Are Joint Audits Associated with Higher Audit Fees?

Abstract

In its October 2010 Green Paper on audit policy, the European Commission suggested that joint audits might be a way of improving the audit market in Europe. However, some parties consider that a joint audit system is not an efficient solution because the perceived improvements in audit quality, if any, are not commensurate with the significant increase in audit fees. We compare audit fees paid during the years 2007–2011 by listed companies in France, where joint audits are mandatory, with those paid by British and Italian companies. Theory suggests that audit fees in countries with high investor protection, such as the UK, are likely to be greater than those in countries with lower investor protection, such as France and Italy, ceteris paribus. However, we find significantly higher audit fees in France after controlling for well-documented auditor, client, and engagement attributes, which vary across countries. Furthermore, since we do not find statistically significant differences in the magnitude of abnormal accruals, the higher audit fees observed in France do not appear to be associated with higher audit quality.

Acknowledgements

We would like to thank the participants at the 2009 Earnet Conference in Valencia, the 2008 European Accounting Association in Rotterdam, the 2008 French Accounting Association in Cergy-Pontoise, the 2008 American Accounting Association in Anaheim, the 2012 Corporate Governance Conference in Lyon, and workshop participants at ESSEC Business School, Concordia University, HEC Montréal, and Stockholm School of Economics, for their valuable comments on the previous version of the paper. In particular, we like to thank Jere Francis, Sophie Audousset, Sudarshan Kumar Pillalamarri, Michel Magnan, Charles Piot, Robert Knechel, and John Innes, the two anonymous referees of the European Accounting Review, and Ann Vanstraelen (Associate Editor) for their insightful suggestions.

Notes

1 The Impact Assessment issued by the European Commission (2011a, Annex 12) mentions that joint audits in Denmark ‘did not necessarily result in any tangible benefits from an audit quality perspective’ and Danish representatives noted that the cost of joint audits ‘is significantly higher, although no estimates are provided’.

2 The CNCC is the French federation of registered auditors, which has more than 14,000 members.

3 While we control for audit firm switching, as discussed in more detail later, we do not distinguish between voluntary and mandatory switches in Italy. Consequently, we do not provide a full test of the impact of the Italian mandatory audit firm rotation rule on audit fees. For a more detailed discussion and analysis, see Cameran et al. (in press).

4 This finding on earnings management, based on recent and post-IFRS accounting data, sheds new light on cross-country differences in Europe, compared to pre-IFRS studies, such as those of Burgstahler, Hail, and Leuz (2006), Leuz, Nanda, and Wysocki (2003), and Maijoor and Vanstraelen (2006).

5 As indicated previously, in 2005, Denmark abolished their mandatory joint audit requirement. Two studies analyse this specific market. Lesage, Ratzinger-Sakel, and Kettunen (2012) find, for the period 2002–2010, a positive association between joint audit and audit fees, but a non-significant association between joint audit and audit quality (proxied by abnormal accruals). Thinggaard and Kiertzner (2008) show that competition between the two auditors explains the amount of audit fees paid. In particular, their results indicate that audit fees are reduced when both auditors have significant stakes in the audit.

6 Haskins and Williams (1988) are among the first to have conducted a cross-country study examining audit fee differences in a sample from the UK, Australia, New Zealand, Ireland, and the USA. Their study focuses on how individual country's firm-specific models vary.

7 Taylor and Simon's (1999) sample includes Australia, Canada, Chile, the UK, Hong Kong, India, Ireland, Japan, Korea, Malaysia, Mexico, New Zealand, Nigeria, Pakistan, Singapore, South Africa, Spain, Sri Lanka, the USA, and Zimbabwe. France and Italy are not included.

8 The sample of Choi et al. (2008) includes Australia, Denmark, Hong Kong, India, Ireland, Italy, Malaysia, New Zealand, Norway, Pakistan, Singapore, South Africa, Sweden, the UK, and the USA. France is not included.

9 This professional standard is called ‘Normes d'Exercice Professionnel (NEP) 100'. It provides some detailed information about joint audits.

10 In France, non-audit fees have significantly decreased since 2003 (Autorité des marchés financiers, 2012), but some fees are still related, for example, to fiscal services to foreign subsidiaries.

11 In practice, Italian audit firms still charge a limited amount of non-audit fees, knowing that ‘there have been interpretative problems involving the coexistence of consulting and audit services' (Ianniello, 2012).

12 The UK Auditing Practices Board issued a Consultation Paper in October 2009 in response to the House of Commons Treasury Committee's call for a consultation on their proposal issued in May 2009 that the provision of non-audit services by auditors to the entities that they audit should be prohibited. Both the Institute of Chartered Accountants of England and Wales and the Institute of Chartered Accountants of Scotland set up working groups on the topic. While some changes have been in effect since 2011, they mostly require greater steps to ensure that non-audit services do not impair independence.

13 A recent study provided by Audousset-Coulier (in press) examines joint audit pricing in France. However, this paper focuses on how the choice of pairing and tenure affects French audit fees, but does not address the impact of joint audit setting on audit fees.

14 Untabulated results show that the fees are quite stable over the years.

15 Exceptionally, we sometimes have more than two audit firms receiving fees, the other audit firms doing work in foreign or newly acquired subsidiaries, for example. Only two firms, however, are the statutory joint auditors. It is likely that more than one audit firm receives fees in the UK and Italy, but fees are only disclosed in aggregate and are assumed to have been paid to the statutory auditor.

16 Sales exhibited a similar pattern. We also use the total sales of the companies, but the results are not affected since there is a very high correlation between total assets and total sales.

17 For ownership structure, Worldscope provides the ratio of the number of closely held shares to common shares outstanding. Closely held shares represent shares held by insiders. They include, but are not restricted to, shares held by officers, directors, and their immediate families; shares held in trust; company shares held by any other corporation (except shares held in a fiduciary capacity by banks or other financial institutions); shares held by pension/benefit plans; and shares held by individuals who hold 5% or more of the outstanding shares.

18 We carried out multicollinearity diagnostics (variance inflation factors, or VIFs) when performing regressions and the results do not indicate a significant multi-collinearity issue. The highest VIF of any variable never exceeds 10 and the mean VIFs for regressions are between two and three.

19 The percentage is given by the transformation [exp(coefficient) − 1].

20 Similar Big 4 premiums exist in Italy and the UK (an untabulated test of differences is significant).

21 Such a relationship was recently studied by Zerni, Haapamäki, Järvinen, and Niemi (2012) in Sweden (a weakly litigious setting), where public and privately held companies can voluntarily employ two audit firms. They find that voluntary joint audits are associated with substantial increases in the fees paid. However, joint audits are also positively associated with audit quality (a higher degree of earnings conservatism and lower abnormal accruals) for both public and private companies.

22 There are also many dimensions to earnings quality. For a detailed discussion, see Dechow et al. (2010), DeFond and Zhang (2013), and Francis (2011).

23 Descriptive statistics for this section are not tabulated for sake of brevity, but they are available upon request.

24 We also performed a similar analysis using signed (positive and negative) AWACC and the results are qualitatively similar.

25 The average (median) absolute value of AWCACC for our full sample is 0.057 (0.024), which compares with the pooled sample AWCACC of Maijoor and Vanstraelen (2006) of 0.058 (0.031). The average (median) values are 0.051 (0.023) for the UK, 0.069 (0.033) for Italy, and 0.057 (0.022) for France.