The Relationship between Management Ability and Audit Fees by Considering Firm Credit and Auditor’s Dependency during Financial Crises

Iranian Journal of Accounting, Auditing and Finance

دوره 4، شماره 1، خرداد 2020، صفحه 19-34  

نوع مقاله: Original Article

شناسه دیجیتال (DOI): 10.22067/ijaaf.2020.39256

نویسندگان

Iman Rasaei¹؛ Mahmoud Mousavi Shiri ²

¹Department of accounting and auditing, Sanabad Golbahar Institute of Higher Education, Mashhad, Iran

²Department of Accounting, Payame Noor University, Tehran, Iran

چکیده

This paper aims to assess the relationship between management ability and audit fees by considering firm credit and auditor’s dependency during the financial crisis. Despite the presence of extensive studies on determining factors in audit fees, most of the studies have been concentrated on determining factors at the firm level, and little evidence is available to auditors on the information content of special managerial features. This paper aims to examine the relationship between managerial abilities and audit fees by considering firms' financial crisis conditions.
In this paper, management abilities are considered to form three firm size indices, the firm's sales share in the market and cash. Moreover, the standard deviation of 3-year sales is used for firm credit, and an abnormal audit fee is employed for calculating auditor dependency. For this purpose, a total number of 91 listed firms on the Tehran Stock Exchange is evaluated for 6 years between 2014 and 2019. The panel regression model is used for hypothesis testing, and Chow and Hausman's tests are used for selecting the appropriate model-fitting method. The VIF test is used for analyzing linearity among explanatory variables. The obtained results indicate that financial crisis conditions contribute to the relationship between management abilities (based on firm size measurement) and audit fees. Further, the results indicate the negative impact of firm credit on the relationship between audit fee and management ability (based on cash). According to the results, audit fee dependency on the relationship between management ability (based on measurement, the firm's sales share, and cash) and audit fee is positive. Moreover, the results suggest that financial crisis conditions contribute to firm credit effectiveness in the relationship between management ability and audit fees.
In past research, some factors affecting the auditor fee are debts, management ability, and auditor independence. In this paper, we contribute to the financial crisis as a variable that influences some of these relationships. And we show that relationships make sense by considering this variable.

کلیدواژه‌ها

Audit fee؛ Firm Credit؛ Auditor Dependency؛ Financial Crisis؛ Management Ability

مراجع

Agarwal, S. Chomsisengphet, S. Liu, C. and Rhee, S. G. (2007). Earnings management behaviors under different economic environments: evidence from Japanese banks. International Review of Economics and Finance, 16 (3), 429–443. https://doi.org/10.1016/j.iref.2005.08.003

Andreou, P. Ehrlich, D. and Louca, C. (2016). The Impact of Managerial Ability on Crisis Period Corporate Investment. Journal of Business Research, 79,107-122. https://doi.org/10.1016/j.jbusres.2017.05.022

Andreou, P. Ehrlich, D. and Louca, C.) 2013(. Managerial ability and Firm performance. Evidence from the global financial crisis. SSRN Electronic Journal, DOI: 10.2139/ssrn.2633216

Asthana, S. and Boone, J. (2012). Abnormal audit fee and audit quality. Auditing: A Journal of Practice & Theory, 31 (3), 1–22. https://doi.org/10.2308/ajpt-10294

Ayers, B.C. Jiang, J.X. and Yeung, P.E. (2006). Discretionary accruals and earnings management: an analysis of pseudo earnings targets. Accounting Review. 81 (3), 617–652. https://doi.org/10.2308/accr.2006.81.3.617

Bamber, L. Jiang, J. and Wang, I. (2010). What’s my style? The influence of top managers on voluntary corporate financial disclosure. The Accounting Review, 85 (4),1131–1162. Doi:10.2308/accr.2010.85.4.1131

Beaver, W.H. (1966). Financial ratios as predictors of failure. Journal of Accounting Research, 4, 71-111. https://doi.org/10.2307/2490171

Bedard, J.C. and Johnstone, K.M. (2001). Earnings manipulation risk, corporate governance risk, and auditors’ planning and pricing decisions. The Accounting Review 79 (2), 277-304. https://www.jstor.org/stable/3203245

Bentley, K.A. Omer, T.C. and Sharp, N.Y. (2013). Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research, 30(2), 780-817. https://doi.org/10.1111/j.1911-3846.2012.01174.x

Bills, K.L. Lisic, L.L. and Seidel, T.A. (2015). Do auditors respond to management uncertainty? Evidence from audit fees. http://www.ssrn.com.

Blankley, A.I. Hurtt, D.N. and MacGregor, J.E. (2012). Abnormal audit fees and restatements Auditing. A Journal of Practice & Theory, 31 (1), 79–96. https://doi.org/10.2308/ajpt-10210

Carcello, J. Hermanson, T. Neal, L. and Riley, R. (2002). Board characteristics and audit fees. Contemporary Accounting Research, 19 (3), 365-384. https://doi.org/10.1506/CHWK-GMQ0-MLKE-K03V

Chen, Y. Gul, F. Veeraraghavan, M. and Zolotoy, L. (2015). Executive equity risk-taking incentives and audit service pricing. The Accounting Review, 90(6), 2205-2234. https://doi.org/10.2308/accr-51046

Choi, J.H. Kim, J.B. and Zang, Y. (2010). Do Abnormally High Audit Fees Impair Audit Quality?. Auditing A Journal of Practice & Theory, 29 (2), 73-97. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1586306

COSO. (2013). Internal Control – Integrated Framework. Executive summary. www.coso.org.

Demerjian, P. Lev, B. Lewis, M. and MacVay, S. (2012). Quantifying managerial ability: A new measure and validity test. Management Science, 58(7), 7884-7892. https://doi.org/10.1287/mnsc.1110.1487

Demerjian, P. Lev, B. Lewis, M. and MacVay, S. (2013).  Managerial ability and Earnings quality. The Accounting Review, 88(2), 463-498. https://www.jstor.org/stable/23525943

Duellman, S. Hurwitz, H. and Sun, Y. (2015). Managerial Overconfidence and Audit Fees. Journal of Contemporary Accounting & Economics, 11(2), 148-165. https://doi.org/10.1016/j.jcae.2015.05.001

Dyreng, S. Hanlon, M. and Maydew, E. (2010). The effects of executives on corporate tax avoidance. The Accounting Review, 85 (4), 1163–1189. doi:10.2308/accr.2010.85.4.1163

Ferdinand, A.G. Khedmati, M. Edwin, K. Yang, L. and Navissi, F. (2018). Managerial Ability, Financial Distress, and Audit Fees. ACCOUNTING HORIZONSAmerican Accounting Association, 32(1), DOI: 10.2308/acch-51888. pp. 29–51.

Francis, J.R. (1984). The effect of audit firm size on audit prices: A study of the Australian market. Journal of Accounting and Economics, 6(2), 133-151. https://doi.org/10.1016/0165-4101(84)90010-7

Francis, J.R. Reichelt, K. and Wang, D. (2005). The pricing of national and city-specific reputations for industry expertise in the U.S. audit market. The Accounting Review, 80(1), 113–136. https://www.jstor.org/stable/4093163

Ghosh, A. kallapur, S. and Moon, D. (2005). Audit and Non-Audit fees and Capital Market perceptions of Auditor Independence. Journal of Accounting and Public Policy, 28(5), 369-385. https://doi.org/10.1016/j.jaccpubpol.2009.07.001

Greening, D.W. and Johnson, R.A. (1996). Do managers and strategies matter? A study in crisis. Journal of Management Studies, 33(1), 25-51. https://doi.org/10.1111/j.1467-6486.1996.tb00797.x

Hay, D.C. Knechel, W.R. and Wong, N. (2006). Audit Fees: A Meta-Analysis of the Effect of Supply and Demand Attributes. Contemporary Accounting Research, 23(1), 141–191. https://doi.org/10.1506/4XR4-KT5V-E8CN-91GX

Hnifeh, M. and Mahmoodi, S. (2009). Audit risk and its components. The Auditor Journal, 47, 54-59. (In Persian)

Hoag, M.L. Hollingsworth, C.W. (2011). An intertemporal analysis of audit fees and section 404 material weaknesses. A Journal of Practice & Theory, 30(2), 173-200. https://doi.org/10.2308/ajpt-50005

Huang X, and Sun L. (2017). Managerial ability and real earnings management. Adv Account, 39, 91–104. https://doi.org/10.1016/j.adiac.2017.08.003

Jantadej, P. (2006). Using the combination of cash flow component to predict financial distress. Summary of doctoral dissertation. Graduate college. The University of Nebraska.

Johnson, E. Kuhn, J. Apostolou, B. and Hassell, J. (2013). Auditor Perceptions of Client Narcissism as a Fraud Attitude Risk Factor. Auditing: A Journal of Practice & Theory, 32(1), 203–219. https://doi.org/10.2308/ajpt-50329

Kannan, Y. Skantz, T.R. and Higgs, J.L. (2014). The Impact of CEO and CFO Equity Incentives on Audit Scope and Perceived Risk as Revealed through Audit Fees. Auditing: A Journal of Practice and Theory, 33 (2), 111-139. Doi: 10.2308/ajpt-50666

Karim, W.A. (2010). Audit Pricing, Audit Concentration and BiG4 Premium in Bangladesh. Available at SSRN: https://ssrn.com/abstract=1613454

Kim, Y. Li, H., and Li, S. (2014). CEO Equity Incentives and Audit Fees. Contemporary Accounting Research, Forthcoming. Available at SSRN https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2378477

Kinney, W.R. and Libby, R. (2002). Discussion of the Relation between Auditors’ Fees for Non audit Services and Earnings Management. The Accounting Review, 77, 107-114. https://www.jstor.org/stable/3203327

Kizirian, T. Mayhew, B. and L. Sneathen. (2005). the Impact of Management Integrity on Audit Planning and Evidence. Auditing: A Journal of Practice & Theory, 24(2), 49–67. https://doi.org/10.2308/aud.2005.24.2.49

Krishnan, V.G. and Wang, C. (2015). The Relation between Managerial Ability and Audit Fees and Going Concern Opinions. Auditing: A Journal of Practice & Theory, 34(3), 139–160. https://doi.org/10.2308/ajpt-50985

Latridis, G. and Kadorinis, G. (2009). Earnings management and firm financial motives: a financial investigation of UK listed firms. International Review of Financial Analysis. 18 (4), pp.164–173. https://doi.org/10.1016/j.irfa.2009.06.001

Lauck, J.R. Rakestraw, J.R. Stein, S.E. (2014). The effect of executives on the pricing of audit services. Working Paper, Virginia Tech University.

Li, Q. Wang, H. and Rong, X. (2013). Firm earnings persistence over the business cycle: evidence from listed companies in China. China Accounting and Finance Review, 15 (4), 166–203. Doi: 10.7603/s40570-013-0011-x

Palmrose, Z.V. (1986). Audit fees and auditor size: Further evidence. Journal of Accounting Research, 24(1), 97-110. https://doi.org/10.2307/2490806

Pastena, V. and Ruland, W. (1986).The Merger/ Bankruptcy Alternative. The Accounting Review, 64(1), 288-301. https://doi.org/10.2307/253913

Persakis, A. and Iatdidis, G.E. (2015). Earnings quality under financial crisis: A global empirical investigation. Journal of Multinational Financial Management, 30, 1-35.

Santanu M. Bikki, J. and Al-Hayale, T. (2018). Managerial overconfidence, ability, firm governance and audit fees. Rev Quant Finance Acc. https://doi.org/10.1007/s11156-018-0728-3.

Simunic, D. (1980). The Pricing of Audit Services: Theory and Evidence. Journal of Accounting Research, 18(1), 161–190. https://doi.org/10.2307/2490397

Strobl, G. (2013). Earnings manipulation and the cost of capital. Journal of Accounting Research. 51 (2), 449–473. https://doi.org/10.1111/1475-679X.12008

Xingze, W. (2012). Corporate governance and audit fees: Evidence from companies listed on the Shanghai stock exchange. China Journal of Accounting Research, 5(4), 321-342. https://doi.org/10.1016/j.cjar.2012.10.001

Yuan, G.S. Troshani, I. and Tarca, A. (2019). Managerial ownership, audit firm size, and audit fees: Australian evidence. Journal of International Accounting, Auditing and Taxation, 35, 18–36. https://doi.org/10.1016/j.intaccaudtax.2019.05.002