Do Corporate Pension Plans Affect Audit Pricing?

Journal of Contemporary Accounting and Economics, Forthcoming

47 Pages Posted: 5 Oct 2017 Last revised: 24 Nov 2017

See all articles by Yangyang Chen

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

Rui Ge

Shenzhen University - Shenzhen Audencia Business School

Leon Zolotoy

University of Melbourne - Melbourne Business School

Date Written: September 27, 2017

Abstract

We examine whether corporate pension plans of client firms (hereafter, clients) influence auditors’ decisions on audit pricing for the clients in the U.S. We find that, on average, auditors charge higher fees for auditing financial statements of client firms sponsoring defined benefits (DB) pension plans than matched firms without DB pension plans. Moreover, we find that the effect of DB pension plans on audit fees is stronger when clients’ earnings are more sensitive to DB pension estimates, or when managers’ compensation induces more risk taking. Finally, we find that the additional audit fees charged for clients with DB pension plans are negatively associated with the extent of manipulations of DB pension accounting estimates. Collectively, our findings suggest that auditors consider managers’ incentive to manipulate earnings and increase audit effort to reduce audit risk associated with DB pension accounting, which results in higher audit fees.

Keywords: Pension Plans, Audit Pricing, Audit Effort, Audit Risk, Earnings Management.

JEL Classification: M40, M42, M48

Suggested Citation

Chen, Yangyang and Ge, Rui and Zolotoy, Leon, Do Corporate Pension Plans Affect Audit Pricing? (September 27, 2017). Journal of Contemporary Accounting and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3047593

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Rui Ge (Contact Author)

Shenzhen University - Shenzhen Audencia Business School ( email )

Shenzhen
China

Leon Zolotoy

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

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