Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    The Relation between Managerial Ability and Audit Fees and...
    research summary posted June 15, 2016 by Jennifer M Mueller-Phillips, tagged 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    407 Views
    Title:
    The Relation between Managerial Ability and Audit Fees and Going Concern Opinions
    Practical Implications:

     This research makes two primary contributions. The first is to the literature on audit pricing and going concern opinion by providing empirical evidence that after controlling for firm-level characteristics, managerial characteristics are also associated with audit fees and the propensity of auditors to issue going concern opinions. This evidence is particularly important because there is a paucity of empirical evidence on the relation between managerial characteristics and auditors’ decisions. The second contribution is providing two validation checks on the managerial ability measure developed by Demerjian which is becoming more widely used.

    Citation:

    Krishnan, G.V. and C. Wang. 2015. The Relation between Managerial Ability and Audit Fees and Going Concern. Auditing: A Journal of Practice and Theory 34 (3): 139-160.

    Keywords:
    managerial ability, audit fees, engagement risk, and going concern
    Purpose of the Study:

    Extensive literature exists that examines the determinants of audit pricing and the propensity of auditors to issue going concern opinions; however, much of this literature focuses on firm-level determinants as opposed to if managerial attributes of the client are informative to auditors. This study examines the relation between managerial ability, defined as the ability to transform corporate resources to revenues, and audit fees and the likelihood of issuing a going concern opinion.

    Design/Method/ Approach:

    For the measurement of managerial ability, the managerial ability measure, a recently developed measure, was used. The audit fee sample consists of nearly 31,000 firm-year observations representing more than 5,000 unique firms for the period 2000 through 2011. For the going concern analysis, a sample of financially distressed firms consisting of 11,257 firm-year observations was used.

    Findings:
    • The authors find that their research strongly supports their hypothesis that managerial ability is negatively associated with audit fees after controlling for firm-level characteristics.
    • The authors’ findings are also consistent with the notion that greater managerial ability mitigates the auditor’s engagement risk.
    • The authors’ findings support the notion that when the incoming CEO/CFO is deemed to be more efficient than the outgoing CEO/CFO, audit fees are lower, consistent with lower engagement risk.
    • The authors find that the likelihood of issuing a going concern opinion is negatively related to firm size, cash flows, beta, stock return, and investments, and positively related to leverage, prior-year loss, distress, stock return volatility and audit report lag.
    • The authors’ findings support the hypothesis that after controlling for firm-level characteristics, managerial ability is negatively associated with the likelihood that an auditor will issue a going concern opinion.
    • The findings support the notion that the managerial ability is informative to auditors.
    Category:
    Accountants' Reporting
    Sub-category:
    Going Concern Decisions