Auditor liability and excess cash holdings: Evidence from audit fees of foreign incorporated firms
Document Type
Article
Source of Publication
International Review of Financial Analysis
Publication Date
2021
Abstract
Auditors of foreign cross-listed firms face liability arising from the nature of the institutional monitoring framework of legal claims that can potentially be brought against the auditor in both the home country and the US. This paper is the first to document the relationship between auditor liability and auditor pricing of excess cash holdings for foreign firms cross-listed in the US. Our findings indicate that auditors demand a fee premium for foreign incorporated clients with greater excess cash holdings, consistent with auditors recognizing the potential for legal exposure to agency conflict arising from foreign listed US traded clients. Furthermore, we examine aspects of foreign capital market protections, such as disclosure requirements, the strength of legal enforcement, and the strength of shareholder rights to better understand auditor perception of the liability they incur due to the agency costs associated with excess cash holdings. We find that there is a significant positive association between audit fees and excess cash holdings for firms where the country of incorporation permits greater liability of auditors in criminal and civil litigation. In addition, auditors assign higher audit fees to firms holding greater excess cash incorporated in countries with greater required accounting disclosure, stronger legal enforcement and stronger shareholder rights.
DOI Link
Disciplines
Business
Scopus ID
Recommended Citation
Smith, Deborah Drummond; Gleason, Kimberly C.; and Kannan, Yezen H., "Auditor liability and excess cash holdings: Evidence from audit fees of foreign incorporated firms" (2021). All Works. 4636.
https://zuscholars.zu.ac.ae/works/4636
Indexed in Scopus
yes
Open Access
no