Audit Fees Research Articles

Mandatory Disclosure of Negative Events and Auditor Behavior: Evidence from a Natural Experiment

Using the staggered adoption of data breach disclosure (DBD) laws, this paper studies the impact of mandatory disclosure of adverse corporate events on audit fees. DBD laws increase the frequency of disclosed cyber incidents, which adversely impacts firms’ financial condition and operations; this could result in a higher risk of misstatement and reputation loss for auditors. Consistent with this hypothesis, we find that auditors charge higher fees after the adoption of DBD laws. We also find that the increase in audit fees is more pronounced in firms with higher cyber risk and greater auditor reputational concerns. Furthermore, governance mechanisms and resources that are available to auditors can mitigate the rise in audit fees. Robustness tests suggest that the effect is not driven by realized cyber incidents and other contemporaneous events. Overall, our study provides evidence that the mandated disclosure regulation significantly affects audit pricing.

Pengaruh Karakteristik Perusahaan Terhadap Audit Delay

The impact of firm attributes including size, subsidiaries, audit firm size, leverage, profitability, and audit fees on audit delay is investigated in this study. The financial accounts of the company must be submitted on schedule, but in 2022, a number of corporations have not submitted their reports on time despite having been granted a grace period. This is the focus of the study so it needs to be studied further. Panel regression is used in this study to test the hypothesis using 1,180 sample data from three sectors of companies listed between 2018 and 2022 on the Indonesia Stock Exchange. The analysis's findings indicate that while firm size, subsidiaries, leverage, and audit fees have no effect on audit time, audit firm size and profitability do. This study contributes to academic research on company characteristics for reporting financial statements on time, especially in Indonesia. The results of this research can be used by users of financial reports in reviewing the effectiveness of company operations for continued investment and also useful for companies so that companies can be open about information and the accuracy of submitting financial reports. The new thing in this study is the use of samples of three company sectors that have the highest number of audit delay companies as the main focus of investors to invest their funds in these companies, so this study reflects the need for timeliness of financial reporting, especially for BEI listed companies.

Unveiling Dynamics: Financial Performance Determinants in the Ghanaian Insurance Industry

This pioneering study unravels the financial performance dynamics of Ghanaian insurance firms, leveraging proprietary data from the National Insurance Company (NIC), Ghana. Utilizing a system GMM technique on a comprehensive panel dataset of 40 firms from 2012-2017, it uncovers cost efficiency, claims ratio, retention ratio, audit fees, firm age and size, and board composition as crucial performance drivers. In what concerns the implications for the emerging economies, we show that the inclusion of the variable “risk retention and claims” helps insurance companies to better ascertain the right level of risks associated with the businesses they underwrite, so that the claims ratio will be minimized, and the appropriate premium ensured. Moreover, for the insurance sector in the frontier markets, with characteristics like Ghana´s economy, the study advocates for strategic cost control measures and emphasizes the need for proactive regulatory approaches aiming to enhance policy actions and to provide supplementary funds for firms demonstrating growth potential. These empirical evidence-based insights help design a roadmap for developing the insurance sector in the economies belonging to frontier and emerging markets.

The Impact Of Audit Fee, Size Of Public Accounting Firm, Company Size, And Leverage On The Communication Of Key Audit Matters (Implementation Of The First Year Of KAMs Adoption In Independent Auditors' Reports In Indonesia)

Auditing standard 701 "Communicating Key Audit Matters (KAMs) in the Independent Auditor's Report" will be implemented in Indonesia in 2022. The communication of KAMs aims to increase the transparency of financial statements for users. This study examines the effect of audit fees, Size of public accounting firm, company size and leverage on the communication of Key Audit Matters (KAMs). The research population is companies that are listed on the Indonesia Stock Exchange and report audited financial statements for the fiscal year 2022. The sample was selected using purposive sampling method. The research data was processed using the Multiple Linear Regression method using IBM SPSS Statistics software ver. 25. This study proves that audit fees (sig 0.000 < 0.05) and Size of public accounting firm (sig 0.000 < 0.05) have a positive and significant effect on communicating KAMs. While company size (0.188 > 0.05) leverage (0.378 > 0.05) has no significant effect on communicating KAMs. Based on the results of the study, it is hoped that companies can consider an adequate audit fee budget and choose a Public accounting firm whose competence is in accordance with the conditions of the company to be able to increase the communication of KAMs. Thus, companies can increase investor and other stakeholder confidence through the communication of KAMs as an effort to demonstrate commitment to transparency and good corporate governanc

Media coverage as a moderator in the nexus between audit quality and ESG performance: Evidence from China.

In response to growing pressure on companies to manage and improve their reputation regarding environmental, social, and governance (ESG) issues, the audit is regarded as a vital resource for ensuring ESG risk management, improving transparency, mitigating opportunistic constraints, and guaranteeing accurate reporting. The objective of this paper was to investigate the role of audit quality in improving ESG performance, as well as to examine the role of media coverage represented by ESG controversy score in moderating these relationships. We analyzed 303 Chinese companies with 2,121 observations covering the period from 2017 to 2023. The results suggest that the effects of audit quality as measured by the Big 4 and audit fee on improving ESG performance are positive but not significant. On the other hand, the results reveal that media coverage serves as a positive, albeit non-significant, moderating variable between audit quality measured by the Big 4 and ESG performance, while it has a significant negative effect when audit quality is evaluated based on audit fees. The results indicate that improving ESG performance is significantly linked to auditors intensifying their practices and implementing their work more stringently. More importantly, media coverage is an important additional driver and economic incentive that encourages companies to steer clear of poor ESG-related practices.

Study On the Factors Affecting the Audit Fees of Small and Medium Enterprises in Vietnam

The competitive pressure within the group of domestic audit firms is becoming increasingly intense, and pricing is considered one of the most effective competitive tools. This also stems from the fact that many small businesses tend to prioritize low costs when selecting an audit firm. Through a survey conducted on 70 companies, the author utilized SPSS 26 software to analyze the data and identified five factors. The results from the correlation test between two variables and the multivariate linear regression model both indicated that for small and medium-sized enterprises in Vietnam, two factors significantly impact the audit fees for client companies: the size of the audited company and the reputation of the auditing firm.

The Influence of External Audit Quality on Discretionary Accruals and Real Earnings Management Practices: An Analysis of Malaysian Firms

This paper aims to analyse the mitigating effects of external audit quality (EAQ) factors on earnings management (EM) practices. Data were collected from firms listed on Bursa Malaysia’s main market, covering the years 2011 through 2022. Panel regression was employed to analyse the data. The findings of this study confirmed a significant negative association between audit reputation, audit quality, audit opinions, and EM of listed firms in Malaysia. Audit fees and audit tenure were found to be not significant in relation to EM. The study included five control variables in the analysis, and only economic value added (EVA) was found to be significant. The findings suggest that a number of audit quality factors are indicative of EM among listed firms. The authors extend, as well as contribute to, the growing literature on the EAQ, and therefore, wider corporate governance literature. Thus, it provides originality by presenting empirical evidence and outcomes to fully understand how discretionary accrual and real EM affect EAQ in the Malaysian context. Therefore, stakeholders should place higher concern on the selection of an external auditor, and investors should take into account the external audit factors when making investment decisions. Measuring the effectiveness of EAQ allows decision-makers to evaluate how effective employed governance measures are in improving shareholders’ perceptions of financial information quality and mitigating EM practices.

The Role of Internal Control on Financial Fraud: Evidence of Pre-Fraud and Post-Punishment from Chinese Firms

ABSTRACT Our study is the first to provide systematic evidence of the internal control (IC) prevention and punishment effect on financial fraud (FF). We examine the pre-fraud and post-punishment IC of Chinese firms. Results show that the lower the firm’s IC, the greater the possibility of FF. We find that IC five elements have different prevention effects. Information and communication cannot prevent FF, while the other four can. Executive compensation, audit fees and earnings management can weaken the negative correlation between IC and FF, while independent director attendance can strengthen the negative correlation between them. In addition, the IC of fraudulent firms has been improved after punishment. This article extends the role of IC and its five elements in FF and the response of IC to punishment, providing country-specific evidence for other emerging market research about IC prevent FF.

Legal Liability, Institutional Environment and Audit Pricing: Insights from China’s Securities Law Revision

This study investigates the impact of China's revised Securities Law (2019) on the audit pricing strategies of A-share listed companies. Using a Difference-in-Differences (DID) approach and a sample of 26,057 firm-year observations from 2016 to 2022, we find that the new law led to a significant increase in audit fees, especially for non-state-owned enterprises and firms in regions with stronger legal institutions. We attribute these effects to the heightened legal liability and regulatory scrutiny faced by auditors under the new regime, which incentivizes them to enhance audit quality and charge higher risk premiums. Our results are robust to a series of sensitivity tests and alternative specifications. We conclude that the revised Securities Law has achieved its intended objectives of improving market transparency and investor protection but at the cost of higher compliance burdens for listed companies. Our findings have important implications for policymakers, regulators, and market participants in China and other emerging economies undergoing similar legal and institutional reforms.

Pengaruh Firm Size, Audit Fee, Audit Tenure, Kompetensi dan Independensi Auditor Terhadap Kualitas Audit pada Perusahaan Perbankan yang Terdaftar di Bursa Pengaruh Indonesia 2018-2022

This research aims to determine the influence of firm size, audit fees, audit tenure, auditor competency and independence on audit quality in banking companies listed on the Indonesia Stock Exchange for the 2018-2022 period. This research population used a purposive sampling technique to obtain a sample of 150 data from 30 companies, but data transformation and outliers were applied so that the sample size became 120 data. The data analysis applied in this research is classical assumption testing, multiple linear regression analysis, and hypothesis testing. The research results show that simultaneously there is an influence of the variables firm size, audit fee, audit tenure, competence and independence of the auditor on audit quality, but partially the variables of competence and independence of the auditor do not have a significant effect on the quality of audits in banking companies listed on the Indonesia Stock Exchange for the period 2018-2022.

CFO Compensation and Audit Fees

Executive compensation contracts may influence financial reporting quality, and the CFO plays a key role in preparing the financial statements. This study examines whether the structure and components of CFO compensation are associated with audit risk as measured by audit fees for a sample of S&P 1500 companies during the period 2012–2022. We find that the percentage of total compensation composed of either stock or options is significant and positively related to audit fees, while non-equity incentive plan compensation is significant and negatively related to audit fees. We also find that the dollar amount of equity compensation is significant and positively related to audit fees, while the dollar amount of non-equity compensation is not related to audit fees. These results suggest that CFO compensation structure is an important factor in the assessment of audit risk, which is important for compensation committees as well as regulators. This is the first study, to our knowledge, that examines the relationship between the dollar amount and composition of CFO compensation and audit fees.

The Influence Of Audit Fee And Competency On Audit Quality Moderated By Professionalism At Kaps In Indonesia

This research aims to examine and analyze the influence of audit fee and competency on audit quality which is moderated by professionalism at KAP in Indonesia. The type of research applied in this research is a quantitative approach. The selected population was all auditors who worked at KAPs in Indonesia and were registered in the 2023 IAPI Directory. The sample was selected using convenience sampling techniques and obtained 97 respondents. This research uses WarpPLS 8.0 software as a data analysis tool. The research results show that audit fee and competency can influence audit quality at Indonesian KAP. Professionalism can also strengthen the influence of audit fee on audit quality, but cannot moderate the influence of competency on audit quality at KAPs in Indonesia.

Intelligent manufacturing, auditor selection and audit quality

PurposeThe purpose of this paper is to examine the influence of intelligent manufacturing on audit quality and its underlying mechanism as well as the variation in this influence across different types of organizations.Design/methodology/approachThis research utilizes a difference-in-differences (DID) method to examine how enterprises that apply intelligent manufacturing choose auditors and impact their audit work. The study is based on 15,228 observations of Chinese-listed A-shares from 2011 to 2020.Findings(1) There is a strong correlation between intelligent manufacturing and audit quality. (2) This positive correlation is statistically significant only in state-owned enterprises (SOEs), those that have steady institutional investors and where the roles of the CEO and chairman are distinct. (3) Enterprises that have implemented intelligent manufacturing are more inclined to employ auditors who possess extensive industry expertise. The auditor's industry expertise plays a crucial role in ensuring audit quality. (4) The adoption of intelligent manufacturing also leads to higher audit fees and longer audit delay periods.Practical implicationsThis paper validates the beneficial impact of intelligent manufacturing on improving corporate governance. In addition, it is recommended that managers prioritize the involvement of skilled auditors with specialized knowledge in the industry to ensure the high audit quality and the transparency of information in intelligent manufacturing enterprises.Originality/valueThis study builds upon previous research that has shown the importance of artificial intelligence in enhancing audit procedures. It contributes to the existing body of knowledge by examining how enterprise intelligent manufacturing systems (IMS) enhance audit quality. Additionally, this study provides valuable information on how to improve audit quality in the field of intelligent manufacturing by strategically selecting auditors based on resource dependency theory.

The impact of auditor attributes and firm size on financial reporting timeliness of listed firms

This empirical study examines the impact of auditor attributes and firm size on financial reporting timeliness among listed firms in Nigeria. The study employs an ex-post facto type of research, with a quantitative design covering a ten-year period (2013–2022). The sample size comprises sixty-six (66) non-financial firms listed on the Nigerian Exchange Group (NGX). Based on data extracted from the audited annual reports of the sampled sixty-six firms, the robust regression model results reveal that joint audits contributed considerably to shorter financial reporting lags, underscoring the value of collaborative audit efforts in streamlining the audit process. Audit fees maintained a positive significant effect on the reporting lag of listed Nigerian firms. However, audit switch, client firm size, audit opinion, and audit firm size all maintained insignificant effects on the financial reporting timeliness of the Nigerian listed firms investigated. Therefore, the study recommends that listed firms should rather opt for affordable joint audits due to their efficiency in streamlining the audit process. Equally, the study recommends that listed firms should maintain long-term relationships with auditors to leverage increased familiarity, yet remain cautious of likely complacency and breach of auditing ethical guidelines that can arise from prolonged engagements.

The Choice of the Financial Year-End: Does It Matter? An International Evidence

This paper examines how specific firm characteristics (size, industry, audit fees and age) and firm performance influence the choice of financial year-end (December vs. non-December). The sample consists of companies from Australia, France, Germany, Japan, the United Kingdom and the United States to tackle issues with international diversity. Both domestic and international regulations for each country are addressed in developing expectations and conclusions. The results of the study show that December is generally becoming less and less ‘popular’ compared to a few years back. The results also revealed that December year-end firms tend to be larger and operate in certain types of industries with some industries preferring to close their books at certain dates, whether a December or a non-December month. As a result, financial-reporting comparability issues may arise if firms depart from the year-end chosen by most similar firms. It is also found that older firms tend to have December as their year-end, while relatively younger firms prefer a non-December year-end. Moreover, firms tend to prefer December as audit fees go up. Finally, firms with better performance are less likely to have December as their fiscal year-end. These findings show the importance of the topic and suggest conducting more research by academics and standard setters.

Economic Policy Uncertainty, Financial Reporting Quality, and Audit Fees: Examining the Role of Industry Characteristics and International Accounting Standards

Economic Policy Uncertainty, Financial Reporting Quality, and Audit Fees: Examining the Role of Industry Characteristics and International Accounting Standards

Common Institutional Ownership and Auditor Risk Response

Based on the data of China's Shanghai and Shenzhen A-share listed companies from 2010 to 2021, this paper investigates the relationship between a company's common institutional ownership and auditors' risk response behavior. The study shows that common institutional ownership drives auditors to increase audit investment and audit fees, which supports the collusive fraud effect. Further analysis reveals that the effect of common institutional ownership on auditor risk response behavior is more pronounced in firms with a higher degree of industry competition as well as in state-owned enterprises, and that Big Four auditors will be more sensitive to the collusive fraud effect of common institutional ownership and respond to this risk mainly by increasing audit investment. This paper not only enriches the research literature on the factors influencing auditors' risk response behavior and the economic consequences of common institutional ownership but also sheds light on how to improve corporate governance and regulate the market order in practice.

The Impact of Client Bankruptcies on Auditors’ Judgment and Future Audit Engagements

We examine whether and how engagements with bankrupt clients (i.e., bankruptcy experiences) affect auditors’ behavior in future engagements. Using a large sample of Swedish auditors-in-charge (AICs), we find that AICs’ bankruptcy experiences are positively related to the issuance of going-concern opinions to financially distressed clients, audit fees, and clients’ earnings quality. Our evidence implies that such experiences increase AICs’ conservatism and professional skepticism and contribute to higher audit quality. We also show that AICs’ bankruptcy experiences are associated with more conservative client management strategies – the lower (higher) likelihood of accepting (resigning from) financially distressed clients. Furthermore, we find that the impact of bankruptcy experiences on AICs’ decision-making is stronger when those experiences are more salient and recent, as well as when they are followed by a sanction. Overall, our findings indicate that AICs who have experienced client bankruptcies deliver higher audit quality and exhibit a greater level of conservatism in client selection, providing novel evidence on how individual auditors’ auditing styles are shaped by their professional experiences.

IXBRL Adoption and the Pricing of Audit Services

ABSTRACT This study examines how inline XBRL (iXBRL) mandatory adoption impacts audit fees. Although iXBRL can make financial reporting information accessible to a wide range of external stakeholders, the presentation format change should have no impact on audit pricing. However, audit firms note that presenting nonaudited XBRL metadata on top of audited financial statements could lead to an expectation gap where external stakeholders believe that the inline tags have been audited despite no procedures being required. We find that iXBRL adoption is associated with higher audit fees. Upon further examination, we find that the increase in audit fees reflects more of a risk premium being placed on iXBRL clients rather than increased audit effort, as audit quality does not necessarily improve following adoption. We provide timely information on how auditors respond to iXBRL adoption. JEL Classifications: M41; M42; O33.

Switching Costs and Market Power in Auditing: Evidence from a Structural Approach

ABSTRACT This study provides novel evidence on the magnitude of switching costs in auditing. Using a discrete choice approach, we infer switching costs from clients’ audit firm choices. The demand estimation reveals that switching costs are significant and vary by direction, with the highest costs associated with switching from non-Big 4 to Big 4 audit firms. Counterfactual analyses of forced switches suggest that switching costs are substantial, ranging from 0.7 billion U.S. dollars (14.2 percent of audit fees) to 1.2 billion U.S. dollars (24.0 percent of audit fees) when aggregated across all clients. Counterfactual analyses of voluntary switching show that the audit market would become highly dynamic and more concentrated if switching costs were removed. Additionally, clients would gain consumer surplus of up to 306 million U.S. dollars (5.4 percent of audit fees) in such a scenario. Overall, our study documents the importance of switching costs for understanding audit market dynamics. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42; M48; L11; L84.