Offshore Trading Activities and Audit Fees: A Textual Approach

Managerial Auditing Journal, Forthcoming

40 Pages Posted: 17 Jan 2019 Last revised: 30 Jun 2020

See all articles by Janus Jian Zhang

Janus Jian Zhang

Hong Kong Baptist University

Yun Ke

University of Texas at El Paso - Department of Accounting & Information Systems

Shuo Li

Western Washington University - Department of Accounting; Western Washington University

Yanan Zhang

Central University of Finance and Economics (CUFE) - School of Accountancy

Date Written: December 17, 2019

Abstract

This paper examines whether and how auditors’ pricing decisions are affected by their clients’ offshore activities, which are comprehensively measured through a textual analysis technique. We find that offshore activities are positively associated with audit fees, suggesting that offshore activities are likely to increase client firm’s business risk and/or the extent of client complexity. This main finding is robust to using alternative measures of offshore activities and applying methods to mitigate the omitted correlated variables problem. We also find that auditors charge higher audit fees only to firms with inputs produced by its own assets overseas not to firms that buy inputs produced by local firms oversea. Moreover, the association between offshore activities and audit fees is more pronounced for offshore activities that are in countries with high trading centrality, high income, or high political stability, for Big 4 auditors, or for auditors with industry expertise. In additional analyses, we find that offshore activities are positively associated with tax fees, audit effort and audit quality. This evidence suggests that both client business risk and client complexity are the plausible channels through which offshore activities affect audit fees.

Keywords: Audit Fees, Offshore Activities, Perceived Audit Risk, Audit Effort

Suggested Citation

Zhang, Janus Jian and Ke, Yun and Li, Shuo and Li, Shuo and Zhang, Yanan, Offshore Trading Activities and Audit Fees: A Textual Approach (December 17, 2019). Managerial Auditing Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3316945

Janus Jian Zhang

Hong Kong Baptist University ( email )

Renfrew Road 34
Kowloon Tong
Hong Kong

Yun Ke

University of Texas at El Paso - Department of Accounting & Information Systems ( email )

University Library - Acquisitions Department
500 West University Avenue
El Paso, TX 79968
United States

Shuo Li

Western Washington University - Department of Accounting ( email )

516 High Street
Bellingham, WA N.A 98225
United States
3606503202 (Phone)

Western Washington University ( email )

United States
3606503202 (Phone)

Yanan Zhang (Contact Author)

Central University of Finance and Economics (CUFE) - School of Accountancy ( email )

39 South College Road, Haidian District
Beijing
China

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