Auditor Reports, Audit Fees, and CEO Compensation

Transcription

1 Inernaional Journal of Economics and Finance; Vol. 6, No. 9; 2014 ISSN X E-ISSN Published by Canadian Cener of Science and Educaion Audior Repors, Audi Fees, and CEO Compensaion Yinghong Zhang 1 & Chunwei Xian 2 1 Lally School of Managemen, Rensselaer Polyechnic Insiue, Troy, New York, USA 2 College of Business and Managemen, Norheasern Illinois Universiy, Chicago, Illinois, USA Correspondence: Yinghong Zhang, Lally School of Managemen, Rensselaer Polyechnic Insiue, Troy, New York, NY 12180, USA. Tel: zhangy22@rpi.edu Received: May 27, 2014 Acceped: June 23, 2014 Online Published: Augus 25, 2014 doi: /ijef.v6n9p1 URL: hp://dx.doi.org/ /ijef.v6n9p1 Absrac We run he regressions of CEO cash and oal compensaion on changes in audi opinions and changes in audi or oal fees. Our findings show ha he incidence of non-sandard opinions reduces cash or oal compensaion. Then afer he issuance of going concern opinions, CEOs receive more curren incenive compensaion relaive o oal compensaion. Finally, here is a posiive correlaion beween changes in cash or oal compensaion and changes in audi or oal fees. Our resuls show ha he audi opinion is one deerminan of CEO compensaion while audiors charge higher audi or oal fees o compensae for he high liigaion risk associaed wih increases in CEO compensaion. Keywords: CEO compensaion, cash compensaion, oal compensaion, audi opinions, modified opinions, going-concern opinions, audi fees, oal fees 1. Inroducion Audiing is a profession ha should incorporae enough audi risk and ensure effecive audi scope. According o Wallace (1987), audiors play hree roles monioring role, signaling role and insuring role. Monioring role means ha audiors wach as public wachdog o monior managers behaviors o align wih shareholders benefis. To be specific, i means ha audiors should preven managers from engaging in earning managemen aciviies. Signaling role means ha audiors should provide imely and useful informaion o he public. Insuring role means ha audiors should comply wih legal and regulaory requiremens. In some circumsances, audiors do no hink ha he monioring role is heir mos imporan role. Previous sudies (e.g., DeFond & Subramanyam, 1998) find ha audiors preference for conservaive accouning choices is no based on he desire o conrol earnings managemen bu he desire o avoid fuure liigaion. The choice of accouning reamens and hus he exen of earnings managemen differ across audiors based on facors such as individual assessmen of clien risk and relaive risk propensiies. Our sudy uilizes audi opinions and audi fees as proxies for he liigaion risk of audiors cliens. We invesigae he impac of audi opinions and audi fees on CEO compensaion. To be specific, we examine changes in CEO compensaion based on differen audi opinions and audi or oal fees. Our sample period is for he invesigaion of impacs of audi opinions ha are classified by sandard and nonsandard opinions. Then we furher resric our sample period o when we examine impacs of going concern opinions and of audi or oal fees. Our sample period (including years prior o he effeciveness of Sarbanes-Oxley Ac and he ransiion year for he compliance of his ac) helps me o invesigae he impacs of audi opinions and audi fees on CEO compensaion prior o he complee implemenaion of he Sarbanes-Oxley Ac (SOX). We find ha he exisence of modified opinions is associaed wih lower CEO cash compensaion and oal compensaion. The explanaion is ha modified opinions are he indicaors of poor firm performance or financial disress. The porion of CEO compensaion decreased by he unsaisfied firm performance or financial condiion dominaes he porion of CEO compensaion increased by earnings managemen. Our analysis of going concern opinions implies ha afer he issuance of going concern opinions, CEOs are offered more curren incenive compensaion compared o oal compensaion. This indicaes ha CEOs prefer shor-erm compensaion o long-erm compensaion afer he issuance of going concern opinions ha conain informaion abou poenial bankrupcy. 1

2 Inernaional Journal of Economics and Finance Vol. 6, No. 9; 2014 Finally, we show ha changes in cash or oal compensaion are he increasing funcion of changes in audi or oal fees. The economic meaning is ha discreionary accruals, one proxy for audi risk, are posiively relaed o audi or oal fees. Audiors would raher charge higher audi or oal fees o pay for higher audi risk han ask managemen o reduce he level of discreionary accruals. Generally speaking, our resuls show some evidence ha audiors do no funcion very well as he monioring role because audiors do no modify managerial discreion of increasing compensaion hrough accouning choices or discreionary accruals. Audiors even claim for addiional audi or oal fees o allow managers o manipulae earnings. Furhermore, modified opinions and going concern opinions are able o predic he level and srucure of CEO compensaion. Our sudy is useful o compare audiors' behaviors as he monioring role. Secion 301 of SOX allows he audi commiee (insead of managers) o have he auhoriy o hire he audior. Therefore, afer he enacmen of SOX, audiors should srenghen heir monioring role o be more responsible o shareholders. This sudy also adds o he compensaion lieraure by showing ha audi opinions and audi fees are addiional deerminans of CEO compensaion. Finally our sudy conribues o he audiing lieraure by showing ha CEO compensaion can affec audiors judgmen abou audi opinions and audi fees. 2. Lieraure 2.1 Audior Opinions Previous sudies focus on designing models o predic audi opinions. Dopuch, Holhausen and Lefwich (1987) develop he benchmark model o predic audi opinions. They find ha companies receiving qualified repors are more likely o have curren year loss, larger amouns of invenories, higher leverage, smaller marke adjused-reurns and bea, and larger sock reurn volailiy. Muchler (1985) and Muchler, Hopwood and McKeown (1997) indicae ha he exisence of going concern opinions is posiively correlaed wih probabiliy of bankrupcy, prior years of going concern opinions, deb covenan defaul, negaive news from he media, days beween saemen dae and audi-repor dae, and negaively correlaed wih firm size, days beween audi-repor dae and bankrupcy filing dae. Some sudies address he influence of accouning accruals on audi opinions. Francis and Krishnan (1999) documen ha audiors are more likely o issue modified opinions (Noe 1) of asse realizaion uncerainies or going concern problems o companies having high accruals. Bradshaw, Richardson and Sloan (2001), o he opposie, show ha high levels of working capial accruals lead o a greaer incidence of clean opinions (Noe 2). One relaed sudy is done by Lennox (1998). Using a sample of U.K. companies, he finds ha modified repors are negaively relaed o compensaion of op direcors. He also indicaes ha audi repors comprise of larger economic effecs on execuive compensaion han accouning and marke variables. 2.2 Audi Fees Similar o he research on audi opinions, radiional lieraure on audi fees (Noe 3) aims a idenifying he model of pricing audi services. Simunic (1980) and Palmrose (1986) find ha audi fees grow up wih increases in firm size, business complexiy (Noe 4), receivables and invenories, incidence of losses, incidence of modified opinions, number of repors provided by he audior, and big eigh audiors. Audi fees decline if he clien paricipaes during he audi. Recen sudies pay aenion o non-audi fees due o he regulaory concern ha non-audi services migh impair audior independence. The resuls are mixed. Using earnings managemen as he proxy for audior independence, Frankel, Johnson and Nelson (2002) show ha non-audi fees are posiively relaed o he magniude of discreionary accruals while Ashbaugh, LaFond and Mayhew (2003) and Chung and Kallapur (2003) sugges ha non-audi services do no violae audior independence. DeFond, Raghunandan and Subramanyam (2002) also imply ha non-audi fees do no relae o he inclinaion o issue going concern opinions, anoher proxy for audior independence. Two useful sudies are hose of Gul, Chen and Tsui (2003) and Chen, Krishnan and Su (2002). Based on Ausralian firms, Gul, Chen and Tsui (2003) show ha discreionary accruals are posiively associaed wih audi fees. Chen, Krishnan and Su (2002) documen a posiive relaionship beween non-audi fees and he proporion of performance-based compensaion paid o op five execuives. 2

3 Inernaional Journal of Economics and Finance Vol. 6, No. 9; Hypohesis 3.1 The Associaion of Compensaion and Audi Opinions The audior-clien negoiaion heory suggess ha modified opinions (qualified, adverse, or unqualified opinions wih he explanaory paragraph) resul from he failure of he audior-clien negoiaion. The clien refuses o accep any revision proposed by he audior (Anle & Nalebuff 1991; Gibbins, Salerio, & Webb, 2001). On one hand, audiors usually issue modified opinions o companies ha are financially disressed, repor losses or perform quesionable accouning applicaions (Dopuch e al., 1987; Muchler, 1985; Muchler e al., 1997). Therefore, for companies wih modified opinions, compensaion should be lower due o he poor economic performance. The sudy of Lennox (1998) is consisen wih his conjecure. On he oher hand, accrual levels are higher in firms subjec o SEC enforcemen acions for GAAP violaions (Bradshaw e al., 2001). Francis and Krishnan (1999) show ha audiors are more likely o issue modified opinions o firms wih larger magniudes of accruals, especially income-increasing accruals. Neverheless, Bradshaw e al. (2001) imply ha firms wih high levels of accruals are associaed wih he prevalence of clean opinions, hough he associaion becomes weaker for subsequen audi opinions. Due o he diverse findings of previous sudies, we predic no direcion abou he compensaion-opinion relaionship and our hypohesis is: H1: Changes in compensaion is no associaed wih he incidence of modified audi opinions. We specifically focus on going concern opinions. Companies having going concern problems end o violae deb covenans or go o bankrupcy (Muchler, 1985; Muchler e al., 1997). Since companies face he probabiliy of liquidaion in he shor run, managemen is more likely o earn shor-erm compensaion insead of long-erm compensaion. Our furher hypohesis abou going concern opinions is: H1a: The raio of curren compensaion o oal compensaion is posiively associaed wih he incidence of going concern opinions. 3.2 The Associaion of Compensaion and Audi / Toal Fees The impac of audi fees on compensaion is in wo-fold. On one hand, he invesigaion of discreionary accruals needs subjecive judgmens. This consumes more effors of audiors and requires higher audi fees (Gul e al., 2003). In addiion, he level of discreionary accruals is posiively correlaed wih he probabiliy of accouning missaemens. Thus high-accrual firms are relaed o high inheren audi risk (Francis & Krishnan 1999). Audiors compensae high audi risks for high audi fees. Since managers use discreionary accruals o oversae earnings and hus increase compensaion, we expec a posiive relaionship beween compensaion and audi fees. On he oher hand, he level of audi fees is ied o audi brand names because big five accouning firms charge audis fee premiums (Simunic, 1980; Palmrose,1986). Since big five audiors are more likely o resric he level of discreionary accruals (Francis e al., 1999; Becker, DeFond, Jiambalvo, & Subramanyam, 1998; Kim, Chung, & Firh, 2003). Therefore, when audi fees are higher, compensaion is lower due o he failure for managemen o opporunisically increase earnings. Toal fees affec changes in compensaion in he same way as audi fees. Audi-relaed fees are also spen for he aesaion and assurance services. Non-audi fees vary in he same direcion as audi fees due o he knowledge spillover effec (Simunic, 1980). Consequenly, we make no predicion abou he associaion of compensaion wih audi fees (oal fees) and our hypohesis regarding audi fees (oal fees) is: H2: There is no relaion beween changes in compensaion and changes in audi fees (oal fees). 4. Research Design I esablish he equaion of compensaion based on audi informaion afer conrolling economic condiion of he company, indusries and years. Thus he funcion abou compensaion is he following: Compensaion variables = f (audior change variables, economic variables, indusry dummies, year dummies) There are wo measures of compensaion variables: cash compensaion (CASHCOMP) and oal compensaion (TOTALCOMP). Toal compensaion is overall compensaion managemen has earned while cash compensaion capures he curren componen of oal compensaion. According o Core e al. (1999), economic variables include naural log of sales (SALES), book o marke raio (BM), reurn on asses (ROA), one-year sock reurns (TRS1YR), sandard deviaion of ROA (SROA) and sandard deviaion of one-year sock reurns (STRS1YR). SALES is he proxy for firm size and complexiy. BM represens he invesmen opporuniy se. ROA and TRS1YR measure he firm performance. SROA and 3

4 Inernaional Journal of Economics and Finance Vol. 6, No. 9; 2014 STRS1YR conrol for firm risk. The following equaion is adoped o check H1 (Noe 5). We use he dummy variable MOD o invesigae he relaionship beween audi opinions and CEO compensaion. MOD equals one for modified opinions, i.e. qualified opinions, adverse opinions or unqualified opinions wih he explanaory paragraph. CASHCOMP ortotalcomp = α + α MOD + α TRS1 YR + α SROA + α STRS1YR (1) α SALES α BM + α ROA α j Indusrydummies j + α kyeardummies k + To examine H1a, we use a new dependen variable o replace CASHCOMP or TOTALCOMP. The dependen variable is MIX, he raio of curren incenive compensaion o oal compensaion (Noe 6). We also change MOD ino GOCO (he indicaor variable coding one for going concern opinions). The model relaing o H1a is: MIX = α + α GOCO + α SROA α SALES + α STRS1YR α Yeardummies k 7 2 k + ε + α BM α ROA α Indusrydummies j 4 4 ε + α TRS1YR Finally, o examine he associaion of CEO compensaion wih audi / oal fees (H2), we use a differen research approach. Firs, we regress CASHCOMP / TOTALCOMP on all variables excep dummy variables for audior changes or audi opinions (Noe 7). Second, we esablish new equaions whose dependen variables are he wo residuals R1 (residual from he CASHCOMP regression) and R2 (residual from he TOTALCOMP regression) and whose independen variables are DCHAUDFEE / DCHTOTFEE (changes in audi / oal fees, deflaed by oal asses), CHPMDA (changes in performance-mached discreionary accruals (Noe 8), deflaed by oal asses), and CH (dummy variable for audior changes). The model for examining H2 is specified as follows: 5. Sample R1 orr2 = α0 + α1dchaudfee ordchtotfee + α2chpmda + α3ch 1 + α jindusrydummies j + αkyeardummies k + We firs obain all compensaion daa from he ExecuComp during he sample period of (Noe 9). We focus on CEO compensaion because CEOs have he auhoriy o manipulae earnings and can significanly affec firm performance (Gaver & Gaver, 1998). We hen obain financial informaion, sock reurns and audi opinions from he Compusa. Finally, we collec informaion abou going-concern opinions and audi fees from he Audi Analyics. The regressions abou Equaion 2 and 3 are only for he sample period of because Audi Analyics only has he daa from 2000 o ε j 5 (2) (3) Table 1. Sample selecion Panel A. Selecion Crieria No of observaions Panel A: Audi Opinions Obs of CEO oal/cash compensaion and he mix raio Less: Obs wihou info. on audi opinions 1438 Obs wihou he financial and sock price daa 4426 Toal Observaions: Obs available for he regressions on equaion From Toal Observaions Less: Obs wihou info. on going concern opinions 8860 Obs available for he regression on equaion Panel B. Audi / oal fess Obs of residuals 7356 Less: Obs wihou daa of performance discreionary accruals 2914 Obs wihou info. on audior changes 0 Obs wihou info. on audi / oal fees 1438 Obs available for he regressions on equaion

5 Inernaional Journal of Economics and Finance Vol. 6, No. 9; 2014 Table 1 indicaes he sample selecion (Panel A and B are for he selecions of audi opinions and audi / oal fees respecively). In Panel A, beginning wih he 18,872 observaions of compensaion daa, we delee 1,438 observaions lack of audi opinion daa and 4,426 observaions lack of financial and sock marke daa o run he regression on nonsandard opinions (Equaion 1). Then we furher eliminae 8,860 observaions lack of daa of going concern opinions o examine he relaion beween he mix raio and going concern opinions (Equaion 2). In Panel B, here are 7,356 observaions of residuals from he regressions of cash / oal compensaion on financial and marke variables. Then we exclude 2,914 observaions of missing discreionary accrual daa and 1,438 observaions of missing fee daa o come up wih 3,004 observaions o invesigae he impac of audi / oal fees (Equaion 3). 6. Descripive Saisics 6.1 Frequency Analysis Table 2. Frequency of audi opinions Panel A. Sample period = Frequency Sandard Opinions Non-Sandard Opinions Toal Panel B. Sample period = Toal Going Concern Opinions Noe. Non-sandard Opinions: Qualified opinion, adverse opinion or unqualified opinion wih he explanaory paragraph. Table 2 shows variaions of audi opinions across he sample years. Panel A examines sandard / non-sandard opinions during In general, number of sandard opinions (7,480) is more han number of non-sandard opinions (4,414). However, in 1993, 1994, 2002, and 2003, number of sandard opinions is fewer han number of non-sandard opinions probably because audiors are more conservaive during hese years. Relaive o oher years, during observaions of sandard opinions have he highes frequencies while observaions of non-sandard opinions have he lowes frequencies. Panel B provides frequency of going concern opinions during Number of going concern opinions goes up from 0 in 2000 o 13 in 2001 and 14 in 2004, hen goes down o 8 in 2003 and 1 in Table 3. Mean of audi fees and oal fees (sample period = ) Audi Fees Toal Fees Obs 2000 $1,493,419 $7,387, $1,346,303 $4,534, $1,475,713 $3,469, $1,887,621 $3,358, $3,101,333 $4,555, Toal $1,891,254 $3,846,

6 Inernaional Journal of Economics and Finance Vol. 6, No. 9; 2014 Table 3 presens mean audi fees / oal fees by years during The mean audi fees and mean oal fees for he oal sample are abou $1.9 million and $3.8 million respecively. There are a few observaions in 2000 (7) compared o oher years (558 in 2001, 910 in 2002, 958 in 2003, 571 in 2004). Mean audi fees slighly decrease from 2000 o 2001 and hen consisenly increase from 2001 o Mean audi fees grow up by abou $1.2 million from 2003 o 2004 due o he inernal conrol requiremens by he Sarbanes-Oxley Ac (Noe 10). Mean oal fees consisenly decrease during and hen increase from 2003 o 2004 by almos he same amoun as changes in mean audi fees. 6.2 Descripive Saisics Table 4. Descripive saisics Variable Obs Mean Sd. Dev. 25% Median 75% CASHCOMP TOTALCOMP MIX R R MOD GOCO DCHAUDFEE DCHTOTFEE SALES BM ROA TRS1YR SROA STRS1YR CHPMDA CH Table 4 provides descripive saisics for variables in Equaion 1 3. For equaion 1 and 2, abou one-hird of observaions are for nonsandard opinions during (mean MOD = 0.339) and almos one percen of observaions are associaed wih going concern opinions during (mean GOCO = 0.009). Also during , more han half of oal compensaion is curren incenive compensaion (MIX = 0.644). For Equaion 3, variables oher han financial and marke variables can only explain a very small percenage of variaions of CEO compensaion (mean R1 = 0.000; mean R2 = ). Furhermore, afer deflaed by oal asses, audi fees and oal fees almos remain he same across years (mean DCHAUDFEE = ; mean DCHTOTFEE = ). Finally, in general, changes in performance-mached discreionary accruals occupies abou 13% of oal asses (mean CHPMDA = 0.013). 7. Empirical Findings 7.1 Audi Opinions Table 5. OLS regressions for audi opinions Panel A. Sample period = (Equaion 1) Dependen Variables = Log (Cash Compensaion) Dependen Variables = Log (Toal Compensaion) Coeff. -sa Coeff. -sa Inercep *** *** MOD * ** SALES *** *** BM *** ROA *** TRS1YR *** *** SROA *** 6

7 Inernaional Journal of Economics and Finance Vol. 6, No. 9; 2014 STRS1YR *** *** Obs Adj. R % 53.13% Panel B. Sample period = (Equaion 2) Dependen Variables = MIX Coefficien T-saisics Inercep *** GOCO * SALES *** BM * ROA *** TRS1YR SROA *** STRS1YR *** Obs 3859 Adj. R % Noe. ***, **, * Coefficien is significan a he one percen level, he five percen level, he en percen level respecively (one-ailed where signs are prediced, wo-ailed oherwise). Table 5 demonsraes regression resuls of Equaion 1 (Panel A) and Equaion 2 (Panel B). In Panel A, only SALES, TRS1YR and STRS1YR are significan in he cash compensaion regression while all financial and sock marke variables are significan in he oal compensaion regression. Coefficien on MOD is significanly negaive in boh he cash and oal compensaion regressions (Cash compensaion regression: coefficien = ; -saisics = -1.56; p-value < 0.1. Toal compensaion regression: coefficien = ; -saisics = -2.47; p-value < 0.05). This rejecs H1 and implies ha exisence of modified opinions is associaed wih less cash / oal compensaion. In paricular, afer receiving modified opinions, compared o prior cash and oal compensaion, cash compensaion and oal compensaion shrink o approximaely 98% (exp(-0.017)) and 96% (exp(-0.038)) respecively. The economic implicaion is ha non-sandard opinions are he indicaor of poor firm performance, which cus off CEO compensaion. In Panel B, all financial and sock marke variables have he explanaory power excep TRS1YR. The negaive coefficien on STRS1YR indicaes ha he higher he firm risk, he more likely ha a CEO receives curren incenive compensaion o offse he risk. The variable of ineres is GOCO. Consisen wih H1a, coefficien on GOCO has he significanly negaive sign. This indicaes ha a CEO is inclined o receive curren incenive compensaion (especially bonus) relaive o long-erm compensaion when he company is likely o go o bankrupcy in he near fuure. 7.2 Audi Fees / Toal Fees Table 6. OLS regressions for audi / oal fees (Sample Period = ) Panel A. Dependen variables = R1 (Equaion 3) R1 R1 Coeff. -sa Coeff. -sa Inercep DCHAUDFEE *** DCHTOTFEE *** CHPMDA CH Obs Adj. R % 1.29% 7

8 Inernaional Journal of Economics and Finance Vol. 6, No. 9; 2014 Panel B. Dependen variables = R2 (equaion 3) R2 R2 Coeff. -sa Coeff. -sa Inercep DCHAUDFEE ** DCHTOTFEE *** CHPMDA ** ** CH Obs Adj. R % -0.19% Noe. ***, **, * Coefficien is significan a he one percen level, he five percen level, he en percen level respecively (one-ailed where signs are prediced, wo-ailed oherwise). Table 6 shows regression resuls of Equaion 3. Panel A focuses on he residual from cash compensaion. Each coefficien on DCHAUDFEE (0.015, -saisic = 2.97, p-value < 0.01) and DCHTOTFEE (0.013, -saisic = p-value < 0.01) is significan and posiive. Thus here is a posiive relaionship beween changes in audi / oal fees and variaions of cash compensaion afer conrolling financial and marke impacs. This is consisen wih he noion ha audiors charge higher audi / oal fees a he percepion of higher firm risk, which in urn is posiively relaed o discreionary accruals. Hence H2 is no rue. The wo conrol variables CHPMDA and CH do no have he significan coefficien. In Panel B, he dependen variable is he residual from oal compensaion. Again, boh DCHAUDFEE (0.079, -saisic = 2.12, p-value < 0.05) and DCHTOTFEE (0.076, -saisic = p-value < 0.01) have he significanly posiive coefficiens. This also rejecs H2. Furhermore, CHPMDA is significan and negaive even hough he magniude of he coefficien is very small. (Noe 11). This is inconsisen wih previous sudies ha find a posiive relaionship beween CEO compensaion and discreionary accruals. Our explanaion is ha since discreionary accruals and audi fee / oal fees are highly correlaed (Gul e al., 2003), audi / oal fees have already capured he posiive relaion beween discreionary accruals and CEO compensaion. Toally speaking, all empirical evidence is no consisen wih H2 and indicaes ha increases in audi / oal fees are correlaed wih increases in cash / oal compensaion. 8. Conclusions This paper examines he audi qualiy when audiors are considered as performing he monioring role o miigae discreionary accruals. The frequency analysis shows ha audiors are likely o issue sandard opinions excep ha before 1994 and afer 2001 audiors are more conservaive and issue more non-sandard opinions. In addiion, since 2004 audiors have charged higher audi fees for he inernal conrol requiremens of he Sarbanes-Oxley Ac. The empirical evidences abou audi opinions sugges ha modified opinions have significan impacs on CEO compensaion. Cash compensaion is 98% of prior cash compensaion and oal compensaion is 96% of prior oal compensaion afer audiors issue modified opinions. In addiion, he incidence of going concern opinions affecs he srucure of compensaion conracs. CEOs are graned more curren incenive compensaion relaive o oal compensaion afer he issuance of going concern opinions. The regression resuls abou audi or oal fees also indicae ha conrolling earnings managemen is no he primary concern for audiors. Insead of prevening managemen from inflaing earnings, audiors charge higher audi or oal fees o compensae for higher audi risk associaed wih higher accouning accruals. Therefore, changes in audi or oal fees are posiively relaed o changes in cash or oal compensaion. References Anle, R., & Nalebuff, B. (1991). Conservaism and Audior-Clien negoiaions. Journal of Accouning Research, 29(Supplemen), hp://dx.doi.org/ / Ashbaugh, H., LaFond, R., & Mayhew, B. (2003). Do Nonaudi Services Compromise Audior Independence? Furher Evidence. The Accouning Review, 78, hp://dx.doi.org/ /accr Balsam, S. (1998). Discreionary Accouning Choices and CEO Compensaion. Conemporary Accouning Research, 15(Fall), hp://dx.doi.org/ /j b00558.x Becker, C., DeFond, M., Jiambalvo, J., & Subramanyam, K. (1998). The Effec of Audi Qualiy on Earnings 8

9 Inernaional Journal of Economics and Finance Vol. 6, No. 9; 2014 Managemen. Conemporary Accouning Research, 15(Spring), hp://dx.doi.org/ /j b00547.x Bradshaw, M., Richardson, S., & Sloan, R. (2001). Do Analyss and Audiors Use Informaion in Accruals? Journal of Accouning Research, 39(June), hp://dx.doi.org/ / x Chen, C., Krishnan, G., & Su, X. (2002). The Associaion Beween Non-Audi Service Purchases and Managers Compensaion Srucure. Working paper, Ciy Universiy of Hong Kong, Hong Kong. Chung, H., & Kallapur, S. (2003). Clien Imporance, Nonaudi Services, and Abnormal Accruals. The Accouning Review, 78, hp://dx.doi.org/ /accr DeFond, M., & Subramanyam, K. (1998). Audior Changes and Discreionary Accruals. Journal of Accouning and Economics, 25, hp://dx.doi.org/ /s (98) Dopuch, N., Holhausen, R., & Lefwich, R. (1987). Predicing Audi Qualificaions wih Financial and Marke Variables. The Accouning Review, 62(Auumn), Francis, J., & Krishnan, J. (1999). Accouning Accruals and Audior Reporing Conservaism. Conemporary Accouning Research, 16(Spring), hp://dx.doi.org/ /j b00577.x Frankel, R., Johnson, M., & Nelson, K. (2002). The Relaion Beween Audiors Fees for Nonaudi Services and Earnings Managemen. The Accouning Review, 77(Supplemen), hp://dx.doi.org/ /accr s-1.71 Gaver, J., & Gaver, K. (1998). The Relaion beween Nonrecurring Accouning Transacions and CEO Cash Compensaion. The Accouning Review, 73(April), Gibbins, M., Salerio, S., & Webb, A. (2001). Evidence Abou Audior-Clien Managemen Negoiaion Concerning Clien s Financial Reporing. Journal of Accouning Research, 39(December), hp://dx.doi.org/ / x Gul, F., Chen, C., & Tsui, J. (2003). Discreionary Accouning Accruals, Managers Incenives and Audi Fees. Conemporary Accouning Research, 20(Fall), hp://dx.doi.org/ /686e-nf2j-73x6-g540 Hopwood, W., & McKeown, J. (1997). The Influence of Conrary Informaion and Miigaing Facors on Audi Opinion Decisions on Bankrup Companies. Journal of Accouning Research, 35(Auumn), hp://dx.doi.org/ / Kim, J., Chung, R., & Firh, M. (2003). Audior Conservaism, Asymmeric Monioring, and Earnings Managemen. Conemporary Accouning Research, 20(Summer), hp://dx.doi.org/ /j29k-mrua-0app-yj6v Lennox, C. (1998). Modified Audi Repors, Execuive Compensaion and CEO Turnover. Working Paper. Brisol Universiy, England. Muchler, J. (1985). A Mulivariae Analysis of he Audior s Going-Concern Opinion Decision. Journal of Accouning Research, 23(Auumn), hp://dx.doi.org/ / Palmrose, Z. (1986). Audi Fees and Audior Size: Furher Evidence. Journal of Accouning Research, 24(Spring), hp://dx.doi.org/ / Raghunandan, K., & Subramanyam, K. (2002). Do Non-Audi Service Fees Impair Audior Independence? Evidence from Going Concern Audi Opinions. Journal of Accouning Research, 40(Sepember), hp://dx.doi.org/ / x Simunic, D. (1980). The Pricing of Audi Services: Theory and Evidence. Journal of Accouning Research, 18(Spring), hp://dx.doi.org/ / Wallace, W. (1987). The Economic Role of he Audi in Free and Regulaed Markes: A Review. Research in Accouning Regulaion, 1, Noes Noe 1. In he sudy of Francis and Krishnan (1999), modified opinions are audi opinions oher han sandard unqualified opinions and unqualified opinions wih he explanaory paragraph for accouning policy changes. Noe 2. Bradshaw e al. (2001) indicae ha a clean opinion is he sandard unqualified opinion and an unclean opinion includes he qualified, adverse, or unqualified opinion wih explanaory language. 9

10 Inernaional Journal of Economics and Finance Vol. 6, No. 9; 2014 Noe 3. Audi fees refer o charges for all kinds of services done by audiors, including audi fees, audi-relaed fees, non-audi fees, and fees for financial informaion sysems design and implemenaion. Noe 4. The proxies for business complexiy are differen in each sudy. Simunic (1980) uses number of subsidiaries, indusry diversiy and foreign operaion. Palmrose (1986) uses number of audi locaions. Noe 5. Please refer o he index for he definiion of each variable for equaions (1) (3). Noe 6. The curren incenive compensaion is he difference beween oal compensaion and he sum of salary, oher annual compensaion, and all oher oal compensaion. Noe 7. The equaion is: DCASHCOMP ordtotalcomp = α + α DSALES + α BM + α ROA + α TRS YR + α SROA + α STRS YR + ε Where, DCASHCOMP/DTOTALCOMP is changes in cash compensaion / oal compensaion deflaed by oal asses. DSALES is sales deflaed by oal asses. Noe 8. The performance-mached discreionary accrual for one company is calculaed by aking he difference of he discreionary accrual of his company and he discreionary accrual of anoher company mached by indusry and year. Noe 9. Compensaion daa in 1992 is deleed because I need he daa abou economic condiions one year prior o he compensaion daa. Noe 10. Secion 404 of Sarbanes-Oxley asks an audior o evaluae he managemen assessmen of inern conrols and issue an inernal conrol opinion in he 10-K filing in 2004 for a company whose marke capializaion is a leas 75 million dollars. Noe 11. The magniude of coefficien is less han in each regression. Appendix A. Definiion of Variables CASHCOMP = Naural log of CEO cash compensaion in year TOTALCOMP = Naural log of CEO oal compensaion in year MIX = The raio of curren incenive compensaion o oal compensaion R1 = Residual from he regression of deflaed cash compensaion in year on deflaed sales, book o marke raio, reurn on asses, adjused sock price, sandard deviaion of reurn on asses, and sandard deviaion of adjused sock price in year -1 R2 = Residual from he regression of deflaed oal compensaion in year on deflaed sales, book o marke raio, reurn on asses, adjused sock price, sandard deviaion of reurn on asses, and sandard deviaion of adjused sock price in year -1 MOD -1 = 1 if he audior issues a qualified opinion, an adverse opinion or an unqualified opinion wih he explanaory paragraph in year -1 and 0 oherwise GOCO -1 = 1 if he audior issues a going concern opinion in year -1 and 0 oherwise DCHAUDFEE = Changes in audi fees in year, deflaed by oal asses in year DCHTOTFEE = Changes in oal fees in year, deflaed by oal asses in year SALES -1 = Naural log of sales in year -1 BM -1 = The raio of common equiy in year -1 o he marke value a year -1 ROA -1 = Ne income before exraordinary iems in year -1, deflaed by oal asses a year -1 TRS1YR -1 = Adjused sock price in year -1 plus adjused dividend minus adjused sock price a beginning of year -1, deflaed by adjused sock price a beginning of year -1 SROA -1 = Sandard deviaion of reurn on asses in year -1 STRS1YR -1 = Sandard deviaion of one-year sock reurns in year -1 CHPMDA = Changes in performance-mached discreionary accruals in year, deflaed by oal asses in year CH -1 = 1 if he company changes he audior in year -1 and 0 oherwise Copyrighs Copyrigh for his aricle is reained by he auhor(s), wih firs publicaion righs graned o he journal. This is an open-access aricle disribued under he erms and condiions of he Creaive Commons Aribuion license (hp://creaivecommons.org/licenses/by/3.0/). 10