Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

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  • Jennifer M Mueller-Phillips
    Are All Industry Specialist Auditors the Same?
    research summary posted October 13, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 11.0 Audit Quality and Quality Control 
    Title:
    Are All Industry Specialist Auditors the Same?
    Practical Implications:

    The results have implications on two fronts. First, the findings indicate that auditors pursue different production and pricing strategies in different segments of the market, suggesting that the Big 4 audit firms respond to the competitive pressures in each submarket. Second, the evidence raises questions about the construct validity of market share-based measures of industry specialization, which have been used extensively in the literature. The evidence suggests that auditors who obtain a large market share by auditing a large proportion of the industry sector may actually do so by producing lower quality, lower cost audits. As such, these auditors are not acting as true specialists in the sense of using specialized training and knowledge to raise the quality of the audit performed.

    Citation:

    Cahan, S. F., D. C. Jeter, and V. Naiker. 2011. Are All Industry Specialist Auditors the Same? Auditing: A Journal of Practice & Theory 30 (4): 191-222.

  • Jennifer M Mueller-Phillips
    How Much Does IFRS Cost? IFRS Adoption and Audit Fees.
    research summary posted September 14, 2015 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 15.0 International Matters, 15.02 IFRS Changes – Impacts 
    Title:
    How Much Does IFRS Cost? IFRS Adoption and Audit Fees.
    Practical Implications:

    The authors document and quantify audit fees as a significant cost associated with mandatory adoption of IFRS. The empirical results concerning small firms also inform discussions on the appropriateness of mandated IFRS regulations for small to mid-sized entities. Given the emphasis of auditing in the proposed roadmap for U.S. convergence to IFRS, the results will be of particular importance to U.S. firms, auditors, and regulators. On a broader level, the authors document variation in the costs of IFRS adoption that provides insight into the significant variation in the net benefit observed in previous studies. For instance, the authors find evidence that certain IFRS requirements have higher compliance costs than others, which explains the significant heterogeneity in compliance costs during the adoption of IFRS. 

    Citation:

    De George, E. T., C. B. Ferguson, and N. A. Spear. 2013. How Much Does IFRS Cost? IFRS Adoption and Audit Fees. Accounting Review 88 (2): 429-462.

  • Jennifer M Mueller-Phillips
    Client-Auditor Supply Chain Relationships, Audit Quality,...
    research summary posted March 2, 2015 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 11.0 Audit Quality and Quality Control, 11.04 Industry Experience 
    Title:
    Client-Auditor Supply Chain Relationships, Audit Quality, and Audit Pricing
    Practical Implications:

    The results of this study provide empirical evidence of an association between supply chain knowledge and improved audit quality, as well as audit efficiency when this knowledge exists at a local level.  Audit firms often attempt to differentiate themselves by a certain level service and audit quality that can be provided based on specialized knowledge, such as industry experience.  Supply chain knowledge can add a new dimension to auditor knowledge and specialization.  By identifying an association between supply chain knowledge and audit quality and fees, this study demonstrates to audit firms an additional value-adding, quality-differentiating audit service. 

    For more information on this study, please contact Karla Johnstone.

    Citation:

    Johnstone, K. M., C. Li, and S. Luo. 2014. Client-Auditor Supply Chain Relationships, Audit Quality, and Audit Pricing. Auditing: A Journal of Practice and Theory 33 (4): 119-166

  • Jennifer M Mueller-Phillips
    Who’s Really in Charge? Audit Committee versus CFO Power a...
    research summary posted March 1, 2015 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    Title:
    Who’s Really in Charge? Audit Committee versus CFO Power and Audit Fees
    Practical Implications:

    The results demonstrate the importance of, and tension between, CFO and audit committee power in audit fee negotiations. Our findings suggest CFOs often continue to exert significant influence over audit fees even though contractual responsibility for compensating external auditors resides with the audit committee. These results highlight the importance for auditors to identify the more powerful party when negotiating audit fees with their clients.

    In addition, this study has significant implications for investors who believe current regulations separate management from audit fee negotiations. These regulations may give investors a false sense of security if they assume the audit committee always limits managerial influence during audit fee negotiations.

    For more information on this study, please contact Elaine Mauldin.

    Citation:

    Beck, M. J. and E. Mauldin, 2014. Who’s really in charge? Audit committee versus CFO power and audit fees. The Accounting Review 89 (6): 2057-2085.

  • Jennifer M Mueller-Phillips
    Effect of Client Reputation on Audit Fees at the Office...
    research summary posted February 20, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations 
    Title:
    Effect of Client Reputation on Audit Fees at the Office Level: An Examination of S&P 500 Index Membership
    Practical Implications:

    The results of this study are important for audit firms to consider when they choose their clients.  The evidence indicates that auditors can benefit from client’s reputation by using it for advertising audit quality. Promotion of audit quality via the presence of reputed clients in the portfolio enables the auditors to negotiate favorable audit pricing from their other clients.    

    For more information on this study, please contact Dr. Sharad Asthana.

    Citation:

    Asthana, S. C., and R. Kalelkar. 2014. Effect of Client Reputation on Audit Fees at the Office Level: An Examination of S&P 500 Index Membership. AUDITING: A Journal of Practice & Theory 33(1): 1-27.

  • Jennifer M Mueller-Phillips
    City-Level Auditor Industry Specialization, Economies of...
    research summary posted February 17, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations 
    Title:
    City-Level Auditor Industry Specialization, Economies of Scale, and Audit Pricing
    Practical Implications:

    The consolidation of audit firms from the Big 6 to the Big 5 in 1998, and then to the Big 4 in 2002, has raised concerns about the lack of competition in the large-client market (GAO 2003). However, while it is possible that the consolidation has reduced competition and increased prices, it could also have created efficiencies leading to reduced prices. This study shows that there is some merit in the "efficiency" argument that larger firms pass on an economies-of-scale discount to their clients. The finding provides some support for the GAO’s (2008) observation that there is little evidence of Big N oligopolistic pricing.

    For more information on this study, please contact Jagan Krishnan.

    Citation:

    Fung, Simon Y.K., Ferdinand A. Gul, and Jagan Krishnan. 2012. City-Level Auditor Industry Specialization, Economies of Scale, and Audit Pricing. The Accounting Review 87 (4): 1281-1307.

  • Jennifer M Mueller-Phillips
    Reconciling Archival and Experimental Research: Does...
    research summary posted February 16, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations 
    Title:
    Reconciling Archival and Experimental Research: Does Internal Audit Contribution Affect the External Audit Fee?
    Practical Implications:

     The results of this study are useful to managers, boards of directors, and audit committees to benchmark their own organizations and determine areas in which they may be able to realize cost savings.  Standard setters for external auditors could consider these results in terms of whether external auditors are appropriately relying on specified characteristics of the IAF when making their reliance decisions.  Client companies and their auditors might both find it worthwhile to examine whether external auditors could make better use of financial work performed by internal auditors on which the external auditors might later rely.  Finally researchers may wish to consider the results of this study when examining the external auditor’s reliance decision or when performing other audit fee analyses, especially considering whether proxies used in this study would be appropriate control variables or experimental variables of interest with respect to the contribution of internal auditing.

    For more information on this study, please contact David A. Wood.

    Citation:

    Prawitt, D. F., N. Y. Sharp, and D. A. Wood. 2011. Reconciling archival and experimental research:  Does internal audit contribution affect the external audit fee. Behavioral Research in Accounting 23 (2): 187-206

  • Jennifer M Mueller-Phillips
    Non-Timely 10-K Filings and Audit Fees
    research summary posted December 1, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations 
    Title:
    Non-Timely 10-K Filings and Audit Fees
    Practical Implications:

    A practical implication from the findings for public companies is that as they consider the costs associated with non-timely filings, they also need to include in their calculations future costs arising from heightened risk assessment by auditors. The results also highlight the fact that there are significant differences in the market for audit services of accelerated and non-accelerated firms, and reinforce the view that there are differences between the two types of firms in terms of the consequences associated with internal control weaknesses.

    For more information on this study, please contact Kannan Raghunandan (raghu@fiu.edu).

    Citation:

    Wang, C., K. Raghunandan, and R. A. McEwen. 2013. Non-Timely 10-K filings and audit fees. Accounting Horizons 27 (4): 737-756

  • Jennifer M Mueller-Phillips
    The Impact of Mandatory IFRS Adoption on Audit Fees: Theory...
    research summary posted November 25, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 15.0 International Matters, 15.02 IFRS Changes – Impacts 
    Title:
    The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and Evidence
    Practical Implications:

    This study should be of interest to regulators and policy makers. IFRS adoption influences audit complexity and financial reporting quality, which have countervailing effects on audit fees. On the one hand, IFRS are generally believed to be superior to local accounting standards; hence the adoption of IFRS potentially improves financial reporting quality. This reduces audit risk and thus audit fees. On the other hand, IFRS are comprehensive, fair-value oriented, and principles-based. Using them generally requires accountants and auditors to make more complex estimates and use greater professional judgment. In other words, IFRS adoption increases the complexity of audits, which can increase audit fees. Our results suggest that, on average, the effect of audit complexity dominates the effect of improvement in financial reporting quality, leading to an overall increase in audit fees in the post-IFRS period. Moreover, our cross-country analysis sheds light on how the institutional features of different countries, including legal environments and characteristics of pre-IFRS domestic accounting standards, affect the audit fee increase associated with IFRS adoption.

    For more information on this study, please contact Xiaohong Liu.

    Citation:

    Kim, J.-B., X. Liu, and L. Zheng. 2012. The impact of mandatory IFRS adoption on audit fees: Theory and evidence. The Accounting Review 87 (6): 2061-2094.

  • Jennifer M Mueller-Phillips
    Fee Pressure and Audit Quality
    research summary posted November 10, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 11.0 Audit Quality and Quality Control, 11.08 Proxies for Audit Quality 
    Title:
    Fee Pressure and Audit Quality
    Practical Implications:

    The results of this study are important evidence that a large proportion of audit engagements during the Recession were characterized by positive fee pressure, and that fee pressure was associated with lower audit quality during the Recession. The results suggest that auditors who experienced fee pressure from clients during the Recession were not able to maintain or increase audit effort in line with client risks due to pressure on fees. These results should be of interest to the PCAOB who expressed concern that audit fee pressure may have had negative effects on audit quality during the Recession.

     

    For more information on this study, please contact Mike Ettredge.  

    Citation:

    Ettredge, M., E. E. Fuerherm, and C. Li. 2014. Fee pressure and audit quality. Accounting, Organizations and Society 39 (4):247-263

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