Audit Pricing for Strategic Alliances: An Incomplete Contract Perspective

45 Pages Posted: 28 May 2012 Last revised: 3 Dec 2016

See all articles by Sebahattin Demirkan

Sebahattin Demirkan

George Mason University - Department of Accounting

Nan Zhou

University of Cincinnati - Lindner College of Business

Date Written: June 1, 2015

Abstract

We study the pricing of audit services for strategic alliances, a governance structure involving an incomplete contract between separate firms. Since incomplete contracts do not specify all future contingencies, we expect that the non-verifiability of information and potential agency behavior in alliances increases audit complexity, resulting in higher audit fees. Our findings support this prediction. We then separate strategic alliances into joint ventures and contractual alliances as the latter involve more complexity. We find that our audit fee results are largely driven by contractual alliances. We perform additional tests to rule out the concern that our audit fee results might be attributable to the impact of strategic alliances on distress risk, audit risk, or control risk. Contrary to the distress risk argument, we find that auditors are less likely to issue going-concern modified opinions when there is an increase in strategic alliances. Contrary to the audit risk argument, we find that an increase in strategic alliances is unrelated to the likelihood of financial misstatements. Contrary to the control risk argument, we find that an increase in strategic alliances is unrelated to internal control weakness opinions.

Keywords: Strategic alliance; Audit fee; Incomplete contract; Audit complexity

JEL Classification: M42, L14, L24

Suggested Citation

Demirkan, Sebahattin and Zhou, Nan, Audit Pricing for Strategic Alliances: An Incomplete Contract Perspective (June 1, 2015). Contemporary Accounting Research, Winter 2016, Vol. 33, No. 4, pp. 1625-1647, Available at SSRN: https://ssrn.com/abstract=2067398 or http://dx.doi.org/10.2139/ssrn.2067398

Sebahattin Demirkan (Contact Author)

George Mason University - Department of Accounting ( email )

Nan Zhou

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States

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