Elizabeth Carson

Note on Audit Fee Premiums to Client Size and Industry Specialization

This research note examines the impact of client size on the estimation of audit fee premiums in the Australian market for audit services. Previous research suggests that higher audit fees are expected for both larger clients and for industry specialization. We find that in the Australian market for audit services, the fee premium attributed to industry specialist audit firms is concentrated in the audit fees paid by the largest clients in each industry. One reason for higher fees paid by larger clients is the demand for additional audit services. We find higher fees for companies cross-listed on US exchanges. We also find that fee premiums to auditors that are city-industry leaders are strongly related to client size.

Factors Associated with the Development of Board Sub-committees

This study examines the factors associated with the presence of board sub-committees, specifically audit, remuneration and nomination committees. Factors which are hypothesised in this study to affect sub-committee presence are Big 6 auditors, non-executive directors, non-executive chairmen, number of intercorporate relationships of the board and shareholder type. Company size, number of board members and leverage are employed as control variables as suggested by earlier research. Copyright Blackwell Publishers Ltd 2002.

The Impact of the Sarbanes-Oxley Act on the Audit Fees of Australian Listed Firms

The Sarbanes-Oxley Act (2002) (SOX) was enacted to improve the corporate governance practices of US firms. Significantly, foreign registrants traded on US stock exchanges are also required to comply with SOX. This study assesses the impact of the SOX legislation on non-US firms by examining audit fees for Australian firms with foreign registrant status in the US from 2001 to 2005, compared with audit fees for other Australian firms. The findings indicate that Australian companies issuing American Depositary Receipts (ADRs) incurred substantial increases in audit fees and Australian firms subject to the full provisions of SOX incurred larger increases in audit fees. These findings provide a broader understanding of the compliance costs for non-US firms subject to SOX and therefore inform both policy-makers and firms.

The Competitive Advantage of Audit Support Systems: The Relationship between Extent of Structure and Audit Pricing

ABSTRACT: This study investigates if different audit support system designs provide firms with competitive advantages when competing in the market for audit services. We examine the association between the extent of structure a system imposes on the audit process and audit pricing. We find that audit firms with systems that impose more structure on the audit process compete as lower-cost producers in industries more suited to a structured audit approach. However, when these audit firms are also national industry specialists, they retain a fee premium. This study provides evidence that audit support system design is associated with economic consequences for audit firms and clients. We include suggestions for future research. Data Availability: Data are available from sources described in the text with the exception of the level of structure embedded within a firms audit support system, which the audit firms provided on the condition of anonymity.

Impact of stakeholder characteristics on voluntary dissemination of interim information and communication of its level of assurance

Equity of access to information for listed entities is a key principle in an efficient and effective market. Direct mailing is a mechanism for achieving this. This study examines equity of access by identifying the half-yearly financial information, if any, voluntarily mailed out by Australian listed entities and associated stakeholder characteristics. We find that certain stakeholder characteristics (presence of audit committee and shareholder dispersion) are associated with voluntary mail-out of half-yearly financial information, along with certain control variables (size of entity, industry and audit opinion). This study further identifies that there are very few instances of the higher level of assurance (audit) being chosen, and where half-year information is disseminated there are very few instances of the level of assurance on this information being communicated to shareholders.

Transparency report disclosure by Australian audit firms and opportunities for research

Purpose - – The purpose of this study is to compare the information disclosed by leading Australian audit firms in their first-time audit firm transparency reports. Australia has mandated the preparation and release of transparency reports by audit firms in 2013 to provide better information to stakeholders about audit firms, their governance and their internal governance systems. These reports promote increased transparency regarding issues which are believed to contribute to audit quality. Design/methodology/approach - – The paper takes the form of an archival analysis where the authors summarise the governance and other information for the 21 leading Australian audit firms as disclosed in their first-time 2013 transparency reports. Findings - – The authors find that audit firms meet the minimum transparency report disclosure requirements, but have different approaches to governance in the areas which may impact audit quality. These areas include: the internal quality control systems, independence practices, continuing education and partners’ remuneration structures. The authors identify specific areas where transparency reports may give rise to future research opportunities. Originality/value - – Australia is one of the first countries to require audit firms to publish transparency reports, and this is the first study to examine these reports. By summarising transparency report disclosures, we present a comprehensive picture of how Australian leading audit firms govern and oversee their business activities. This is useful to transparency report preparers, report users and regulators.

Discussion of ‘Strategic Pricing by Big 4 Audit Firms in Private Client Segments’

This article discusses the paper by Dutillieux et al., (2013). The comments are in four main areas, regarding the importance of the research question, the setting in which the study is located, the theoretical development of the study and some thoughts regarding both supply‐ and demand‐side considerations around auditor change.

The Impact of Group Audit Arrangements on Audit Quality and Pricing

Regulators have raised concerns about the quality of group audits, particularly where other component auditors are involved. These other component auditors may be affiliated (i.e. part of the principal auditor’s network) or unaffiliated with the principal auditor. Using Australian disclosures, we examine these arrangements and their impact on audit quality and fees. Although international auditing standards require the signing auditor to accept responsibility for the entire engagement, we find lower audit quality for group audits involving the principal auditor’s network compared to other arrangements, suggesting potential over reliance on the work of network members. Further, we find that fees are relatively higher when other auditors are involved, particularly network auditors. Collectively, our evidence supports the need for closer monitoring of group audits by audit firms and regulators when other auditors, especially network auditors, are involved.Regulators have raised concerns about the quality of group audits, particularly where other component auditors are involved. These other component auditors may be affiliated (i.e. part of the principal auditor’s network) or unaffiliated with the principal auditor. Using Australian disclosures, we examine these arrangements and their impact on audit quality and fees. Although international auditing standards require the signing auditor to accept responsibility for the entire engagement, we find lower audit quality for group audits involving the principal auditor’s network compared to other arrangements, suggesting potential over reliance on the work of network members. Further, we find that fees are relatively higher when other auditors are involved, particularly network auditors. Collectively, our evidence supports the need for closer monitoring of group audits by audit firms and regulators when other auditors, especially network auditors, are involved.

Returns to Australian Investment Newsletter Recommendations

We investigate the recommendations made by four high profile Australian investment newsletters during 2001. Five issues are investigated: (1) The clarity of newsletter recommendations; (2) the return that might have been earned by following newsletter recommendations; (3) the liquidity of shares recommended; (4) the relative success of recommendations on small, medium and large stocks; and (5) the extent newsletters make recommendations consistent with momentum and contrarian investing strategies. We find that newsletters contain a varying mix of clear and less clear recommendations. The clear recommendations we evaluated earned exceptionally high return, relative to control samples matched on size and holding period and relative to the ASX300 index. The exceptional performance was driven by recommendations on stocks ranked outside the top 150, by market capitalization, and was consistent with a momentum based selection strategy.