Substantive or symbolic compliance with regulation, audit fees and audit quality

Fakhroddin MohammadRezaei (), Omid Faraji (), Zabihollah Rezaee (), Reza Gholami-Jamkarani () and Mehdi Yari ()
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Fakhroddin MohammadRezaei: Kharazmi University
Omid Faraji: College of Farabi, University of Tehran
Zabihollah Rezaee: The University of Memphis
Reza Gholami-Jamkarani: Qom Branch, Islamic Azad University
Mehdi Yari: Qom Branch, Islamic Azad University

International Journal of Disclosure and Governance, 2024, vol. 21, issue 1, No 3, 32-51

Abstract: Abstract We examine whether Audit Fee Regulation (AFR) enhances auditors’ bargaining power in setting audit fees, consequently leading to superior quality audit services using the Iranian audit environment. We posit two hypotheses of “symbolic” and “substance” compliance. We find that neither audit fees nor audit quality has increased in the post-AFR era, supporting the symbolic hypothesis. The results are robust to several sensitivity tests, including difference-in-difference analysis. Contrary to the regulator’s expectation, our findings suggest that arbitrarily stimulating suppliers’ incentives without considering the priority and importance of demand-side incentives in a compliance-driven audit market and the flexibility to bypass the regulation result in symbolic (de jure) compliance with the regulation. We provide policy, practice, and research implications by suggesting that positive intended consequences of regulations in a compliance-driven audit market can be achieved when the regulation is robust with less latitude for discretion symbolic compliance.

Keywords: Audit fee regulation; Audit quality; Audit fees; Substantive and symbolic compliance (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41310-023-00178-4

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