Audit fee discounting in the post-SOX environment

Hoffman, Benjamin W.; Nagy, Albert L.

doi:10.1108/maj-03-2016-1335

Cited by 9 publications

(7 citation statements)

References 25 publications

(37 reference statements)

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“…Recently, firms and their audit committees have increasingly focused on reining in audit fees (Ryan, 2014; Gwin, 2016). Furthermore, auditors sometimes also tend to lowball audit fees (Hoffman and Nagy, 2017). Our study suggests that firms should consider audit fees’ impact on financial report readability.…”

Section: Discussionmentioning

confidence: 99%

Financial report readability and audit fees: a simultaneous equation approach

Xu¹,

Fernando

Tam

et al. 2019

MAJ

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Purpose This paper aims to investigate whether audit fees and financial report readability are bi-directionally related. Design/methodology/approach The authors test their hypotheses with empirical data. Specifically, they adopt a two-stage simultaneous equation regression model to assess the bi-directional relationship between audit fees and financial report readability. Findings While poor readability increases the fees charged by the auditor, higher audit fees improve the readability of the financial reports. Research limitations/implications This study is based on US data. Future research may extend this study to other countries. Practical implications Poor financial report readability encumbers stakeholders of the firms. Understanding the interaction between financial report readability and audit fees will help both auditors and firm managers. Social implications Audit committees aggressively negotiating for lower audit fees should be aware of the link of low audit fees, potentially indicative of poor quality, to less readable reports. Investors and regulators too should be concerned about this relationship, especially in instances when auditors low-ball audit fees or when firms aggressively negotiate for lower audit fees. Originality/value To the best of authors’ knowledge, this study is the first to document the bi-directional relationship between financial report readability and audit fees and assess the positive impact of audit fees on financial report readability.

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Section: Discussionmentioning

confidence: 99%

Financial report readability and audit fees: a simultaneous equation approach

Xu¹,

Fernando

Tam

et al. 2019

MAJ

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“…SOX 404(b) caused the cost structures of audit firms to change significantly by incorporating integrated audits into the firms' client portfolios. Also, when auditors realized that their expected future economic rents decreased due to the exemption, they likely tried to raise the audit fees for their affected clients, especially if the auditors used audit fee discounting to obtain the clients in the first place (Hoffman and Nagy, 2016). Prior literature has established that increased audit fees in the Sarbanes-Oxley era are more likely to lead to auditor dismissals (Ettredge et al, 2007).…”

Section: Hypothesis Developmentmentioning

confidence: 99%

SOX 404(b) exemption effects on auditor changes

Hoffman

Nagy

2016

MAJ

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Purpose This paper aims to investigate whether the Sarbanes-Oxley Act: Section 404(b) exemption caused an increase in auditor changes due to changes in expectations for both auditors and their clients. Design/methodology/approach This paper predicts that this exemption caused a significant amount of auditor changes post-exemption, due to a change in expected future economic rents (audit scope demands) for auditors (clients). Logistic regression analysis is used to examine whether auditor changes increased for non-accelerated filers (public companies with less than $75 million in public float), who were affected by this exemption, compared to auditor changes for accelerated filers (public companies with greater than $75 million in public float), who were not affected by this exemption. Findings The results show a significant positive association between the exemption and auditor dismissals for non-accelerated filers compared to that of accelerated filers. This finding is robust when sensitivity tests are used. Practical implications Prior literature finds that an increase in auditor changes can have various positive and negative effects on the affected companies. Thus, investors will be interested in the results of this paper when making their investment decisions with regard to non-accelerated filers. Social implications The results of this paper will aid policymakers as they consider the pros and cons of this exemption, as it pertains to the affected companies. Originality/value This paper is the first to study the effects of this exemption on auditor turnover for the affected companies.

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“…Thus, if audit firms are unwilling to absorb the cost of host-city audit inefficiencies themselves, we would expect to see a positive relationship between Super Bowl hosting and audit fees. We note, however, that increasing audit fees was not viewed by partners as an effective strategy when dealing with the 10-K filing deadline reduction (Lambert et al , 2017), and audit fees can also reflect elements other than effort (Hoffman and Nagy, 2019).…”

Section: Literature and Hypothesis Developmentmentioning

confidence: 93%

All my rowdy friends: the effect of Super Bowl hosting on audit and financial reporting timeliness

Crook,

Lambert,

Walkup

et al. 2023

MAJ

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Purpose The purpose of this paper is to examine the impact hosting the Super Bowl has on audit completion and financial reporting timeliness for companies headquartered in Super Bowl hosting cities. Design/methodology/approach Using 16 years of financial reporting data, this study uses the Super Bowl and related activities, combined with required filings during “busy season,” as a natural experiment to examine how audit firms navigate short-term, exogenously imposed but anticipated, audit team capacity constraints. Findings Companies headquartered in a city hosting the Super Bowl, during busy season, have longer audit report lags (by approximately three days, in comparison to non-hosting busy season audits) and less timely securities and exchange commission (SEC) (10-K) filings. The authors find no evidence that Super Bowl hosting affects audit fees or earnings announcement timeliness. Practical implications When confronted with anticipated capacity shocks, audit firms take longer to complete the audit, absorbing the financial costs of the delay and maintaining audit quality, resulting in less timely financial reporting. Originality/value This study demonstrates the costs of Super Bowl-related inefficiencies and contributes to our understanding of how auditors navigate capacity shocks. This study provides evidence that auditors can effectively manage business risk and continue to facilitate providing timely and accurate information to financial statement users in the face of a capacity shock.

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Audit fee discounting in the post-SOX environment

Cited by 9 publications

References 25 publications

Financial report readability and audit fees: a simultaneous equation approach

Financial report readability and audit fees: a simultaneous equation approach

SOX 404(b) exemption effects on auditor changes

All my rowdy friends: the effect of Super Bowl hosting on audit and financial reporting timeliness

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