Effects of Clients’ Controversial Activities on Audit Pricing

Koh, Kevin; Tong, Yen H.

doi:10.2139/ssrn.1530664

Cited by 12 publications

(46 citation statements)

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“…This study's contribution to the literature is threefold. First, evidence as to how firms' CSR risk affects auditor tenure extends the current literature on the impact of clients' CSR activities on auditor–client decisions in general (e.g., Koh & Tong, ). As such, we complement recent studies examining auditors' behaviors related to mitigating CSR risk through the manipulation of auditor activities (Kim & Park, ) and perceptions of audit quality (Butcher, Harrison, & Ross, ) on auditor tenure.…”

Section: Introductionmentioning

confidence: 59%

“…In addition to risk‐adjusted fees and changes in audit procedures, an auditor will risk‐adjust its client portfolios by becoming more selective in accepting new clients (Laux & Newman, ) or shedding existing high‐risk clients (Bockus & Gigler, ) in order to reduce audit and business risk to an acceptable level. With regard to corporate social responsibility, Koh and Tong () demonstrated a positive relationship between the aforementioned methods of auditor risk mitigation with regard to existing clients undertaking socially irresponsible CSR activities. To date, however, studies have not examined the relationship between auditor tenure and CSR risk, which is the focus of this study.…”

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 99%

“…CSR studies in the audit area provide evidence that irresponsible social activities impose threats to auditors' engagement risk, resulting in changes in auditors' actions. Specifically, studies document relationships between irresponsible social activities and increased audit fees (Koh & Tong, ). However, it is currently unclear whether the risk related to irresponsible social activities (hereafter referred to as CSR risk) is related to auditor–client retention decisions .…”

Section: Introductionmentioning

confidence: 99%

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Corporate social responsibility risk and auditor–client retention

2019

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Literature suggests that firms engaging in irresponsible corporate social responsibility (CSR) activities are more likely to increase auditor's engagement risk. Using audit firm tenure as a continuous measure for retention decisions made by either auditors or client firms, we find a significant and negative association between CSR risk and auditor tenure. Moreover, when the continuous variable audit tenure is replaced with a dichotomous variable auditor change, the likelihood of auditor change intensifies with increases in CSR risk. These results suggest that both clients and auditors are more likely to sever relationships when client firms exhibit high CSR risk than low CSR risk. This study has implications for future research on audit firm tenure and audit outcomes.

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Section: Introductionmentioning

confidence: 59%

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Corporate social responsibility risk and auditor–client retention

2019

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“…Existing research suggests that audit fees depend on company size (Simunic, 1980;Koh & Tong, 2013;Gietzmann & Pettinicchio, 2014;Han et al, 2016), auditee complexity (Craswell, Francis, & Taylor, 1995;Choi et al, 2008;Hogan & Wilkins, 2008;Han et al, 2016), asset structure (Stice, 1991;Sundgren, 1998;Krishnan & Visvanathan 2009), financial condition (Stice, 1991;Craswell, Francis, & Taylor, 1995;Chang & Hwang, 2003;Desai, Hogan, & Wilkins, 2006;), business risk (Bell, Landsman, & Shackelford, 2001;Koh & Tong, 2013), earnings quality (Becker et al, 1998;Bartov, Gul, & Tsui, 2000;Bedard & Johnstone, 2004;Abbott et al, 2006;Dechow, Ge, & Schrand, 2010), corporate governance (Chen et al, 2014;Srinidhi, Yan, & Tayi, 2015), and regulatory environment (Jaggi & Low, 2011;Su & Wu, 2017). Furthermore, researchers have also considered the effect of external monitoring on audit risk.…”

Section: Background and Hypothesesmentioning

confidence: 99%

Audit Firm Assessments of Cyber-Security Risk: Evidence from Audit Fees and SEC Comment Letters

Rosati

Gogolin²,

Lynn³

2019

Int. J. Acc.

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This study investigates the impact of cyber-security incidents on audit fees. Using a sample of 5,687 firms, we find that (i) breached firms are charged 12% higher audit fees, and (ii) firms operating in the same industry of a breached firm are charged 5% higher fees. Finally, using a difference-in-difference regression on a propensity score matched sample, we provide evidence suggesting that auditors do not revise their audit risk assessment following a breach. Overall, these results suggest that the increase in audit fees in the year of a breach is only temporary, and that auditors include cyber-security risk in their audit risk assessment even before an incident occurs. Higher cyber-security risk is ultimately reflected in higher audit fees paid by auditees.

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“…Using KLD data, Koh and Tong () explored the engagement of audit clients in controversial activities and found that audit clients who engage in controversial corporate activities pay higher audit fees. However, since KLD mainly rates the broad social performance (e.g., environmental performance, product safety, and employee relations) of clients, rather than the managerial integrity of the directors, they indicated that further research was needed to test the effects of specific managerial integrity characteristics (such as financial disclosure violation, accounting misrepresentation, and fraudulent misconduct) of directors on company audit fees.…”

Section: Literature Review and Development Of The Hypothesesmentioning

confidence: 99%

“Problem” directors and audit fees

2019

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This study investigates the association between audit fees and the presence of “problem” directors on corporate boards and audit committees. “Problem” directors, in this context, are those directors who have been involved in corporate financial failures and integrity indiscretions in the past. Auditors regard the presence of such directors on boards and audit committees as audit risk, and may have to enhance their audit procedures, leading to higher audit fees. Using a sample of 9,175 firm‐year observations from 2004 to 2010 of US firms, we find that the presence of “problem” directors on boards and audit committees is associated with higher audit fees. This finding has a policy implication for corporate managers, that they should be mindful of the increase in perceived audit risk that arises from professional and personal attributes of directors when recruiting individuals to serve on their boards.

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Effects of Clients’ Controversial Activities on Audit Pricing

Cited by 12 publications

References 0 publications

Corporate social responsibility risk and auditor–client retention

Corporate social responsibility risk and auditor–client retention

Audit Firm Assessments of Cyber-Security Risk: Evidence from Audit Fees and SEC Comment Letters

“Problem” directors and audit fees

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