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.

Do Joint Audits Improve or Impair Audit Quality?

In this study, we investigate whether and to what extent country‐level board reforms affect audit pricing decisions. We find audit fees are positively associated with board reforms. An increase in audit fees is more pronounced for firms that switched up to Big N auditors following board reforms. After board reforms, firms are less likely to issue restatements, and both analyst forecast accuracy and management forecast frequency increase, indicating improved audit quality and information transparency in the postreform period. Moreover, the positive relation between board reforms and audit fees is more evident for firms in countries that lack institutional governance mechanisms, captured by emerging capital markets, high political risk, weak governmental enforcement actions and low corporate governance quality. Overall, our findings broadly support the view that audit fees increase upon demand for better audit quality.

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.

This study empirically investigates the relationship between negative new media coverage and audit fees by collecting a sample of nonfinancial listed companies on the main board of the Shanghai Stock Exchange (SSE) from 2017 to 2019, along with data on negative new media coverage of official WeChat public accounts founded by the most influential national financial newspaper obtained using a crawler. This study revealed that: 1. Audit fees are significantly and positively related to negative news media coverage; 2. The increase in audit fees is due to the fact that if a listed company undergoes negative new media coverage, the accounting firm that audits the company will consequently increase risk premium and thus audit fees. We found no evidence that accounting firms spend more time and effort on audit work after a listed company experiences negative new media coverage; 3. Analyst-tracking has a moderating effect on negative new media coverage and audit fees, leading to an increase in audit fees; 4. Negative media reporting on non-state-owned enterprises is more likely to cause accounting firms to increase their audit fees than their state-owned peers, whereas "non-Big Four" accounting firms are more likely to increase their audit fees for companies with negative new media reports. This study, based on the differing impacts of negative new media coverage, intended to unravel the intricate relationship between different types of negative new media coverage and audit fees, help understand the mechanism whereby negative reporting impacts audit fees, and provides a benchmark for the development of a feasible audit fee system.

PurposeThis paper aims to examine how a firm’s exposure to economic policy uncertainty affects the auditors’ perceptions of financial reporting risk. Firms that are more sensitive to policy uncertainty are predicted to engage in more earnings management because these firms are more likely to experience greater uncertainty in future operations. Audit fees will reflect this reporting risk. On the other hand, auditors might feel more fee pressure from policy-sensitive firms because firms are more inclined to reduce spending in the face of uncertainty and subsequently charge lower fees.Design/methodology/approachThe author tests my hypothesis using U.S. data on audit fees and client characteristics of public companies between the years 2001 and 2021. The author estimates a standard audit fee model based on the audit fee literature (Hay et al., 2006) while also including the two policy sensitivity measures. This study uses panel data methods that allow time-series analyses, providing a powerful setting to test dynamic audit fee adjustment to improve the understanding of the audit market.FindingsThe results suggest that audit fee is higher for policy-sensitive firms than for policy-neutral firms. These results are robust to various proxies of policy sensitivity and various specifications designed to mitigate the endogeneity concerns. The study provides assurance that on average, auditor pricing reflects client risk adequately, mitigating the concern that auditors give in to fee pressure and compromise audit quality as a result.Research limitations/implicationsWhile the findings from this study should be of value to regulators and academics seeking to understand audit activities amid escalating macroeconomic uncertainty, when interpreting these results, several limitations must be considered. The study does not examine how external auditors evaluate risks tied to policy uncertainty. A comprehensive understanding of how and why external auditors respond to heightened policy uncertainty faced by firms could be better achieved through interviews with external auditors and audit committee members. In addition, while this study posits that auditors adjust their approach in response to changes in policy uncertainty, largely due to potential shifts in the risks of material misstatement, there might be additional factors at play that warrant higher audit fees post a change in policy uncertainty. For instance, specific policy changes may give rise to new risks or modify existing ones, thereby precipitating increased scrutiny of records and procedures as company directors’ demand. These aspects offer potential avenues for future research.Practical implicationsThis study underscores the significant role of policy sensitivity in determining audit fees and audit quality. Policy-sensitive firms present unique complexities and potential risks that require additional effort and vigilance from auditors. Auditors must develop a specialized understanding of sectors prone to policy fluctuations to navigate these unique challenges effectively. In addition, the role of professional standards boards and regulators in establishing guidelines for auditing policy-sensitive firms cannot be understated. Such guidelines could lead to more consistent audit practices and improved audit quality. Finally, by recognizing and effectively responding to the policy sensitivity of client firms, audit firms can mitigate their own risks, strengthen public trust and enhance the reliability of financial reports.Originality/valueFirst, this study adds to an emerging stream of auditing literature that focuses on how audit fees interact with a firm’s external environment by providing evidence of an unexplored implication, a firm-specific policy sensitivity. Second, my main construct, policy sensitivity, provides two distinct advantages over other variables used in prior studies that explore the relationship between audit fees and external firm environments. Third, this study answers the calls for research by De Villiers et al. (2013, p. 3), who identified the cost behavior of audit fees, especially over time, as an area not well understood.

The Impact of Regulation on Auditor Fees: Evidence from the Sarbanes-Oxley Act

This research examines the motivations for, and obstacles to, establishing a Joint Audit (JA) system in Kuwait. The research includes a survey taken by 190 people and 25 in-depth interviews with key individuals. According to the qualitative study, 'auditor performance and collaboration' as well as 'market confidence and cost efficiency' are two factors that contribute to the widespread use of JA. According to the research, however, 'coordination difficulties and free rides' prevent its widespread use. The study found that JA laws, stricter regulations, and more open financial reporting were all required. In order to restore confidence in financial reporting, the results highlight the need for enhancements to audit quality, investor protection, and communication amongst audit firms. The limited size of the qualitative and quantitative samples used in this study may reduce the external validation. The study's limited generalisability may be attributable to its exclusive emphasis on JA practices in Kuwait.

While many countries have adopted International Financial Reporting Standards (IFRS) for private sector enterprises, New Zealand (NZ), Australia and the United Kingdom adopted IFRS for all sectors, including the public sector. This approach is consistent with the concept of sector‐neutral accounting standards that gained wide acceptance in NZ and Australia in the early 1990s. Although a number of studies have assessed the impact of IFRS adoption in the private sector, and the public sector has provided some evidence as to the effects of IFRS adoption on financial statements, the costs of adopting IFRS have not been examined. One measure of cost is the change in audit fees in an IFRS reporting environment. The authors examine the impact of IFRS adoption in the NZ public sector on audit fees and audit effort. They obtained data regarding audit fees and audit effort in the NZ public sector and compared the pre‐adoption year with the first year of adoption for all segments. Their results indicate a substantial increase in audit fees and audit effort in the first year of IFRS adoption for all segments, with some variation across the segments. Two sectors, local authorities and energy companies, have had significant increases in audit fees and audit effort. These findings provide some empirical evidence regarding the cost of transition to IFRS and are of interest to researchers and regulators in countries that are currently considering transitioning to IFRS or IFRS‐based International Public Sector Accounting Standards standards in reporting for the public sector.

Agency Conflicts and Audit Fees: An International Study

ABSTRACT: This study examines the impact of International Financial Reporting Standards (IFRS) adoption on audit fees. We first build an analytical audit fee model to analyze the impact on audit fees for the change in both audit complexity and financial reporting quality brought about by IFRS adoption. We then test the model's predictions using audit fee data from European Union countries that mandated IFRS adoption in 2005. We find that mandatory IFRS adoption has led to an increase in audit fees. We also find that the IFRS-related audit fee premium increases with the increase in audit complexity brought about by IFRS adoption, and decreases with the improvement in financial reporting quality arising from IFRS adoption. Finally, we find some evidence that the IFRS-related audit fee premium is lower in countries with stronger legal regimes. Our results are robust to a variety of sensitivity checks. Data availability: Data are available from public sources identified in the paper.

The reform of accounting standards and audit pricing

Revaluation of Property, Plant and Equipment (PPE) in Bangladesh: Motivations, Value Relevance, and Effects on Audit Fees

Considering the context of the changes implemented by the revised ISA 700, which required including items such as Key Audit Matters (KAMs), this article aimed to examine the effects of the changes in ISA 700 on audit quality and fees. Accounting and market data, information on the responsible audit firms, and the number of KAMs disclosed by publicly traded companies in Brazil were collected from 2014 to 2017. Overall, the results did not demonstrate evidence of improvement in audit quality after adopting the revised ISA 700. Audit fees also did not show statistically significant changes when comparing the period before and after adopting the new requirement. So, the study concluded that, during the four-year period surrounding the adoption of the new requirements, there was no evidence of an increase in audit quality or auditor fees for publicly traded companies in Brazil. This article expands academic discussions in the Brazilian capital market regarding the implications of including KAMs in audit reports, as well as the analysis of the practical effects of applying standards issued by regulatory bodies.

This research was conducted to investigate improving audit quality through several ways, including audit fees, audit tenure, and audit rotation. This research was conducted by taking a sample of companies in Indonesia listed on the IDX during 2020 to 2022, so 826 data were found. From the course of this research, it was found that audit fees can positively affect audit quality, audit tenure can negatively affect audit quality, and audit rotation can positively affect audit quality. This research contributes to decision making for principals in improving audit quality for the companies they own.