Information Contents of Disclosing Audit Fees: Financial Reporting Risk and Auditor Litigation Risk
Date Issued
2011
Date
2011
Author(s)
Huang, Shih-Hui
Abstract
Financial supervisory commission（FSC） of Taiwan has required public companies to disclose auditor fees when certain conditions are fulfilled. The main reason from FSC is to make auditor fees publicly available, helping investors to understand the compositions of auditor fees and measuring the auditor independence by the proportion of non-audit fees. Prior researches and auditing theories find that auditor fees are determined mainly by risks of companies. This study targets to discuss whether audit fees disclosure provides information which is about financial reporting risk and auditor litigation risk.
This paper is separated into two parts and based on 106 valid questionnaires mainly from students of accounting majored. Part I discusses whether audit fees is a sign of financial reporting risk or not. This study finds that financial reporting risk becomes higher as audit fees increasing. When considering the effect of financial reporting risk from auditor opinion, investors tend to use opinion as a signal of companies’ financial reporting risk. But when audit fees increase greatly (50% in this study), investors would take the impact of audit fees into consideration. Consequently, both audit fees and opinion are signals of financial reporting risk and the effect of audit fees would become more significant when the variation of audit fees increases greatly.
Part II discusses whether audit fees disclosure influences investors’ consideration of auditor litigation risk and the possibility to sue auditors when suffering great investment loss. The results indicate that the disclosure would increase auditors’ litigation loss regardless of the types of opinion rendered by auditors. These are possibly because investors fully understand that litigation risk is a primary determinant of audit fees; therefore, they would take auditors’ litigation payment for granted. In addition, the results also indicate that auditor litigation loss is expected to be the highest when unqualified opinion is rendered, even when participants are accounting-majored students who understand that auditors only make reasonable assurance of financial statements. These results indicate that modified reports provide some defense against auditor litigations, consistent with prior researches.
Subjects
Audit fees
Disclosure
Financial reporting risk
Litigation Risk
Opinion
Type
thesis
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