e-journal

Overvalued equities and audit fees: a research note

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Purpose – The purpose of this research note is to examine the association between overvalued
equities and audit fees in the USA.
Design/methodology/approach – The paper employs a standard audit fee regression model
incorporating proxies for overvalued equities and controls for other known determinants of audit fees.
Three proxies for overvaluation are used in this paper. These are: a lagged price-earnings-based
overvaluation measure; a lagged price-to-book-based overvaluation measure; and finally, a lagged
abnormal-return-based overvaluation proxy measure.
Findings – Findings show that auditors charge higher audit fees for clients posing increased audit
risks because of equity overvaluation, that this relationship did not change during and after the global
financial crisis period, and is more pronounced for firms prone to aggressive earnings management.
Practical implications – This finding should assure investors about audit quality, since the
positive finding potentially implies that auditors exert extra audit effort in auditing financial
statements of firms that have been identified as overvalued. This finding should also provide some
evidence to audit regulators that the audit profession incorporates audit risk into audit pricing.
However, since no test has been conducted to identify the association between clients’ business risk
and audit effort, the positive association between equity overvaluation and audit fees should be
interpreted in light of this limitation.
Originality/value – Jensen cautions that firms with overvalued equities suffer substantial agency
costs. Although empirical research has documented managerial responses to overvaluation, there exists
scant empirical evidence on auditors’ response to the increased risk emanating from equity overvaluation.
Since external auditors perform a significant role in ensuring the credibility of financial statements, it is
important to understand whether auditors efficiently price this risk while determining audit fees.

KeywordsOvervaluation,Audit fees, Earningsmanagement, PCAOB,Accounting valuations, Earnings

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Informasi Detail

Judul Seri

Managerial Auditing Journal

No. Panggil

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Penerbit

: Emerald Group., 02686902

Deskripsi Fisik

Managerial Auditing Journal Vol. 28 No. 8, 2013 pp. 755-776

Bahasa

English

ISBN/ISSN

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Klasifikasi

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Tipe Isi

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Tipe Media

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Tipe Pembawa

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Edisi

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Subjek

AKUNTANSI

Info Detail Spesifik

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Pernyataan Tanggungjawab

Asmawati/Syahrial

Versi lain/terkait

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