Julia L. Higgs

Managerial Stock Ownership, Analyst Coverage, and Audit Fee

The authors study whether managerial ownership and analyst coverage relate to audit fees. To the extent that these corporate governance factors relate to auditor assessment of the firm’s agency costs and hence various risks the auditor must consider in the development of an audit program, they will affect audit effort and hence audit fees. The authors find that managerial equity holdings and analyst coverage are negatively associated with audit fees and that these associations are both statistically and economically significant. On average, a 1% increase in managerial ownership translates into a 0.2% reduction in audit fees. In the low managerial ownership sample (i.e., less than 5% managerial ownership), a 1% increase in the ownership reduces the fees by 1.4%. Similarly, one more analyst following a company reduces audit fees by 9.3%. These results add to the literature on the effects of corporate governance on audit fees.

Managerial Ownership, Corporate Monitoring and Audit Fee

We study whether managerial ownership and analyst coverage relate to audit fee. To the extent that these corporate governance factors relate to auditor assessment of the firm’s agency costs and hence various risks the auditor must consider in the development of an audit program, they will affect audit effort and hence audit fee. We find that managerial equity holdings and analyst coverage are negatively associated with audit fee and that these associations are both statistically and economically significant. On average, one percent increase in managerial ownership translates into 0.2% reduction in audit fees. In the low managerial ownership sample (i.e., less than 5% managerial ownership), one percent increase in the ownership reduces the fees by 1.4%. Similarly, one more analysts following reduces audit fees by 9.3%. These results add to the literature on the effects of corporate governance on audit fees.

Knowledge transfer among experts: lessons from audit partner rotation

Given the complexity of the transfer of tacit knowledge, the presence of robust knowledge transfer practices are particularly critical when experts transfer knowledge to other experts (e.g., when companies newly-appoint members of the board of directors, or during the succession of key executives). Accounting firms are unique in that in many jurisdictions partners assigned to audit publicly-traded companies are mandated to periodically rotate their client engagement responsibilities, and these rotations in the US have become more frequent following passage of the Sarbanes-Oxley Act. The purpose of this study is to learn more about the knowledge transfer practices of partner-experts in public accounting firms to better understand this critical element of the audit process. As similar between-expert knowledge transfer techniques may be appropriate for use in other business contexts, lessons learned from audit partner rotation may help to mitigate knowledge transfer risks in other organisations.