How Industry Specialist Auditors Respond to the Unit Fee Discount?
Asian Tax Journal Vol. 18 No. 6 (2017), pp. 241-283
Abstract
A recent research discovered that the industry specialized auditors’ audit fees were rather discounted and that the audit fee premiums were attributed to more audit hours spent. If industry specialists discount their fees and maintain their hours, their fee－per－hour and profitability will decrease. In this study, we examine how auditors respond to a decline in profitability, and annalize industry specialists for empirical perforce. Based on the audit fee and hours－per－rank disclosures of KOSPI and KOSDAQ companies from 2014 to 2016, our main focus is how industry specialist auditors allocate their audit hours for each rank. Our findings are as follows. First, compared to non－specialists, industry specialists assign more audit hours to junior auditors. Industry specialists allow relatively few hours to quality control department, partners, and registered CPAs (senior auditors), and relatively high for junior auditors and experts. Second, unlike higher rank auditors, junior auditors fail to restrain earnings management for both industry specialists and non－specialists. This finding partially confirms the concern that the reliance on junior auditors may reduce audit quality. Third, the fee－per－hour has a positive (＋) effect to partners hours, negative (－) to the junior hours, and negative (－) to earnings management. We interpret this result as the confirm of the practitioners’ concerns who pointed out that the audit fee discount may deepen the dependence on low－rank auditors and worsen audit quality. However, industry specialized auditors’ fee－per－hour has a marginally significant positive (＋) relationship with the earnings management. We interpreted this as, despite of the high reliance on the junior auditor, the efficiency of industry specialized auditor prevents deterioration of audit quality. However, concerns about the potential audit quality deterioration request more skilled senior auditors and more time commitments by them. We suggest that the starting line to consider is the guarantee of proper audit fees；others include the standard rate system, the disclosure of fee－per－hour, more application of designated auditors, and authorizing audit committee to determine audit fee.
Keywords
- Industry specialized auditor
- audit hours
- junior auditor
- unit audit fee discount
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