Audit Fees: A Further Evidence of the Role of Financial and Operating Liability Leverage

Document Type : Research Paper


1 Department of Accounting, Ayandegan Institute of Higher Education, Tonekabon, Iran.

2 Assistant prof in accounting, Imam Khomeini International University, Qazvin


Objective: The purpose of this paper investigates the relationship between debt leverage, especially operating and financial Liability leverage with audit fees in the Tehran Stock Exchange. Because previous studies in the field of audit fees used debt leverage only as a control variable in the audit pricing model, and the impact of other components of debt leverage less considered, namely (1) operating liability leverage and (2) financial liability leverage.
Methods: The statistical population of the research was selected through the systematic elimination method, 113 firms for during the period 2011 to 2018, and also the relationships between research variables were examined using multivariate regression.
Results: The results indicate that there is a positive and significant relationship between total debt leverage, financial leverage and estimated operating liability leverage with audit fees. In other words, High liability leverage increases the risk of client failure and the risk of auditor litigation, resulting in increased audit fees, and auditor's reaction to their clients' risk is to increase audit fees. Also, there is no relationship between changes in all debt leverages and changes in audit fees. The results of additional tests indicate that increasing the total debt leverage and financial leverage in small and large firms has an effect on increasing audit fees; and when financial leverage is high in the situation of financial distress, auditors receive higher fees to face with audit risk. Also, there is a positive and significant relationship between total debt leverage, financial leverage and estimated operating liability leverage with abnormal audit fees. The results show that there is no significant relationship between delays in the presentation of the audit report as a measure of the auditor's effort and its interactive effect with the leverage of debt and audit fees.
Conclusion: Overall, this study highlights the importance of distinguishing between different types of leverage in audit studies, and in particular audit fees. It also adds to the existing literature the agency costs and the differential effects of various types of leverage in the accounting and financial context. Because there are two main problems of the agency with debt: (1) risk shifting and (2) under-investment. Based on the findings of the present study, it can be suggested that recognizing the different sources of leverage and the distinction between financial leverage and operating leverage is important in auditing research, especially audit fee models. As a result, provide an appropriate model for clients and audit firms interested in accurately estimating audit fees.


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