This study iestigates the economic auditor–client dependency issue by examining the association between abnormal audit fee pricing and audit quality. Our study is the first to analyze this phenomenon empirically for the institutional setting of German IFRS firms by using a sample of 2,334 firm-year observations for the period from 2005 to 2010. Our empirical results demonstrate that positive abnormal audit fees are negatively associated with audit quality and imply that the audit fee premium is a significant indicator of compromised auditor independence due to economic auditor–client bonding. Audit fee discounts generally do not lead to a reduced audit effort, or respectively, audit quality is not impaired when client bargaining power is strong. The association of positive abnormal audit fees and audit quality is robust to different audit quality surrogates such as absolute discretionary accruals, financial restatements, and meeting or beating analysts’ earnings forecasts.
Using a matched sample of 1,806 firm-year observations from Germany and the United States over the sample period from 2005 to 2010, this paper examines potential differences of audit tenure effects on audit quality in both countries. Our empirical results show that audit firm tenure is neither in Germany nor in the United States a significant factor with regard to the quality of the conducted audits. Nevertheless, our results also show that the levels for unsigned and income-increasing discretionary accruals for German companies are significantly higher than for matched firm observations from the United States. We suggest that the differences in the accrual levels have at least two explanations. Firstly, the less restrictive institutional eironment in Germany and secondly, the use of divergent accounting standards in both countries contribute to the differences. Our results are robust to a variety of sensitivity tests.
We examine the presence and magnitude of initial audit engagement fee cutting and its potential effect on audit quality in Germany using a sample of 992 firm-year observations from 2005 through 2011. Our results show systematic fee cutting for initial audit engagement years in Germany. Despite significant audit fee differences between initial and subsequent audit engagement years, we do not find differences in audit quality. Overall, our findings support prior empirical studies, suggesting that low-balling is merely a natural response of auditors to competitive audit market conditions and does not necessarily impair auditor independence. In the wake of the on-going discussion in the European Union regarding the control of appointment, remuneration, and duration of audit engagements to curb threats to auditor independence, our findings do not support the implementation of audit market price controls through governmental regulators.
The relation of auditor tenure to audit quality: empirical evidence from the German audit market
(2013)
This study iestigates whether and how the length of an auditor-client relationship affects audit quality. Using a sample of 1,071 firm observations of large listed companies for the sample period of 2005 to 2011, the study is one of the first to empirically analyze this auditing issue for the German audit market. The empirical results demonstrate that neither short term nor long term audit firm tenure seems to be a significant factor with regard to audit quality in Germany. In the wake of the ongoing discussion in the European Union regarding the optimal audit tenure length for the quality of the conducted statutory audits, our findings do not support the idea of a mandatory audit firm rotation rule.
Audit services, non-audit services, and audit firm tenure: three perspectives on audit quality
(2013)
The faith in financial reporting quality and the corresponding auditing process has suffered a lot within the last decade, due to signifi cant accounting scandals (e.g. Enron, WorldCom, Parmalat, etc.). As an answer to these accounting scandals, the law-makers in Germany and the European Union, respectively, have strengthened audit regulations in order to improve the quality of the conducted audits. The aim of this cumulative dissertation is to provide empirical evidence on the effects of intended and already implemented regulative audit requirements in Germany. ln order to consider the wide range of different audit requirements, the dissertation is based on four different study manuscripts, highlighting various perspectives with regard to the appointment, duration, and remuneration of a statutory auditor in the German audit eironment. Besides the empirical evidence for separate auditing issues, this dissertation is also aimed to provide a solid theoretical background and critical suggestions for future research.
This study iestigates whether and how audit quality is associated with the provision of non-audit services by the statutory auditor. Using a sample of 1,008 firm observations of major German listed companies for the sample period 2004-2011, our study is one of the first to thoroughly analyze this issue empirically for the German audit market. Consistent with prior studies we choose discretionary working capital accruals as our proxy for audit quality. Our empirical results demonstrate that total non-audit fees in general and audit related fees in particular are negatively associated with audit quality, while provided tax and other advisory services have an insignificant impact on audit quality. Our results imply that non-audit fees are a significant factor with regard to auditor independence and economic auditor-client bonding while we are not able to detect compensating high knowledge spillover effects from these services. The empirical results are robust to alternative accrual measures and estimation model specifications, while our empirical evidence is not robust with regard to alternative fee measures.
Using a matched sample of 1,806 fi rm-year observations from Germany and the United States over the sample period of 2005 to 2010, this paper examines audit practice differences between both countries. Our empirical results show qualitative similar results with regard to audit tenure effects on audit quality in Germany and the United States. The results imply that the increased process of accounting and audit harmonization worldwide have led to quite some similarities in auditing practices, respectively audit regulations. However, our empirical results also imply that beside specifi c audit regulation requirements, the auditing practices in Germany and the United States still differ signifi cantly. In particular, we are able to detect generally higher levels of earnings management for German companies than their matched counterparts from the United States. Our results are robust to a variety of sensitivity tests.