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  • 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
    Client Acceptance and Engagement Pricing following Auditor...
    research summary posted January 17, 2017 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions 
    Title:
    Client Acceptance and Engagement Pricing following Auditor Resignations in Family Firms
    Practical Implications:

    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. 

    Citation:

    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 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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  • 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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  • Jennifer M Mueller-Phillips
    Conditional Conservatism and Audit Fees.
    research summary posted July 24, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment 
    Title:
    Conditional Conservatism and Audit Fees.
    Practical Implications:

    The results should be of interest to regulators, standard setters, auditors, and firms. Regulators and standard setters may benefit from the results as they consider promulgating accounting rules and standards, particularly those involving fair value measures. Auditors and the firms’ managers may also benefit from the results by knowing the possible effect of accounting conservatism on audit fees and the moderating effect of the quality of corporate governance as they select auditors and accounting policies.

    Citation:

    Lee, H. S., Li, X., & Sami, H. 2015. Conditional Conservatism and Audit Fees. Accounting Horizons 29 (1): 83-113.

  • Jennifer M Mueller-Phillips
    Debt Covenant Violations, Firm Financial Distress, and...
    research summary posted June 26, 2017 by Jennifer M Mueller-Phillips, tagged 02.01 Audit Fee Decisions, 02.06 Resignation Decisions, 12.01 Going Concern Decisions 
    Title:
    Debt Covenant Violations, Firm Financial Distress, and Auditor Actions
    Practical Implications:

    The findings from this study impact firms with debt covenant requirements. Violations from debt covenants occur frequently and are often due to tight restrictions rather than signs of financial distress. These types of violations often lead to renegotations or waivers instead of immediate repayment. However, this study shows that auditors will still have negative reactions regardless of whether or not the violation is due to financial difficulty. It is important for firms to not only consider the financial and lending consequences of a violation, but the auditing consequences as well.

    Citation:

    Bhaskar, Lori Shefchik, G. V. Krishnan, and W. Yu.2017. “Debt Covenant Violations, Firm Financial Distress, and Auditor Actions”. Contemporary Accounting Research 34.1 (2017): 186.

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  • Jennifer M Mueller-Phillips
    Do Political Connections Add Value to Audit Firms? Evidence...
    research summary posted July 29, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 04.0 Independence and Ethics, 04.05 Ethics and Consultation 
    Title:
    Do Political Connections Add Value to Audit Firms? Evidence from IPO Audits in China.
    Practical Implications:

    To the extent that political connections bring significant economic benefits, non-top-tier firms may be induced to spend scarce resources in competing for such connections while reducing the amount of resources directed towards improving audit quality. Audit clients may also be attracted to audit firms with political connections rather than to those providing high-quality audit services. Auditors in China play a role in reducing the risk of an IPO application being rejected. Because the Chinese IPO market has become the largest in the world in recent years, this finding should be of interest to academics, practitioners, and regulators.

    Citation:

    Yang, Z. 2013. Do Political Connections Add Value to Audit Firms? Evidence from IPO Audits in China. Contemporary Accounting Research 30 (3): 891-921.

  • Jennifer M Mueller-Phillips
    Does Audit Fee Homogeneity Exist? Premiums and Discounts...
    research summary posted October 29, 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, 03.01 Auditor Qualifications, 05.0 Audit Team Composition, 05.03 Partner Rotation 
    Title:
    Does Audit Fee Homogeneity Exist? Premiums and Discounts Attributable to Individual Partners
    Practical Implications:

    The results of this study point to further complications that could arise from mandatory partner rotation policies. Because the assumption underlying this policy is that all partners from any given firm are interchangeable and that the benefits of enhanced auditor independence are not expected to lead to negative consequences for the client, this study creates a conflict. The author found that different partners from the same firm do provide different levels of quality in the eyes of the client which lead to discounts and premiums in audit fees. As a result, partner rotations could lead to unforeseen costs including clients having to switch audit firms to find the preferred level of quality as well as audit firms trying to poach partners from competitors in order to satisfy clients. These added costs should be considered when assessing the value of partner rotation policies.

    For more information on this study, please contact Stuart D. Taylor.
     

    Citation:

    Taylor, S. 2011. Does audit fee homogeneity exist? Premiums and discounts attributable to individual partners. Auditing: A Journal of Practice and Theory 30 (4): 249-272.

  • Jennifer M Mueller-Phillips
    Does Incentive-Based Compensation for Chief Internal...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 02.01 Audit Fee Decisions, 02.02 Client Risk Assessment, 04.02 Impact of Fees on Decisions by Auditors & Management, 08.11 Reliance on Internal Auditors 
    Title:
    Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective
    Practical Implications:

    The results of this study suggest that companies who offer incentive-based compensation to chief internal auditors, especially through equity, are more likely to be perceived as having a higher audit risk by external auditors. Consequently, external auditors may charge a higher fee for their services. This study gives a basis for the benefit/cost analysis of providing incentive-based compensation for chief internal auditors. While it is possible internal auditors will respond positively to an IBC and bring extra value to the organization, there is a risk that an external auditor could raise audit fees cancelling out this added benefit.   

    Citation:

    Chen, Lucy Huajing, H. H. Chung, G. F. Peters., and J. P. Wynn. (Jeannie).2017. Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective. Auditing, A Journal of Practice and Theory 36 (21): 21-44

  • 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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