Family Ownership, Auditor Choice and Audit Fees: Evidence from Hong Kong

Lei, Adrian C. H.; Lam, Samuel W. K.

doi:10.5296/ijafr.v8i1.12571

Cited by 4 publications

(19 citation statements)

References 61 publications

(82 reference statements)

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“…Their results also show that firms suffering from principal-principal conflicts are likely to appoint Big 4 auditor, in this case, to signal to the market that their financial statements are credible. Lei and Lam (2013) examine the relation between family ownership and auditor choice in Hong Kong-listed firms. Their results indicate that family firms are more likely to hire a Big 4 company to reduce potential agency problems.…”

Section: Auditor Choicementioning

confidence: 99%

Does ownership structure affect the quality of auditor pair composition?

Alfraih

2017

JFRA

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Purpose This study examines the effects of institutional and government ownership on audit quality in Kuwait. Kuwait provides an interesting regulatory context as listed firms are legally required to appoint two external auditors from different auditing firms. This offers a unique opportunity to examine differentiation in demand for audit quality when there are three potential combinations of auditors: two non-Big 4, one Big 4 and one non-Big 4 and two Big 4. Design/methodology/approach The sample consists of all firms listed on the Kuwait Stock Exchange in 2013. Multinomial logistic regression examines the influence of ownership structure on audit quality. Analyses are controlled for the effect of company characteristics. Control variables are: firm size, complexity, growth, leverage, profitability and industry category. Findings The results show that institutional ownership is positively related to the number of Big 4 auditing firms that audit a company’s financial statements. This reflects the powerful and influential role institutional investors play in discouraging management from choosing lower-quality providers. In contrast, government ownership has a negative impact on audit quality. These findings are consistent with the hypothesis that audit quality is a function of, among other factors, the structure of equity ownership. Practical implications Given the importance of audits, knowledge of the determinants of audit quality is of particular interest to regulators, enforcement agencies and investors. The findings imply that different ownership structures have different effects on the demand for audit quality; some structures strengthen it, while others weaken it. The negative relation between government ownership and audit quality raises serious questions about the effectiveness of government in monitoring its investments. Originality/value This paper extends the literature by investigating the determinants of the choice of auditors in an emerging market where there is a joint audit requirement. It highlights the important role played by ownership structure in shaping demand for audit quality. A distinguishing feature in previous research is the classification of the audit quality proxy into two choices (Big 4 vs non-Big 4 auditors). However, the regulatory context in Kuwait means that there are three choices. Thus, unusually, a multinomial logistic regression is used for the analysis.

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Section: Auditor Choicementioning

confidence: 99%

Does ownership structure affect the quality of auditor pair composition?

Alfraih

2017

JFRA

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“…This paper provides additional insight into the relationship between auditor risk assessment and the CEO horizon problem in family firms. It extends existing literature in auditing (Ho and Kang, 2013;Lei and Lam, 2013) by departing from the agency view adopted in previous literature in explaining the incentives behind family-controlled firms' behaviour. Despite prior literature on family businesses identifying the objectives of family-controlled companies, including both financial and non-financial objectives (Berrone et al, 2012;G omez-Mejía et al, 2007;Stockmans et al, 2010), this has mainly focused on the financial-objective aspect using the agency theory to explain family-controlled firm behaviour.…”

Section: Introductionmentioning

confidence: 56%

“…Second, this study responds to a call for research to examine family firm characteristics on various auditing outcomes (Lei and Lam, 2013). This paper provides additional insight into the relationship between auditor risk assessment and the CEO horizon problem in family firms.…”

Section: Introductionmentioning

confidence: 91%

Chief executive officer retirement and auditor’s risk assessment

Abdulmalik

Amran

Ahmad

2020

JFRA

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Purpose This study aims to examine the unique nature of family firms by investigating the moderating effect of chief executive officer (CEO) identity on CEO career horizon and the auditor’s client risk assessment. Consistent with literature on family businesses, the level of CEO attachment to socio-emotional wealth (SEW) varies among family businesses. Design/methodology/approach This study used a longitudinal sample of 2,063 non-financial family firm-year observations from 2005 to 2016 listed on the Bursa Malaysia. The study used the general method of moments (GMM), which controls for endogeneity concerns. Findings The results reveal that, without the moderating effect of CEO identity, the relationship between CEO career horizon and auditor’s risk assessment is positive, which suggests that the auditor’s risk perception of retiring CEOs is very high. However, the interaction of CEO identity reverses the relationship as evidenced by the negative and significant coefficient on the interacted terms. The finding suggests that the auditor’s perceived risk associated with CEO career horizon is lower in family firms with CEOs affiliated to family members or in which the CEO has an equity stake. Overall, the findings provide compelling evidence that the extent of the CEO’s attachment to the firm’s SEW affects the auditor’s client risk assessment. Practical implications The findings of the study serve as an enlightenment to policymakers such as Bursa Malaysia and Security Commission that within the family-controlled firms, differences still exist; therefore, there might be a need for future regulatory initiative to cater for the specific need of family-controlled firms. Originality/value The study contributes to prior literature by departing from the agency theory adopted in previous studies on auditor choice in family firms under the assumption that family firms are homogenous.

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“…To clarify the effect of Type I agency problems on the family firms' auditor choice and audit fees, we carry out our analysis by classifying family firms (FAM_Control) on the basis of dichotomous variable equaling 1 if the firm is classified as a family firm; otherwise, 0. Moreover, to shed light on the effects of Type II agency problems on family firms' auditor choice and audit fees, we carry out our analysis by classifying family firms (FAM_Ownership) on the basis of an indicator variable with a value of one if a firm has Following earlier research (e.g., Chaney et al, 2004;Abbott et al, 2003;Ho and Kang, 2013;Lei and Lam, 2013;DeFond and Zhang, 2014;Alzeban, 2019), we test our hypotheses on Chinese family firms' auditor choice and audit fees using the following regressions. Appendix presents a summary of all the variable definitions.…”

Section: Model Specificationmentioning

confidence: 99%

“…JFBM 13,4 3.2.5 Control variables. Following earlier research on auditor choice and audit fees, we anticipate client firm size, complexity and risk to affect auditor choice and audit fees (Biswas et al, 2022;Alshirah et al, 2022;Carcello et al, 2002;Suttipun, 2022;Ashbaugh et al, 2003;Chaney et al, 2004;Abbott et al, 2003;Ho and Kang, 2013;Lei and Lam, 2013;DeFond and Zhang, 2014). We proxy firm size by the natural logarithm of total asset (LnTA) and control for firm complexity by asset turnover ratio (TURNOVER).…”

Section: Model Specificationmentioning

confidence: 99%

Auditor choice and audit fees through the lens of agency theory: evidence from Chinese family firms

Rahman

Zhu

Hossain

2023

JFBM

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PurposeFrom an agency perspective, the authors investigate whether family ownership and control configurations are systematically associated with a firm's choice of auditor and audit fees. Agency theory is an economic theory that purposes the existence of a contract between two parties, principals and agents. Auditor choice and audit fees by family firms provide interesting insights given the unique nature of the agency problems faced by such firms.Design/methodology/approachThe authors employ Big-4 auditors (PWC, KPMG, E&Y and Deloitte) as a proxy for high quality auditor (Big N) for the auditor choice model. For the audit fee model, the dependent variable is the natural logarithm of audit fees (LnAF). The authors use two measures for family firm as explanatory variables: (1) a dummy variable (FAM_Control), which equals one if the firm is classified as a family firm and (2) FAM_Ownership, which is an indicator variable with a value of one if a firm has family members who hold CEO position, occupy board seats, or hold at least 10% of the firm's equity. Data of Chinese listed firms from 2011 to 2021 are used. The authors adopt the Heckman (1979) two-stage model to mitigate the potential endogeneity issue involved in the selection of Big-N auditors.FindingsThe findings suggest that compared with non-family firms, Chinese family firms have a less tendency to employ Big-4 auditors due to less severe agency problems between owners and managers. Additionally, Chinese family firms sustain higher audit fees than non-family firms. Similar to the prior literature, however, Chinese family firms audited by Big-4 auditors incur lower audit fees than family firms audited by non-Big-4 auditors in this study. In contrast to young-family firms, old-family firms are less likely to pick top-tier auditors and sustain lower audit fees. Consistent and robust results are found from endogeneity tests and sensitivity analyses.Originality/valueThe empirical evidence provides a unique insight, for accounting practitioners, policymakers, family owners and other capital market participants concerning the diverse effects of various family ownership and control features on selecting high-quality auditors and audit fees. This study advances the understanding, showing that a lower demand for audit quality occurs in Chinese family firms as they encounter less severe Type I agency problems. However, the more severe Type II agency problems in Chinese family firms sustain higher audit fees due to higher audit risk and greater audit effort.

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Family Ownership, Auditor Choice and Audit Fees: Evidence from Hong Kong

Cited by 4 publications

References 61 publications

Does ownership structure affect the quality of auditor pair composition?

Does ownership structure affect the quality of auditor pair composition?

Chief executive officer retirement and auditor’s risk assessment

Auditor choice and audit fees through the lens of agency theory: evidence from Chinese family firms

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