Auditing Section Research Summaries Space

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  • Jennifer M Mueller-Phillips
    A Reexamination of Audit Fees for Initial Audit Engagements...
    research summary posted December 3, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 03.0 Auditor Selection and Auditor Changes, 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergers, 04.0 Independence and Ethics 
    Title:
    A Reexamination of Audit Fees for Initial Audit Engagements in the Post-SOX Period
    Practical Implications:

    The results of the study strongly suggest that initial-year audit discounts are quite common and substantial in the post-SOX period. Although the existence of lowballing seems to be a threat to independence, at least in appearance, the existing research on lowballing provides mixed results on its impact on audit quality. The findings will likely be of interest to the PCAOB as it searches for ways to bolster auditor independence and other regulators because many, including the GAO, believe that without non-audit service fees, auditors are less likely to offer ‘‘loss-leader’’ fees for audits.

    For more information on this study, please contact Rosemond Desir.

    Citation:

    Desir, R., J. R. Casterella, and J. Kokina. 2014. A Reexamination of Audit Fees for Initial Audit Engagements in the Post-SOX Period. Auditing: A Journal of Practice & Theory 33 (2):  59-78

  • Jennifer M Mueller-Phillips
    Abnormal Audit Fees and Audit Quality: The Importance of...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 11.0 Audit Quality and Quality Control, 14.0 Corporate Matters, 14.01 Earnings Management 
    Title:
    Abnormal Audit Fees and Audit Quality: The Importance of Considering Managerial Incentives in Tests of Earnings Management.
    Practical Implications:

    This paper provides new evidence on the fee-quality relationship using the propensity to use income-increasing discretionary accruals to meet or beat analysts' forecasts. The evidence in this paper suggests that abnormal audit fees are positively related to audit quality. This result is consistent with concerns raised by regulators that lower audit fees could reflect a lower level of effort provided by the auditor. This is important, given the trend of declining audit fees in recent years. By finding different results using a more focused sample of firms with the incentive and ability to manage earnings, this study highlights the importance of considering the context when performing tests of earnings management. This information is of interest to regulators, such as the SEC.

    Citation:

    Eshleman, J. D., & P. Guo. 2014. Abnormal Audit Fees and Audit Quality: The Importance of Considering Managerial Incentives in Tests of Earnings Management. Auditing: A Journal of Practice & Theory 33 (1): 117-138.

  • Jennifer M Mueller-Phillips
    An Experimental Investigation of the Influence of Audit Fee...
    research summary posted October 15, 2013 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 03.0 Auditor Selection and Auditor Changes, 04.0 Independence and Ethics, 04.02 Impact of Fees on Decisions by Auditors & Management 
    Title:
    An Experimental Investigation of the Influence of Audit Fee Structure and Auditor Selection Rights on Auditor Independence and Client Investment Decisions
    Practical Implications:

     Lowballing has been cited as a threat to auditor independence and manager performance in regulatory reports and academic research. This study suggests that auditors may face independence issues at the beginning of a client relationship under the lowballing fee structure because of the uncertainty of retaining a client. The study also suggests, however, that these independence issues seem to dissipate over time. Therefore, auditors should be aware of these potential opportunities to lose objectivity when they acquire new audit clients and continue to rely on professional skepticism to evaluate management assertions.

    For more information on this study, please contact Darius J. Fatemi.
     

    Citation:

    Fatemi, D. J. 2012. An Experimental Investigation of the Influence of Audit Fee Structure and Auditor Selection Rights on Auditor Independence and Client Investment Decisions. Auditing: A Journal of Practice and Theory 31(3): 75-94.

  • Jennifer M Mueller-Phillips
    Are Capitalized Software Development Costs Informative About...
    research summary posted March 10, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment 
    Title:
    Are Capitalized Software Development Costs Informative About Audit Risk?
    Practical Implications:

    In general, the results of this study provide empirical evidence that capitalized software development costs are incrementally informative about the client’s business risk and the overall audit risk.

    • First, although intangible assets play an increasing role in firm valuation, very little is known about whether and how auditors regard these assets in assessing audit risk. Thus it fills a void in the literature on the auditor’s assessment of capitalized software development costs.
    • Second, this study examines a setting that mitigates the client’s business risk. It is important in that while economic models predict that audit fees reflect business risk, there is some evidence that audit practice does not support a relation between business risk and audit fees
    • Third, this study could be viewed as a ‘‘bridge’’ between the limited literature on investor valuation of capitalized software assets and auditing
    • Fourth, this study also shed light on how auditing under certain circumstances could potentially enhance the informativeness of recognized assets that are subject to a high degree of information asymmetry and managerial discretion

    For more information on this study, please contact Gopal V. Krishnan.

    Citation:

    Krishnan, G. V., and C. Wang. 2014. Are Capitalized Software Development Costs Informative About Audit Risk? Accounting Horizons 28(1): 39-57.

  • Jennifer M Mueller-Phillips
    Are There Adverse Consequences of Mandatory Auditor...
    research summary posted July 27, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 15.0 International Matters, 15.04 Audit Firm Rotation 
    Title:
    Are There Adverse Consequences of Mandatory Auditor Rotation? Evidence from the Italian Experience.
    Practical Implications:

    The consequences of mandatory rotation appear to be (1) higher audit fees, and (2) lower-quality audited earnings following rotation (which is consistent with the evidence in non-mandatory settings). The authors conclude with some conjectures on how the negative effects of mandatory rotation observed in Italy might be even greater in countries with larger audit markets and larger clients, such as the United States and other European Union countries, which should give regulators pause. Another unintended consequence of mandatory rotation in the United States would be to reduce an audit firm’s industry expertise. A rotation rule in the United States and other large economies could disrupt the market and fundamentally change the way accounting firms are organized for the delivery of audits. 

    Citation:

    Cameran, M., Francis, J. R., Marra, A., & Pettinicchio, A. 2015. Are There Adverse Consequences of Mandatory Auditor Rotation? Evidence from the Italian Experience. Auditing: A Journal of Practice & Theory 34 (1): 1-24.

  • Jennifer M Mueller-Phillips
    Audit Fees and Investor Perceptions of Audit...
    research summary posted September 9, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure 
    Title:
    Audit Fees and Investor Perceptions of Audit Characteristics.
    Practical Implications:

    These findings provide important insight into investors’ current perceptions of auditor independence, particularly in the absence of relative or comparative information, and suggests that it might be useful for regulators, when contemplating additional disclosure requirements, to allocate some attention to disclosures that have the potential to enhance investor perceptions of auditor independence. The findings of this study contribute to the forum of debate concerning the current state of audit-related disclosures and their value for investors.

    Citation:

    Beck, A. K., R. M. Fuller, L. Muriel, and C. D. Reid. 2013. Audit Fees and Investor Perceptions of Audit Characteristics. Behavioral Research in Accounting 25 (2): 71-95.

  • Jennifer M Mueller-Phillips
    Audit Fees and Social Capital.
    research summary posted July 23, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions 
    Title:
    Audit Fees and Social Capital.
    Practical Implications:

    By showing that the social capital where the firm is headquartered affects audit fees, this study makes an important contribution to the auditing literature. It shows that the social environment where the firm is headquartered can affect its relation with auditors and, consequently, the audit fees. This is a new way of looking at the auditor and client’s relation. Although the audit-fee literature is extensive, no studies the authors know of have investigated the possible impact of the social environment on how much the auditors charge. The study suggests that trust is an important component of the auditor-client relation, that local social capital proxies to some extent for auditor trust, and its impact on audit fees is meaningful.

    Citation:

    Jha, A., & Chen, Y. 2015. Audit Fees and Social Capital. Accounting Review 90 (2): 611-639.

  • 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
    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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  • Jennifer M Mueller-Phillips
    Audit Firms’ Client Acceptance Decisions: Does P...
    research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual 
    Title:
    Audit Firms’ Client Acceptance Decisions: Does Partner-Level Industry Expertise Matter?
    Practical Implications:

     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.

    Citation:

    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.

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