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    Dual-Class Shares and Audit Pricing: Evidence from the...
    research summary posted April 16, 2012 by The Auditing Section, last edited May 25, 2012, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 02.05 Business Risk Assessment - e.g., industry, IPO, complexity 
    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.


    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.

    audit pricing; ownership structure; dual-class shares; corporate governance
    Purpose of the Study:

    This study examines the impact that dual-class shares have on audit fees.  Dual-class shares exist when there are 2 or more classes of shares and they have disproportionate voting rights (i.e. voting rights are concentrated while the rights to the cash flows of the firm are more dispersed).  The presence of dual-class shares affects audit pricing through an increase or decrease of audit risk.  

    There are two competing hypotheses on how dual-class shares affect audit risk.  First, dual-class shares may entrench the  shareholder and thus reduce financial reporting quality. This view is known as the entrenchment perspective. Secondly, the alignment perspective posits that dual-class shares reduce audit risk because the holders (1) are poorly diversified, (2) protect their reputation and desire to pass wealth onto the next generation, and (3) manage the firm themselves. 

    The authors examine which of these competing hypotheses is dominant: dual-class shares represent increased risk to the auditor, or dual-class shares represent an effective governance mechanism (think: “tone at the top”) and therefore lower risk to the auditor.

    Design/Method/ Approach:

    The authors gather data on Canadian companies publicly traded on the Toronto Stock Exchange (TSX) for the year 2004. The authors create a ratio of ownership to control and compare audit fees for firms with a high ratio of ownership to control to firms with a low ratio using statistical techniques.


    Audit fees are higher for firms with dual class share structures, suggesting perceived audit risk is higher, although it is not clear whether the increase is due to increased audit effort or a risk premium. 

    Client Acceptance and Continuance
    Audit fee decisions, Business Risk Assessment (e.g. industry - IPO - complexity)
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