The Deteminants of Audit Fees in HongKong: An Empirical Study

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. ABSTRACTThis paper studies the audit fee structure in Hong Kong. By analysing data concerning a number of variables representing auditee size, auditee risk, complexity of audit, auditor identity, and the timing of audit, we develop a model of the determinants of audit fees which is applicable to the unique environment in Hong Kong. Using a more recent time period of 1992 and 1993, this study strongly confirms that most of the previous research findings are also applicable to the Hong Kong audit service market. We provide additional evidence relating to variables such as the Big Six (previously Big Eight) effects, auditee risk and auditee complexity which have been found to have inconclusive associations with the level of audit fees in previous research. Specifically, auditee size appears to have been the main determinant of audit fees, and the size measure is two-dimensional, both asset and turnover respectively add explanatory power to that provided by each other. Complexity of audit adds significantly to the cost of audit. There is also evidence of Big Six effects and low-balling. In addition, some evidence is found for the effects of auditee risk on audit fees. Finally, a longer audit delay, which reflects the possibility of inefficient audit time spent, entails higher audit fees. Future research should consider the importance of other issues such as non-audit services and the extent of market concentration.The authors wish to thank

Determinants of Audit Fees: Evidence from an Emerging Economy

“…Previous research pointed to possible association between audit fees and corporate profitability (Joshi & Al-Bastaki, 2000;Sandra & Patrick, 1996). Companies reported high levels of profit would disclose more information to highlight their achievements and reduce agency costs (Watts & Zimmerman, 1986).…”

“…A significant proportion of previous studies observed positive relationship between corporate complexity and audit fees (Simunic, 1980;Brinn et al, 1994;Cameran, 2005;Joshi & Bastaki, 2000;Clatworthy & Peel, 2006;Thinggaard & Kiertzner, 2008;Vermeer et al, 2009;Ellis & Booker, 2011;Verbruggen et al, 2011). The main reasons advanced in the literature to explain such a relationship is that greater number of subordinate financial statements require more audit time and greater expertise to ensure the accuracy of the consolidated financial statements (Sandra & Patrick, 1996). Moreover, auditing complex clients exposes external auditors to more professional liability claims than non-complex companies (Clatworthy & Peel, 2006).In the literature, corporate complexity is measured by either the complexity of operations (e.g., Taylor & Baker, 1981;Langendijk, 1997;Joshi & Al, B., 2000) or the complexity of assets reported in the balance sheet (e.g., Chan et al, 1993, Peel & Clatworthy, 2001Simunic, 1980;Francis, 1984;Francis & Stokes, 1986;Francis & Simon, 1987;Simon & Francis, 1988;Gonthier, B., & Schatt, 2007).…”

An International Perspective on Audit Report Lag: A Synthesis of the Literature and Opportunities for Future Research

“…In an examination of audit fees for Hong Kong companies, Ho and Ng (1996) noted that companies with longer ARL appeared to pay higher audit fees. They asserted that these increased fees were due to inefficiencies in the audit process.…”

Corporate Governance Structure and Its Relationship with Audit Fee-Evidence from Malaysian Public Listed Companies

“…Among the determinants of audit fee are corporate size (Waresul & Moizer, 1996;Sandra & Patrick, 1993;Kamal & Rana, 2008), status of the audit firm (big 4 or non-big 4) (Waresul & Moizer, 1996;Kamal & Rana, 2008), industry type (Mohd & Takiah, 1993;Kamal & Rana, 2008;Leventis, Hassan & Dedoulis, 2013;Casterella, Desir & Irwin, 2013), degree of corporate complexity (Sandra & Patrick, 1993;Kamal & Rana, 2008;Sundgren & Svanstrom, 2013), perceived risk (Sandra & Patrick, 1993;Mark et al, 2007;Kamal & Rana, 2008;Aswadi et al, 2009;Kim & Fukukawa, 2012), ownership concentration (Aswadi et al, 2009), type of equity ownership (Badertscher et al, 2013) and audit delay (Sandra & Patrick, 1993;Coster, Dahl & Jenson, 2013). In addition, Taylor & Simon (1999) found that higher audit fee is associated to litigation propensity, higher level of disclosure (and stringent regulation while Stanley (2011) finds that audit fees reflects future changes in client earnings.…”

“…The selection of control variables in model was mainly based on the extensive past literature such of Waresul & Moizer (1996), Sandra & Patrick (1993), Kamal & Rana (2008), Mark et al (2007) and also an adaptation from the study of Lin & Liu (2009).…”