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    Auditor Choice and Audit Fees in Family Firms:Evidence from...
    research summary posted July 20, 2017 by Jennifer M Mueller-Phillips, tagged 04.02 Impact of Fees on Decisions by Auditors & Management 
    Auditor Choice and Audit Fees in Family Firms:Evidence from the S&P 1500
    Practical Implications:

    This study provides policy-makers and practitioners with critical insight into differences in auditor selection criteria between family and non-family firms and differences in the severity of their agency conflicts between shareholders and managers and also between family owners and minority shareholders.

    Our empirical evidence also sheds light on how family firms view and value the external audit and whether they are selecting auditors on price or quality, or some combination of these factors. In addition, given the current downward trend in audit revenues as a percentage of total revenues, our findings could lead accounting firms to re-examine how they market audit services to family firms.


    Ho, J.L., and F.Kang. 2013.Auditor Choice and Audit Fees in Family Firms: Evidence from the S&P 1500.Auditing: A Journal of Practice and Theory32(4): 71-93

    Auditor choice; audit fees; family firms; agency problems
    Purpose of the Study:

    The authors study auditor choice and audit fees in family firms, which have a special ownership structure and different types of agency problems. Family firms are both prevalent and important in the U.S. About one-third of the S&P 500 are family-controlled companies in which the founding families on average own 11 percent of the cash flow rights and 18 percent of the voting rights.

    The unique class of family shareholders may influence firms’ auditor choice in two competing ways. On one hand, compared to non-family firms, family owners can more directly and closely monitor managers and therefore have less severe agency conflicts with managers. This may result in a lower demand for high-quality auditors. On the other hand, due to the agency problems between family owners and minority shareholders, family firms may have incentives to hire high-quality auditors as a signal of credible financial reporting in exchange for better contracting terms (e.g., lower cost of capital). Similarly, the different types of agency problems in family firms may also affect the level of audit fees. Family owners’ active monitoring reduces the inherent risk of material misstatements in financial reporting and results in a lower demand for audit effort, and therefore audit fees. However, the severe agency problems between family owners and minority shareholders suggest that family firms may incur higher audit fees due to higher audit risk and greater audit effort. Therefore, the effect of family firm characteristics on auditor choice and audit fees warrants empirical investigation.

    Design/Method/ Approach:

    The empirical analysis is performed on firms listed on the S&P 1500 index from 2000 through 2008. We define family firms as those in which founders or their family members (by either blood or marriage) are key executives, directors, or block holders and update the classification every year. We hand collected the ownership of the founding family and test our hypotheses on family firms’ auditor choice and audit fees using regressions.

    • The authors find that, on average, family firms are less likely to appoint top-tier accounting firms and incur lower audit fees than non-family firms.
    • The authors observe that the tendency not to hire top-tier accounting firms and to pay lower audit fees is more significant for firms in which family owners are the largest shareholders.
    • The authors find that, compared to family firms without dual-class shares, family firms with dual-class shares tend to mitigate their more severe agency problems between family owners and minority shareholders by hiring top-tier accounting firms to signal their earnings quality and they incur higher audit fees.
    • The authors also find that active family control (i.e., family members as CEOs or on the board) is associated with a lower tendency to hire top-tier accounting firms and lower audit fees.
    Independence & Ethics
    Impact of Fees on Decisions by Auditors & Management