Jurisdictional differences in contracting out GBE audits : the impact on audit pricing

This paper examines audit costs for government business enterprises in various Australian jurisdictions, focusing on whether contracting private-sector suppliers induces competitive pricing and hence lower-priced audits. One jurisdiction (New South Wales) is shown to have low levels of contracting-out. It is argued that this lowers price competition and therefore, we predict, audit costs in NSW will be higher than elsewhere in Australia. An empirical comparison shows that, controlling for other factors, NSW is statistically significantly more expensive than other Australian jurisdictions. Alternative explanations relating to variation in audit quality, jurisdiction differences and relative cost are also discussed.

City-level auditor industry specialization, economies of scale, and audit pricing

We examine the effects of city-level auditor industry specialization and scale economies on audit pricing in the United States. Using a sample of Big N clients for the 2000-2007 period, and a scale measure based on percentile rankings of the number of audit clients at the city-industry level, we document significant specialization premiums and scale discounts in both the pre- and post-Sarbanes-Oxley Act (SOX) periods. However, the effects of industry specialization and scale economies on audit pricing are highly interactive. The negative effect of city-industry scale on audit fees obtains only for clients of specialist auditors. By contrast, clients of non-specialist auditors obtain scale discounts only when they enjoy strong bargaining power, suggesting that auditors are "forced" to pass on scale economies to clients with greater bargaining power.

Do political connections affect the role of independent audit committees and CEO Duality? Some evidence from Malaysian audit pricing

This study examines whether political connection to firms affects the association between audit committee independence and demand for higher quality audits. In line with Carcello et al. (2002), our findings show that there is a positive association between audit committee independence and audit fees thus supporting the hypothesis that more independent audit committees demand higher audit quality. However, we find that this relationship is weaker for politically connected (PCON) firms suggesting that the independence of audit committees in Malaysian PCON firms may be compromised. Additionally, we provide evidence that PCON firms that have CEO duality are perceived by audit firms as being of higher risk than CEO duality firms without political connection.

Executive equity risk-taking incentives and audit pricing

Using a large sample of U.S. firms spanning the period 2000-2010, we document a strong positive association between the sensitivity of CEO compensation portfolio to stock return volatility (vega) and audit fees. We also show that the positive association between vega and audit fees is weaker in the post-Sarbanes-Oxley Act (SOX) period. In supplementary tests, we show that the relation between vega and audit fees is stronger for firms with older CEOs and in firms where the CEO is also chairman of the board. Collectively, our results suggest that audit firms incorporate executive risktaking incentives in the fees they charge for their services.

Business group affiliation, board quality and audit pricing behavior: evidence from indian companies

This study examines the relationships among business group affiliation, board quality and audit fees in an emerging market setting. Using data from Indian firms listed on the Bombay Stock Exchange (BSE) over a nine-year period (2004-2012), our results indicate that firms affiliated with a business group pay higher audit fees than those without such affiliations. We also find that group-affiliated firms with higher-quality boards pay relatively higher audit fees compared to other counterparts. Further, our findings suggest that group-affiliated firms pay lower fee premiums when an audit is undertaken by a Big 4 firm or its affiliates, which implies that economies of scale may be a potential competitive advantage held by larger auditors. The results of the study have implications for the management of audit fees by group-affiliated firms through board structure and processes.

The association between corporate governance attributes and audit fees in Malaysia : ethnicity implications

This study extends the literature on audit pricing by examining the relationship between audit fees and corporate governance factors, namely audit committee and CEO characteristics of 605 public-listed companies in Malaysia. The study specifically investigates the association between audit fees and the ethnicity attributes of the CEO (bumiputra or not) and audit committee members (i.e. proportion of bumiputra membership), as well as audit committee characteristics pertaining to the proportion of independent members, financial expertise and diligence. The findings indicate audit committee independence is significantly and positively associated with audit fees, while financial expertise has a negative association with audit fees. We however do not find any relationship between audit fees and audit committee diligence as measured by meeting frequency. In addition, the data also reveals that firms with bumiputra CEOs and bumiputra dominated audit committees hold significant and positive relationships with audit fees.

Audit fees, auditor choice and stakeholder influence: Evidence from a family-firm dominated economy

Despite the dominance of family-owned publicly listed companies in developing economies, prior research has paid relatively little attention to this area and the socio-economic context of these countries has been mostly ignored. This study contributes to the accounting literature by providing empirical evidence of the effects of family control and ownership on audit pricing and auditor choice in a developing economy context. Using 1058 firm-year observations of publicly listed companies in Bangladesh, where family firms are the most dominant form of public companies, we find that in comparison with non-family firms, our sample family firms pay significantly lower audit fees and choose lower quality auditors. However, for export-oriented industries, family firms seem to pay significantly higher audit fees and recruit better quality auditors compared to non-family firms. Collectively, our findings have important implications for audit markets in emerging economies in which the sustainability of family firms is crucial for overall economic development.

Auditor independence: regulation, oversight and inspection

Much of what auditors do is unobservable. Indeed, what goes on in an audit has been described as ‘secret audit business’. Audits in this context are of financial reports and those financial reports are the representations of the management of those companies, not the auditors. The audits of financial reports are of value in that they provide a competent and independent (of auditee management) attestation of the validity of those management representations. This attestation lowers the ‘information risk’ for the users of these financial reports. There has been a marked increase in activity to regulate matters relating to independence. The proposals outlined in CLERP 9 are one example of this. The requirements in the United States under the Sarbanes-Oxley Act are a further example.

Audit firms operate in a highly regulated yet highly competitive market. Evidence exists to suggest that audit firms are active competitors in respect of audit pricing and competency, including specialist industry expertise. Until recently, there has been little or no observable evidence that audit firms compete in respect of independence. The issues as they relate to audit independence are complex. One issue is that threats to independence are frequently subtle and difficult to observe and measure. Hence, controlling the decisions that relate to them cannot rely solely on regulation which itself inevitably relies on crude definitions and imprecise measures. Additionally, further regulation may not achieve the desired end without other processes being but in place in tandem.

This paper argues that:

1. auditors of certain classes of companies (in particular, those that are publicly traded) should be provided with incentives or requirements to have observable processes on independence
2. the means of observability should be in the form of an inspection and review process focussing on issues critical to the audit, such as independence
3. expert persons not having a current or past financial interest in the firm or in the commercial outcomes of the review should be used in the inspection and review process
4. the review process should have wide-ranging powers of inspection to examine the policies, processes, structures and ‘culture’ of audit firms
5. the report of the inspection and review should be made public, unedited and in full, and in a timely fashion. The primary objectives of this proposal are to (1) make more transparent to the market for information the characteristics of the audit firms and their process to ensure audit independence, and (2) provide a rigorous oversight of independence decision-making by persons who have no commercial interest in the outcome of the decision.

Partner-scale economies, service bundling and auditor independence in the Australian self-managed superannuation (pension) fund industry

Using proprietary Australian Taxation Office (ATO) data, this study examines audit pricing, service bundling and independence issues in the self-managed superannuation fund (SMSF) sector, the fastest growing and largest segment of the Australian $2 trillion retirement savings industry. We consider the impact of partner-level scale effects for a large sample of SMSF audits for the three years to June 2010. After controlling for factors known to determine audit fees, we find evidence of fee discounting by partners with large client portfolios. However, when the dependent variable is redefined to the total 'bundle' of services (including audit and non-audit fees), the firms of partners with larger client portfolios are shown to earn bundling fee premiums. This finding suggests industry specialists price strategically using audits as a conduit to supply higher margin non-audit services (NAS) to clients with more resources. Last, we find no evidence the supply of NAS impairs auditor independence, alleviating joint supply concerns raised in the Cooper Review.

Auditee religiosity, external monitoring, and the pricing of audit services

Based on prior studies which show that firms headquartered in high religiosity counties exhibit high level of business ethics, this study examines whether these firms are associated with low audit risk, and therefore low audit fees. In investigating this relationship, we draw a distinction between intrinsic and extrinsic religiosity of auditees. Using a sample of 25,872 U.S. observations from 2003 to 2012, we find that intrinsic religiosity of the auditees is associated with low audit fees after controlling for auditee extrinsic religiosity, social capital, firm-specific characteristics, and county-specific characteristics. Furthermore, we find that external monitoring (institutional ownership and leverage) weakens the negative relationship between auditee intrinsic religiosity and audit fees. Finally, we conclude that the effect of auditor religiosity on audit fees is a regional effect that may affect the relationship between audit fees and auditee intrinsic religiosity.

Short-term debt maturity structures, credit ratings, and the pricing of audit services

ABSTRACT: Short-term debt and credit ratings have benefits for financial reporting quality that may be associated with lower audit fees. Using U.S. data for 2003 through 2006, we find that short-term debt is negatively related to audit fees for firms rated by Standard & Poor’s, consistent with more monitoring and better governance mechanisms in firms with higher short-term debt. Credit ratings quality is negatively related to audit fees, consistent with ratings quality reflecting a firm’s liquidity risk, governance mechanisms, and monitoring from rating agencies. We also find that the negative relation between short-term debt and audit fees is stronger for firms with low-quality credit ratings, consistent with auditors pricing lender monitoring.

The role of internal audit in corporate governance and management

This research report is based on a study undertaken in Australia, and aims to evaluate the role of internal audit in corporate governance and management. It identifies the accountability structures and objectives of internal audit, considers the nature of internal audit functions and the extent of application of The Institute of Internal Auditors Standards of Professional Practice, reviews the relationships of the chief audit executives (CAEs) and assesses the nature of financial report risks and other issues covered by internal auditors. The research findings include a diversity of accountability structures for CAEs and a range of internal audit activities, with the application of the IIA Standards being in need of improvement. In conclusion, the researchers make recommendations for improvements in practice to be considered by The Institute of Internal Auditors and other regulating and governing bodies.

The importance of audit committees in initial public offerings

This paper follows Balvers, McDonald and Miller (1988), and Beatty (1989), who find lower underpricing in Initial Public Offerings (IPOs) when prestigious auditors are used to attest to the IPO's financial statements. Australian IPOs are not obliged to nominate audit firms in the prospectus, but often identify that they will have audit committees so as to assist in more appropriate corporate governance. This paper analyzes if IPOs identifying the existence of audit committees in the prospectus have a lower underpricing return. While our findings are consistent with previous studies concluding that both the size of the new issue and the use of an underwriter are important ingredients in the level of underpricing return, the inclusion of an audit committee in the prospectuses has actually increased underpricing returns. The capital market may view the audit committee identification with some skepticism.