Fee Dependence Research Articles

Effect of normal and abnormal audit fee and audit fee dependence on corporate social responsibility according stakeholder theory

Effect of normal and abnormal audit fee and audit fee dependence on corporate social responsibility according stakeholder theory

Drivers of Audit Failures: A Comparative Discourse

The aim of this study is to identify the most potent factors driving audit failures by theoreticallyexploring two most publicized corporate and external audit failures cases in Nigeria and globally (EnronAndersen and Cadbury Akintola Williams Deloitte). An exploratory case study approach was adopted to analyze the selected two cases and several other external audit failures in extent literature. Findings reveal that audit failure factors are the same in the cases analyzed and compared and include poor audit approach, negligence and incompetency from the auditors, lack of professional questioning attitude, connivance with clients, fee dependence on major clients, long tenured appointment, external auditors acting as internal auditors to client and rendition of Management Advisory Services (MAS), blatant disregard to accounting standards on auditing, among others. Based on these findings, the following recommendations were made: more stringent sanctions be molted to defaulters, regular review and update of accounting and auditing standards to take care contemporary developments, prohibition of external auditors from rendering multiple MAS, adherence to ethical principles, strengthening of corporate governance structure as well as improved oversight functions by regulatory authorities on the activities of corporate management and auditors.

Audit Within the Corporate Governance Paradigm: A Cornerstone Built on Shifting Sand?

AbstractThis paper is a case study‐based investigation of aspects of the current paradigmatic approach to ‘good’ corporate governance, with its focus on the interlinked roles of internal control and risk management procedures, internal audit and external audit, overseen and coordinated by a formal structure of board committees, in particular the audit committee. The evidence that we adduce from the study of four high‐profile cases of perceived accounting and governance failure provides limited assurance that this approach will in fact be cost‐effective or efficient in preventing further such cases of accounting and governance failure. Specifically, issues as to remuneration and fee dependence, lack of relevant knowledge and expertise, social and psychological dependence upon executive management appear to have significantly and negatively affected the quality of decision‐making of governance gatekeepers. This suggests that further consideration of relevant economic, institutional and cognitive/behavioural factors beyond the rational choice model of traditional economics should underpin future developments in required modes and structures of governance.

The Effect of Networked Clients' Economic Importance on Audit Quality

SUMMARY In this study, we examine the association between audit quality and networked clients' economic importance. We consider networks of clients that result from audit committee member-audit partner interlocks. These interlocks occur when an audit committee member of a company is also an audit committee member of other companies that are audited by a common audit firm and audit partner. The audit partner may perceive that future fee income from the network of interlocked companies may be affected by disputes with the management of an interlocked client company. These economic ties have the potential to erode auditor independence and, as a consequence, reduce audit quality. The test variables include measures of network fee dependence based on the audit partner's fees generated from the networked clients created by audit committee member-audit partner interlocks. Audit quality is proxied by the likelihood of issuing a first-time going-concern modified audit report and the absolute value of discretionary accruals. Regressions on unrestricted and propensity score matched samples provide consistent evidence that audit partner dependence on fees from other companies in the network reduce audit quality. JEL Classifications: G34; M41; M42. Data Availability: All data used in this paper are publicly available.

Audit Quality and Partner Wealth

This paper employs unique and confidential data on audit partners’ wealth and audit related variables for a very large sample of firms in a setting where the auditors’ risk of litigation and loss of reputation is low. We analyze the relationship between audit quality and audit fees at the partner level and test if the strength of this relationship depends on the engagement partners’ private financial position. Overall, we find a negative relationship between audit quality and the fees the engagement partners’ obtain from his or her clients, consistent with partners acquiescing to pressure of clients that are of more economic significance to them. Furthermore, this negative relationship is weaker for rich partners, consistent with partners’ wealth acting as guards against fee dependence. These results are robust to different measures of audit quality and of the economic bonding that fees create between clients and partners. We only find partial evidence that audit quality is adversely affected by the partners’ debt. This paper provides new evidence on how audit quality is associated with the financial position of the engagement partner.

Did SOX Influence the Association between Fee Dependence and Auditors' Propensity to Issue Going-Concern Opinions?

SUMMARY:Li (2009) found that the association between fee dependence (FEEDEP) and the incidence of going-concern opinions (GCO) changed from insignificant in 2001 to positive in 2003. This finding has been interpreted as evidence that auditors became more conservative after the Sarbanes-Oxley Act (SOX). However, Feldmann and Read (2010) suggested that the year following SOX was not typical due to the intense spotlight directed at the audit profession. We revisit Li (2009) by extending the post-SOX period to 2011, and find robust results of little FEEDEP-GCO association in the years after 2003. Hence, the rise in auditor conservatism identified by Li (2009) likely represented the audit profession's temporary reaction to public scrutiny surrounding the passage of SOX, rather than a sustained movement toward more conservative going-concern reporting. Our study reinforces the notion that the effect of major events and government regulations cannot be adequately assessed based on what transpires in the short run.JEL Classifications: M420.

Audit Quality of the Integrated Supply Chain – Evidence from Taiwan Electronic Industry

Many suppliers and their major customers share a common audit firm or even common auditors in endorsing financial statements (i.e., supply chain audit). Yet, accompanying with the benefits stemmed from enhanced information corroboration and expertise spillover, supply chain audit faces the challenge of potential information collusion and fee dependence. We find supply chain audit alone is not associated with high audit quality. However, supply chain audit, coupled with firm-level industry expertise, results in low discretionary accruals and weakly reduction in restatement probability. Further, sharing a common audit at firm, lead auditor, or concurring auditor-level might have differential implications for audit quality. We find sharing either a staggered common lead or concurring auditor decreases the likelihood of restatement; in contrast, sharing them simultaneously increases it. Moreover, our analyses suggest supply chain audit contributes more to audit quality for up than for middle and down stream firms. Our study is motivated by recent audit failures divulged along the supply chain, and the Public Company Accounting Oversight Board’s (PCAOB) initiatives on mandatory audit firm rotation and engagement partner’s signature.

Auditor fee dependence, auditor tenure, and auditor independence: the case of Finland

A Green Paper on Audit Policy published by the European Commission is questioning, among other issues, whether the maximum fee collected from one client should be regulated and whether continuous assignment should be limited. In this paper, we examine the association between fee dependence and auditor tenure on auditor independence in Finland. We utilise audit, non-audit, and total fees as proxies of auditor fee dependence and discretionary accruals as a proxy of auditor independence. We find that: 1) fee dependence is not associated with discretionary accruals; 2) short auditor tenure (i.e., one year, equal or less than two years, and equal to or less than three years) is positively associated with discretionary accruals, however, only the former is statistically significant; 3) long auditor tenure is negatively associated with discretionary accruals, though this result is not statistically significant. Taken together, these results do not support policies to regulate auditor fee and limit auditor tenure in Finland.

Investors’ Perceptions of Auditors’ Economic Dependence on the Client

The authors revisit the client importance and auditor independence debate, and investigate whether investors’ perceptions of the auditor’s economic dependence has changed since the passage of the Sarbanes–Oxley Act of 2002 (SOX). Client importance is measured as the proportion of client nonaudit service fees, audit fees, or total fees to the total audit office revenue. Consistent with their hypothesis, they find a significant decrease in the association between both nonaudit services (NAS) and total fees, and the cost of equity from the pre- to the post-SOX period, indicating that investors’ concerns over auditor independence have changed in the post-SOX period. In addition, the authors find some evidence of a positive and significant association between both audit fees (2003) and total fees (2004), and cost of equity in the post-SOX period. Overall, these results indicate that the independence requirements in SOX and/or the heightened litigation environment post-SOX have, to some extent, mitigated but not completely eliminated investors’ concerns over the threat of economic fee dependence.

Has SOX Affected the Association between Fee Dependence and Auditors’ Going-Concern Opinions?

Recently, Li (2009) reports that an auditor’s going-concern decision is unaffected by pressure from her economically important clients in 2001, but is positively affected in 2003. Li attributes these findings to enhanced auditor independence under the Sarbanes-Oxley Act (SOX) of 2002. However, this interpretation seems premature, as failures to issue going-concern reservation are generally regarded as a serious violation of independence which auditors will try and avoid even before the passage of SOX. Moreover, several audit-related SOX provisions did not become effective until 2003. Our study sheds light on Li’s (2009) surprising findings by extending her post-SOX period to 2007 and conducting parallel analyses using a more comprehensive logistic regression model developed by DeFond, Raghunandan and Subramanyam (2002). Unlike Li (2009), we fail to find any association between the incidence of going-concern opinions and economic bonding using either model in 2004–2007. Her findings for 2003 are also very sensitive to model specification and sample choice. We then add to the models an interaction term between economic bonding and an indicator variable, denoting firms with high non-audit service fees in 2001 and hence most affected by SOX. This term is insignificant in 2003–2007, implying that SOX has not improved independence even for targeted firms. Expanding Li’s model to include five additional control variables in DeFond et al. (2002) yields qualitatively similar results as DeFond et al. Thus, the phenomena identified by Li (2009) appear to reflect auditors’ response to the aftermath of accounting scandals and/or the publicity surrounding SOX.

Has Sox Affected the Association between Fee Dependence and Auditors’ Going-Concern Opinions?

Has Sox Affected the Association between Fee Dependence and Auditors’ Going-Concern Opinions?

Auditor-in-Charge Characteristics and Going Concern Reporting Behavior: Does Number of Assignments, Age and Client Fee Dependence Matter?

We examine the impact of auditor-in-charge characteristics on audit quality using the propensity to issue a going concern paragraph as the measure of audit quality. Our sample consists of 1202 Swedish SMEs that filed for bankruptcy during October 2008 and September 2009. All companies in Sweden are required to be audited independent of their size. We report the following main findings. First, our results show a negative association between the number of audit assignments held by the auditor-in-charge and audit quality. This result is consistent with concerns raised by oversight bodies and practitioners and one explanation to the result is that some auditors specialize on large amounts of low quality audits at markets with statutory audits. Second, we study the association between age, experience and the likelihood of a going concern opinion. Consistent with theories about the diminishing role of career concerns as the auditor approaches the retirement age, we find that the age of the auditor is negatively associated with audit quality. We do not find any support for an experience effect. We also find that non-Big 4 auditors are less likely to issue a going concern opinion if the sales of the client are large in comparison to the aggregate sales of all clients of the auditor-in-charge. These results show that undue fee dependence from a single important client has a negative impact on audit quality.

Does Auditor Tenure Improve Audit Quality? Moderating Effects of Industry Specialization and Fee Dependence*

Contemporary Accounting ResearchVolume 27, Issue 3 p. 923-957 Does Auditor Tenure Improve Audit Quality? Moderating Effects of Industry Specialization and Fee Dependence* CHEE-YEOW LIM, CHEE-YEOW LIM Singapore Management UniversitySearch for more papers by this authorHUN-TONG TAN, HUN-TONG TAN Singapore Management UniversitySearch for more papers by this author CHEE-YEOW LIM, CHEE-YEOW LIM Singapore Management UniversitySearch for more papers by this authorHUN-TONG TAN, HUN-TONG TAN Singapore Management UniversitySearch for more papers by this author First published: 13 September 2010 https://doi.org/10.1111/j.1911-3846.2010.01031.xCitations: 90 † Accepted by Michel Magnan. We thank the editor (Michel Magnan), two anonymous referees, and Sanjay Kallapur for helpful comments. Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume27, Issue3Fall 2010 (September)Pages 923-957 RelatedInformation

Does Auditor Tenure Improve Audit Quality? Moderating Effects of Industry Specialization and Fee Dependence

We investigate whether the relation between auditor tenure and audit quality is conditional on auditor specialization and fee dependence. Although prior studies have investigated the relation between extended auditor-client tenure and audit quality, none has examined how this relation is jointly influenced by both auditor specialization and fee dependence. Our main analyses, using accrual quality as a measure of audit quality, show that firms audited by specialists (vs. non-specialists) have relatively higher audit quality with extended auditor tenure, and that this relation is negatively moderated by auditors’ fee dependence on clients. These results are robust to sensitivity tests, and alternative proxies for audit quality such as the issuance of going concern opinions and the market’s response to quarterly earnings surprises.

An Empirical Analysis of Auditor Independence in the Banking Industry

ABSTRACT: We examine auditor independence in the banking industry by analyzing the relation between fees paid to auditors and the extent of earnings management through loan loss provisions (LLP). We also examine whether this relation differs across large banks whose managements are required under the Federal Deposit Insurance Corporation Improvement Act to evaluate internal control over financial reporting and whose auditors must attest to the effectiveness of such internal controls, and small banks that are not subject to those requirements. We find that unexpected auditor fees are unrelated to earnings management for large banks. For small banks, we find greater earnings management via under-provisioning of LLP by banks that pay higher unexpected total and nonaudit fees to the auditor. These results suggest that auditor fee dependence on the audit client is associated with earnings management via abnormal LLP and is a potential threat to auditor independence for small banks. Our findings are relevant to policymakers contemplating new regulations in light of the recent banking crisis.

Fee Dependence and Credibility of Financial Reporting:The Effects of Litigation Risks and Governance Strength

Fee Dependence and Credibility of Financial Reporting:The Effects of Litigation Risks and Governance Strength

Auditor Independence in a Private Firm and Low Litigation Risk Setting

ABSTRACT: We examine the issue of auditor independence in a unique setting. Specifically, we test for auditor independence impairment among (1) private client firms, for which the risk of auditor reputation loss is lower than for publicly traded firms, and (2) in a low litigation environment (i.e., Norway) that further reduces the expected costs to the auditor associated with independence impairment. We have thus chosen a setting that gives independence impairment its best chance of being detected if it exists. Using a large sample of private Norwegian firms, we analyze whether auditors who receive higher fees are less likely to issue modified opinions. Despite the low litigation risk and the reduced reputation risk, our empirical results provide no evidence that auditors compromise their independence through fee dependence. These results are robust to controlling for the expected portion of fees, to different sample specifications, to the use of both levels and changes specifications, and to a number of sensitivity analyses.

An Empirical Analysis of Auditor Independence in the Banking Industry

We examine auditor independence in the banking industry by analyzing the relation between fees paid to the auditors and the extent of earnings management through loan loss provisions (LLP). We also examine whether this relation differs across large banks whose managements are required under the FDIC Improvement Act to evaluate the internal control over financial reporting and whose auditors must attest to the report on the effectiveness of such internal controls, and small banks that are not subject to such controls. Our results indicate that unexpected auditor fees are unrelated to earnings management for large banks. For small banks, we find a strong negative association between income-increasing (negative) abnormal LLP and both unexpected total and nonaudit fees. These results suggest that auditor fee dependence on the audit client is associated with earnings management via abnormal LLP and may be a threat to auditor independence for small banks. Our findings are relevant to policymakers who are contemplating new regulations in light of the recent banking crisis.

The Effect of Client Fee Dependence on Audit Independence

This paper examines the effect of client fee dependence on the independence of audit firms. For the largest 25 audit firms for which fee revenue and total revenue could be determined, three research approaches were used to identify whether inappropriate audit opinions are being issued to large‐fee clients. All situations identified by an audit opinion prediction model as having a high probability of qualification were duly qualified. It was found that for the top 25 audit firms, the level of fee dependence from any one client was substantially below the level suggested in auditing standards. In summary, the investigation was unable to identify any instances of fee dependence impairing the independence of auditors.

Auditor independence and fee dependence

This study investigates whether fee dependence within the audit firms’ offices jeopardises auditor independence. Fee dependence is examined at both the national audit firm level as well as the local office level and in a setting where public disclosure of fees is mandatory. We focus our tests on audit fee dependence and at the same time we control for the effects of non-audit service fee dependence post the 1989 mergers. We operationalise the exercise of independent judgement in auditing by the propensity to issue qualified audit opinions. If fee dependence affects auditors’ independent judgement, then auditors are less likely to qualify the accounts. The study's results show that the level of auditor fee dependence does not affect auditor propensity to issue unqualified audit opinions. The findings remain robust to a number of sensitivity tests including the analyses controlling for the effects of non-audit service fee dependence and other settings in which there is heightened pressure on auditors to confront the effects of fee dependence on exercising independent audit judgement.