The Regulation of Public Company Auditing:
Evidence from the Transition to AS5
Section：12:30-01:45 Name: Yi Su
This paper compared the difference between the Auditing Standard No.2 and the Auditing Standard No.5. The replacement of AS2 by AS5 creates a natural experiment: the new regulation changed the audit approach prescribed in AS2 but left largely unchanged the institutional context of public company audits, including the attendant auditor liability regime. An analysis of the impact of AS5 is informative on at least two counts. First, it sheds light on the economic impact of regulation resulting from a political crisis. Second, AS2 and AS5 both specify standards for audits of internal controls over financial reporting. Relative ...view middle of the document...
First, does the within-period association between audit fees and audited fraud risk increase after AS5? Second, are AS5 audit fees, on average, lower than AS2 benchmarks? Third, how does AS5 affect fees for higher-fraud-risk auditors? For first research question, this paper estimated separately, for each of three periods (the AS2a period , the AS2b period , and the AS5 period ), the crosssectional association between audit fees and an indicator of audited fraud risk and test whether this association increases during the AS5 period. The author set up a model as following.
LNAFEE = b0 + b1 LNTA + b2 LNSEG + b3 FOROPS + b4 ROA + b5 LOSS +b6 INVREC + b7 LEV + b8 BUSY + b9 DELAY + b10 GCO+ b11 FRSK + ε
To investigate research question two, the autor test whether the mean of DFEE is less than zero, that is, is consistent with an overall decline in AS5 audit fees relative to AS2b benchmarks. To address the third research question, the author examine how the mean of DFEE varies with audited fraud risk, FRSK.
The result of question one is that more risky audited payment is higher of AS5 fees. The result of question two is that AS5 fees are, on average, 4% (1 −e−0.037 ) lower than AS2b benchmarks. The result of question three is that the economic impact of AS5 was to reduce, on average, fees for lower-fraud-risk audited by about 8% (1 −e−.085 ) while increasing fees, on average, for higher-fraud-risk audited by about 5%(1 −e0.047 ).
Overall, the key finding of this paper are that (1) AS5 audit fees are aligned with audited fraud risk while AS2 fees are not; (2) AS5 audit fees are, on average, lower than AS2 fees; and (3) AS5 audit fees are, on average, lower for lower-fraudrisk audited and higher for higher-fraud-risk audited than are AS2 fees.