Offshore trading activities and audit fees: a textual approach

Abstract

Purpose The purpose of this paper is to investigate whether and how auditors’ pricing decisions are affected by their clients’ offshore trading activities, which are comprehensively measured through a textual analysis technique. Design/methodology/approach The authors identified a sample of 32,264 firm-year observations from publicly listed firms in the US during 2004 to 2015. The authors then used multivariate regressions to examine the effect of offshore trading activities on audit fees. In the regression models, the authors also control for a series of factors that are documented to influence audit pricing. Findings The authors find that offshore trading activities are positively associated with audit fees, suggesting that offshore activities are likely to increase a client firm’s business risk and/or the extent of client complexity. The authors also find that auditors charge higher audit fees only to firms purchasing inputs produced by their own assets overseas but not to firms buying inputs produced by local firms overseas. Moreover, the association between offshore trading activities and audit fees is more pronounced for offshore activities that are in countries with high trading centrality, for Big 4 auditors, or for auditors with industry expertise. Originality/value This paper extends the literature on the consequences of offshore activities by providing evidence on how auditors react to offshore activities. Moreover, it contributes to the audit fee literature. Prior studies largely focus on client-level determinants, while this study complements this line of literature by identifying firm’s offshore activities as an important risk indicator, which is perceived by auditors in their pricing decisions. A firm’s offshore activity is unique because the risk implication of the offshore activities depends not only on factors within the firm, but also on factors outside the firm in foreign nations.

The Impact of Audit Market Concentration and Market Power on Audit Fees: A Comparison of Indonesia and Singapore

“…Multiple studies have been conducted to model the correlation between audit fees and various characteristics of the client, attributes of the auditor and also related factors specific to that audit engagement (Carson et al 2014). Among client attributes are client's size, the complexity of client's operation (number of segments, multinational operation, and/or IFRS adoption), the possibility of client to have financial difficulties, and (AL-Mutairi & Naser 2017;Gunn 2019, Hay, Knechel & Li 2006Huang et al 2007;Low, Tan & Koh 1990;Mardiana 2016;Rusmanto & Waworuntu 2015;Simunic 1980;Zhang, Ke & Li 2020). Several other studies consider the level of corporate governance in auditee and ownership structure.…”