Audit Pricing and Audit Quality: The Influence of Livability

• In Event: Audit Pricing

Abstract

As cities and states compete for business and human capital, the theories and concepts of livability shape public policy and investment decisions. In the accounting literature, the majority of audit fee research focuses on the relationship between client characteristics and audit fees. Economic research investigates how variations in livability across geographies affect wages, rents and property value; however, accounting research has not examined many factors associated with the auditor and client’s local environment and how these factors influence audit pricing and audit quality. Our study applies established economic and social theories to investigate how variation in livability affects audit pricing and finds that audit fees are significantly higher in lower livability regions. Investigating audit quality, we find that absolute and income increasing/decreasing discretionary accruals are associated with lower livability regions. We also find that firms in lower livability regions exhibited reduced efficiency as indicated by increased audit report lag and are more likely to issue inaccurate (Type I error) going concern opinions, indicating reduced audit quality. These findings are consistent with economic and social theory regarding livability and provide important new information to audit market participants by extending our understanding of the determinants of auditor effort, audit fees, and the related audit quality.

Authors

• Jeff L Payne, University of Kentucky

• Chong Wang, University of Kentucky

• Russell Williamson, University of Kentucky