Do abnormal audit fees/non-audit fees communicate firm specific information to the stock market?

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Do abnormal audit fees/non-audit fees communicate firm specific information to the stock market?

 

Author: Wang, Xinhua
Title: Do abnormal audit fees/non-audit fees communicate firm specific information to the stock market?
Degree: Ph.D.
Year: 2009
Subject: Hong Kong Polytechnic University -- Dissertations.
Auditors' reports.
Disclosure of information.
Financial statements.
Securities.
Stocks -- Prices.
Corporations -- Auditing.
Disclosure in accounting.
Department: School of Accounting and Finance
Pages: v, 171 p. ; 30 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2307185
URI: http://theses.lib.polyu.edu.hk/handle/200/4328
Abstract: Previous studies, most of which use the pre-SOX (Sarbanes-Oxley Act) samples, provide mixed and even contradictory findings on whether both audit and non-audit service fees affect auditor independence, both in terms of auditor independence in fact and in appearance. It is therefore an unsettled empirical issue. However, the Sarbanes-Oxley Act (SOX) passed on July 25, 2002 prohibits auditors from providing non-audit services including bookkeeping, information systems design and implementation, appraisal or valuation services, actuarial services, internal audit outsourcing services, management and human resource functions, broker or dealer or investment banking services and other services forbidden by the Public Company Accounting Oversight Board. Post-SOX empirical evidence on the issue of audit and non-audit fees and auditor independence is scarce. To fill the void, this study examines market perception of auditor independence in the post-SOX period. In addition, this research uses measures different from most prior studies. First, instead of using audit and non-audit fees, this study uses abnormal audit/non-audit fees, which are the excess of actual audit/non-audit fees over normal (predicted) audit/non-audit fees and thereby more accurate measures of economic dependence. Second, this study draws on finance literature on stock price synchronicity to measure market perception. This stream of finance studies provides empirical support that stock price synchronicity is a firm-specific information measure, which captures the incorporation of firm-specific information into stock prices. The association between abnormal audit/non-audit fees and stock price synchronicity (i.e. the incorporation of firm-specific information into stock prices) is an empirical question. On the one hand, if investors perceive that abnormal audit/non-audit fees create economic bonding and result in a decline of financial reporting quality, they will incorporate less firm specific information into stock prices. On the other hand, if investors perceive that abnormal audit/non-audit fees measure auditors' reputation capital investments and thereby provide incentives for auditors to ensure credible financial reporting, they will incorporate more firm-specific information into stock prices. To test these competing arguments, this research examines whether there is any association between stock price synchronicity and abnormal audit (non-audit) fees in the post-SOX period. Using 9,188 firm-year observations in the post-SOX (Sarbanes-Oxley Act) period of 2004 to 2006, this study finds that there is a statistically significant positive association between stock price synchronicity and abnormal audit fees. Moreover, this study finds that there is no significant association between stock price synchronicity and abnormal non-audit fees. These results suggest that abnormal audit fees impair audit independence and result in less firm-specific information in the stock prices, while abnormal non-audit fees do not in the post-Sox period. Overall, this study indicates that market perception of lack of auditor independence on abnormal audit fees, but not on abnormal non-audit fees in the post-SOX period. The insignificant findings on the abnormal non-audit fees suggest the effectiveness and success of SOX on restrictions of non-audit services.

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