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Abstract:
In this paper, we first develop a model in which national legal environments play a crucial role in determining auditor effort and audit fees. Our model predicts that: (1) audit fees increase monotonically with the strictness of a country's legal liability regime; (2) given a legal liability regime, Big 4 auditors charge higher audit fees than non-Big 4 auditors; and (3) the Big 4 fee premium decreases as a country's legal regime shifts from a weak to a strong regime. We then test the model's predictions using a large sample of audit clients from 15 countries with different legal regimes where audit fee data are publicly available. The results of our cross-country regressions strongly support the above three predictions, and are robust to a battery of sensitivity checks. Overall, our regression results indicate that a country's legal environment plays an important role in determining both audit fees and the fee spread between Big 4 and non-Big 4 auditors.

Audit fee, legal liability cost, liability regime shift big 4 fee premium

Abstract:
Our research objective is to identify characteristics of clients and of audit engagements that are associated with changes in the mix of audit procedures performed by auditors. The conceptual basis for the research is simply that profit maximizing auditors should vary the nature of procedures performed and time spent in performing procedures as marginal benefits and/or costs change. However, prior research has found that audit programs generally tend to be quite rigid.

In this archival study, we examine the determinants of the number of audit hours devoted to the performance of 34 common audit procedures over four audit phases - planning, risk assessment, substantive testing, and completion - for a cross-section sample of 113 audits of Dutch companies in 1998/99 by 14 public accounting firms, including a cluster of 56 audits performed by two of the (then) international Big 5 firms. We find that the length of auditor tenure with a client increases audit hours, while a high risk of management fraud weakly increases audit hours - but without changing the mix of procedures. A high level of client pressure on audit time and fees decreases audit hours, particularly in the areas of planning and risk assessment. Use of modern, strategic systems (business risk) based audit approaches, considerably changes the mix of procedures, but these approaches are applied quite differently by Big 5 vs. non-Big 5 firms. Likewise, the degree of auditor-reliance on clients' internal controls changes the mix of procedures, but the effects are quite different for Big 5 vs. non-Big 5 firms. The joint performance of management advisory services (MAS) for an audit client results in relatively less audit time in planning and risk assessment, but does not change total audit hours, suggesting that any benefits from 'knowledge spillovers' from MAS are retained by auditors, and hence may not be detectable in total hours or in audit fees. Finally, our results are consistent with the notion that the details of audit production by Big 5 firms are both more reasonable and predictable than audits by non-Big 5 firms. This can explain why Big 5 audits are more highly valued in the marketplace.

audit procedures, audit hours, mix, audit quality

Abstract:
In this paper, we first develop a model in which national legal environments play a crucial role in determining audit fee premiums for cross-listed firms. Our model predicts that: (1) auditors charge higher fees for the firms that are cross-listed in stronger legal regimes than for non-cross-listed firms; and (2) the cross-listing audit fee premium increases (decreases) as the difference in the strictness of legal regimes between the cross-listed foreign country and the home country becomes larger (smaller). We then test the model's predictions using a large sample of audit clients from 14 countries with different legal regimes where audit fee data are publicly available. The results of our cross-country regressions strongly support the model's predictions. However, we find no significant cross-listing premiums for the firms that are cross-listed in countries whose legal regimes are no stronger than those of their home countries. Our regression results are robust to a battery of sensitivity checks, and offer explanations of why the cross-listing premiums occur and what determines the magnitude of the premiums.

Cross-listing, Audit fee, Legal regime, Legal liability costs

Abstract:
Using a large sample of privately held Korean companies that are not required to obtain an external audit, this paper examines the informational value of voluntary external audits of financial statements with respect to the cost of debt. We find that private companies with an external audit pay a significantly lower interest rate on their debt than do private companies without an audit. Further, the interest rate on borrowing is significantly lower for Big 4-audited companies than for non-Big 4-audited companies. Finally, we find that a change in a company's status from no audit to being audited - either voluntarily or because the audit became mandatory - leads to significant savings in the cost of borrowing.

Voluntary audit, Private companies, Cost of debt, Private debt pricing, Korea