The present study examines the empirical relationship between ownership characteristics and audit fees. The basic premise is that the level of ownership sophistication and the extent to which ownership is large and substantial impact the effectiveness of stockholder monitoring on corporate affairs including the financial reporting process. Furthermore, high managerial ownership firms may experience a decline in agency problems in financial reporting due to a decrease in managerial propensity to misreport financial results. By employing a cross-sectional least squares regression analysis for a sample of 358 New York Stock Exchange-listed firms audited by the Big Five auditors, we find evidence of a significantly positive relationship between diffused institutional stock ownership (i.e., having less than 5% individual shareholding) and audit fees, and a significantly negative relationship between institutional blockholder ownership (i.e., having 5% or more individual shareholding) and audit fees. Finally, we document that managerial stock ownership is negatively associated with audit fees. We do not, however, find evidence of any relationship between noninstitutional blockholder ownership (with at least 5% individual stock ownership) and audit fees. The study's main results hold in various specification tests including when the effects of board-related and audit committee variables are factored in the analysis. Based on the observed relationship between the ownership variables and audit fees, we suggest that the ownership characteristics of a firm as a part of its governance mechanism constitute an important determinant of audit fees. Copyright Springer Science+Business Media, LLC 2007Diffused institutional stock ownership, Institutional and noninstitutional blockholder ownership, Managerial stock ownership, Audit fees, Agency problem, Corporate Governance,

This study examines the empirical relationship between institutional percentage shareholding and accounting discretion exercised by firms to manage accruals over a period of time. It also evaluates the effects of firm size and information environment on such relationship. By employing a firm-specific abnormal accrual estimation design to measure accounting flexibility/discretion used to adjust abnormal accruals in financial reporting, the study documents that institutional stock ownership is inversely related to such accounting discretion exercised to manage abnormal current accruals. This inverse relationship is, however, found to be dependent on firm size and richness of information environment. Specifically, the inverse relationship strongly holds for smaller firms that are deemed to have an impoverished information environment compared with larger firms having information-rich environment. Furthermore, by using a two-stage least-squares approach, the study addresses the endogeneity-driven ambiguity which is inherent in the simple identification of a negative relation between institutional stock ownership and accrual management. The analysis demonstrates that the overall negative relationship is partly attributed to institutional shareholder monitoring that constrains management's ability to opportunistically manage abnormal accruals. The evidence is consistent with the view that active monitoring of institutional shareholders mitigates opportunistic reporting behavior of corporate managers and improves the quality of governance in the financial reporting process.

Backdating stock options, a practice that retroactively adjusts stock option grant dates to lower the exercise price, has raised governance, legal, accounting, tax, and auditing concerns. The practice of backdating options generally is believed to be a result of both ineffective corporate governance and management opportunism. Both of these factors have been linked to a higher level of discretionary accruals adjustments. This study examines the accruals-based earnings management patterns for a group of firms that were implicated by the Securities and Exchange Commission (SEC) for backdating stock options with a matched control group of nonimplicated firms for a time period surrounding the enactment of the Sarbanes-Oxley Act (SOX) of 2002. Both the univariate and multivariate analyses show that in the pre-SOX years, the sample of implicated firms managed abnormal accruals at a significantly greater level than the matched group of nonimplicated firms. The differential pattern of accruals management across these two groups becomes insignificant in the post-SOX period. Our result also suggests that the effect of SOX on mitigating the level of accruals management is substantially greater for the implicated companies than for the nonimplicated companies. The difference in the effect of SOX on the two groups of firms persists even after controlling for the differences in their governance and internal control effectiveness. We, therefore, suggest that SOX had effects on management’s reporting choices beyond those resulting from improvements in governance and internal control over financial reporting.

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This study examines the relationship between accounting conservatism and internal control weaknesses (ICW) in the post-Sarbanes-Oxley Act of 2002 (SOX) period when the U.S. firms have been subject to higher regulations and enhanced corporate oversight and scrutiny. Our multivariate analyses show that the firms having ICW, especially the firms with company-level ICW, have significantly changed their conservative reporting practice from the pre-to the post-SOX period. The analyses further show that the ICW firms exhibit greater accounting conservatism in the post-SOX period compared with the firms with effective internal controls (non-ICW). The result is mostly driven by increased conditional conservatism by the firms having company-level ICW that are more pervasive in effect, less auditable, and more difficult to detect and prevent. Furthermore, we find that the difference in conservatism between ICW and non-ICW firms is more prominent in the first 3 post-SOX years than in the last 3 post-SOX years of the sample period. These findings suggest that enhanced corporate oversight and scrutiny have induced the ICW firms to use more accounting conservatism in an effort to reduce reporting uncertainty, enhance information reliability, and promote contracting efficiency. Our findings are consistent with prior studies that demonstrate a shift in the U.S. firms' financial reporting strategies in response to stringent regulations and governance in the post-SOX period.

Purpose -The purpose of this paper is to examine the empirical association between expected and unexpected audit fees and reported earnings quality for a sample of Big 4(5) client companies over a period from 2000 to 2005. Design/methodology/approach -The paper employs a cross-sectional multiple regression model for a sample of 1,142 firms (6,852 firm-years) covering a time period of six years comprising 2000 to 2005 to evaluate the relationship between both expected and unexpected audit fees and performanceadjusted discretionary accruals that are estimated from the extended version of the modified Jones model. Findings -The paper finds that both expected and unexpected audit fees are associated with an increase in earnings quality, as indicated by the reduction of both absolute and signed discretionary accrual adjustments. Furthermore, in some analyses these associations are found to persist into the post-Sarbanes-Oxley Act (SOX) period. The main results hold in sensitivity tests that involve using both the absolute and signed unexpected audit fees as independent variables and in tests that use both the absolute and signed current accruals as dependent variables of interest.Research limitations/implications -The results suggest that audit efforts consistent with clientspecific business attributes and reflected in expected audit fees mitigate financial reporting biases, the effect of which is incrementally observable to some extent in the post-SOX period as well. Unexpected audit fees, a proxy for fee surprise arising out of auditor-client-specific contractual situations, are also associated with an increase in earnings quality. The association is, in some analyses, significant for the post-SOX years. The test results do not exhibit any evidence of auditor independence problems associated with high expected and unexpected audit fees; a result that supports the ''reputation protection'' argument for auditors' reporting decisions. Originality/value -In a time period surrounding the introduction of SOX when nonaudit consulting services have severely been restricted, and the audit fee growth for publicly traded companies have been dramatic, an analysis of this nature potentially produces valuable insights into the auditors' fee decision, audit efforts, and auditor independence issue. The study looks into a new perspective concerning the relationship between audit fees and financial reporting practice over the two regulatory regimes, pre-and post-SOX.

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