Auditing Section Research Summaries Space

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  • The Auditing Section
    The Pricing of National and City-Specific Reputations for...
    research summary posted May 7, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications 
    Title:
    The Pricing of National and City-Specific Reputations for Industry Expertise in the U.S. Audit Market
    Practical Implications:

    This study has practical audit client portfolio management implications for audit firms seeking to earn audit fee premiums for reputations of industry expertise. For example, auditors’ reputations for industry expertise are neither strictly national nor strictly local.  One interpretation with practical implications for such firms is that national level or city level reputations for industry expertise are not individually sufficient to maximize fee premiums.  Rather, auditors can most effectively earn fee premiums when they establish both city-level and national-level reputations for industry expertise.

    Citation:

    Francis, J. R., K. Reichelt, and D. Wang.  2005.  The Pricing of National and City-Specific Reputations for Industry Expertise in the U.S. Audit Market.  The Accounting Review 80 (1): 113-136.

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  • The Auditing Section
    Competition for Andersen's Clients (article and...
    research summary posted May 7, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.04 Predecessor Auditor Factors 
    Title:
    Competition for Andersen's Clients (article and discussion)
    Practical Implications:

    Audit firms may find this study interesting because it contributes to an understanding of the competitive nature of the U.S. audit market among the remaining Big Four firms.  Additionally, this study appears to have implications for audit firms operating in a market where a major accounting firm either leaves the market or dissolves.  Specifically, the results imply that a potential growth strategy for firms remaining in such markets may be to purchase the practices of such firms, where possible.  Further, this study appears to have implications for portfolio management related to small clients and large clients, since the audit fees for these firms behaved differently following the demise of Andersen. 

    Additionally, the results suggest that the decreasing number of Big Four audit firms may be detrimental to competitive forces in the audit market, which is of importance to audit market regulators in the U.S. and globally. Given that the dissolution of an audit firm is a very rare event, this study provides unique empirical evidence on the consequences of such a dissolution. 

    In their discussion of the study, Ramnath and Weber (2008) raise concerns related to what a purchase of an Andersen office really means and how this definition may differ across markets.  They also note that a more appropriate level to examine these issues would be the partner level (e.g. clients may have chosen to remain with their Andersen partner at their new firm).  

    Citation:

    Kohlbeck, M., B. W. Mayhew, P. Murphy, and M. S. Wilkins. 2008. Competition for Andersen's Clients. Contemporary Accounting Research 25 (4): 1099-1136.

    Ramnath, S. and J.P. Weber. Discussion of “Competition for Andersen’s Clients”. Contemporary Accounting Research 25 (4): 1137-1146.

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  • The Auditing Section
    Audit Fees at U.S. Non-Profit Organizations
    research summary posted May 2, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations 
    Title:
    Audit Fees at U.S. Non-Profit Organizations
    Practical Implications:

    This study identifies relationships between attributes specific to non-profit organizations (see above) and external audit fees, and it has practical implications for non-profit organizations as well as auditors in negotiating audit fees.  The audit fee model can be useful for non-profit organizations that seek to benchmark their audit fees.  Additionally, this study shows that non-profits with higher quality internal oversight are willing to incur additional costs for monitoring by external auditors. Further, this study shows that Big 4 auditors earn a premium for their services in the non-profit sector (similar to the for-profit sector).

    Citation:

    Vermeer, T. E., K. Raghunandan, and D. A. Forgione. 2009.  Audit Fees at U.S. Non-Profit Organizations.  Auditing: A Journal of Practice and Theory 28 (2): 289-303.

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  • The Auditing Section
    Financial Restatements, Audit Fees, and the Moderating...
    research summary posted April 23, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment, 02.03 Management Integrity Assessments, 06.06 Earnings Management, 14.0 Corporate Matters, 14.01 Earnings Management 
    Title:
    Financial Restatements, Audit Fees, and the Moderating Effect of CFO Turnover
    Practical Implications:

    This study provides evidence that auditors consider a client restatement as an increase in the audit risk of a client for future periods.  This increase in audit risk is factored into the audit fee possibly through additional hours or higher hourly rates.  This study also provides evidence that when a company has a change in CFO, auditors view this positively. 

    Citation:

    Feldmann, D.A., W.J. Read, and M.J. Abdolmohammadi. 2009. Auditing: A Journal of Practice and Theory 28 (1): 205-223.

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  • The Auditing Section
    Audit Fees for Initial Audit Engagements Before and After...
    research summary posted April 23, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions 
    Title:
    Audit Fees for Initial Audit Engagements Before and After SOX
    Practical Implications:

    This study provides an analysis of initial-year audit fee discounts/premiums in the pre-SOX era (2001) and post-SOX era (2006). 
    The findings from this study suggest that concerns over initial-year audit fee discounts are not supported by empirical evidence in the post-SOX era, at least for the Big 4 auditors.  Additionally, this study provides empirical evidence that suggests the Big 4 have become more conservative in their client acceptance and pricing decisions in the post-SOX era.  The authors note that these results
    should be of interest to clients, auditors, and regulators, given the concerns expressed by regulators and legislators about the adverse consequences associated with initial-year fee discounts.

    Citation:

    Huang, H-W., K. Raghunandan, and D. Rama.  2009.  Audit Fees for Initial Audit Engagements Before and After SOX.  Auditing: A
    Journal of Practice and Theory
    28 (1): 171-190

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  • The Auditing Section
    Dual-Class Shares and Audit Pricing: Evidence from the...
    research summary posted April 16, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.05 Business Risk Assessment - e.g., industry, IPO, complexity 
    Title:
    Dual-Class Shares and Audit Pricing: Evidence from the Canadian Markets
    Practical Implications:

    This study provides evidence that dual class share structures increase audit risk.  In response, audit firms either increase the scope of the audit or charge a fee premium.

    Citation:

    Khalil, S., M.L. Magnan, and J.R. Cohen. 2008. Dual-Class Shares and Audit Pricing: Evidence from the Canadian Market. Auditing: A Journal of Practice & Theory 27 (2): 199-216.

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  • The Auditing Section
    The Association between Audit-Firm Tenure and Audit Fees...
    research summary posted April 16, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.04 Predecessor Auditor Factors 
    Title:
    The Association between Audit-Firm Tenure and Audit Fees Paid to Successor Auditors: Evidence from Arthur Andersen
    Practical Implications:

    The results from this study are important for regulators when considering mandatory audit firm rotation. The evidence suggests that auditors are concerned about the length of their new client’s relationship with their former auditor and perceive this as a risk factor in pricing their engagements. 

    However, the authors caution that the evidence does not necessarily support mandatory rotation. As Andersen was a high-profile case, it is possible that the fee premium observed in this study is unique to Andersen clients. Moreover, in examining mandatory rotation, the authors suggest that switching costs should also be considered in conjunction with the fee premium.

    Citation:

    Kealey, B. T., H. Y. Lee, and M. T. Stein. 2007. The Association between Audit-Firm Tenure and Audit Fees Paid to Successor Auditors: Evidence from Arthur Andersen.  Auditing: A Journal of Practice and Theory 26 (2): 95-116.

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  • The Auditing Section
    Client Retention and Engagement-Level Pricing
    research summary posted April 13, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.06 Resignation Decisions, 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergers, 04.02 Impact of Fees on Decisions by Auditors & Management 
    Title:
    Client Retention and Engagement-Level Pricing
    Practical Implications:

    The results of this study are useful for regulators to consider the motives for auditor changes and to understand audit client portfolio management. The findings underscore the importance of engagement pricing as a determinant of audit firm’s client retention decisions.  Specifically, the evidence suggests that engagement pricing pressure occurs on more than an isolated basis and the audit firm’s inability to recover unexpectedly high labor usage is associated with the severing of the auditor-client relationship.

    Citation:

    Hackenbrack, K. E. and C. E. Hogan. 2005. Client Retention and Engagement-Level Pricing.  Auditing: A Journal of Practice and Theory 24 (1): 7-20. 

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