Determinants of audit fees and the management of corporate disclosures
Abstract: Ever since Simunic (1980), a great deal of research has examined the pricing of auditing services. The absence of proprietary audit cost data forces most researchers to use audit fee models linking theoretical concepts to observable data. In order to make audit pricing more transparent, there is a need to examine the determinants of audit fees with regard to, for example, different organizational forms, institutional settings, and governance mechanisms. Regarding corporate disclosures, most prior research has investigated various determinants, although little field-based research has focused on the actual disclosure process. By focusing on disclosure practices, it is possible to explore the role of essential actors involved in the preparation of annual reports. The overall aim of this thesis is twofold: first, to explore theoretically salient influences on audit fees by analyzing the effects of client business risk, municipal ownership, and the content of internal audit disclosures, and second, to improve our understanding of how companies manage their corporate disclosures.This thesis consists of a compilation of four papers and a comprehensive summary. The specific aim of each paper and current knowledge of the phenomenon under study have formed the basis for the methodological choices (interviews, content analysis, and regression analysis). The empirical material consists mainly of publicly available data from annual reports and of interviews with managers of listed companies, audit firms, and communication agencies. Given the twofolded aim of this thesis, evidence is provided that: (i) the determinants of audit fee cutting and relative audit fee pressure are considerably different, especially with regard to different client business risk factors; (ii) municipal companies are paying significantly lower audit fees than equivalent private companies; (iii) there is a considerable heterogeneity in internal auditing disclosures, and companies with more transparent firm-specific disclosures related to internal auditing pay lower audit fees than do those not providing such disclosures; and (iv) the management of corporate disclosure within the annual report is heavily influenced by the knowledge, skills, and personal characteristics of the project manager.
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