Shareholder Voting on Auditor Selection, Audit Fees, and Audit Quality

Abstract

The Advisory Committee on the Auditing Profession (ACAP), formed by the U.S. Department of the Treasury, has recommended that all public companies be required to have shareholder ratification of auditor selection. Using data from 1,382 firms for the year ending December 31, 2006, we find that audit fees are higher in firms with shareholder voting on auditor ratification. We also find that firms that started having a shareholder vote pay higher fees than firms that stopped having a shareholder vote. In the second part of our study, we find that in firms with shareholder voting on auditor selection (1) subsequent restatements are less likely and (2) abnormal accruals are lower. Our findings are consistent with the experimental results in Mayhew and Pike (2004), and provide empirical grounding for the debate about mandating shareholder voting on auditor selection.

Dual–class ownership structure and audit fees

“…Based on the audit fee model in Dao, Raghunandan, and Rama (2012), we construct our model and include the following variables.…”

The influence of the CEO's value perception towards auditing on audit demand in private firms

“…In line with Copley et al (1994Copley et al ( , 1995, Ireland and Lennox (2002) and Dao et al (2012), we employ a simultaneous equations analysis to account for the fact that both the choice for a Big4 auditor and the level of audit fees are '. .…”

“…More specifically, we include INV_REC_ASSETS, defined as inventory and receivables divided by total assets, as these accounts are generally considered to be difficult to audit and may therefore increase the audit fee (Hay et al, 2006;Dao et al, 2012). We also control for the busy season using a dummy variable BUSY, which is coded 1 if the fiscal year-end is December 31 and 0 otherwise, as an audit conducted during the busy season often requires staff working overtime and may therefore be more expensive (Hay et al, 2006;Johnstone et al, 2014).…”

Lower audit fees for women audit partners in Taiwan and why

“…Accordingly, we control for the client size effect by including the logarithm of total assets (LNTA) and the number of years since the firm was established (AGE) and control for client complexity by including the percentage of receivables and inventories over total assets (RECINV), the square root of the number of related parties (RELATE), and the percentage of foreign sales (FOREIGN) (Chi, Huang, Liao, & Xie, 2009;Francis, 1984;Fung et al, 2012;Simunic, 1980). Following Dao et al (2012) and Kim et al (2012), client-specific litigation risks and financial conditions are controlled by including an indicator of reporting net loss (LOSS), the ratio of current assets to current liabilities (CURRENT), the debt-to-asset ratio (LEV), the return on assets (ROA), an indicator of receiving a going concern opinion (GC), and an indicator of receiving unclean audit opinions (UNCLEAN), which include unqualified audit opinions with explanatory notes, and an indicator of financial restatements in the current year (RESTATE). Similar to Ashbaugh, LaFond, and Mayhew (2003) and Kim et al (2012), we include an indicator of initial public offerings (IPO), an indicator of the over-the-counter market (OTC), and an indicator of the emerging stock market (ROTC) to control for the needs of additional audit and consulting services.…”

“…Second, we follow prior audit pricing studies (e.g., Huang, Raghunandan, & Rama, 2009;Kim, Liu, & Zheng, 2012;Dao, Raghunandan, & Rama, 2012;Fung, Gul, & Krishnan, 2012) to construct the audit pricing regression model as follows:…”