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101. Customer-Base Concentration: Implications for Audit Pricing and Quality

Author

Krishnan, Gopal V., Patatoukas, Panos N., and Wang, Annika

Abstract

What are the implications of major customer dependency, i.e., the degree of a supplier firm's dependency on its major customers, for external auditors? While the conventional view emphasizes the negatives of major customer dependency for client business risk, we find that suppliers with more concentrated customer bases spend less on audit fees. The evidence is consistent with reduced audit effort due to efficiency gains in the audit process, especially when suppliers with more concentrated customer bases share the same auditors with their long-standing major customers. The audit fee discount we identify does not imply that audit quality declines with customer-base concentration. In fact, we find that suppliers with more concentrated customer bases are less likely to experience material restatements of previously audited financial statements. Taking the external auditors' perspective, our study provides new managerial insights on the costs and benefits of major customer relationships for supplier firms.

Published
2024
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105. Venture Capital Financing and the Informativeness of EarningsManagerial Shareholding and Compensation Structure, Investment Opportunities and Non-Audit Service Purchases: An Alternative Explanation

Author

Chen, Charles, Du, Jun, Krishnan, Gopal, and Su, Xijia

Subjects
compensation, investment opportunities, audit fees, Non-audit services, performance
Abstract

The rise of fees paid to incumbent auditors for non-audit services (NAS) relative to audit fees has been actively debated by the accounting profession, investors, and regulators. Although accounting firms are banned by the Sarbanes-Oxley Act from providing non-auditing services to their auditees, the debate is far from over. Despite the negative publicity generated by NAS purchases, why do managers continue to purchase increasing quantities of NAS? We contribute to this debate by offering an alternative explanation on determinants of NAS purchase decisions. We find that (1) the association between NAS purchases and earnings management documented in extant literature is affected by the way top managers are compensated and by managers' shareholdings, and (2) NAS purchases are positively associated with the proportion of performance-based compensation paid to the top five executives and this association is more pronounced for firms with high investment opportunities.

Published
2009

106. Accounting Conservatism in Fraud Firms: An Empirical Investigation*

Author

Jones, Keith L, Krishnan, Gopal V, Pevzner, Mikhail, and Sengupta, Partha

Subjects
Ball and Shivakumar Model, Basu Model, Fraud, Conservatism
Abstract

We examine whether Ball and Shivakumar (2006) and Basu (1997) models of conservatism identify fraud firms as anti-conservative. We show that both models do so to some extent, but Ball and Shivakumar model results are stronger. We further show that these results are driven by firms committing largest frauds as a percentage of firms' assets. Our results are important to academics who use conservatism measures in their studies, and to policy makers who seek to assess usefulness of conservatism to capital markets., http://www.ibrarian.net/navon/paper/Accounting_Conservatism_in_Fraud_Firms__An_Empiri.pdf?paperid=13326009

Published
2008
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109. Audit fees and book-tax differences

Author

Sloan School of Management, Hanlon, Michelle, Krishnan, Gopal V., Mills, Lillian F., Sloan School of Management, Hanlon, Michelle, Krishnan, Gopal V., and Mills, Lillian F.

Abstract

We investigate whether book-tax differences are associated with higher audit fees, a proxy for auditor risk assessments and auditor effort. Our evidence suggests that there is a significantly positive relation. Further, this association is larger for firms that appear to have managed earnings (i.e., have high accruals) relative to those that are tax avoiders (i.e., have low cash effective tax rates). Our evidence is consistent with large book-tax differences representing an observable proxy for earnings management that is associated with auditor decisions. Our study contributes to capital market research that examines audit fees, as well as other research that examines the usefulness of book-tax differences for market participants., Ernst & Young (Faculty Fellowship in Accounting)

Published
2012

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