Do Relatively More Efficient Firms Demand Additional Audit Effort (Hours)?

Mali, Dafydd; Lim, Hyoung-Joo

Abstract

We examine whether firms with higher relative efficiency (operational performance) require additional audit effort (hours) to signal audit quality to demonstrate that their financial reporting systems are robust. Therefore, we use a Korean sample of publicly listed firms because of the Korean audit hour policy which mandates that audit hour information be made available for market participants. We find that client firms with higher relative efficiency have higher audit hours, suggesting that management has an incentive to demand additional audit hours for signalling purposes, and that shareholders, amongst other stakeholders, have an incentive to demand external monitoring to reduce potential agency problems. The results show that relative efficiency is a unique measure of firm performance that can provide insights into a client firm's business and audit risk. We also find evidence suggesting that audit firms do not subject clients to a fee (fee per hour) premium based on relative efficiency, supporting our finding that client firms require audit effort for signalling purposes. Thus, our results have important implications for policymakers about audit effort demand.

Citation

Mali, D., & Lim, H.-J. (2021). Do Relatively More Efficient Firms Demand Additional Audit Effort (Hours)?. Australian Accounting Review, 31(2), 108-127. https://doi.org/10.1111/auar.12327

• Journal Article Type: Article
• Acceptance Date: Sep 27, 2020
• Online Publication Date: Nov 2, 2020
• Publication Date: 2021-06
• Deposit Date: Nov 4, 2021
• Publicly Available Date: Nov 5, 2021
• Journal: Australian Accounting Review
• Print ISSN: 1035-6908
• Electronic ISSN: 1835-2561
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 31
• Issue: 2
• Pages: 108-127
• DOI: https://doi.org/10.1111/auar.12327
• Keywords: Accounting
• Public URL: https://nottingham-repository.worktribe.com/output/6611020
• Publisher URL: https://onlinelibrary.wiley.com/doi/10.1111/auar.12327