAOB to conduct inspections of audit firms. We take advantage of this setting to investigate whether PCAOB-registered audit firms improve audit quality in the absence of inspections and whether they charge an audit fee premium. Our findings indicate that audit quality increases following PCAOB registration and that clients pay higher audit fees for audits by PCAOB-registered firms.

Implementation costs of IFRS 9 for non‐financial firms: evidence from China

AbstractExamining Chinese non‐financial firms between 2016 and 2019, this study documents that the new accounting standard for financial instruments imposes severe implementation costs on affected firms, as evidenced by a significant rise in the selling of available‐for‐sale (AFS) equity investments and increased audit fee premiums. We also find that the disposal of AFS is more prominent in state‐owned enterprises (SOE) and firms issuing corporate bonds. The increase in audit fees is more severe for non‐SOEs, bigger audit firms and firms with a higher total account balance affected by the new standard.

IPO-Audit Expertise, Audit Quality, and Capital Allocation Efficiency: Evidence from China

Backed by China's economic growth, the initial public offering (IPO) market in China has been one of the most vigorous in the world. In this market, practicing auditors routinely sit on the regulatory committee responsible for screening prospective IPO firms. Against this backdrop, we examine whether IPO-audit expertise can influence IPO-audit quality and capital allocation. We find that auditors with richer IPO-audit experience improve the quality of earnings in IPO prospectus, earn an audit fee premium, and are significantly more likely to be assigned to IPO engagements by audit firms or appointed to the regulatory committee by regulators. We also show that, by enhancing the credibility of information disclosure in IPO prospectus, IPO exper-tise of the regulatory committee members and the IPO engagement auditors improves capital allocation efficiency. Collectively, our evidence implies that a more sophisticated audit profes-sion can contribute to the development of capital market in a country.

The differential effect of accrual-based and real earnings management on audit fees: international evidence

This study investigates the relative importance of accrual-based earnings management (AEM) and real earnings management (REM) as reflected in audit fees. Auditors charge not only for AEM, but also for REM, because it increases the litigation risks and audit complexity they face by dampening firms’ long-term fundamentals; however, whether auditors charge more for AEM or for REM is relatively unexplored. Using data from 24 countries, we find that auditors, on average, charge a higher premium for REM than for AEM. We also find that a strong legal regime increases the audit fee premium charged on both AEM and REM, where the premium for REM increases to a greater extent than it does for AEM. Overall, our results provide novel evidence of the relative importance of the different types of earnings management under different legal regimes to auditors.

글로벌 산업전문 감사인의 감사보수 프리미엄과 감사품질

본 연구는 한국의 감사시장에서 글로벌 산업전문 감사인이 감사보수 프리미엄을 받는지 여부와 고품질의 감사를 제공하는지를 살펴본다. 이 분야의 국내 선행연구는 산업전문감사인이 고품질의 감사를 제공하고, 그 대가로 더 많은 감사보수를 받는다는 것을 보여준다. 그러나 이러한 연구에서 감사인의 산업전문성은 국내시장점유율에 기반한 측정치이지 글로벌 수준에서 측정된 지표가 아니다. 글로벌 회계법인 네트워크는 감사인이 산업전문성을 획득할 수 있는 경로를 국내고객을 넘어 국외의 제휴된 회계법인과 그 고객까지 포함하여 감사인의 산업전문성의 개념을 한 국가 수준에서 글로벌 수준으로 확대시키고 있다. 본 연구는 한국의 감사시장에서 고객회사들이 글로벌 산업전문성의 가치를 어떻게 평가하고 있으며, 글로벌 회계법인 네트워크 내에서의 산업고유 지식의 활용이 감사품질에 어떠한 영향을 미치는지 실증적으로 살펴본다. 이를 위하여 본 연구는 2015년부터 2017년까지 유가증권 및 코스닥시장에 상장된 비금융, 12월 결산법인 4,766개의 기업-연도 표본을 이용하여 글로벌 산업전문성과 감사보수 및 (재량적 발생액으로 측정된) 감사품질과의 관계를 살펴보았다. 본 연구에서 감사인의 산업전문성은 고객회사의 매출액 기준 시장점유율을 이용하여 측정하였다. 실증결과 글로벌 산업전문성만 있는 감사인은 감사보수 프리미엄을 받지는 못하지만 양질의 감사서비스를 제공하는 반면 한국의 산업전문성이 있는 감사인은 감사보수 프리미엄을 받지만 이에 상응하는 높은 품질의 감사서비스를 제공하지 않는 것으로 나타났다. 본 연구는 글로벌 산업전문 감사인과 한국의 산업전문 감사인의 감사보수 및 감사품질을 비교 분석함으로써 한국 감사시장에서 글로벌 수준의 산업고유지식의 활용정도와 그에 대한 고객회사의 평가를 살펴보았다는 점에서 의의가 있다.