外文翻译审计办事处规模审计质量与审计定价.docx

1、外文翻译审计办事处规模审计质量与审计定价Audit Office Size, Audit Quality, and Audit Pricing Jong-Hag Choi, Chansog (Francis) Kim,Jeong-Bon Kim, and Yoonseok ZangSUMMARY: Using a large sample of U.S. audit client firms over the period 20002005,this paper investigates whether and how the size of a local practice office w

2、ithin an audit firmhereafter, office size is a significant, engagement-specific factor determining audit quality and audit fees over and beyond audit firm size at the national level and auditor industry leadership at the city or office level. For our empirical tests, audit quality is measured by uns

3、igned abnormal accruals, and the office size is measured in two different ways: one based on the number of audit clients in each office and the other based on a total of audit fees earned by each office. Our results show that the office size has significantly positive relations with both audit quali

4、ty and audit fees, even after controlling for national-level audit firm size and office-level industry expertise. These positive relations support the view that large local offices provide higher-quality audits compared with small local offices, and that such quality differences are priced in the ma

5、rket for audit services.Keywords: audit office; office size; audit quality; audit pricing.Data Availability: Data are publicly available from sources identified in the paper.The way we think about an accounting firm changes dramatically when we shift the unit of analysis away from the firm as a whol

6、e, to the analysis of specific city-based offices within a firm. In terms of DeAngelos 1981b argument, a Big 4 accounting firm is not so big when we shift to the officelevel of analysis. For example, while Enron represented less than 2 percent of Arthur Ander-sens national revenues from publicly lis

7、ted clients, it was more than 35 percent of such revenuesin the Houston office.INTRODUCTIONAs alluded to in the above quote, the size of a city-based audit engagement office could be a more crucial determinant of audit quality and thus audit feesthan the size of a national-level audit firm because t

8、he city-based office is a semi-autonomous unit within an audit firm with its own client base. It is an office-based engagement partner or audit team, not national headquarters, who actually administers and implements individual audit engagement con-tracts, including the delivery of audit services an

9、d the issuance of an audit opinion. In this regard, Wallman (1996) and Francis (2004) argue that the assessment of auditor independence needs to focus more on the individual office level rather than the entire firm level because most of the audit decisions with respect to a particular client are mad

10、e within each individual office. The anecdotal evidence on the collapse of Enron, which was audited by the Houston office of Arthur Andersen, is a good example that demonstrates the importance of office-level audit quality. However, muchof extant audit research has focused its attention on two natio

11、nal-level audit firm characteristics as fundamental determinants of audit quality, namely: audit firm size (e.g., Simunic and Stein 1987 ; Becker et al. 1998 ; Francis and Krishnan 1999; Kim et al. 2003; Choi and Doogar 2005), and auditor industry leadership (e.g., DeFond et al. 2000 ; Balsam et al.

12、 2003 ; Krishnan 2005). These studies find, in general, that large audit firms with international brand names (i.e., Big 4 auditors ) or industry expertise provide higher-quality audit services than small audit firms whichlack such brand names or industry expertise. Implicit in this line of research

13、 is the assumption that audit quality is homogeneous across offices of various sizes located in different cities within the same audit firm. As a result, we have little evidence on cross-office differences in audit quality, and in particular, whether and how the size of a local engagement office has

14、 an impact on audit quality and/or audit pricing. A natural question to ask is: Is the office size an additional engagement-specific factor determining audit quality and thus audit pricing over and beyond audit firm size and industry leadership? We aim to provide direct evidence on this unexplored q

15、uestion.Several recent studies provide indirect evidence suggesting that audit quality may differ across different engagement offices within an audit firm. For example, in the first U.S. study that uses each engagement office as the unit of analysis, Reynolds and Francis (2000, 375) find that when c

16、lient size is measured at the office level using office-specific clienteles, “Big 5 auditors report more conservatively for larger clients.” Further,Ferguson et al.(2003) and Francis et al. (2005) find that city-specific, office-level industry leadership, when combined with the national-level leader

17、ship, generates the highest audit fee premiums and thus, by inference, higher audit quality in the Australian and U.S. audit markets, respectively, while national-level industry lead-ership alone has no effect. Subsequently, Francis et al. (2006) document that client earnings quality proxied by abno

18、rmal accruals is higher when auditors are city-level industry leaders alone, or they are both city-level and national-level industry leaders. Put differently, their results indicate that national-level industry leadership alone has no significant impact on audit quality. More recently, Choi et al. (

19、2007) show that the geographical proximity of the city-based engagement office to clients headquarters is positively associated with the accrual quality of clients, suggest-ing that the geographical location of the auditors office is an important engagement-specific determinant of audit quality. The

20、 above findings, taken together, suggest that city-based, office-level characteristics may play an important role in determining audit quality and thus audit pricing.It should be pointed out, however, that none of these studies has paid attention to the question of whether the size of a local engage

21、ment office is systematically associated with audit quality and fees paid to auditors.To bridge this gap in our knowledge, we investigate a hitherto under-researched question of whether, and how, the size of a local engagement office hereafter, office sizeis associated with audit quality and audit p

22、ricing. We first hypothesize that office size is systematically associated with audit quality even after controlling for audit firm size at the national level and auditor industry expertise at the office level. As will be further elaborated in the next section, one wouldobserve a positive associatio

23、n if the audits by large offices are of higher quality than the audits by small offices. Second, we also examine the association between the office size and audit fees. Previous research shows that audit quality is priced in the market (Choi et al. 2008; Craswell et al. 1995; Ferguson et al. 2003 ;

24、Francis et al. 2005 ). To the extent that the office size is positively associated with audit quality, one can predict that the larger is the office size, the higher is the audit quality, and thus the greater is the audit fee. Therefore, a positive association between the office size and audit fees

25、could be viewed as evidence corroborating the positive association between the office size and audit quality.In testing our hypotheses, we assert that biased earnings reporting can be used to draw inferences about audit quality, and we use the magnitude of abnormal accruals as a proxy for audit qual

26、ity. To measure abnormal accruals, we rely on two alternative models developed by Ball and Shivakumar (2006)and Kothari et al.(2005). In addition, we estimate the size of a local engage-ment office using the Audit Analytics database, which provides the identity of audit engagement offices for all SE

27、C registrant clients. We measure office size in two different ways: one based on the number of audit clients in each office, and the other based on a total of audit fees earned by each office.Briefly, our results reveal that in the U.S. audit market, both audit quality and audit fees are positively

28、associated with office size after controlling for audit firm size at the national level proxied by a Big 4 dummy variable , industry leadership at the local office level proxied by an industry specialist dummy variable), and other relevant factors. These results are robust to a battery of sensitivit

29、y checks we perform. Our study contributes to the existing literature in several ways. First, our paper is one of few studies which document that audit quality is not homogeneous across local offices within an audit firm. To our knowledge, our paper is one of the first studies that provide direct ev

30、idence that the size of an audit engagement office is an important engagement-specific determinant of audit quality in the U.S. The results of our study suggest that future research on audit quality differentiation needs to pay more attention to office-level auditor behavior as the unit of analysis

31、and to the size of a local engagement office. Second, this paper is the first to consider office size as a critical factor in audit pricing. Given that no previous research has examined whether audit fees are influenced by the size of a local office, our evidence helps us better understand the natur

32、e of auditor-client relationships in the context of audit pricing.Finally, the findings in this study provide both regulators and practitioners with useful insights into what determines audit quality and thus audit fees. Our results suggest that regulators would have a better assessment of audit qua

33、lity if they shift the level of quality comparison to small versus large auditors at the office level, and away from Big 4 versus non-Big 4 auditors at the national level. Economic theory on quality premiums claims that producing goods and services of a uniform quality for various markets and consumers over time is crucial for maintaining quality pre