2 results for Ananthanarayanan, Umapathy

  • The association between auditors' fees and earnings management in New Zealand

    Ananthanarayanan, Umapathy (2009-01-20T23:14:27Z)

    Masters thesis
    Auckland University of Technology

    This study provides evidence between auditors' fees and earnings management in New Zealand. The fee measures used in this study are audit fees, non-audit fees and total fees paid by a client to the audit firm. For each of the three fee measures, I derive client importance fee measures that reflect a client’s economic importance to the auditor relative to other clients of the auditor at the city office and national levels. This study employs both performance adjusted discretionary accruals and current accruals as proxies for earnings management. Using a sample of 224 firm-years comprising firms listed on the New Zealand Stock Exchange (NZX) in fiscal years 2004 and 2005, the results of multivariate tests indicate an adverse association between non-audit fees and earnings management. In other words, non-audit fees paid by a client relative to fees paid by other clients, at the office and national levels, appear to impair the auditor’s independence because clients generating relatively more non-audit fees report greater discretionary and current accruals. Such evidence is more pronounced for income increasing accrual proxies for earnings management. The results also show that audit fee is not related to earnings management. As the results in this study are consistent across both discretionary and current accruals, the validity of the results is strengthened. This study contributes to the literature by providing insight into how auditors’ fee metrics indicating client importance affect earnings management in a legal and institutional environment of a small economy, and where the audit market is largely saturated with little room for growth. This study raises implications for relevant regulatory bodies in New Zealand pertaining to future developments of auditor independence and financial reporting regulations.

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  • Audit committee independence and expertise, institutional ownership, and executive compensation as determinants of audit fees in the post-SOX era : a thesis presented in partial fulfilment of the requirements for the degree of Doctorate of Philosophy in Accounting at Massey University, Albany Campus, New Zealand

    Ananthanarayanan, Umapathy (2011)

    Doctoral thesis
    Massey University

    The objective of this dissertation is to examine the influence of firm-specific factors: audit committee independence and expertise, institutional ownership, and executive compensation, on audit fees in two different institutional settings in the post-Sarbanes Oxley Act (SOX) era. Prior studies on audit fee determinants examine the influence of these factors separately, from either the demand perspective or the supply perspective. These studies find inconsistent results. This dissertation examines the influence of all of these factors together considering both the demand and supply side perspectives. The enhanced requirements for audit under SOX increase the audit risk of auditors. SOX imposes requirements for more thorough audit processes, and the oversight of auditors. These requirements make auditors more susceptible to legal penalties. However, SOX also emphasizes better corporate governance arrangements for firms. The quality of a corporate governance arrangement can serve as a signal for the auditors concerning the audit risk associated with a firm. The better the corporate governance a firm enjoys the lower would be the level of audit risk. This lessens the need for more thorough audits and, thereby, reduces the audit fee for the audited company. This study uses the market perspective of price setting and regards audit fees as a price for audit services. While price could be regarded simply as an outcome of the quality of product demanded and supplied, there are many other factors that can influence price. Following the audit fee literature, this dissertation includes many determinants of audit fee including the firm-specific factors mentioned above. The study also looks at the influence of institutional settings on the price setting arrangements. In this regard, this study examines two different institutional settings, one a more regulated and highly litigious setting, and the other a less regulated and moderately litigious setting, to understand whether the variations in institutional settings influence the relation between the firm-specific variables and audit fees. The two institutional settings are those of the US and New iv Zealand audit markets, where the US market is more regulated and litigious than the New Zealand market. The study examines 4,490 US firm-years and 445 New Zealand firm-years from the years 2004 to 2008. The overall results suggest that the prevalence of independent audit committees and expertise has increased over the years in both countries. Therefore, no significant effect is found for the association between audit fees, and audit committee independence and audit committee expertise, except for the negative association for audit committee expertise in 2004. The result for institutional ownership is negative and significant for the US, whereas in New Zealand it is not significant. The likely reason for this difference is that financial institutions hold high levels of shares in US companies, whereas, in New Zealand the shareholdings of financial institutions is relatively small. Further analysis seems to suggest that, in New Zealand, corporate ownership in firms plays a stronger role in the audit fee setting process than institutional ownership. For executive compensation, the two countries observe different incentive arrangements. The US firms have large incentive-based salaries and stock option schemes, whereas the New Zealand firms mainly have base salaries. For all of these methods of compensation, the results show that when compensation is high, audit fee is also high suggesting that auditors perceive higher audit risk when executive compensations under these schemes are high. Further analyses of the above results reveal that the audit markets in both countries have supply-side market segmentation. Both countries seem to have three tiers of firms arising from the level of industry specialisation and the amount of audit fees charged. The level of audit fees varies between the tiers, and between the two countries for each tier. These variations suggest that the market for audit services has idiosyncrasies, and these idiosyncrasies vary across countries. The data of the two countries are re-examined using a pooled data test. The sample of this test comprises firms of similar size from each country. The results show that because of their stronger regulatory oversight environment, on a scale v relative to total assets, US firms have lower audit fees than New Zealand firms when audit committee expertise and basic executive compensation are higher. Taken as a whole, the findings of this dissertation provide strong support for the supply-side hypotheses of audit fee determination. The findings suggest that with better corporate governance arrangements in the post-SOX era, auditors perceive lower audit risk, which in turn, lowers audit fees. There is, however, some indication that strong regulations may have diminished the audit risk signalling capacity of audit committee independence and expertise.

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