Audit fees and cost of debt: differences in the credibility of voluntary and mandatory audits

Figures & data

Table 1. Sample distribution.

Panel A: Sample distribution by audit status
Year	Voluntary Audits		Mandatory Audits		Total
2010	164	5.41%	2,866	94.59%	3,030
2011	238	8.26%	2,644	91.74%	2,882
2012	295	9.45%	2,828	90.55%	3,123
2013	260	8.71%	2,725	91.29%	2,985
2014	240	10.70%	2,002	89.30%	2,242
2015	240	11.15%	1,912	88.85%	2,152
2016	181	9.64%	1,696	90.36%	1,877
2017	130	7.84%	1,529	92.16%	1,659
Total	1,748	8.76%	18,202	91.24%	19,950

Table

Panel B: Sample distribution by auditor choice
Year	Small Auditors	Middle-Tier Auditors	Big Auditors	Total
2010	2,769	131	130	3,030
2011	2,620	123	139	2,882
2012	2,866	93	164	3,123
2013	2,728	93	164	2,985
2014	2,041	65	136	2,242
2015	1,969	60	123	2,152
2016	1,726	48	103	1,877
2017	1,518	44	97	1,659
Total	18,237	657	1,056	19,950
Voluntary Audits	1506	78	164	1,748
	86.16%	4.46%	9.38%	(100.00%)
Mandatory Audits	16,731	579	892	18,202
	91.92%	3.18%	4.90%	(100.00%)
Total	18,237	657	1,056	19,950
	(91.41%)	(3.29%)	(5.29%)	(100.00%)

Source: Authors’ own estimations.

Table 2. Descriptive statistics.

Panel A: Distributional properties (19,950 observations)
Variable	Mean	S. Dev.	1%	25%	50%	75%	99%
COST_D	0.0466	0.0229	0.0138	0.0293	0.0424	0.0588	0.1173
COST_D_LAG	0.0490	0.0222	0.0150	0.0327	0.0451	0.0605	0.1177
LNASS	8.8101	0.5158	7.7765	8.4576	8.7783	9.1128	10.3165
ROBA	0.0616	0.0700	–0.1392	0.0276	0.0550	0.0913	0.2801
LEV	0.3022	0.1721	0.0212	0.1638	0.2878	0.4233	0.7251
LIQ	1.6853	0.9990	0.4598	1.0977	1.3898	1.9389	5.8074
TAN	0.2529	0.1846	0.0047	0.1022	0.2189	0.3675	0.7818
GROWTH	0.0009	0.1902	–0.4703	–0.1040	0.0010	0.0980	0.5662
SOLV	1.9327	0.9329	1.0359	1.3345	1.6318	2.1821	5.6984
COV	7.8914	18.2502	–11.6970	1.2810	2.6082	7.4597	97.8000
AGE	23.5645	10.8823	5.0000	16.0000	22.0000	30.0000	57.0000
LNFEES	1.9878	0.3449	1.2238	1.7579	1.9678	2.2083	2.8622

Table

Panel B: Mean and standard deviation of variables by audit status
	Voluntary Audit (1,748 observations)		Mandatory Audit (18,202 observations)		Test for mean differences
Variable	Mean	Std. Dev.	Mean	Std. Dev.	Diff	t
COST_D	0.0458	0.0226	0.0467	0.0230	–0.0009	–1.50*
COST_D_LAG	0.0480	0.0222	0.0491	0.0222	–0.0011	–1.89**
LNASS	8.5482	0.6753	8.8353	0.4905	–0.2871	–22.51***
ROBA	0.0423	0.0742	0.0634	0.0693	–0.0211	–12.09***
LEV	0.2963	0.1753	0.3028	0.1718	–0.0066	–1.52*
LIQ	1.8934	1.2108	1.6653	0.9739	0.2280	9.13***
TAN	0.2890	0.2114	0.2494	0.1815	0.0396	8.58***
GROWTH	0.0162	0.2025	–0.0006	0.1889	0.0168	3.53***
SOLV	2.2015	1.1166	1.9068	0.9092	0.2946	12.66***
COV	5.8507	17.1865	8.0873	18.3376	–2.2367	–4.90***
AGE	24.3764	11.2048	23.4865	10.8480	0.8899	3.27***
LNFEES	1.8629	0.3508	1.9998	0.3420	–0.1370	–15.96***

COST_D: Cost of debt; COST_D_LAG: Cost of debt lagged one period; LNASS: Natural logarithm of total assets; ROBA: Return on Business Assets; LEV: Leverage; LIQ: Liquidity ratio; TAN: Tangibility ratio; GROWTH: Growth of sales; SOLV: Solvency ratio; COV: Coverage ratio; AGE: Age of the company; LNFEES: Natural logarithm of audit fees.

*** , ** and * denote coefficients’ statistical significance at the 1%, 5% and 10% confidence level, respectively.

Source: Authors’ own estimations.

Table 3. Correlation matrix.

	COST_D	VOL	LNFEES	LNASS	ROBA	LEV	LIQ	TAN	GROWTH	SOLV	COV	AGE
COST_D	1
VOL	–0.0106	1
LNFEES	0.0351	–0.1123	1
LNASS	–0.1236	–0.1574	0.2052	1
ROBA	0.0358	–0.0853	–0.0241	0.0335	1
LEV	–0.0643	–0.0108	–0.0198	0.0915	–0.162	1
LIQ	–0.1189	0.0645	0.0373	0.1337	0.0204	–0.3648	1
TAN	–0.1384	0.0606	–0.0803	–0.0149	–0.1006	0.1576	–0.17	1
GROWTH	–0.0288	0.0250	–0.0094	0.1165	0.2599	–0.0199	–0.0659	–0.026	1
SOLV	–0.1088	0.0893	0.0255	0.0867	0.0020	–0.5735	0.7253	0.0312	–0.0707	1
COV	–0.152	–0.0347	0.0059	0.0444	0.4971	–0.3897	0.2901	–0.0756	0.1169	0.3909	1
AGE	–0.0501	0.0231	0.1043	0.0757	–0.1402	–0.1090	0.1388	0.0026	–0.0124	0.1748	–0.0044	1

COST_D: Cost of debt; VOL: 1 if voluntary audits, 0 if mandatory audits; LNFEES: Natural logarithm of audit fees; LNASS: Natural logarithm of total assets; ROBA: Return on Business Assets; LEV: Leverage; LIQ: Liquidity ratio; TAN: Tangibility ratio; GROWTH: Growth of sales; SOLV: Solvency ratio; COV: Coverage ratio; AGE: Age of the company.

Coefficients in bold denote statistical significance at 5% level.

Source: Authors’ own estimations.

Table 4. Fixed-effects regression results.

	Model 1a		Model 1b
	Coeff.	t	Coeff.	t
VOL	0.0099	2.95***	0.0098	2.92***
LNFEES	–0.0005	–0.47	–0.0006	–0.59
INTER	–0.0056	–3.21***	–0.0056	–3.17***
LARGE	–		–0.0002	–0.15
BIG	–		0.0015	0.93
LNASS	–0.0058	–7.99***	–0.0058	–8.02***
ROBA	0.0022	0.85	0.0023	0.89
LEV	–0.0824	–17.53***	–0.0823	–17.51***
LEV_SQ	0.0687	11.57***	0.0687	11.56***
LIQ	–0.0013	–3.96***	–0.0013	–3.96***
TAN	–0.0035	–1.59	–0.0035	–1.61
GROWTH	0.0015	2.17**	0.0015	2.18**
SOLV	–0.0013	–3.08***	–0.0013	–3.07***
COV	0.0000	–4.17***	0.0000	–4.18***
AGE	–0.0049	–20.25***	–0.0049	–20.26***
Intercept	0.2410	28.38***	0.2414	28.40***
N	19,950		19,950
F	313.89		284.05
R-Within	29.28%		29.29%

COST_D: Cost of debt; VOL: 1 if voluntary audits, 0 if mandatory audits; LNFEES: Natural logarithm of audit fees; INTER: Interaction of VOL and LNFEES; LARGE: 1 if audited by Big 4 or Middle-Tier, 0 if audited by small auditor; BIG: 1 if audited by Big 4, 0 otherwise; LNASS: Natural logarithm of total assets; ROBA: Return on Business Assets; LEV: Leverage; LIQ: Liquidity ratio; TAN: Tangibility ratio; GROWTH: Growth of sales; SOLV: Solvency ratio; COV: Coverage ratio; AGE: Age of the company.

*** , ** and * denote coefficients’ statistical significance at the 1%, 5% and 10% confidence level, respectively.

Coefficients of year dummies are not included for parsimony.

Source: Authors’ own estimations.

Table 5. Abnormal fees.

Panel A: Estimation of abnormal accruals
	Coef.	T
LARGE	0.1366	15.30***
BIG	0.2809	24.25***
LNASS	0.1150	26.91***
LNSAL	0.0871	19.58***
LNEMP	0.0661	22.11***
INVREC	0.0910	7.58***
ACQ	–0.0428	–8.87***
INT_ASS	0.0558	1.93*
UNUS	0.0529	0.80
SIMP_GAAP	–0.0323	–6.83***
NUM_SUBS	0.0026	3.05***
GROUP	0.0222	4.37***
LEV	–0.0294	–2.56***
CH_LEV	0.0532	2.61***
GROWTH	0.0000	0.32
ROBA	0.0665	3.12***
N_EARN	0.0413	6.30***
NEG_ROBA	–0.0734	–3.42***
CURRENT	–0.0038	–3.33***
QUICK	0.0075	4.27***
SOLV	0.0534	2.78***
CH_SOLV	–0.0270	–0.46
MOD_REP	0.0384	7.75***
YEAR_END	–0.0336	–3.00***
C_CITY	0.0884	12.91***
AGE	0.0029	15.23***
Industry Dummies	0.1450	4.12***
Year Dummies	0.1723	3.91***
Intercept	–0.3902	–7.43***
N	29,573
F	161.65
R-Squared	21.49%

Table

Panel B: Distributional properties of AB_LNFEES (16,714 observations)
Variable	Mean	S. Dev.	1%	25%	50%	75%	99%
AB_LNFEES	–0.0015	0.3062	–0.6928	–0.2105	–0.0071	0.2091	0.7088

Table

Panel C: Mean and standard deviation of AB_LNFEES by audit status
	Voluntary Audit (1566 observations)		Mandatory Audit (15,148 observations)		Test for mean differences
Variable	Mean	Std. Dev.	Mean	Std. Dev.	Diff	t
AB_LNFEES	–0.0156	0.3078	0.0000	0.3060	–0.0156	–1.92**

LARGE: 1 if audited by Big 4 or Middle-Tier, 0 if audited by small auditor; BIG: 1 if audited by Big 4, 0 otherwise; LNASS: Natural logarithm of total assets; LNSAL: Natural logarithm of net sales; LNEMP: Natural logarithm of number of employees; INVREC: Ratio of inventory and receivables to total assets; ACQ: 1 if company made acquisitions, 0 otherwise; INT_ASS: Ratio of intangible assets to total assets; UNUS: 1 if unusual items in the income statement, 0 otherwise; SIMP_GAAP: 1 if use of simplified GAAP, 0 otherwise; NUM_SUBS: Number of subsidiaries; GROUP: 1 if company belongs a group, 0 otherwise; LEV: Leverage; CH_LEV: Changes in leverage; GROWTH: Growth in sales; ROBA: Return on business assets; N_EARN: 1 if negative earnings, 0 otherwise; NEG_ROBA: Interaction of N_EARN and ROBA; CURRENT: Current ratio; QUICK: Quick ratio; SOLV: Solvency ratio; CH_SOLV: Changes in solvency; MOD_REP: 1 if modified report, 0 otherwise; YEAR_END: 1 if year-end 31 December, 0 otherwise; C_CITY: 1 if company located in Madrid or Barcelona, 0 otherwise; AGE: Age of the company.

***, ** and * denote coefficients’ statistical significance at the 1%, 5% and 10% confidence level, respectively.

Source: Authors' own estimations.

Table 6. Regression results with abnormal fees (AB_LNFEES).

	Model 3a		Model 3b
	Coeff.	t	Coeff.	t
VOL	–0.0011	–1.39	–0.0010	–1.36
AB_LNFEES	–0.0005	–0.38	–0.0005	–0.43
INTER_AB	–0.0075	–3.37***	–0.0074	–3.35***
LARGE	–		–0.0028	–1.63
BIG	–		0.0040	2.02**
LNASS	–0.0060	–7.40***	–0.0061	–7.43***
ROBA	0.0036	1.26	0.0036	1.28
LEV	–0.0859	–16.50***	–0.0860	–16.51***
LEV_SQ	0.0702	10.57***	0.0703	10.58***
LIQ	–0.0012	–3.33***	–0.0012	–3.33***
TAN	–0.0049	–2.00**	–0.0050	–2.05**
GROWTH	0.0018	2.42**	0.0018	2.41**
SOLV	–0.0012	–2.47**	–0.0012	–2.50**
COV	0.0000	–3.77***	0.0000	–3.79***
AGE	–0.0049	–20.27***	–0.0049	–20.30***
Intercept	0.2407	27.26***	0.2411	27.29***
N	16,714		16,714
F	324.24		292.07
R-Within	33.26%		33.28%

COST_D: Cost of debt; VOL: 1 if voluntary audits, 0 if mandatory audits; AB_LNFEES: Abnormal LNFEES; INTER_AB: Interaction of VOL and AB_LNFEES; LARGE: 1 if audited by Big 4 or Middle-Tier, 0 if audited by small auditor; BIG: 1 if audited by Big 4, 0 otherwise; LNASS: Natural logarithm of total assets; ROBA: Return on Business Assets; LEV: Leverage; LIQ: Liquidity ratio; TAN: Tangibility ratio; GROWTH: Growth of sales; SOLV: Solvency ratio; COV: Coverage ratio; AGE: Age of the company.

*** , ** and * denote coefficients’ statistical significance at the 1%, 5% and 10% confidence level, respectively.

Coefficients of year dummies are not included for parsimony.

Source: Authors’ own estimations.

Table 7. Regression results with COST_D_LAG.

Panel A: LNFEES
	Model 1a		Model 1b
	Coeff.	t	Coeff.	t
COST_D_LAG	0.2712	33.00***	0.2711	32.99***
VOL	0.0094	2.91***	0.0093	2.89***
LNFEES	–0.0001	–0.08	–0.0002	–0.19
INTER	–0.0051	–3.03***	–0.0051	–3.00***
LARGE	–		–0.0005	–0.37
BIG	–		0.0016	0.99
LNASS	–0.0040	–5.70***	–0.0040	–5.72***
ROBA	–0.0140	–5.53***	–0.0139	–5.49***
LEV	–0.0555	–12.05***	–0.0555	–12.04***
LEV_SQ	0.0432	7.47***	0.0432	7.47***
LIQ	–0.0011	–3.47***	–0.0011	–3.47***
TAN	–0.0023	–1.10	–0.0024	–1.12
GROWTH	0.0007	1.03	0.0007	1.03
SOLV	–0.0012	–2.92***	–0.0012	–2.91***
COV	0.0000	3.57***	0.0000	3.56***
AGE	–0.0029	–11.91***	–0.0029	–11.92***
Year Dummies	Yes		Yes
Intercept	0.1531	17.78***	0.1535	17.81***
N	19,950		19,950
F	375.17		341.10
R-Within	34.26%		34.26%
Panel B: AB_LNFEES
	Model 3a		Model 3b
	Coeff.	t	Coeff.	t
COST_D_LAG	0.2486	27.34***	0.2487	27.35***
VOL	–0.0005	–0.63	–0.0004	–0.60
AB_LNFEES	0.0004	0.31	0.0003	0.26
INTER_AB	–0.0063	–2.94***	–0.0063	–2.93***
LARGE	–		–0.0032	–1.93*
BIG	–		0.0041	2.11**
LNASS	–0.0042	–5.31***	–0.0042	–5.32***
ROBA	–0.0112	–3.98***	–0.0111	–3.97***
LEV	–0.0608	–11.85***	–0.0609	–11.86***
LEV_SQ	0.0466	7.16***	0.0466	7.18***
LIQ	–0.0009	–2.68***	–0.0009	–2.67***
TAN	–0.0030	–1.24	–0.0031	–1.29
GROWTH	0.0011	1.52	0.0011	1.50
SOLV	–0.0013	–2.72***	–0.0013	–2.75***
COV	0.0000	2.61***	0.0000	2.59***
AGE	–0.0030	–12.42***	–0.0030	–12.45***
Year Dummies	Yes		Yes
Intercept	0.1597	17.63***	0.1601	17.66***
N	16,714		16,714
F	366.11		331.54
R-Within	37.26%		37.29%

COST_D: Cost of debt; VOL: 1 if voluntary audits, 0 if mandatory audits; LNFEES: Natural logarithm of audit fees; INTER: Interaction of VOL and LNFEES; AB_LNFEES: Abnormal LNFEES; INTER_AB: Interaction of AB_LNFEES and VOL; LARGE: 1 if audited by Big 4 or Middle-Tier, 0 if audited by small auditor; BIG: 1 if audited by Big 4, 0 otherwise; LNASS: Natural logarithm of total assets; ROBA: Return on Business Assets; LEV: Leverage; LIQ: Liquidity ratio; TAN: Tangibility ratio; GROWTH: Growth of sales; SOLV: Solvency ratio; COV: Coverage ratio; AGE: Age of the company.

*** , ** and * denote coefficients’ statistical significance at the 1%, 5% and 10% confidence level, respectively.

Coefficients of year dummies are not included for parsimony.

Source: Authors’ own estimations.

Table 8. Voluntary vs mandatory audits.

Panel A: Model 1a
	Below SAT		Above SAT
	Coef.	t	Coef.	t
LNFEES	–0.0069	–1.87*	0.0004	0.36
LNASS	–0.0006	–0.19	–0.0062	–8.14***
ROBA	–0.0177	–1.90*	0.0032	1.17
LEV	–0.0891	–5.01***	–0.0840	–16.85***
LEV_SQ	0.0571	2.62***	0.0727	11.47***
LIQ	0.0004	0.55	–0.0012	–3.44***
TAN	0.0139	1.68*	–0.0039	–1.69*
GROWTH	–0.0023	–0.95	0.0014	1.87*
SOLV	–0.0023	–1.82*	–0.0015	–3.02***
COV	–0.0001	–1.13	0.0000	–3.91***
AGE	–0.0040	–4.58***	–0.0049	–19.24***
_cons	0.1847	5.10***	0.2427	27.34***
N	1,748		18,202
F	14.10		327.47
R-Within	21.84%		29.87%
Panel B: Model 3a
	Below SAT		Above SAT
cost_d_d	Coef.	t	Coef.	t
AB_LNFEES	–0.0087	–2.28**	0.0000	–0.01
LNASS	–0.0032	–0.91	–0.0062	–7.22***
ROBA	–0.0038	–0.40	0.0034	1.13
LEV	–0.1006	–5.25***	–0.0864	–15.62***
LEV_SQ	0.0721	2.99***	0.0729	10.28***
LIQ	0.0005	0.58	–0.0011	–2.70***
TAN	0.0186	2.11**	–0.0059	–2.27**
GROWTH	–0.0028	–1.12	0.0017	2.06**
SOLV	–0.0022	–1.61	–0.0014	–2.56**
COV	–0.0001	–1.82*	0.0000	–2.98***
AGE	–0.0035	–4.13***	–0.0049	–19.54***
_cons	0.1811	4.89***	0.2437	26.37***
N	1,566		15,148
F	13.60		341.40
R-Within	22.26%		34.03%

COST_D: Cost of debt; LNFEES: Natural logarithm of audit fees; AB_LNFEES: Abnormal LNFEES; LNASS: Natural logarithm of total assets; ROBA: Return on Business Assets; LEV: Leverage; LIQ: Liquidity ratio; TAN: Tangibility ratio; GROWTH: Growth of sales; SOLV: Solvency ratio; COV: Coverage ratio; AGE: Age of the company.

*** , ** and * denote coefficients’ statistical significance at the 1%, 5% and 10% confidence level, respectively.

Coefficients of year dummies are not included for parsimony.

Source: Authors’ own estimations.