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Do corporate pension plans affect audit pricing?

Yangyang Chen, Rui Ge and Leon Zolotoy

Journal of Contemporary Accounting and Economics, 2017, vol. 13, issue 3, 322-337

Abstract: We examine whether corporate pension plans of client firms (hereafter, clients) influence auditors’ decisions on audit pricing for the clients in the U.S. We find that, on average, auditors charge higher fees for auditing financial statements of client firms sponsoring defined benefits (DB) pension plans than matched firms without DB pension plans. Moreover, we find that the effect of DB pension plans on audit fees is stronger when clients’ earnings are more sensitive to DB pension estimates, or when managers’ compensation induces more risk taking. Finally, we find that the additional audit fees charged for clients with DB pension plans are negatively associated with the extent of manipulations of DB pension accounting estimates. Collectively, our findings suggest that auditors consider managers’ incentive to manipulate earnings and increase audit effort to reduce audit risk associated with DB pension accounting, which results in higher audit fees.

Keywords: Pension plans; Audit pricing; Audit effort; Audit risk; Earnings management (search for similar items in EconPapers)
JEL-codes: M40 M42 M48 (search for similar items in EconPapers)
Date: 2017
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Journal of Contemporary Accounting and Economics is currently edited by Agnes C.S. Cheng, P. Clarkson, F.A. Gul, Zoltan Matolcsy, Dan Simunic and Ben Srinidhi

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