The results of this paper contribute to the understanding of the determinants of audit firms’ initial audit price discount decisions. The results suggest that concentration of audit firms within the local audit market has a stronger influence on non-Big 4 audit firms’ initial pricing decisions compared to Big 4 firms’ initial pricing decisions. In addition, the results are of interest to regulators and managers who are concerned about the effect of audit market concentration on audit pricing and audit quality.
Eshleman, J. D. and B. P. Lawson. 2017. Audit Market Structure and Audit Pricing. Accounting Horizons 31 (1): 57 – 81.
This paper adds a new dimension to the research on strategic alliances by focusing on auditing rather than governance, performance, funding, or equity participation. It also identifies incomplete contracts as the driver of audit complexity, and extends the audit fee literature by documenting that the number of strategic alliances is a significant determinant of audit fees. Finally, the authors’ evidence that strategic alliances result in higher audit fees provides empirical support for the largely theoretical argument that incomplete contracts are complex.
Demirkan, S. and N. Zhou. 2016. Audit Pricing for Strategic Alliances: An Incomplete Contract Perspective. Contemporary Accounting Research 33 (4): 1625-1647.
Taken together, the results of this study suggest that dividends provide information to auditors and mitigate concerns over their clients’ earnings quality. It appears dividends provide incremental information to auditors beyond other audit risk indicators, such as low earnings persistence or high accruals. These findings also suggest that firms’ dividend-paying status provides an easily observable cue to auditors and others that can be used when assessing a firms’ earnings quality.
Lawson, B. P. and D. Wang. 2016. The Earnings Quality Information Content of Dividend Policies and Audit Pricing. Contemporary Accounting Research 33 (4): 1685 – 1719.
This study contributes to the auditor-client realignment literature by examining whether auditors’ client acceptance and pricing decisions vary with firm ownership structure, which was not investigated before. It also documents a significant association between the identity of the successor auditor and firm ownership structure following the resignation of the incumbent auditor. This is important given the potential consequences of auditor changes to both auditors and their clients.
Khalil, S. and M. Mazboudi. 2016. Client Acceptance and Engagement Pricing following Auditor Resignations in Family Firms. Auditing: A Journal of Practice and Theory 35 (4): 137 – 158.
The importance of understanding the operation of a client’s business and its competitive environment to achieve an effective audit is well-known. More specifically, the PCAOB requires that an auditor understand the company’s objectives and strategies and those related business risks that might reasonably be expected to result in risks of material misstatement. Valid understanding also is necessary to both interpret results from analytical procedures and to engage in effective professional skepticism for management’s assertions. The author’s results reveal a previously unreported level of understanding of process-oriented business risks and their association with the RMM of revenue for essentially new staff auditors.
Wright, W. F. 2016. Client business, models, process business risks and the risk of material misstatement of revenue. Accounting, Organizations and Society 48: 43-55.
This paper contributes to the literature on auditor industry expertise in many ways. First, it extends previous studies on this topic to examine whether industry specialists demonstrate different risk preferences in client acceptance decisions. The finding that partner-level industry specialists are more likely to accept less risky clients may partly explain why industry specialists have better quality clients.
Hsieh, Y., and Lin C. 2016. Audit Firms’ Client Acceptance Decisions: Does Partner-Level Industry Expertise Matter? Auditing: A Journal of Practice and Theory 35 (2): 97-120.
This study is important given the continued concerns expressed by global regulators about the potential harm to audit quality caused by concentrated audit markets. The separation of offsetting direct and indirect effects of concentration on audit quality enhances the understanding of how concentration influences audit quality and could explain why the previous studies document mixed evidences. The study also provides evidence on how audit fees play an important role in the association between concentration and audit quality and that regulatory interventions changing one of the offsetting effects could produce potential unintended consequences.
Huang, T., Chang, H., and Chiou, J. 2016. Audit Market Concentration, Audit Fees, and Audit Quality: Evidence from China. Auditing: A Journal of Practice and Theory 35 (2): 121-145.
This paper asks whether auditors recognize the volatility of OCI and incorporate it into pricing of audits. They find that audit fees do reflect changes in OCI and that these changes reflect various risk factors associated with OCI. The findings suggest that auditors already recognize the difficulty in assessing value of fair value items which run through OCI—reinforcing regulator concerns about fair value valuation.
Huang, H., S. Lin, K. Raghunandan. 2016. The Volatility of Other Comprehensive Income and Audit Fees. Accounting Horizons 30 (2): 195-210.
This study illustrates new measures of spatial competition that incorporate the separate and distinct effects of competition within and between the large and small audit markets. This study also provides evidence that the pricing in the large firm market segment is affected by competitive pressure from small audit firms; furthermore, the study provides evidence of a differentiation premium that small audit firms are able to obtain by being perceived as competing in a bigger league than other small audit firms. Finally, the study contributes by examining measures of competition beyond the Herfindahl index in the audit firm market.
Bills, K.L. and N.M. Stephens. 2016. Spatial Competition at the Intersection of the Large and Small Audit Firm Markets. Auditing: A Journal of Practice and Theory 35 (1): 23-45.
The study results are important to regulators and audit practitioners as they show an association between executive compensation and auditor compensation. The study results show that high executive risk-taking incentives, as measured by vega, contributes to higher audit fees. These results provide important insights into how incentives designed to compensate and motivate executives can alter the audit fee structure.
Chen, Y., F. A. Gul, M. Veeraraghavan, and L. Zolotoy. 2015. Executive Equity Risk-Taking Incentives and Audit Pricing. The Accounting Review 90 (6): 2205–2234.