Asset Securitizations and Audit Effort

2011

Asset securitizations increase audit complexity and audit risks, which may have an impact on audit fees. Using U.S. data from 2003 to 2008, we find that asset securitization risks (retained interests) are associated with audit fees after, but not before, the global financial crisis (GFC). This suggests auditors neglected securitization risks before the GFC. The results are consistent with auditors treating securitizations as asset sales rather than secured borrowings.

AUDITING: A Journal of Practice & Theory

SUMMARY We examine whether bank auditor effort, proxied by audit fees, is related to asset securitization risks (ASR) and whether the incremental auditor effort attributed to ASR is related to audit quality. Our sample period encompasses the global financial crisis (GFC) and the introduction of FAS No. 166 and FAS No. 167, which were intended to constrain accounting for asset securitizations as sales. Using U.S. bank holding company (BHC) data from 2003 to 2013, we find significantly positive associations between ASR and audit fees for Big N auditors but not for non-Big N auditors. Pre-GFC audit fees have a positive association with ASR, and are more significant for BHCs reporting a loss. After the implementation of FAS Nos. 166 and 167, this positive association persists, mainly driven by BHCs reporting a loss. With respect to the incremental auditor effort attributed to ASR, we find that, prior to the GFC, the incremental audit effort by Big N auditors, but not by non-Big N audito...

During the most recent financial crisis, the economic difficulties, along with potentially high uncertainties associated with fair value estimates, increased the audit risks for bank auditors. We analyze a sample of US public banks during the crisis (2008–09) and after the crisis (2010–11), and provide contrasting evidence concerning auditors' role in conservative financial reporting (proxied by higher discretionary loan loss provisions). Specifically, we document a significant positive association between discretionary loan loss provisions and the role of auditors (proxied by higher amounts of audit fees and abnormal audit fees) during the crisis. However, the positive association disappears following the financial crisis. Similarly, we document that during the crisis, auditors are less likely to issue unmodified audit opinions to banks that subsequently filed for bankruptcy. Thus, our evidence is consistent with elevated auditor conservatism for the sample banks during the financial crisis. Our evidence also suggests that bank auditors raise fees more to maintain accounting quality than to price protect from aggressive accounting choices.

Journal of Accounting and Public Policy, 2004

In this paper we investigate audit pricing for financial institutions. We modify the standard audit fee model for industrial companies by incorporating measures of risk and complexity that are either unique to or more relevant for banks, and that are used by bank regulatory agencies. For a sample of 277 financial institutions in fiscal 2000, we find that audit fees are higher for banks having more transactions accounts, fewer securities as a percentage of total assets, lower levels of efficiency, and higher degrees of credit risk. Higher fees also obtain for savings institutions, for banks that are more involved in acquisition activity, and for institutions that are required by regulatory agencies to maintain higher levels of risk-adjusted capital. Our model reveals that the complexities and risks deemed most important by regulatory agencies are also those that tend to be priced by audit firms. The importance of the audit process for banks is likely to intensify in the future as regulatory changes increase the importance of market discipline in controlling bank risk-taking.

Journal of Business Strategies, 1970

The Sarbanes-Oxley Act of 2002 was intended to improve corporate governanceand increase the transparency of financial audits. The legislation also could havesignificant effects on the public accounting industry. This study finds evidence ofhigher audit fees across all firms resulting from compliance with the law. However,after accounting for self-selection of auditors, we do not find evidence that thesize of the audit firm affects the magnitude of the audit fee increase.

2007

This study analyzes audit fees following SOX, in particular, the residual increase in audit fees controlling for those factors predicted to change such fees but for the Act. We find significant relations between residual audit fees and incremental audit risk, audit effort, and auditor changes. These factors are noticeably more influential in the period following SOX that includes the implementation of section 404 on internal control. Our results imply that SOX most likely caused an increase in the auditing profession's share of the risk of defective financial statements and client companies' resources to audit a costlier accounting system.

Research in International Business and Finance, 2017

In response to the concerns raised by the financial media and regulators about the audit quality around the recent global financial crisis (GFC), this study examines whether investors also perceived the audit quality to have declined during the GFC. Based on a sample of US firms over 2003-2009 and using the information content of earnings announcements as the proxy for the investors' perception of the audit quality, we find evidence of an increase in the information content of earnings announcements during the GFC period compared to pre-GFC period. The subsample analysis shows an increase in the information content of earnings announcements for both the non-financial and financial firms. Our results also show that the increase in the information content of earnings announcements is not dependent on auditors' size (Big 4 versus non-Big 4 auditors) or auditors' independence (based on the level of audit, non-audit and total audit fee). Additional tests also reveal that the reported increase in the information content of earnings announcements are not driven by a general decline in the richness of information environment during the GFC. Overall, our results provide a strong evidence of an increase in the perceived quality of audits during the GFC for US firms non-financial and financial firms.

International Journal of Disclosure and Governance, 2022

The purpose of this study is to investigate if audited financial statements add value for firms in the private debt market. Using an instrumental variable method, we find that firms with audited financial statements, on average, save 0.47 percentage points on the cost of debt compared to firms with unaudited financial statements. We also find that using the big, well-known auditing firms does not yield any additional cost of debt benefits. Lastly, we investigate if there are industries where alternative sources of information make auditing less valuable in reducing the cost of debt. Here, we find that auditing is less important in lowering cost in one industry, agriculture, where one lender has a 74% market share and a 100-year history of lending to firms within that industry. As such, it seems that lenders having high exposure to a certain industry might act as an alternative to auditing in reducing the information asymmetry between the firm and the lender.

Journal of International Accounting, Auditing and Taxation

This paper provides evidence that the Securities and Exchange Commission's (SEC's) enforcement policies affect audit pricing. Firms with a higher probability of enforcement by the SEC are hypothesized to experience increased pricing of audit services. According to Kedia and Rajgopal (2011), geographical proximity to SEC's offices can serve as a proxy of enforcement probability. The hypothesis of the current paper is supported by the findings that audit firms charge companies with a higher enforcement probability significantly higher audit fees. Thus, audit pricing increases when auditors perceive an enhanced audit risk for firms with greater prominence on the SEC's radar. Therefore, one can infer that the probability of SEC enforcement increases the need for shareholders to bear the costs of monitoring agents and that enforcement and audit provision are complementary devices. 1. Introduction Confidence in public company financial reporting is essential to the strength and vitality of markets, especially in light of the recent increasing complexity of corporate transactions and the unprecedented development of financial products and services (PCAOB, 2012; SEC, 2013). In this context, the role of oversight bodies that regulate public company financial reporting occupies a position of utmost importance (Caramanis, Dedoulis, & Leventis, 2015). Further, in the internationally influential context of the United States, the Securities and Exchange Commission's (SEC's) operation is considered important because it contributes to safeguarding the quality of financial reporting and consequently the stability of the broader economic system (

The accounting scandals and Sarbanes-Oxley Act (SOX) of 2002 resulted in large increases in required audit work, and corresponding increases in audit fees for public companies. This study provides early evidence regarding the relationship between higher audit fees, both levels and changes, and auditor dismissals in the period immediately subsequent to the passage of SOX. We find that clients paying higher fees are more likely to dismiss their auditors. We also find that dismissals are associated with smaller companies, companies with going-concern reports, and companies that later reported material weaknesses in their internal controls. Among dismissing clients, smaller Big 4 clients, paying higher fees, tend to hire non-Big 4 successor auditors. This result holds when auditors are divided into Big 4, national, and local tiers. We also find evidence that dismissing clients, in particular clients hiring new non-Big 4 auditors, experience smaller fee increases than nonswitching clients in the following year. These results are consistent with the notion that in the immediate post-SOX period, some companies dismissed their auditors in expectation of lower fees from the succeeding auditor.