Profit sharing in an auditing oligopoly

This paper examines how partners in an audit firm can use profit-sharing rules to induce optimal partner behavior from the firm's point of view, taking into account the strategic competition of firms in an auditing oligopoly. We use a linear contracting framework to investigate the effects of profit-sharing rules on individual partners' various decisions, including their pricing strategies and effort choices. We assume that efficient audits of different types of clients require different effort profiles with respect to degree of partner cooperation. For example, the audit of a complex company requires different amounts of partner collaboration than does the audit of a simple company. Moreover, since it is too costly for an enforcement party, such as the head office of an audit firm or a court, to verify each client's type in order to resolve compensation disputes among the firm's partners, it is reasonable to assume that client type cannot be contracted upon for partner compensation purposes. Given this assumption, we derive conditions under which there exists an equilibrium in which audit firms strategically choose different profit-sharing rules to specialize in different types of clients, thereby earning positive economic profits. Our analysis provides insights into the strategic competition among the big audit firms, and helps to explain the observed differences in the compensation plans of these firms and in the nature of their client portfolios

Profit sharing in an auditing oligopoly

This paper examines how partners in an audit firm can use profit-sharing rules to induce optimal partner behavior from the firm's point of view, taking into account the strategic competition of firms in an auditing oligopoly. We use a linear contracting framework to investigate the effects of profit-sharing rules on individual partners' various decisions, including their pricing strategies and effort choices. We assume that efficient audits of different types of clients require different effort profiles with respect to degree of partner cooperation. For example, the audit of a complex company requires different amounts of partner collaboration than does the audit of a simple company. Moreover, since it is too costly for an enforcement party, such as the head office of an audit firm or a court, to verify each client's type in order to resolve compensation disputes among the firm's partners, it is reasonable to assume that client type cannot be contracted upon for partner compensation purposes. Given this assumption, we derive conditions under which there exists an equilibrium in which audit firms strategically choose different profit-sharing rules to specialize in different types of clients, thereby earning positive economic profits. Our analysis provides insights into the strategic competition among the big audit firms, and helps to explain the observed differences in the compensation plans of these firms and in the nature of their client portfolios

Audit pricing, legal liability regimes, and big 4 premiums: Theory and cross-country evidence

In this paper, we first develop a model in which national legal environments play a crucial role in determining auditor effort and audit fees. Our model predicts that (a) audit fees increase monotonically with the strength or strictness of a country's legal liability regime; (b) given a legal liability regime, Big 4 auditors charge higher audit fees than non-Big 4 auditors; and (c) the Big 4 fee premium is lower in countries with strong legal regimes than in countries with weaker legal regimes. We then test the model's predictions using a large sample of audit clients from 15 countries with different legal regimes where audit fee data are publicly available. The results of our cross-country regressions are consistent with the above three predictions and are robust to a variety of sensitivity checks. In addition, our hypotheses are all consistent with the pattern of auditor effort (measured by labor hours) observed in proprietary data sets from four countries whose legal regimes vary. Finally, we find that the effects of a legal regime on audit pricing and the Big 4 premium are more salient for the small client segment than for the large client segment. Overall, our results indicate that a country's legal environment plays an important role in determining auditor effort, audit fees, and the fee spread between Big 4 and non-Big 4 auditors. © CAAA.link_to_subscribed_fulltex

The 'Independence' of Expert Opinions in Corporate Takeovers: Agreeing With Directors' Recommendations

The impact of non-audit services on auditor independence has been the recent focus of regulators worldwide. Using expert reports provided in Australian takeovers, this study investigates a context where the audit independence issue is reversed. As approximately a quarter of expert reports are prepared by the target firm's auditor, concerns have been expressed over the independence of the opinion provided. This paper finds that, relative to other experts, there is no difference in the rate at which experts with other business dealings with the target, including the target's auditor, provide an opinion that agrees with that of directors. However, the capital market reaction around the release of the report indicates that reports produced by auditors are viewed as non-independent. Copyright Blackwell Publishers Ltd, 2005.

Study of mechanical characteristics of the knee extensor and flexor musculature of volleyball players

The aim of the present study was to analyse differences in muscle response and mechanical characteristics of the vastus medialis, rectus femoris, vastus lateralis, and biceps femoris in elite volleyball players of both sexes using tensiomyography. To this end, 47 players of nine nationalities playing for teams in the men's and women's Spanish Superleagues were assessed. The sample comprised 22 women (age 24.6±4.3 years; weight 72.14±10.06 kg; height 178.40±8.50 cm) and 25 men (age 25.0±4.3 years; weight 88.76±9.07 kg; height 194.71±7.84 cm). Tensiomyography was used to assess muscular response and muscular mechanical characteristics. For this purpose, the following variables were analysed: maximum radial displacement of muscle belly and normalized response speed. The findings show, both in men and women, a higher normalized response speed score in the vastus lateralis and vastus medialis compared with the rectus femoris and biceps femoris. A marked lateral symmetry of maximum radial displacement of the muscle belly was also observed in the musculature of the lower limbs, with no statistically significant differences being detected in either men or women. There were, however, clear differences in terms of normalized response speed between male and female volleyball players: women displayed a more pronounced difference in the normalized response speed of the musculature responsible for extension (vastus medialis, rectus femoris, and vastus lateralis) and flexion (biceps femoris) of the knee joint than men. Moreover, tensiomyography proved to be a highly sensitive tool for detecting such changes.4073990,6491,146Q2Q3SCI

‘Post-Sarbanes–Oxley changes in the composition of boards: Have they impacted spending for audit services?’

The issue of the importance of the independent auditor\u27s audit to the integrity of corporate financial statements has been a staple of the corporate governance and financial market functioning literature since the Securities Act of 1933 and the Securities Exchange Act of 1934. These acts required auditor attestation of corporate financial statements. Subsequent to the passage of the auditor attestation requirement, occasional financial reporting scandals erupted. None of these had the impact of the Enron/Worldcom scandals of 2001 and 2002. These scandals illustrated the ability of corporate management to game the corporation\u27s financial statements, despite - or perhaps with the tacit concurrence of - the boards of directors of affected firms. Accordingly, much of the 2002 legal response to corporate financial reporting scandals came in the form of new corporate governance requirements on all publicly held firms. The impact of these requirements, however, differed between firms. Some firms had introduced use of independent directors and fully independent committees before their being made compulsory in 2002. One instrument of control over corporate management that the board of directors possesses, in actuality or potentially, is control of the extent of the work of the independent auditors. The auditors work can result in the board learning of accounting-related corporate mis-and malfeasance. Accordingly, the extent of the auditor\u27s work is important and the obvious surrogate for this effort is the audit fee. This investigation examines the effect on spending by listed firms for audit services attributable to the Sarbanes-Oxley Act of 2002 and related stock exchange regulations. It uses the difference-in-differences methodology to overcome endogeneity concerns. The results reveal that firms that were compelled by law to change their boards increased their spending on financial statement-related audit services more than did firms that had pre-adopted the Sarbanes-Oxley corporate board composition requirements