Audit Market Measures in Audit Pricing Studies : The Issue of Mechanical Correlation
Mechanical correlation bias is inherent in audit pricing studies when independent variables (X) are derived from firm level audit fees (Y); a form of endogeneity which appears not to have been addressed fully in the extant literature. Such variables are endogenous by construction leading to biased estimates, since (mechanically) X determines Y and Y determines X. After reviewing the extant auditing/accounting literature where mechanical correlation obtains (together with the remedies advocated to alleviate the associated bias), we employ mathematical derivations and simulations to quantify the bias associated with a range of mechanically correlated market competition and industry specialist variables. Since auditor market competition variables are important to regulators and antitrust authorities, we analyse the mechanical correlation issue with regard to an extant study which introduces a novel measure of audit market competition (derived from audit fees). The study provides evidence that smaller incumbent auditors are pressured into offering lower fees when competing against a large local audit firm. However, when the current client’s audit fee is ‘decoupled’ from this new competition measure to mitigate bias, it is statistically insignificant in our multivariate regression analysis. Additionally, we employ auditee sales and total assets to construct proxies for competition variables (which are not mechanically correlated) and find them to be statistically insignificant. We conclude with suggestions of how to address the issue of mechanical correlation in future studies
Year of publication: |
[2023]
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Authors: | Kacer, Marek ; Duboisée de Ricquebourg, Alan J. ; Peel, Michael J. ; Wilson, Nick |
Publisher: |
[S.l.] : SSRN |
Saved in:
freely available
Extent: | 1 Online-Ressource (56 p) |
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Type of publication: | Book / Working Paper |
Language: | English |
Notes: | In: : European Accounting Review Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments May 4, 2023 erstellt |
Other identifiers: | 10.2139/ssrn.4442764 [DOI] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10014360704
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