The Effect of Divergence between Cash Flow Right and Voting Right on Audit Hour and Audit Fee per Audit Hour
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This study examines the association between ownership structure of client firms measured by the divergence between cash flow rights and voting rights, and audit hour and audit fee per audit hour. Auditors could spend more audit hours or increase the audit fees per audit hour for the risky firms which have greater divergence between cash flow right and voting right. Using 436 firm-year observations collected over 2003~2005 period from Korean stock market, we investigate this relationship. The empirical results reveal that the audit hour increases as the divergence increases. However, there is a great difference in the empirical results depending on the firm size. Although small firms show the positive association between the divergence and audit hour, large firms reveal the negative association between the two. In addition, there is no change in the hourly audit fee rate for total sample and small firm samples. In contrast, the hourly fee rate increases as divergence increases for the large firm sample. In summary, auditors increase hourly fee rate but decrease audit hour as the divergence of large firms increases. These findings are very interesting and provide new insights to regulators, academics, as well as practitioners
Abstract
This study examines the association between ownership structure of client firms measured by the divergence between cash flow rights and voting rights, and audit hour and audit fee per audit hour. Auditors could spend more audit hours or increase the audit fees per audit hour for the risky firms which have greater divergence between cash flow right and voting right. Using 436 firm-year observations collected over 2003~2005 period from Korean stock market, we investigate this relationship. The empirical results reveal that the audit hour increases as the divergence increases. However, there is a great difference in the empirical results depending on the firm size. Although small firms show the positive association between the divergence and audit hour, large firms reveal the negative association between the two. In addition, there is no change in the hourly audit fee rate for total sample and small firm samples. In contrast, the hourly fee rate increases as divergence increases for the large firm sample. In summary, auditors increase hourly fee rate but decrease audit hour as the divergence of large firms increases. These findings are very interesting and provide new insights to regulators, academics, as well as practitioners
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