What is it about?
Based on the credence goods theory, we examine whether the effect of audits on the cost of debt is affected by the type of audit (voluntary or mandatory) and the audit fees, as well as whether there is a combined effect of voluntary audits and audit fees, so that the effect of voluntary audits on the cost of debt is affected by audit fees.
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Why is it important?
Results suggest that, although the type of audit and the audit fees do not have a direct effect on the credibility of audits, the combination of both factors has relevance for lenders, so that higher audit fees in the voluntary setting are positively valued by them. The study contributes to the literature on auditing by showing that voluntary audits are relevant for capital providers as long as audits are perceived of quality.
Perspectives
The paper presents several opportunities for future research. First, since we found that there is an association between the cost of debt and audit fees when companies are voluntarily audited, it would be appropriate to examine whether audit fees have also an effect on the association between the auditor type (Big 4, Middle-Tier auditors and small auditors) and the cost of debt of audited companies. Furthermore, we should examine whether audit quality is affected by audit fees, and the combined effect of voluntary audits and audit fees on audit quality. On the other hand, results about the interaction between voluntary audits and audit fees should encourage to examine the interaction of other audit characteristics that may affect both audit quality and the credibility of auditors and financial information. Finally, given that managers are in charge of the preparation of the financial statements of the companies, and have to look out for the reputation of the company, future research should examine the managerial implications derived from the audit fees paid by the auditee.
Dr Juan L. Gandía
University of Valencia
Read the Original
This page is a summary of: Audit fees and cost of debt: differences in the credibility of voluntary and mandatory audits, Economic Research-Ekonomska Istraživanja, October 2019, Taylor & Francis,
DOI: 10.1080/1331677x.2019.1678501.
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