Description | Variable | Definition |
Dependent variable | AF | natural log of total audit fee, which consists of fee paid to external auditors for financial statement audit of the parent company and consolidated subsidiaries. |
Variables of Interest | ||
Audit Fee Premium Model: Equations ((1) and (2)) | FeePrem | dummy variable equals to 1 if the client is audited by one of the Japanese auditors affiliated with the global Big 4 audit firms networks (Deloitte Touche Tohmatsu, E&Y Shin Nihon, KPMG AZSA, PwC Aarata, PwC Chuo Aoyama, and PwC Misuzu), and 0 otherwise. |
| ClientSeg | dummy variable equals to 1 if the median total assets of the client belong to the upper half (>50th percentile) of the industry-year sample, and 0 otherwise. |
| Big3Per | dummy variable equals to 1 if the audit took place during the Big 3 period (2006-2011), and 0 otherwise. |
Control Variables | ||
Description | Variable | Definition |
Client’s attributes―size | TA | natural log of clients’ total assets. |
Client’s attributes―size | IndPTA | ratio of the client’s total assets to total assets of companies within the industry-year. |
Client’s attributes―complexity | SUBS | natural log of number of consolidated subsidiaries (if a company has zero subsidiaries, it is re-coded as 1 before taking the natural log). |
Client’s attributes―complexity | FORN | ratio of the client’s overseas sales to net sales. |
Client’s attributes―risk | ROI | ratio of the client’s net income to total assets. |
Client’s attributes―risk | LIQ | ratio of the client’s current assets (less inventories) to current liabilities. |
Client’s attributes―risk | LEV | ratio of the client’s total liabilities to total equity. |
Client’s attributes―risk | LOSS | dummy variable equal to 1 if the client incurred a net loss in the previous fiscal year, and 0 otherwise. |
Client’s attributes―accounting standards | GAAP | dummy variable equal to 1 if the client is a SEC registrant or an IFRS adopter, and 0 otherwise. |
Auditor’s attributes | TEAM | natural log of number of CPAs, junior accountants and other staffs employed in the audit engagement (excluding engagement partners). |
Auditor’s attributes | TENR | number of years an auditee has hired its current auditor. |
Auditor’s attributes | NAF | natural log of non-audit fee paid by the client to its current year auditor. |
Auditor’s attributes | AISpec | auditor’s industry specialization variable which measures auditor market share within the industry-year (based on client number). |
Auditor’s attributes | DOMN | industry dispersion measure which measures market dominance of an auditor as it obtained more clients in the industry. |
Audit engagement’s attributes | AOP | dummy variable equal to 1 if the client received a modified audit opinion or worse, and 0 if the client received an unqualified audit opinion with additional notes or better. |
Audit engagement’s attributes | ACC | audit quality measure, measured by the absolute value of total discretionary accruals estimated using the modified Jones (1991) model. |
Audit engagement’s attributes | POW | client’s bargaining power with its auditor in the industry, calculated by the relative size of the client’s audit fee divided by the sum of the auditor’s total audit fee received from all its clients in the industry. |
Audit engagement’s attributes | DIST | competitor distance, measured by the smallest absolute audit market share (based on client number) difference between audit leader and its closest competitor within an industry. |
Audit engagement’s attributes | GFC | dummy variable equal to 1 if the audit took place in fiscal year 2008 to control for the effect of global financial crisis, and 0 otherwise. |
Audit engagement’s attributes | REG | dummy variable equal to 1 if the audit took place in fiscal year 2007 to control for the amendment of the Financial Instruments and Exchange Act (FIEA) that is effective in fiscal year 2008 (refer to Table 2.1 for more details), and 0 otherwise. |