Summary: Because financial reporting quality affects audit risk, which determines how auditors price engagements, we analyze audit fees to extract auditor’s professional assessment of family firms’ reporting quality. Relative to non-family firms, we find that audit fees are significantly lower for family firms, which suggests that auditors view family firms as having superior financial reporting quality (i.e. audit risk is low). Because a fee discount might also be attributable to lower litigation risk, we analyze litigation data and find no reliable difference in auditor lawsuits between family and non-family firms. Finally, we provide corroborating evidence on the financial reporting quality of family firms based on three audit risk tests. First, using a financial reporting metric for audit risk, we show that audit risk is lower for family firms. Second, we show that the fee discount is lower for family firms with high audit risk. Third, using audit report lag as a proxy for audit effort, we show that family firm auditors work less to provide the desired level of assurance. Our findings provide compelling evidence in favor of the explanation that auditors charge less from family firms because of superior reporting quality, which lowers audit risk and, therefore, the need for greater audit investments.by
New findings by Dr. Al Ghosh that are being published in the The Journal of Money, Credit, and Banking.
Synopsis: Credit rating agencies have faced renewed criticism following the recent financial crisis. Critics argue that the issuer-pay model creates significant conflicts of interest thereby leading to inflated credit ratings. Contrary to the popular expectations that nationally recognized credit rating organizations (NRSROs) inflate their ratings, we find that rating agencies are more conservative when rating foreign bonds compared to U.S. domestic firms which consistent with rating agencies being more conservative in their ratings when faced with high information asymmetry.by
New findings by Dr. Al Ghosh that are being published in the Accounting Horizons.
Synopsis: Although litigation risk is considered as a leading explanation for auditor resignations, audit and business risks might also trigger resignations. Because the three risk factors are not mutually exclusive, we examine their relevance and incremental importance using measures from the pre- and post-resignation periods. Using summary indices from the pre-resignation period, we find that all the three ex-ante risk indices are incrementally important for resignations, especially when the predecessor auditor is Big 4. Because the ex-ante risk factors are prone to measurement errors, and they are less likely to capture auditor’s proprietary information about the client, we analyze data from the post-resignation period when the auditor’s proprietary information is likely to become publicly known. We find that within a three-year period following an auditor’s resignation, clients are more likely to be: (1) involved in class-action lawsuits (ex-post litigation risk), (2) have internal control problems (ex-post audit risk), and (3) delisted from a national stock exchange (ex-post business risk). Our research demonstrates that auditors consider all three risk factors, and not just litigation risk, in resignation decisions.
View the PDF.