The association between abnormal audit fees and audit quality after IFRS adoption

Abstract

Purpose This paper aims to examine how the relationship between abnormal audit fees and audit quality changed after adoption of the International Financial Reporting Standards (IFRS) in Korea. Design/methodology/approach Using empirical data collected over the period from 2008 to 2013, this study analyzes the association between abnormally high/low audit fee and audit quality. This study uses linear regression to test the hypothetical relation using discretionary accrual as a proxy for audit quality. Findings This study finds that there exists no significant relationship between abnormally high audit fees and audit quality measured by the magnitude of discretionary accruals in the pre-IFRS adoption period. However, the relationship between abnormally high audit fees and the magnitude of discretionary accruals turns to be positive in the post-IFRS adoption period. These finding suggests that the IFRS enables some clients to engage more discretion in the choice of discretionary accruals and auditors charge higher audit fees in return for allowing the discretion for such clients. Practical implications This study provides insight to regulators of the need to review carefully the financial statements of firms with abnormally high audit fees, and to investors to be more cautious when using financial information about these firms. Originality/value To the best of authors’ knowledge, this is the first study to assess IFRS impact on audit fee-quality relation. Also, unique Korean audit market with intensifying competition and discounting audit fee provides interesting setting to review the impact of abnormal audit fee on audit quality.

Does the IFRS Effect Continue? An International Comparison

“…In previous attempts to resolve these contrasting arguments, countries have been compared [14,15,19,21,37], or studies have been limited to companies in one country [18,[20][21][22][23][38][39][40][41]. As a result, in the main results of these studies, it turned out that accounting quality was affected more by the reasons for companies' adoption of IFRS, the compulsory enforcement in the countries that adopted them, and their legal and institutional environments than by the act of IFRS adoption [8,[14][15][16][17][18]20,21,37,40].…”

Audit Fee Research on Issues Related to Ethics

“…They reported ''the regulatory and legislative authorities became concerned that price-based competition could cause deterioration in audit quality'' and that ''public agencies and the popular press suspected that increasing competition for audit services could lead to underpricing'' (Behn et al 2009, 132-133). Their data were from 1999-2004, however, and more recent studies of Korean data have not reported the same issue (Kwon, Lim, and Simnett 2014;Jung, Kim, and Chung 2016).…”

‘Big 4’ influence on audit market

“…Moreover, the potential monopoly created by Big 4 companies does not seem to be affected by the additional expenses, which are expected to be charged by Big 4. Financial reporting according to the IFRS increases the number of companies audited by Big 4 , although the audit fees are higher for this type of auditors (Jung, 2015). Moreover, the audit market in Romania appears to be concentrated for the analysed period, and the power of non-Big 4 companies is not strong after 2012 (Table 1), after the adoption of IFRS became mandatory.…”