Determinants of Audit Engagement Profitability

65 Pages Posted: 25 Jul 2018

See all articles by Kris Hoang

Kris Hoang

University of Alabama - Culverhouse College of Commerce & Business Administration

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University

Date Written: August 1, 2017

Abstract

We examine determinants of audit engagement profitability using proprietary data from the national office of a Big 4 public accounting firm in Canada. We verify through interviews with senior audit partners that the audit realization rate is the primary measure used to assess engagement level profitability, and use the former to proxy for engagement profitability in our archival analysis. We find that engagement profitability is positively associated with the firm’s assignment of lead senior audit managers as identified by the national office, and its delivery of intangible client service dimensions such as communication, customization, and responsiveness (obtained from satisfaction surveys of client management and audit committee chairs). We find that audit quality, measured by discretionary accruals and audit adjustments, is not sacrificed to attain higher engagement profitability. We discuss implications for regulation and competition in audit markets.

Keywords: audit engagement realization rates, auditor expertise, client service delivery, client satisfaction

JEL Classification: M42, M21, L84

Suggested Citation

Hoang, Kris and Jamal, Karim and Tan, Hun-Tong, Determinants of Audit Engagement Profitability (August 1, 2017). Available at SSRN: https://ssrn.com/abstract=3207758 or http://dx.doi.org/10.2139/ssrn.3207758

Kris Hoang (Contact Author)

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-5829 (Phone)
780-492-3325 (Fax)

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
+65 6790 4819 (Phone)
+65 6793 7956 (Fax)

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