Agency Conflicts and Audit Fees: An International Study

Audit pricing and nature of controlling shareholders: Evidence from France

This PhD paper investigates a) the impact of the financial crisis of 2008 on earnings quality, b) the joint effect of financial crisis of 2008 and investor protection on audit quality, c) the joint effect of audit quality and investor protection on earnings quality and d) the cost of capital and the changes of audit quality and earnings quality influencing on it due to financial crisis of 2008 in publicly listed firms in advanced countries as per level of investor protection. The sample is categorized into three clusters. Cluster 1 is referred as outsider economies with strong outsider protection and legal enforcement and clusters 2 and 3 are referred as insider economies with better and weaker legal enforcement systems respectively. Using linear regression analysis, 137.091 firm-years observations are analyzed, the earnings quality is examined by using 10 different measures (conservatism, value relevance, accruals quality, earnings persistence, earnings predictability, loss avoidance analysis and earnings smoothness), the audit quality is examined by using 6 different measures (audit fees, modified audit report opinion, auditor switch, status of audit firm, existence of audit committee and demand for auditing), the investor protection is examined by using 8 different metrics adopted from World Economic Forum (property rights, judicial independence, transparency of government policymaking, strength of auditing and reporting standards, efficacy of corporate boards, protection of minority shareholders' interests, strength of investor protection and legal rights index), and the cost of equity capital under constant growth model introduced by Palea (2007) and under PEG ratio method introduced by Easton (2004) is examined. The results are mixed among clusters and research periods. Specifically, first, the results show that during the financial crisis, earnings quality is decreased. However, this deterioration on earnings quality appears to be more severe in clusters 2 and 3 which are characterized by medium and weak shareholder protection. Particularly, for all clusters, the study shows that in an attempt to cope with recession, managers have an incentive to choose more aggressive conservatism, lower the earnings predictability and book more accruals. Countries in clusters 2 and 3 report more relevant financial numbers and follow artificial smoothing during the financial crisis while the countries in cluster 1 are to some conflicting. Second, the results show that all measures of audit quality is positively associated with most of institutional factors of investor protection in all clusters except audit fees which is not correlated with none of investor protection indexes. Third, against of expectations, it is found that audit quality is lower during financial crisis in all clusters and in most of audit quality measures. Fourth, the findings indicate that audit quality is higher (lower) in firms with strong (weak) investor protection and legal enforcement during financial crisis in all clusters except from audit fees. Fifth, it is reported that earnings quality is stronger (weaker) in countries with strong (weak) investor protection in all clusters in pre and crisis period. Sixth, the results confirm the findings of vast majority of previous literature that higher (lower) audit quality implies higher (lower) earnings quality in all clusters, irrespective of the financial crisis. Seventh, this PhD paper indicates that higher (lower) audit quality implies higher (lower) earnings quality in countries with high (low) investor protection in all clusters, irrespective of the financial crisis. Eighth, the results show that the financial crisis of 2008 has had positive impact on the cost of equity capital for all clusters and the cost of debt for clusters 1 and 2. The cost of equity is negatively associated with firms that are audited by Big Four auditors and have an audit committee in all clusters, and with firms that switch auditors in cluster 2. Firms that are audited by Big Four auditors in cluster 1, firms with a modified audit report in cluster 2 and firms that have an audit committee in cluster 3 have a negative association with the cost of debt. This study also shows that the association between earnings quality attributes and cost of capital is significantly negative before and during the crisis. Overall, the findings offer crucial insights to post crisis management, auditors, regulators and accounting standard setters in stabilizing investors’ confidence and enhancing firm growth after the 2008 financial crisis.

Do Joint Audits Lead to Greater Audit Fees?

In its October 2010 Green Paper on audit policy, the European Commission suggested that joint audits might be a way of improving the audit market in Europe. However, some parties consider that a joint audit system is not an efficient solution because the perceived improvements in audit quality, if any, are not commensurate with the significant increase in audit fees. We compare audit fees paid during the years 2007–2011 by listed companies in France, where joint audits are mandatory, with those paid by British and Italian companies. Theory suggests that audit fees in countries with high investor protection, such as the UK, are likely to be greater than those in countries with lower investor protection, such as France and Italy, ceteris paribus. However, we find significantly higher audit fees in France after controlling for well-documented auditor, client, and engagement attributes, which vary across countries. Furthermore, since we do not find statistically significant differences in the magnitude of abnormal accruals, the higher audit fees observed in France do not appear to be associated with higher audit quality.

This study examined the association between intensive board monitoring (IBM) and segment disclosure quality (SDQ). It also investigated whether this association can be moderated by firm's home country investor protection (IP) level. Based on a panel of 271 non-financial European Union (EU) listed corporations covering the 2007–2012 period, this study estimated two multiple regression models including industry and year fixed effects. We found evidence that the segment disclosure quality is higher when a majority of outside directors serve on monitoring committees. We, also, found that the positive association between IBM and SDQ is more pronounced for firms in a weak IP environment and less pronounced for firms in a strong IP environment. Thus, we provided evidence in favor of a substitutive relationship between IBM and IP level with respect to their association with SDQ. Our findings are evidenced by several robustness tests.

This study examines the association between audit fees and management entrenchment, which is proxied by Bebchuk et al. (2005) entrenchment index. The results show that audit fees are significantly positively correlated with Bebchuk et al. (2005) entrenchment index controlling for other factors. Further results show that the positive relation between audit fees and the entrenchment index exists only in firm with low growth opportunity and high free cash flow (i.e. firms with severe Jensen agency problem). These results indicate that firms’ agency problems moderate the association between audit fees and management entrenchment.

Agency problems caused as a result conflict of interest between managers and shareholders. In the meantime, the audit the efficient strategy to limit the powers of the managers in contractual relations is considered. The aim of this paper is the investigation the relationship between agency costs and audit quality associated with audit fees. The study population consisted of 492 years - company during the period 2010 to 2014. Methodology: In this study, the independent variables agency costs (the ratio of sales to total assets), agency cost (the operating expenses ratio on sales) and audit quality (the rank of audit company) and the dependent variable (audit fees) that using multivariate regression techniques with combined data and to Eviews8 software, hypothesis analysis were made. Results: The results revealed there is a significant relationship between agency costs (the ratio of sales to total assets), agency cost (the operating expenses ratio on sales) and audit fees and the lack of a significant relationship between audit quality and auditing fees. Conclusion: The other research results showed that there is significant relationship between company sizes with audit fees.

Purpose This study investigates how family ownership and involvement in management and directorship influenced audit fees in Chinese family firms during the COVID-19 pandemic, leveraging China’s unique cultural and institutional context. Design/methodology/approach Using data from the China Stock Market and Accounting Research Database, the study analysed 18,889 firm-year observations from family-owned listed firms over the 2015–2022 period, employing two-way fixed-effect regressions, robustness tests and controls for endogeneity. Pre- and post-COVID-19 periods (2015–2018 versus 2019–2022) were compared to assess the impact of family governance on audit fees during the pandemic. Findings The results reveal a significant negative relationship between family ownership and audit fees during COVID-19, compared to the insignificant negative pre-crisis association. Family involvement in management consistently reduced audit fees across the whole period, while directorship showed no significant effect. The findings indicate that Confucian-inspired familial alignment mitigated Type I agency problems, reducing audit risk without significantly increasing Type II agency conflicts. Practical implications Family firms can leverage trust-based management to strengthen resilience and reduce external oversight costs, while auditors can optimise procedures for Chinese family firms, reducing costs associated with lower perceived risk. Policymakers could consider tailoring regulations to acknowledge culturally specific governance strengths. Originality/value This study contributes to the audit fee literature by emphasising the moderating influence of Confucian values and China’s cultural and institutional environment. By demonstrating reduced audit fees in Chinese family firms during a global crisis, the study challenges Western-centric agency theory predictions.

Based on the unique ownership structure of stated-owned enterprises（SOEs）in China, we examine the influence of expected tax burden on corporate investment decisions. Prior researches indicate that the efficiency of SOEs is lower than non-SOEs, which is proved in stock market as well（Wu, 2012; Yao and Zhang, 2001）. There are two explanations for this phenomenon: property right view and policy burden view. The property right view believes that the main reason for the SOEs’ low efficiency is unclear definition of property rights in SOEs（Zhang, 1997）. However, the policy burden view instead argues that excessive social responsibility and lack of reasonable market evaluation index lead to the low efficiency of SOEs（Lin et al, 1998）. In this paper, we find that SOEs care tax when they make investment decisions, which is consistent with the policy burden view. We also indicate that the main reason for this phenomenon is a unique agency problem caused by the fact that the state is the controller of SOEs, which is also consistent with the property right view. We analyze state ownership structure from a tax perspective, examine the influence of the expected tax burden on corporate investment decisions, and then integrate two explanations mentioned above. In traditional corporate finance theory, both state-owned and non-state-owned controlling shareholders have indiscrimination. Both of them get returns on investment according to the proportion of shares, and the private benefits of control at the same time. However, compared with other types of shareholders, the governments, as the ultimate controllers of SOEs, can not only get equity gains and control rights, but also get tax revenues paid by the companies. Although the governments can also obtain tax benefits from private enterprises, it is difficult for the governments to ensure tax revenues by intervening directly in business decisions of the private enterprises. In contrast, in the SOEs, the governments as the controlling shareholders can directly intervene in the business decisions of SOEs, so as to ensure the implementation of the tax revenues. Unlike the equity gains and the private benefits of control rights, the tax benefits are monopolized by the state. Therefore, the tax benefits could not be incorporated in the market price, which makes the market value underestimate the overall value of the state-owned controlled shareholders to a certain extent. When there is a conflict between tax benefits and returns on equity, the governments are more inclined to get exclusive tax benefits. The private benefits for state-owned holding rights cause the special agency problems between state-owned controlling shareholders and minority shareholders. This paper aims to clarify and analyze how agency problem affects corporate（especially SOEs）investing decisions. This paper takes the sample of listed companies from 2004 to 2013, and compares the relationship between corporate investment and expected tax burden under different ownership structure of listed companies（hereinafter referred to as ‘investment-expected tax burden sensitivity’）. We find that, compared with private holding listed companies, investment-expected tax burden sensitivity of SOEs is significantly reduced; when infrastructure investment return rate of local government is higher, that is to say the tax revenue demand of the local governments is bigger, the effect of state-owned shareholders on investment-expected tax burden sensitivity is weaker. The empirical results of this paper support the theoretical hypothesis that private benefits implied by tax is one of the important differences in the property control of listed companies in China. Therefore, tax should not be ignored when comparing and analyzing the different ownership structure and its mechanism of action. From the perspective of governmental exclusive right of taxation, this paper points out that there is a unique agency problem between state-owned controlling shareholders and other shareholders in SOEs. We study the role of ownership structure in corporate financial decision-making, especifically corporate investment decisions, from a perspective of tax benefits under the specific background in China. This paper tries to provide empirical evidence and new research perspective for further investigation into the effect of ownership structure on corporate financial decisions.

Corporate power centralisation, geographic dispersion, and audit fees

Large Shareholders and Firm Value: An International Analysis

Using a multi-national data set, we investigate the herding behaviour of financial analysts. Our results across a range of different countries suggest that analysts consistently deviate from their true forecasts and issue earnings forecasts that are biased by anti-herding. Furthermore, the level of bias (i.e. anti-herding) seems to be systematically higher for forecasts on companies from European countries compared to the US or Japan. We argue that such differences might stem from diverse levels of investor protection and corporate governance as analysts deviate less from true forecasts when the overall information environment is more transparent and company disclosures are of higher quality. Thereby, we proxy investor protection based on the company-level share of institutional ownership as well as on country-level investor protection measures. Our results show that increasing levels of investor protection and corporate governance mitigate the anti-herding behaviour. Especially, when companies that are located in high investor protection countries are held by an increasing number of institutional investors, analysts are most reluctant to issue biased forecasts.

Purpose This study aims to examine the relationship between environmental, social and governance (ESG) performance and audit fees among Indian firms, while investigating the moderating roles of firm size and auditor type. The study also seeks to understand how the environmental, social, and governance dimensions of ESG influence audit pricing differently. Design/methodology/approach The study employs panel regression analysis on a sample of 268 Indian firms over the period from financial year 2012–2013 to 2021–2022. Firm size and auditor type are incorporated as moderating variables to analyze their influence on the relationship between ESG performance and audit fees. Findings The results reveal a significant negative relationship between ESG performance and audit fees, primarily driven by the social and governance pillars. In contrast, environmental performance does not have a significant effect. This negative association is stronger for larger firms and those audited by Big Four auditors, suggesting that better ESG performance leads to lower audit fees. Practical implications The findings hold significant implications for corporate governance, auditors and policymakers. Firms aiming to reduce audit costs should prioritize strengthening social and governance practices, as these factors significantly impact audit pricing. Regulators in emerging markets can leverage these insights to refine ESG disclosure norms, ensuring greater transparency and risk assessment efficiency. Originality/value This study is original in its exploration of the differential impacts of ESG pillars on audit fees, an area where limited research exists, particularly in the context of emerging markets like India. By demonstrating that social and governance factors significantly drive the negative relationship between ESG performance and audit fees, this paper fills a critical gap in understanding how specific ESG dimensions influence audit pricing. Additionally, it advances the literature by examining how auditor type, firm size and auditor industry expertise and independence moderate this relationship. These findings provide fresh insights into how organizational characteristics and auditor expertise shape the ESG–audit fee dynamic, offering a more comprehensive understanding of the intersection between ESG performance and audit practices.

The issue of managerial overconfidence in managers has been studied in relation to audit pricing. Previous studies examined the relationship between managerial overconfidence and audit fees from the supply side. This study investigates the association of managerial overconfidence and audit fees from the demand side. We found a significant negative relationship between managerial overconfidence and audit fees. This finding supports the demand side perspective of audit pricing, specifically that overconfident management demands low quality audit services and subsequently low audit fees. In addition, we also investigated the role of the audit committee in the relationship between managerial overconfidence and audit fees, and found that a negative and significant relationship between managerial overconfidence and audit fees only occurred in companies with a strong audit committee. These findings suggest that a strong audit committee is able to offset the negative effect of managerial overconfidence by increasing monitoring of the financial reporting process, and auditors responds to this by reducing the level of risk of financial reporting and subsequently the audit fee.

This paper explores the impact of corporate governance mechanisms on the nature of the relationship between cash holdings and audit fees, which helps provide an opportunity to identify whether these mechanisms enable to mitigate agency problems, and thus lower audit fees through a sample of 78 Egyptian listed firms in EGX 100 during the period 2014-2016 using panel data analysis. Results indicated that cash holding increases auditing fees. The board characteristics affect negatively on the relationship between cash holdings and audit fees. Also, ownership structure affects negatively on the relationship between cash holdings and audit fees. As well audit committee affects negatively on the relationship between cash holdings and audit fees. There results support the view that corporate governance mitigate on the relationship between cash holdings and audit fees.