Showing papers in "International Journal of Auditing in 2002"
TL;DR: In this article, the existence of risk premiums in actual audit fees after direct control of audit effort through audit hours in a legal environment (Finland) that can be characterised as mildly litigious.
Abstract: This paper documents the existence of risk premiums in actual audit fees after direct control of audit effort through audit hours in a legal environment (Finland) that can be characterised as mildly litigious. Audit fee and hour data were obtained from the internal archives of four Big Six audit firms. The results suggest that when the client is a listed company, or when the auditor's perceived business risk of the client is higher than average, the audit fee contains a risk premium. As the existence of risk premiums can be documented in the institutional setting examined in this paper, they are also likely to be found in more litigious settings.
103 citations
TL;DR: In this article, the authors examined the relationship between various categories of non-audit services and audit fees using survey data and found that there is a positive association between fees paid for nonaudit service and audit fee in terms either of client specific differences, e.g. organisational complexity, or of events giving rise to the purchase of more audit and non-Audit services rather than in terms of direct economic linkages between the cost functions for audit and NAs.
Abstract: Using survey data we examine the relationship between various categories of non-audit services and audit fees. Compared to previous research, we use a more refined classification of non-audit services both for incumbent and non-incumbent auditors, and control for the existence of an internal audit function and basis of disclosure. Our results suggest that the relationship between levels of audit fees and non-audit services varies by category of non-audit service. These results support explanations of the positive association between fees paid for non-audit services and audit fees in terms either of client specific differences, e.g. organisational complexity, or of events giving rise to the purchase of more audit and non-audit services rather than in terms of direct economic linkages between the cost functions for audit and non-audit services. We speculate that the presence of another auditing firm at the client in a consulting capacity may exert competitive pressure on the fee for external audit.
76 citations
TL;DR: A review of the literature in the area of audit fee determinants includes fifty-six studies drawn from seventeen countries over the period 1980 to 2000 as discussed by the authors, starting with work initially based in the US market and then spreading almost immediately to a number of other markets, some of which were similar in structure to that of the US including the United Kingdom, Australia, Canada, India, New Zealand and Ireland.
Abstract: A review of the literature in the area of audit fee determinants includes fifty-six studies drawn from seventeen countries over the period 1980 to 2000. The review starts with work initially based in the US market and then shows that attention spread almost immediately to a number of other markets, some of which were similar in structure to that of the US including the United Kingdom, Australia, Canada, India, New Zealand and Ireland. A second extension of this work has seen studies based on data drawn from markets including Pakistan, Bangladesh, Malaysia, Singapore, Hong Kong, Japan, South Korea, South Africa, The Netherlands and Norway. The comparative, analytical review highlights the use of a core audit fee determinants model that is used and adapted in a limited way, to reflect market specific circumstances and to address market specific issues. The review indicates some consistency across markets in respect of generic variables identified as core determinants of the level of audit fees. There is little evidence in the literature to indicate historical, cultural, institutional or other market-specific factors being addressed in a systematic way, particularly in respect of developing countries.
73 citations
TL;DR: In this article, the authors show that although rotation is costly, in audit markets with relatively few large clients (thin markets), the resulting improved incentives for independence outweigh the associated costs, and that the desirability of rotation depends critically upon characteristics of the audit market structure and to what extent an individual client dominates an auditors client portfolio defined in terms of total fees.
Abstract: When an auditor receives significant fee income from one client it has often been suggested that reappointment concerns may dilute auditors incentives to maintain independence from management. A possible response to this issue could be to mandate the rotation of auditors. However this is costly since new auditors must repeatedly invest in learning a new clients accounting system. In this research we build a model to formally analyze this trade-off. We find that the desirability of rotation depends critically upon characteristics of the audit market structure and to what extent an individual client dominates an auditors’ client portfolio defined in terms of total fees. We show that although rotation is costly, in audit markets with relatively few large clients (thin markets), the resulting improved incentives for independence outweigh the associated costs. Our research is timely because although historically it may not have been economically desirable to adopt mandatory rotation, currently with increased corporate merger activity taking place, for instance in the oil sector, markets may now have become sufficiently thin to warrant the introduction of rotation.
67 citations
TL;DR: In this paper, the authors examined the audit services market in Ireland and found that the large audit-firm fee premium documented in many countries may be attributable to only a few large accounting firms rather than to all large audit firms.
Abstract: Many studies have been conducted on the market for audit services in the United States, the United Kingdom, Australia and other countries, but many countries, including Ireland, have not been studied in detail. This paper examines the audit services market in Ireland. The findings indicate broad similarities in the market for audit services in Ireland and countries previously studied. In addition to extending the results of prior studies of the audit services market to a country not previously examined in detail, this study makes an additional contribution by examining whether the large audit-firm fee premium is a general phenomenon or is attributable to specific audit firms. The results suggest that the large audit-firm fee premium documented in many countries may be attributable to only a few large accounting firms rather than to all large accounting firms. In this regard the market for audit services in Ireland may differ from many of the countries previously studied.
43 citations
TL;DR: In the context of the Enron-Andersen case, the authors investigates and discusses the importance of financial transparency, auditor independence and auditor responsibility for the health of global financial markets and the world economy.
Abstract: On December 2, 2001, Enron, once a global energy-trading giant, filed for protection under Chapter 11 bankruptcy proceedings. In the weeks preceding the filing, numerous reports of accounting irregularities and the perception of a notorious lack of transparency in the company's financial statements raised questions about the responsibility and role played by Enron's auditor Arthur Andersen. On January 10, 2002 Andersen disclosed that employees at its Houston office had shredded thousands of documents and deleted several emails relating to the Enron audit. On March 14, the Justice Department indicted Andersen on charges of obstruction of justice relating to its inquiry into Enron's accounting. On June 15, 2002, a jury in a Texas court convicted Andersen of these charges. In the context of the Enron-Andersen case, this paper investigates and discusses the importance of financial transparency, auditor independence and auditor responsibility for the health of global financial markets and the world economy.
40 citations
TL;DR: In this article, the impact of board composition and audit committee composition on audit fees in mutual and proprietary insurance companies is examined and the authors find that the existence of an audit committee has a positive impact on audit fee paid by companies in the sample but they find no evidence that audit fees are sensitive to the composition of audit committees.
Abstract: This paper adds to the existing audit pricing literature in three respects. First we focus our analysis on insurance companies thereby allowing us to compare the pricing of audits in mutual and proprietary companies. The different external ownership structure of mutual and proprietary insurers provides an ideal environment in which to explore the influence of external governance on auditors’ pricing decisions. Second, we examine the impact of board composition and audit committees on audit fees. Third, we analyse the impact of non-audit fees on audit fees. Data for the study were obtained from both statutory disclosures and a postal questionnaire. Our results suggest that mutual insurers pay significantly lower audit fees compared to their proprietary counterparts. We find some evidence that the existence of an audit committee has a positive impact on audit fees paid by companies in the sample but we find no evidence that audit fees are sensitive to the composition of audit committees. We find weak evidence that the provision of non-audit services exerts a positive impact on audit fees but the nature of the non-audit service provided has no significant impact. Apart from governance factors, we find that company size and complexity are the most important determinants of audit pricing in insurance with significant price reductions earned by insurers specialising in either general or life business.
38 citations
TL;DR: In this article, the issue of auditor independence has been examined across three EU Member States: the UK, France and Italy, by comparing the ethical guides and the legal and professional regulations in place, highlighting and discussing areas of divergence, and contrasting them with the EC's Consultative Paper.
Abstract: The independence of the external auditor has long been a subject of great debate, particularly by UK and US interested parties. With the growth and globalisation of the large multi-disciplinary firms, it has again been pushed to the fore: new ethical guidance issued by international bodies such as La Federation des Experts- Comptables Europeens (FEE) and The International Federation of Accountants (IFAC) and the activities of the Securities and Exchange Commission (SEC) and Independence Standards Board in the US have encouraged a wider consideration of the issue. In Europe, the European Commission has issued a Consultative Paper containing fundamental principles for adoption into Member States’ own regulation on statutory auditor independence. Increasing pressure for the removal of obstacles to a single European audit market have resulted in safeguards of auditor independence in some countries being described as undesirable barriers. This paper considers the issue of statutory auditor independence across three EU Member States: the UK, France and Italy, by comparing the ethical guides and the legal and professional regulations in place, highlighting and discussing areas of divergence, and contrasting them with the EC's Consultative Paper. It takes into account factors such as culture and the historical development of auditing in order to explore the differences found. The paper demonstrates that positions taken in France and Italy on the issue of auditor independence differ markedly from that taken by the UK profession. Of the three countries reviewed, the UK viewpoint has most obviously influenced the drafting of the EC Paper. The implications of these variances for EU harmonisation are discussed, and the paper concludes that there is a clear need for empirical study of this important issue in Europe to better understand the reasons for differing perceptions and attitudes, and the repercussions of these differences on the process of European audit harmonisation.
36 citations
TL;DR: In this paper, a cross-country audit fee model for 12 countries in Europe, Africa, and Asia is presented, and the results show that companies in developed countries pay higher audit fees than companies in developing countries.
Abstract: Most previous studies in the market for auditing services and modeling of audit fees have been limited to either a single country (e.g., Johnson et al. 1995) or a single region (e.g., Simon et al. 1992) or a collection across regions (Haskin & Williams 1988). The main studies to examine cross-country audit fee models are Taylor and Simon (1999) and Wingate (1994). This study extends their previous work by building an audit fees model for 12 countries in Europe, Africa, and Asia. A more comprehensive model is tested which includes the developing stage of the country, (a variable not yet tested) and industry classifications (a variable not tested by most previous studies). Data were compiled from the annual reports published in the International Accounting and Auditing Trends, Fourth Edition (1995) over 1989–1993 by Center for International Financial Analysis and Research (CIFAR).
Our results show that, on average, companies in developed countries pay higher audit fees than companies in developing countries. Companies in manufacturing industries for most of the countries studied have the lowest fees charged to them, as compared to the other four industries, presumably because auditors get more training in auditing manufacturing companies than other companies. As in previous studies, our results show that the Big 6 audit firms charge higher fees than non-Big 6 auditors. The fee premium may be due to the need for quality-differentiated audits in the emerging capital markets, or due to the brand name reputation enjoyed by the Big 6.
29 citations
TL;DR: This article conducted an exploratory study of risk management structures in organisations and how these comply with best practice in corporate governance, finding that structures are in place to deliver a sound system of internal control including risk management.
Abstract: This paper investigates risk management structures in organisations and how these comply with best practice in corporate governance. We carried out an exploratory study (in 2001) of four large public and private sector organisations in the United Kingdom. Interviews were conducted with risk managers and internal auditors to ascertain the extent to which emerging structures complied with the Turnbull Guidance to the Combined Code.
We found that structures are in place to deliver a sound system of internal control including risk management. Internal auditors and risk managers are both involved but their respective roles are often not sufficiently well defined to avoid overlaps and gaps. We also found that several of the organisations studied rely on external auditors to conduct the required annual review of risk management.
23 citations
TL;DR: In this paper, the objectives of the government audit are considered, together with a discussion of the latest notions of public accountability which require periodic reporting by managers and an annual audit, the modern notion of a comprehensive performance audit in the government sector is also discussed.
Abstract: Recent incidents which may involve corruption and misconduct by high government officials in the Hong Kong Special Administrative Region (HKSAR) have aroused public interest in, and concern for, the processes for which the government is held accountable to its citizens as a whole. This requires the reinforcement and reinstatement of a proper and workable government audit mechanism. The objectives of the government audit are considered, together with a discussion of the latest notions of public accountability which require periodic reporting by managers and an annual audit. The modern notion of a comprehensive performance audit in the government sector is also discussed. Finally, some suggestions to remedy the weaknesses in the present government audit are put forward.
TL;DR: The International Accounting Standards Board (IASB) as mentioned in this paper has been recognized as a world leader in setting financial accounting standards and is the only body that has the authority to set auditing standards.
Abstract: In 1973 a consortium of nine accountancy bodies under the initiative of Sir Henry Benson formed the International Accounting Standards Committee (IASC), an organization devoted to the development of a universal accounting language that companies could use to cross-list on financial exchanges throughout the world. Effective 2001, the organization became the International Accounting Standards Board (IASB) and is today recognized as a world leader in setting financial accounting standards. However, good accounting standards are meaningless without strong auditing standards. This study was undertaken to determine the proliferation of International Accounting Standards (IAS) throughout the world financial markets, whilst simultaneously assessing the role that the audit might play in the context of IAS enforcement. Upon completion of the study, many questions remain unanswered.
TL;DR: In this article, a comparative study on disciplinary observance systems of the auditing profession within two member states of the European Union: Germany and Denmark is presented, showing that audit regulations and in particular disciplinary laws remain basically national, despite efforts to harmonise auditing.
Abstract: This paper presents the results of a comparative study on disciplinary observance systems of the auditing profession within two member states of the European Union: Germany and Denmark. Disciplinary observance is an important factor in reducing the hidden action problem, but could also be used by the profession to signal quality. In Germany, the Wirtschaftspruferkammer is the supervisory body which oversees compliance with standards and professional duties. It is entitled to sanction the minor violations of duties by auditors. Only more severe types of misbehaviour are dealt with by courts. In Denmark, a special court (Disciplinaeernaevn) is concerned with disciplinary actions against auditors. The results of this study will demonstrate that audit regulations and in particular disciplinary laws remain basically national, despite efforts to harmonise auditing. This study identifies characteristics of disciplinary systems common to both countries and provides information on the functioning of both systems that may be useful in a number of ways. The results presented might initiate a more systematic comparison of disciplinary systems within member states of the European Union, which would enhance institutional knowledge of the European market for auditing services. This in turn could promote the process of achieving a single European market for auditing services and thus reduce market inefficiencies.
TL;DR: In this paper, the authors investigated the relationship between accounting standards and audit firm switch rates and found that conflict is created over the implementation of the standard which results in a client changing auditors.
Abstract: Researchers have conjectured that accounting standards decrease the rate at which clients change auditors. They argue that conflict caused by disagreements over accounting standards is reduced because there are fewer acceptable accounting principles. Surprisingly, there is little empirical evidence that investigates the impact of accounting standards on audit firm switch rates.
This study investigates the relationship between accounting standards and audit firm switch rates. The paper presents surprising evidence that in the year of enactment, accounting standards cause clients to change auditors at a faster rate. This finding supports the idea that conflict is created over the implementation of the standard which results in a client changing auditors. The paper also supports traditional thought by presenting evidence that in years following the issuance of an accounting standard clients change auditors at slower rates. This finding supports the idea that conflict will be reduced in future years because there are fewer acceptable accounting principles on which an auditor and a client can disagree.
Data Availability: Data are available from sources identified in the text.
TL;DR: In this paper, the authors consider the new system of regulation of the accountancy profession in the UK, based on the Accountancy Foundation, and explore how the system compares with: principles of regulation produced by the Better Regulation Task Force and National Consumer Council; stakeholder perceptions on the nature of an independent regulatory body for UK listed company audit; new and emerging developments arising from the review of competition in professions by the Office of Fair Trading; recommendations of the Company Law Review Steering Group and establishment of the Financial Services Authority.
Abstract: This paper considers the new system of regulation of the accountancy profession in the UK, based on the Accountancy Foundation. It explores how the system compares with: principles of regulation produced by the Better Regulation Task Force and National Consumer Council; stakeholder perceptions on the nature of an independent regulatory body for UK listed company audit; new and emerging developments arising from the review of competition in professions by the Office of Fair Trading; recommendations of the Company Law Review Steering Group and establishment of the Financial Services Authority; and, events set in train in the UK as a result of the collapse of Enron in the US. The paper concludes it is ironic that the new system, enthusiastically endorsed so recently by government, should be called into question so fundamentally, and so rapidly, by events outside its jurisdiction.
TL;DR: In this article, the authors examine audit fees and returns to auditor reputation for Israeli entrepreneurs making initial public offerings (IPOs) of equity in U.S. capital markets and find that the cost of audit quality in terms of audit fees is higher, and the benefit of audit QA is lower for a sample of Israeli IPOs matched to a control sample of U. S. IPOs.
Abstract: We examine audit fees and returns to auditor reputation for Israeli entrepreneurs making initial public offerings (IPOs) of equity in U.S. capital markets. We find that the cost of audit quality in terms of audit fees is higher, and the benefit of audit quality in terms of IPO proceeds is lower for a sample of Israeli IPOs matched to a control sample of U.S. IPOs. The results suggest that the higher levels of country-specific risk in Israel are modifying the cost and benefits of audit quality for Israeli entrepreneurs selling securities in the U.S.