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.

Bank audit fees and asset securitization risks

Using the lens of audit pricing, we provide insights into auditors’ behaviors in relation to the risk of asset securitizations to bank holding companies in a period encompassing the Global Financial Crisis (GFC) and the introduction of the accounting standards FAS 166 and FAS 167. Using US bank holding company data from 2003 to 2011, we find significant and positive associations between asset securitization risks and audit fees. We find that auditors appear to focus on different aspects of asset securitization risks after the onset of the GFC, and increase their attention to the systemic risks facing bank holding companies in general. After the implementation of FAS 166 and FAS 167, which removed the discretion to treat asset securitizations as sales and required the consolidation of the accounts of special purpose entities, asset securitization risks no longer have a significant effect on audit fees.

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.

Gender differences in audit committees

Issues related to the composition of audit committees have attracted significant interest from legislators and regulators in recent years. In my dissertation, I examine one overlooked component of audit committee composition – namely, the presence of female directors on the audit committee. I empirically test to see if there are any differences in the functioning of audit committee when there is at least one female director on the audit committee. My dissertation examines three issues: audit committee diligence, audit pricing and earnings management. ^ The absence of females on corporate boards has become the focus of legislators in some countries. Prior research, in a variety of contexts, suggests that women are in general more conservative in their judgments and decisions. The first part of my dissertation empirically shows that the presence of at least one female director on the audit committee makes the audit committee have more meetings. The second essay empirically examines if there is a positive association between audit fees and the presence of female directors in the audit committee. I posit that having a female director on the audit committee will result in higher audit fees. I find no significant evidence to show that audit fees are higher when there is a female director on the audit committee. The third part of my dissertation empirically examines if there an association between the presence of a female director on the audit committee and earnings management. I find no significant evidence to show that the presence of female directors on the audit committee constrains earnings management. Overall, the results suggest that having a female on the audit committee changes the form – if not the substance – of audit committee functioning. ^

Gender Differences in Audit Committees

Issues related to the composition of audit committees have attracted significant interest from legislators and regulators in recent years. In my dissertation, I examine one overlooked component of audit committee composition – namely, the presence of female directors on the audit committee. I empirically test to see if there are any differences in the functioning of audit committee when there is at least one female director on the audit committee. My dissertation examines three issues: audit committee diligence, audit pricing and earnings management. The absence of females on corporate boards has become the focus of legislators in some countries. Prior research, in a variety of contexts, suggests that women are in general more conservative in their judgments and decisions. The first part of my dissertation empirically shows that the presence of at least one female director on the audit committee makes the audit committee have more meetings. The second essay empirically examines if there is a positive association between audit fees and the presence of female directors in the audit committee. I posit that having a female director on the audit committee will result in higher audit fees. I find no significant evidence to show that audit fees are higher when there is a female director on the audit committee. The third part of my dissertation empirically examines if there an association between the presence of a female director on the audit committee and earnings management. I find no significant evidence to show that the presence of female directors on the audit committee constrains earnings management. Overall, the results suggest that having a female on the audit committee changes the form – if not the substance – of audit committee functioning.

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 taxing effects of the advance pricing arrangement program: A review of APAs and their impact on stakeholders

The current transfer pricing rules contained in Australia’s taxation regime are designed to counter the underpayment of tax by businesses engaged in international related-party dealings. Currently, these transactions must take place at an arm’s length price, a requirement which is becoming increasingly difficult to demonstrate. This results in an increased risk of an audit by the Australian Taxation Office. If a taxpayer wishes to avoid the risk of an audit, and any ensuing penalties, there is one option: an advance pricing arrangement (‘APA’). An APA is an agreement whereby the future transfer pricing methodology to be used to determine the arm’s length price is agreed to by the taxpayer and the relevant tax authority or authorities. This article investigates the use of APAs as a solution to the problem of transfer pricing and considers their impact on stakeholders. It is argued that while APAs provide a valuable practical tool for multinational entities facing the challenges of the taxation of global trading under the current regime, they may not be a practical long term solution.

Advance pricing arrangements : an Australian Tax Office success or a legislative failure?

Australia’s domestic income tax legislation and double tax agreements contain transfer pricing rules which are designed to counter the underpayment of tax by businesses engaged in international dealings between related parties. The current legislation and agreements require that related party transactions take place at a value which reflects an arm’s length price, that is, a price which would be charged between unrelated parties. For a host of reasons, it is increasingly difficult for multinational entities to demonstrate that they are transferring goods and services at a price which is reflective of the behaviour of independent parties, thereby making it difficult to demonstrate compliance with the relevant legislation. Further, where an Australian business undertakes cross-border related party transactions there is the risk of an audit by the Australian Tax Office (ATO). If a business wishes to avoid the risk of an audit, and any ensuing penalties, there is one option: an advance pricing arrangement (APA). An APA is an agreement whereby the future transfer pricing methodology to be used to determine the arm’s length price is agreed to by the taxpayer and the relevant tax authority or authorities. The ATO views the APA process as an important part of its international tax strategy and believes that there are complementary benefits provided to both the taxpayer and the ATO. The ATO promotes the APA process on the basis of creating greater certainty for all parties while reducing compliance costs and the risk of audit and penalty. While the ATO regards the APA system as a success, it may be argued that the implementation of such a system is simply a practical solution to an ongoing problem of an inherent failure in both the legislation and ATO interpretation and application of this legislation to provide certainty to the taxpayer. This paper investigates the use of APAs as a solution to the problem of transfer pricing and considers whether they are the success the ATO claims. It is argued that there is no doubt that APAs provide a valuable practical tool for multinational entities facing the challenges of the taxation of global trading under the current transfer pricing regime. It does not, however, provide a long term solution. Rather, the long term solution may be in the form of legislative amendment.

International transfer pricing : the Australian approach and lessons for Canada

In response to developments in international trade and an increased focus on international transfer-pricing issues, Canada’s minister of finance announced in the 1997 budget that the Department of Finance would undertake a review of the transfer-pricing provisions in the Income Tax Act. On September 11, 1997, the Department of Finance released draft transfer-pricing legislation and Revenue Canada released revised draft Information Circular 87-2R. The legislation was subsequently amended and included in Bill C-28, which received first reading on December 10, 1997. The new rules are intended to update Canada’s international transfer-pricing practices. In particular, they attempt to harmonize the standards in the Income Tax Act with the arm’s-length principle established in the OECD’s transfer pricing guidelines. The new rules also set out contemporaneous documentation requirements in respect of cross-border related-party transactions, facilitate administration of the law by Revenue Canada, and provide for a penalty where transfer prices do not comply with the arm’s-length principle. The Australian tax authorities have similarly reviewed and updated their transfer-pricing practices. Since 1992, the Australian commissioner of taxation has issued three rulings and seven draft rulings directly relating to international transfer pricing. These rulings outline the selection and application of transfer pricing methodologies, documentation requirements, and penalties for non-compliance. The Australian Taxation Office supports the use of advance pricing agreements (APAs) and has expanded its audit strategy by conducting transfer-pricing risk assessment reviews. This article presents a detailed review of Australia’s transfer-pricing policy and practices, which address essentially the same concerns as those at which the new Canadian rules are directed. This review provides a framework for comparison of the approaches adopted in the two jurisdictions. The author concludes that although these approaches differ in some respects, ultimately they produce a similar result. Both regimes set a clear standard to be met by multinational enterprises in establishing transfer prices. Both provide for audits and penalties in the event of noncompliance. And both offer the alternative of an APA as a means of avoiding transfer-pricing disputes with Australian and Canadian tax authorities.

Management audit of the flu vaccine procurement and the I-Save Rx Program /

This audit concluded that Illinois' preocurement of flu vaccine was not adequately planned or monitored and led to financial liability for vaccine that the state did not receive. The I-Save Rx Program, which imports prescription drugs into the United States from other countries, and was found to be in violation of federal law is also covered in this report.