Journal of Law, Finance, and Accounting > Vol 5 > Issue 1

Does Regulating Audit Pricing Enhance Audit Quality and the Timeliness of Audit Reporting? The Texas Experience

Gopal V. Krishnan, Bentley University, USA, gkrishnan@bentley.edu Paul Tanyi, University of North Carolina at Charlotte, USA, ptanyi@uncc.edu
 
Suggested Citation
Gopal V. Krishnan and Paul Tanyi (2020), "Does Regulating Audit Pricing Enhance Audit Quality and the Timeliness of Audit Reporting? The Texas Experience", Journal of Law, Finance, and Accounting: Vol. 5: No. 1, pp 1-64. http://dx.doi.org/10.1561/108.00000040

Publication Date: 20 Apr 2020
© 2020 G. V. Krishnan and P. Tanyi
 
Subjects
Auditing
 
Keywords
JEL Codes: M41, M42
Audit feesTexaslowballingmisstatementsgoing concernaudit qualityaudit lag
 

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In this article:
1. Introduction
2. Prior Research and Hypotheses Development
3. Research Design and Sample
4. Results
5. Conclusion
Appendix A: Definition of All Variables
Appendix B: Calculation of Abnormal Accruals
Appendix C: Supplementary Tables
References

Abstract

The Texas State Board of Public Accountancy has imposed a statewide ban on lowballing of audit fees. We exploit this unique opportunity to study whether audit quality can be enhanced through regulating audit pricing. We find that audit fees are significantly higher for new clients of Texas-based auditors while audit fees are lower for new clients of auditors outside of Texas. However, we do not find a difference in the actual or perceived audit quality or timeliness of audit reports between new clients of Texas-based auditors and clients in control groups. We also find that clients of Texas-based auditors are less likely to switch auditors than clients of out-of-state auditors, consistent with higher switching costs. Thus, while the statewide ban imposes additional cost on new clients of Texas-based auditors, we do not find any corresponding economic benefits. Our findings have implications for regulators, investors and academics.

DOI:10.1561/108.00000040