The Effects of Generalized Trust and Civic Cooperation on the Big N Presence and Audit Fees Across the Globe

Abstract

We examine the impact of informal cultural attributes, such as generalized trust in a society (hereafter "trust") and civic cooperation, on audit fees and Big N presence in countryspecific audit markets. The relation between trust (civic cooperation) and audit fees/Big N presence is ambiguous. On one hand, higher trust and civic cooperation are associated with lower levels of agency problems, thereby reducing the demand and price of audit services. On the other hand, higher trust (civic cooperation) societies may place more value on a strong audit function due to higher societal costs of inappropriate behavior, resulting in a relatively higher demand and cost of audit services. We find that the presence of Big N auditors is stronger in countries with higher levels of civic cooperation, and that audit fees are higher in countries with higher trust and civic cooperation. The positive impact of societal trust and civic cooperation on audit fees and Big N presence is weakened in countries with stronger levels of investor protection. These results suggest that both formal and informal institutions can act as substitutes in determining the demand and supply for audit services.

Development costs capitalization and debt financing

“…We note that the results are robust against the inclusion of further firm‐specific controls ( ROA and O_Score ) as well as country‐specific controls ( Law and Debt_Enforcement ). Similarly, we include a firm's Current_Ratio and the number of geographic segments ( log ( #_Segments_G )) as additional firm controls (Kuo & Lee, ), whilst also incorporating Enforcement and Corruption as additional country controls (Knechel, Mintchik, Pevzner, & Velury, ) for our audit fee analysis. In both cases the dummy variable CAP , which reflects a firm's binary decision to capitalize R&D, remains positive and highly significant.…”

Development Costs Capitalization and Debt Financing

“…We note that the results are robust against the inclusion of further firm-specific controls (ROA and O_Score) as well as country-specific controls (Law and Debt_Enforcement). Similarly, we include a firm's Current_Ratio and the number of geographic segments (log(#_Segments_G)) as additional firm controls (Kuo & Lee, 2017), whilst also incorporating Enforcement and Corruption as additional country controls (Knechel et al, 2018) for our audit fee analysis. In both cases the dummy variable CAP, which reflects a firm's binary decision to capitalize R&D, remains positive and highly significant.…”

Importance of country factors for global differences in audit pricing: New empirical evidence

“…Audit pricing lies at the heart of auditing research because audit fees are often used as a proxy for unobservables such as quality or risk or the degree of competitiveness in the market (DeFond & Zhang, 2014; Francis, 2004; Knechel et al, 2019; Simunic, 1980). Building on insights from prior studies on audit pricing (Hay et al, 2006; Simnett et al, 2016), we contribute to this literature by addressing the question of what drives potential differences in audit pricing and, thus, the financial statement audit generally around the world.…”

“…Yet, these environments seem to vary considerably across the world. Each country has its own unique combination of formal and informal institutional features, which potentially have an impact on the usefulness and value of a financial statement audit for investors and other users of financial reports (e.g., Choi et al, 2008; Knechel et al, 2019). Doing so, these institutional features are likely to influence the nature of audits, including their scope and the level of assurance provided.…”