Economic Consequences of Auditing Standards: Evidence from Auditing Standard No. 18 Related Parties

• In Event: Audit Planning Issues

Abstract

In 2014, the PCAOB adopted a new auditing standard - AS 18 Related Parties - to improve auditors’ performance in related-party transaction (RPT) auditing. In this study, we investigate the impact of AS 18 on firms’ real RPT activities and audit fees by examining six years’ data surrounding the effective date of AS 18. Using a matched-pair difference-in-differences approach, we find significantly reduced RPT activities and increased audit fees following the adoption of AS 18. Our findings reveal that AS 18 has a greater impact on small client firms, particularly firms audited by non-Big-4 firms. In contrast, the Big-4 firms had already taken measures to improve their RPT audit procedures. We also find a more pronounced effect for firms with high ex-ante fraud risk.

Authors

• Haihao Lu, University of Waterloo

• Ole-Kristian Hope, University of Toronto - Rotman School of Management

• Songlan Peng, York University