The Relationship Between An Auditing Firm's Characteristics And The Incidence Rate Of Its Clients Subject To AAERs

Abstract

This paper examines the relationship between an auditors characteristics and the incidence rate of its client subject to the Accounting and Auditing Enforcement Release. Using the sample of AAERs from 2002 to 2006, we find that when a firm is audited from a large accounting firm, there is a significantly less incidence rate subject to AAERs. Also, we find that the audit time of AAERs firms is significantly less than that of non-AAERs firms. Because AAER is related with audit quality, it implies that AAER depends on audit time and audit firm size, and that a firm is affected by the incidence rate of subjects toward AAERs. However, there is no difference between the audit fee of AAERs firms audit fee and that of non-AAERs firms. Although audit time leads to a high audit fee, audit firms are very competitive and therefore, there are some limitations with receiving a high audit fee according to audit time. Therefore, the audit fee is significantly affected by the incidence rate of subjects toward AAERs. Additionally, we also examine the effectiveness of AAERs and the difference of audit efforts depending on the cause of AAERs and the degree of penalties imposed by FSS. Overall, the results suggest that depending on the auditors characteristics, such as the size of accounting firm, audit time, and audit fee, a company is affected by the incidence rate subject to AAERs.