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    Audit Fee Differential, Audit Effort, and Litigation Risk:...
    research summary posted June 26, 2017 by Jennifer M Mueller-Phillips, tagged 02.01 Audit Fee Decisions, 15.0 International Matters 
    Audit Fee Differential, Audit Effort, and Litigation Risk: An Examination of ADR Firms
    Practical Implications:

    There are numerous factors that go into a firm’s decision to cross-list on foreign stock exchanges. One factor firms should consider regarding entrance into the U.S. stock exchange is an increase in audit fees. The evidence from this study indicates this increase can be traced back to costs from the legal environment and increased audit effort. 


    Bronson, Scott N., A. Ghosh, and C. E. Hogan. 2017. “Audit Fee Differential, Audit Effort, and Litigation risk: An Examination of ADR Firms”. Contemporary Accounting Research 34.1 (2017): 83.

    Purpose of the Study:

    U.S. investors rely on financial statements by foreign firms cross-listed on U.S. stock exchanges. Therefore, these financial statements must comply with accounting standards from the entity’s home country and U.S. standards. Previous studies have identified that audit fees are higher for cross-listed firms and attributed this to added litigation costs. This study examines if there are additional factors causing the audit fees to be higher for cross-listed firms. Specifically, about whether an increase in audit effort is incrementally related to price increases and if audit effort varies based on the stringency of an entity’s home country regulations. The authors presume the additional audit effort will result from the attestation of U.S. GAAP reconciliations and foreign auditor attestation of U.S. audit and independence standards.

    Design/Method/ Approach:

    The final sample consists of 36,646 observations and only includes entities audited by Big 4 firms. Compustat was used to find U.S.-based publicly traded firms, a list of foreign firms cross-listed in the United States was obtained from Bank of New York Mellon, and foreign non-cross listed publicly traded firms was listed in Worldscope and Compustat Global. The analysis was run using a regression of audit fees.


    The authors find the following:

    • Cross-listed firms in the United States do in fact pay significantly higher fees relative to other firms.
    • This total fee difference includes both incremental costs in legal environment and audit effort. The authors attributed 29% to 48% of this additional incremental costs as the additional audit effort required.
    • Cross-listed firms in countries with more stringent audit oversight pay a lower incremental audit fee compared to cross-listed firms in countries with more lax audit oversight.
    Client Acceptance and Continuance, International Matters
    Audit Fee Decisions