The nonlinear association between abnormal audit fees and audit quality : evidence from Hong Kong

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The nonlinear association between abnormal audit fees and audit quality : evidence from Hong Kong

 

Author: Ho, Sui-kwong Alan
Title: The nonlinear association between abnormal audit fees and audit quality : evidence from Hong Kong
Degree: D.B.A.
Year: 2008
Subject: Hong Kong Polytechnic University -- Dissertations.
Auditing -- China -- Hong Kong.
Auditing -- Quality control.
Department: Graduate School of Business
Pages: ix, 176 leaves : ill. ; 30 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2240600
URI: http://theses.lib.polyu.edu.hk/handle/200/4049
Abstract: This study uses the positive abnormal audit fees ("POSAAF") to proxy the auditor-client economic bond and test the effectiveness of this measure on the audit quality of Hong Kong listed companies. It also examines the nonlinear association of abnormal audit fees and audit quality. I use accrual quality and accounting conservatism as proxies for audit quality. The measurements of accrual quality and accounting conservatism are the accrual quality of Dechow and Dichev (2002) as modified by McNichols (2002) (the "DDAQ") and the C-Score of Khan and Watts (2007) (the "C-Score") respectively. The abnormal audit fees are separated into positive (the "POSAAF") and negative (the "NEGAAF") to examine the nonlinear relations with DDAQ and C-Score. Using the data of top 350 companies listed on the main board of Hong Kong from 1996 to 2006, I find: i) a significant negative association between POSAAF and accrual quality; ii) a significant positive association between POSAAF and accounting conservatism; iii) a significant positive association between NEGAAF and accrual quality; and iv) a significant positive association between NEGAAF and accounting conservatism. Even though both POSAAF and NEGAAF have positive associations with accounting conservatism, the coefficient of POSAAF is twice of the coefficient of NEGAAF. These results provide evidence on the nonlinear association of the abnormal audit fees metrics and audit quality. Additional analyses on effects of autocorrelation, lowballing and mean reversion, nonaudit fees, the Sarbanes-Oxley Act, and marginal abnormal fees are performed, and the results are substantially the same. The contributions of this study are: i) Providing empirical evidence that accrual quality is negatively associated with POSAAF; ii) Providing empirical evidence that conservatism is positively associated with POSAAF; iii) Providing empirical evidence on the nonlinear nature of abnormal audit fees; iv) providing additional evidence on the research on accounting conservatism using C-Score; and v) providing additional empirical evidence from Hong Kong on the research of audit quality.

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