Internal audit department characteristics/activities and audit fees : some evidence from Hong Kong firms

This study provides preliminary support for the notion that internal audit function assists in reducing external audit effort and fees. Data on internal audit characteristics and activities are obtained from survey respondents of Hong Kong companies and audit fee model data are acquired from their annual reports. The results of this study suggest that the external auditor of firms in Hong Kong rely on the internal audit function and subsequently charge a lower fee. Lower external audit fees are associated with a larger internal audit department and certain activities carried out by the internal audit. Specifically, lower external audit fees are associated with more internal audit effort spent on activities relating to financial statements, systems development and maintenance, operating efficiency and effectiveness, fraud investigations and unlimited access to internal auditors’ working papers. The results of this study suggest that the contribution of the internal audit may substitute for some substantive external auditing processes and lower monitoring costs.

Audit fees and asset securitization risks

The thesis investigates “where were the auditors in asset securitizations”, a criticism of the audit profession before and after the onset of the global financial crisis (GFC). Asset securitizations increase audit complexity and audit risks, which are expected to increase audit fees. Using US bank holding company data from 2003 to 2009, this study examines the association between asset securitization risks and audit fees, and its changes during the global financial crisis. The main test is based on an ordinary least squares (OLS) model, which is adapted from the Fields et al. (2004) bank audit fee model. I employ a principal components analysis to address high correlations among asset securitization risks. Individual securitization risks are also separately tested. A suite of sensitivity tests indicate the results are robust. These include model alterations, sample variations, further controls in the tests, and correcting for the securitizer self-selection problem. A partial least squares (PLS) path modelling methodology is introduced as a separate test, which allows for high intercorrelations, self-selection correction, and sequential order hypotheses in one simultaneous model. The PLS results are consistent with the main results. The study finds significant and positive associations between securitization risks and audit fees. After the commencement of the global financial crisis in 2007, there was an increased focus on the role of audits on asset securitization risks resulting from bank failures; therefore I expect that auditors would become more sensitive to bank asset securitization risks after the commencement of the crisis. I find that auditors appear to focus on different aspects of asset securitization risks during the crisis and that auditors appear to charge a GFC premium for banks. Overall, the results support the view that auditors consider asset securitization risks and market changes, and adjust their audit effort and risk considerations accordingly.

Aligning off-balance sheet risk, on-balance sheet risk and audit fees: a PLS path modelling analysis

This study focuses on using the partial least squares (PLS) path modelling technique in archival auditing research by replicating the data and research questions from prior bank audit fee studies. PLS path modelling allows for inter-correlations among audit fee determinants by establishing latent constructs and multiple relationship paths in one simultaneous PLS path model. Endogeneity concerns about auditor choice can also be addressed with PLS path modelling. With a sample of US bank holding companies for the period 2003-2009, we examine the associations among on-balance sheet financial risks, off-balance sheet risks and audit fees, and also address the pervasive client size effect, and the effect of the self-selection of auditors. The results endorse the dominating effect of size on audit fees, both directly and indirectly via its impacts on other audit fee determinants. By simultaneously considering the self-selection of auditors, we still find audit fee premiums on Big N auditors, which is the second important factor on audit fee determination. On-balance-sheet financial risk measures in terms of capital adequacy, loan composition, earnings and asset quality performance have positive impacts on audit fees. After allowing for the positive influence of on-balance sheet financial risks and entity size on off-balance sheet risk, the off-balance sheet risk measure, SECRISK, is still positively associated with bank audit fees, both before and after the onset of the financial crisis. The consistent results from this study compared with prior literature provide supporting evidence and enhance confidence on the application of this new research technique in archival accounting studies.

Aligning off-balance sheet risk, on-balance sheet risk and audit fees: a PLS path modelling analysis

This study focuses on using the partial least squares (PLS) path modelling methodology in archival auditing research by replicating the data and research questions from prior bank audit fee studies. PLS path modelling allows for inter-correlations among audit fee determinants by establishing latent constructs and multiple relationship paths in one simultaneous PLS path model. Endogeneity concerns about auditor choice can also be addressed with PLS path modelling. With a sample of US bank holding companies for the period 2003-2009, we examine the associations among on-balance sheet financial risks, off-balance sheet risks and audit fees, and also address the pervasive client size effect, and the effect of the self-selection of auditors. The results endorse the dominating effect of size on audit fees, both directly and indirectly via its impacts on other audit fee determinants. By simultaneously considering the self-selection of auditors, we still find audit fee premiums on Big N auditors, which is the second important factor on audit fee determination. On-balance-sheet financial risk measures in terms of capital adequacy, loan composition, earnings and asset quality performance have positive impacts on audit fees. After allowing for the positive influence of on-balance sheet financial risks and entity size on off-balance sheet risk, the off-balance sheet risk measure, SECRISK, is still positively associated with bank audit fees, both before and after the onset of the financial crisis. The consistent results from this study compared with prior literature provide supporting evidence and enhance confidence on the application of this new research technique in archival accounting studies.

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.

Corporate governance quality, audit fees and non-audit services fees

This paper extends prior research on the relationship between governance quality and auditor remuneration.We examine the influence of audit committee effectiveness (ACE), a proxy for governance quality, on audit fees (AF) and non-audit services fees (NASF) using a new composite measure comprising audit committee independence, expertise, diligence and size. We find that after controlling for board of director characteristics, there is a significant positive association between ACE and AF only for larger clients. Our results indicate that effective audit committees undertake more monitoring which results in wider audit scope and higher audit fees. Contrary to our expectations, we find the association between ACE and NASF to be positive and significant, especially for larger clients. This suggests that larger clients are more likely to purchase non-audit services (NAS) even in the presence of effective audit committees probably due to the complexity of their activities. Overall, our findings support regulatory initiatives aimed at improving corporate governance quality.

Fair value accounting for non-current assets and audit fees: Evidence from Australian companies

We investigate the association between asset revaluations of non-current assets and audit fees, using a sample of ASX 300 companies from the years 2003–2007.We report that there is a significant increase in the audit fees paid when non-financial assets (PPEs, investment properties and intangible assets) are measured at fair values. Moreover, we provide evidence that an independent valuer or appraiser significantly weakens the positive association between asset revaluations and audit fees. Furthermore, companies whose noncurrent assets are revalued upwards and those that revalue their non-current assets upwards every year have significantly higher audit fees. Additional tests provide empirical evidence that the strength of corporate governance has a moderating effect on the level of audit fees. This study contributes to the ongoing debate on the role of fair value accounting. The findings suggest agency costs associated with fair value estimates may offset the benefits from the use of fair value accounting.

The effect of internal audit function quality and internal audit contribution to external audit on audit fees

Corporate governance mandates and listing rules identify internal audit functions (IAF) as a central internal control mechanism. External audits are expected to assess the quality of IAF before placing reliance on its work. We provide evidence on the effect of IAF quality and IAF contribution to external audit on audit fees. Using data from a matched survey of both external and internal audits, we extend prior research which is based mainly on internal audits' assessment and conducted predominantly in highly developed markets. We find a positive relationship between IAF quality and audit fees as well as a reduction in audit fees as a result of external auditors' reliance on IAF. The interaction between IAF quality and IAF contribution to external audit suggests that high quality IAF induces greater external auditor reliance on internal auditors' work and thus result in lower external audit fees.

Fair values and audit fees: Evidence from asset revaluations in Australia

This paper examines the association between the level of audit fees paid and asset revaluations, one use of fair value accounting. This Australian study also investigates attributes of asset revaluations and the association with the level of audit fees paid. We find that firms choosing the revaluation model incur higher audit fees than those that chose the cost model; asset revaluations made by directors lead to the firm incurring higher audit fees than for those made by external independent appraisers; and revaluation of investment properties leads to lower audit fees. The findings suggest that asset revaluations can result in higher agency costs and audit fees vary with the reliability of the revaluations and the class of assets being revalued.

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 committee characteristics, internal auditors' contribution to financial statement audits and audit fees : Malaysian evidence

This paper provides empirical evidence on the impact of audit committee characteristics on the extent of internal auditor’s contribution to financial statement audits in an emerging economy. Using a cross-sectional regression model, based on Felix, Gramling and Maletta’s (2001) study, it provides evidence of a positive relationship between internal auditor contribution to financial statement audits and three dimensions of audit committee characteristics: the proportion of independent audit committee members; the extent of audit committee members’ knowledge and experience in auditing, accounting, and finance; and the extent of audit committee review of IA proposal related to program, budget and coordination. A second model examines a relationship between internal audit contribution to financial statement audits and audit fees. However, the results did not yield a significant relationship between the two variables. These results are based on a unique data set comprised of publicly available data matched with survey data from chief internal auditors or financial controllers of 90 firms listed on the Kuala Lumpur Stock Exchange (KLSE).

Internal audit attributes and external audit's reliance on internal audit : implications for audit fees

This study aims to examine two aspects of internal audit quality, namely internal audit competency and internal audit contribution to financial statement audits. Consistent with the substitution view, this study predicts a negative relationship between the competency aspects of internal audit (the tenure of the existence of internal audit in the organization, internal audit staff expertise in IT and computer skills, training hours, internal audit staff professional certifications in accounting and auditing, and internal audit staff experience in auditing) and audit fees. Second, this study tests whether the contribution of internal auditors to financial statement audit reduces audit fees. The data analysis is based on a cross-sectional regression model with observations of 73 public-listed firms in Malaysia, which include publicly available data matched with survey responses from their internal and external auditors. The results of the study suggest that the competency of internal audit, namely the tenure of the existence of internal audit in the organization, training, internal audit staff prior experience in auditing and accounting, and certifications are associated with lower audit fees. Our findings for both aspects of internal audit quality (competency and internal audit contribution) lend support to the substitution view for explaining the links between internal audit quality and 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.