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    Audit Pricing for Strategic Alliances: An Incomplete...
    research summary posted February 16, 2017 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.05 Business Risk Assessment - e.g., industry, IPO, complexity 
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    Title:
    Audit Pricing for Strategic Alliances: An Incomplete Contract Perspective
    Practical Implications:

    This paper adds a new dimension to the research on strategic alliances by focusing on auditing rather than governance, performance, funding, or equity participation. It also identifies incomplete contracts as the driver of audit complexity, and extends the audit fee literature by documenting that the number of strategic alliances is a significant determinant of audit fees. Finally, the authors’ evidence that strategic alliances result in higher audit fees provides empirical support for the largely theoretical argument that incomplete contracts are complex. 

    Citation:

    Demirkan, S. and N. Zhou. 2016. Audit Pricing for Strategic Alliances: An Incomplete Contract Perspective. Contemporary Accounting Research 33 (4): 1625-1647.

    Purpose of the Study:

    A strategic alliance is a long-term contract between multiple firms where resources are pooled to accomplish preset objectives, creating dependence between otherwise legally independent firms. Prior research has focused on the emergence, management and survival of alliances; consequently, there is not substantial research on the relation between strategic alliances and auditing. This paper fills that void by investigating how auditors price their audit services for firms involved in strategic alliances. 

    Design/Method/ Approach:

    The authors conduct a study on the pricing of audit services for strategic alliances through compiling data and utilizing descriptive statistics.  

    Findings:
    • The authors find that the nonverifiability of information and potential agency behavior in alliances increase audit complexity, resulting in higher audit fees.
    • The authors find that auditors are less likely to issue going-concern modified opinions when there is an increase in strategic alliances; moreover, an increase in strategic alliances is associated with a reduction in bankruptcy risk as measured by Altman Z-Scores.
    • The authors find that an increase in strategic alliances is unrelated to the likelihood of financial misstatements.
    • The authors find that an increase in strategic alliances is unrelated to internal control weakness opinions. 
    Category:
    Client Acceptance and Continuance
    Sub-category:
    Audit Fee Decisions, Business Risk Assessment (e.g. industry - IPO - complexity)