Overconfidence and audit fees: does the fiscal council influence this relationship?

Authors

DOI:

https://doi.org/10.21680/2176-9036.2022v14n2ID29385

Keywords:

Behavioral Accounting. Decision Making. CEO. Material Risk..

Abstract

Purpose: This study aims to investigate the role of fiscal council as a mechanism capable of changing the manager's ability to influence audit fees.

Methodology: 231 observations of publicly-held companies that traded their shares on [B]³ in 2017 were analyzed. To investigate the relationship object of this study, an analysis was performed using multiple linear regression with the OLS estimator.

Results: In the analyzed sample, it was identified that managers' overconfidence increases audit costs, which is consistent with the argument that managers' overconfidence can increase the risk of material error. However, possibly due to characteristics of the emerging environment or different levels of efficiency of the fiscal council, it was not possible to confirm the hypothesis that the fiscal council exerts a significant influence on the relationship between manager overconfidence and audit fees.

Study Contributions: In the empirical field, this research provides subsidies for investors and regulators regarding the role of governance mechanisms - more specifically the fiscal council - in the relationship between the auditor and the client. From a theoretical perspective, the accounting literature is added to fill in the existing gap about the consequences of behavioral biases of managers on the audit fees under the moderation of the supervisory board.

Downloads

Download data is not yet available.

Author Biographies

Jorge Luiz De Santana Júnior, University of São Paulo.

Ph.D. student in Controllership and Accounting at University of São Paulo.

Thiago Rios Sena, Federal University of Pernambuco.

Ph.D. student in Accounting at Federal University of Pernambuco.

References

Abbott, L. J., & Parker, S. (2000). Auditor Selection and Audit Committee Characteristics. Auditing: A Journal of Practice & Theory, 19(2), 47–66. https://doi.org/10.2308/aud.2000.19.2.47

Abbott, L. J., Parker, S., & Peters, G. F. (2004). Audit Committee Characteristics and Restatements. Auditing: A Journal of Practice & Theory, 23(1), 69–87. https://doi.org/10.2308/aud.2004.23.1.69

Abbott, L. J., Parker, S., Peters, G. F., &Raghunandan, K. (2003). The Association between Audit Committee Characteristics and Audit Fees. AUDITING: A Journal of Practice & Theory, 22(2), 17–32. https://doi.org/10.2308/aud.2003.22.2.17

Anderson, R. C., Mansi, S. A., &Reeb, D. M. (2004). Board characteristics, accounting report integrity, and the cost of debt.Journal of accounting and economics, 38(3),315-342.https://doi.org/10.1016/j.jacceco.2004.01.004

Baioco, V. G., & Almeida, J. E. F. de. (2017). Efeitos do comitê de auditoria e do conselho fiscal na qualidade da informação contábil no Brasil. Revista Contabilidade & Finanças, 28(74), 229–248. https://doi.org/10.1590/1808-057x201703250

Bell, T. B., Landsman, W. R., &Shackelford, D. A. (2001). Auditors’ Perceived Business Risk and Audit Fees: Analysis and Evidence.Journal of Accounting Research, 39(1), 35-43. https://doi.org/10.1111/1475-679X.00002

Ben-David, I., Graham, J. R., & Harvey, C. R. (2013). Managerial Miscalibration*. The Quarterly Journal of Economics, 128(4), 1547–1584. https://doi.org/10.1093/qje/qjt023

Beneish, M. D. (1999). Incentives and Penalties Related to Earnings Overstatements that Violate GAAP. The Accounting Review, 74(4), 425–457. https://doi.org/10.2308/accr.1999.74.4.425

Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journalof financial economics, 80(3), 511–529.

Borges, V. P., Nardi, P. C. C., & da Silva, R. L. M. (2017). Determinantes dos Honorários de Auditoria das Empresas Brasileiras de Capital Aberto. Revista Contabilidade, Gestão e Governança, 20(2), 216–230.

Castro, W. B. de L., Peleias, I. R., & Silva, G. P. da. (2015). Determinantes dos honorários de auditoria: Um estudo nas empresas listadas na BM&FBovespa, Brasil. Revista Contabilidade & Finanças, 26(69), 261–273.

Comissão de Valores Mobiliários (2014). Irregularidades contábeis na elaboração das demonstrações financeiras. Recuperado em 23 de agosto de 2021,de http://conteudo.cvm.gov.br/sancionadores/sancionador/2018/20180327_PAS_RJ20147072.html.

Chaney, P. K., &Philipich, K. L. (2002). Shredded Reputation: The Cost of Audit Failure. Journal of Accounting Research, 40(4), 1221–1245. https://doi.org/10.1111/1475-679X.00087

Chen, G., Crossland, C., & Luo, S. (2015). Making the same mistake all over again: CEO overconfidence and corporate resistance to corrective feedback. Strategic Management Journal, 36(10), 1513–1535.

Cohen, J. R., Hoitash, U., Krishnamoorthy, G., & Wright, A. M. (2014). The Effect of Audit Committee Industry Expertise on Monitoring the Financial Reporting Process. The Accounting Review, 89(1), 243–273. https://doi.org/10.2308/accr-50585

Cormier, D., Lapointe-Antunes, P., &Magnan, M. (2016). CEO power and CEO hubris: A prelude to financial misreporting? Management Decision, 54(2), 522–554. https://doi.org/10.1108/MD-04-2015-0122

Davidson III, W. N., Jiraporn, P., &DaDalt, P. (2006). Causes and consequences of audit shopping: An analysis of auditor opinions, earnings management, and auditor changes. Quarterly Journal of Business and Economics, 69–87.

Davidson, R., Dey, A., & Smith, A. (2015). Executives’ “off-the-job” behavior, corporate culture, and financial reporting risk. Journal of Financial Economics, 117(1), 5–28. https://doi.org/10.1016/j.jfineco.2013.07.004

DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183–199. https://doi.org/10.1016/0165-4101(81)90002-1

DeFond, M. L., & Francis, J. R. (2005). Audit research after sarbanes-oxley. Auditing: A Journal of Practice & Theory, 24(s-1), 5–30.

DeFond, M. L., Lim, C. Y., & Zang, Y. (2015). Client Conservatism and Auditor-Client Contracting. The Accounting Review, 91(1), 69–98. https://doi.org/10.2308/accr-51150

DuCharme, L. L., Malatesta, P. H., &Sefcik, S. E. (2004). Earnings management, stock issues, and shareholder lawsuits. Journal of Financial Economics, 71(1), 27–49. https://doi.org/10.1016/S0304-405X(03)00182-X

Duellman, S., Hurwitz, H., & Sun, Y. (2015). Managerial overconfidence and audit fees. Journal of Contemporary Accounting & Economics, 11(2), 148–165. https://doi.org/10.1016/j.jcae.2015.05.001

Eissa, A. M. K. (2020). Auditor’s perceptions of CEOs overconfidence in Egypt: A quasi-experimental study.Journal of Accounting, Finance and Auditing Studies, 6(2), 1-30.

Frankel, R. M., Johnson, M. F., & Nelson, K. K. (2002). The Relation between Auditors’ Fees for Nonaudit Services and Earnings Management. The Accounting Review, 77(s-1), 71–105. https://doi.org/10.2308/accr.2002.77.s-1.71

Gaio, C., &Raposo, C. C. (2014). Corporate governance and earnings quality: International evidence. Journal of Accounting and Finance, 14(3), 52.

Greiner, A., Kohlbeck, M. J., & Smith, T. J. (2016). The relationship between aggressive real earnings management and current and future audit fees. Auditing: A Journal of Practice & Theory, 36(1), 85–107.

Hallak, R. T. P., & da Silva, A. L. C. (2012). Determinantes das despesas com serviços de auditoria e consultoria prestados pelo auditor independente no Brasil. Revista Contabilidade & Finanças, 23(60), 223–231.

Hay, D. C., Knechel, W. R., & Wong, N. (2006). Audit Fees: A Meta-analysis of the Effect of Supply and Demand Attributes. Contemporary Accounting Research, 23(1), 141–191. https://doi.org/10.1506/4XR4-KT5V-E8CN-91GX

He, X., Pittman, J. A., Rui, O. M., & Wu, D. (2017). Do Social Ties between External Auditors and Audit Committee Members Affect Audit Quality? The Accounting Review, 92(5), 61–87. https://doi.org/10.2308/accr-51696

Hossain, S., Yazawa, K., & Monroe, G. S. (2017). The Relationship between Audit Team Composition, Audit Fees, and Quality. Auditing: A Journal of Practice & Theory, 36(3), 115–135. https://doi.org/10.2308/ajpt-51682

Hribar, P., KIM, J., Wilson, R., & Yang, H. I.-H. (2013). Counterparty responses to managerial overconfidence. Research Collection School Of Accountancy.https://ink.library.smu.edu.sg/soa_research/1233

Hribar, P., & Yang, H. (2016). CEO overconfidence and management forecasting. Contemporary Accounting Research, 33(1), 204–227.

Hsieh, T., Bedard, J. C., & Johnstone, K. M. (2014). CEO Overconfidence and Earnings Management During Shifting Regulatory Regimes. Journal of Business Finance & Accounting, 41(9-10), 1243-1268.https://onlinelibrary.wiley.com/doi/abs/10.1111/jbfa.12089

Huang, H.-W., Rose-Green, E., & Lee, C.-C. (2012). CEO Age and Financial Reporting Quality. Accounting Horizons, 26(4), 725–740. https://doi.org/10.2308/acch-50268

Judd, J. S., Olsen, K. J., & Stekelberg, J. (2017). How do auditors respond to CEO narcissism? Evidence from external audit fees. Accounting Horizons, 31(4), 33-52. https://doi.org/10.2308/acch-51810

Kim, J.-B., Wang, Z., & Zhang, L. (2016). CEO Overconfidence and Stock Price Crash Risk. Contemporary Accounting Research, 33(4), 1720–1749. https://doi.org/10.1111/1911-3846.12217

Kim, K., Mauldin, E., & Patro, S. (2014). Outside directors and board advising and monitoring performance. Journal of Accounting and Economics, 57(2–3), 110–131. https://doi.org/10.1016/j.jacceco.2014.02.001

Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375–400. https://doi.org/10.1016/S0165-4101(02)00059-9

Kothari, S. P., Mizik, N., & Roychowdhury, S. (2012). Managing for the moment: The role of real activity versus accruals earnings management in SEO valuation. Working paper.

Krishnan, J., Wen, Y., & Zhao, W. (2011). Legal Expertise on Corporate Audit Committees and Financial Reporting Quality. The Accounting Review, 86(6), 2099–2130. https://doi.org/10.2308/accr-10135

Lee, H. S. (Grace), Li, X., & Sami, H. (2015). Conditional Conservatism and Audit Fees. AccountingHorizons, 29(1), 83–113. https://doi.org/10.2308/acch-50928

Lei nº 6.404, de 15 de dezembro de 1976. Dispõe sobre as Sociedades por Ações. Brasília, DF. Recuperado em 23 de agosto de 2021, de http://www.planalto.gov.br/ccivil_03/leis/l6404consol.htm.

Lisic, L. L., Neal, T. L., Zhang, I. X., & Zhang, Y. (2016). CEO power, internal control quality, and audit committee effectiveness in substance versus in form. Contemporary Accounting Research, 33(3), 1199-1237. https://doi.org/10.1111/1911-3846.12177

Lyon, J. D., & Maher, M. W. (2005). The Importance of Business Risk in Setting Audit Fees: Evidence from Cases of Client Misconduct. Journal of Accounting Research, 43(1), 133-151.https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1475-679x.2005.00165.x

Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. The journal of finance, 60(6), 2661–2700.

Memis, M. U., & Cetenak, E. H. (2012). Earnings management, audit quality and legal environment: An international comparison. International Journal of Economics and Financial Issues, 2(4), 460.

Mitra, S., Jaggi, B., & Al-Hayale, T. (2019). Managerial overconfidence, ability, firm-governance and audit fees. Review of Quantitative Finance and Accounting, 52(3), 841–870.

Peni, E., & Vähämaa, S. (2010). Female executives and earnings management. Managerial Finance.36 (7), 629-645.https://doi.org/10.1108/03074351011050343

Pompian, M. M. (2011). Behavioral finance and wealth management: how to build investment strategies that account for investor biases (Vol. 667). John Wiley & Sons.

Procianoy, J. L., & Decourt, R. F. (2014). The Brazilian Fiscal Council—Protecting Minority Shareholders in a Weak Legal System. In S. Boubaker& D. K. Nguyen, Corporate Governance and Corporate Social Responsibility (p. 159–180). WORLD SCIENTIFIC. https://doi.org/10.1142/9789814520386_0006

Schelleman, C., & Knechel, W. R. (2010). Short-Term Accruals and the Pricing and Production of Audit Services. Auditing: A Journal of Practice & Theory, 29(1), 221–250. https://doi.org/10.2308/aud.2010.29.1.221

Schrand, C. M., & Zechman, S. LC. (2012). Executive overconfidence and the slippery slope to financial misreporting. Journal of Accounting and Economics, 53(1-2), 311-329.https://doi.org/10.1016/j.jacceco.2011.09.001

Sutrisno, P. (2019). CEO Overconfidence, Audit Firm Size, Real Earnings Management and Audit Opinion. Academy of Accounting and Financial Studies Journal, 23, 1-13.

Trapp, A. C. G. (2009). A relação do conselho fiscal como componente de controle no gerenciamento de resultados contábeis. Tese de Doutorado, Faculdade de Economia, Administração e Contabilidade. Universidade de São Paulo, São Paulo. Recuperado de https://www.teses.usp.br/teses/disponiveis/12/12136/tde-08072009-160920/pt-br.php

Yu, C. F. (2014). CEO overconfidence, CEO compensation, and earnings manipulation. Journal of Management Accounting Research, 26(2), 167-193. https://doi.org/10.2308/jmar-50722

Zaman, M., Hudaib, M., & Haniffa, R. (2011). Corporate Governance Quality, Audit Fees and Non-Audit Services Fees. Journal of Business Finance & Accounting, 38(1–2), 165–197. https://doi.org/10.1111/j.1468-5957.2010.02224.x

Downloads

Published

04-07-2022

How to Cite

SANTANA JÚNIOR, J. L. D. .; SENA, T. R. . Overconfidence and audit fees: does the fiscal council influence this relationship?. REVISTA AMBIENTE CONTÁBIL - Universidade Federal do Rio Grande do Norte, [S. l.], v. 14, n. 2, 2022. DOI: 10.21680/2176-9036.2022v14n2ID29385. Disponível em: https://periodicos.ufrn.br/ambiente/article/view/29385. Acesso em: 22 nov. 2024.

Issue

Vol. 14 No. 2 (2022): Jul./Dez.

Section

Section 7: International (S7)

License

Copyright (c) 2022 REVISTA AMBIENTE CONTÁBIL - Universidade Federal do Rio Grande do Norte

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

Authors who publish in this magazine agree with the following terms: 

Authors keep the copyrights and concede the right of its first publication to the magazine. The work piece must be simultaneously licensed on the Creative Commons Attribution Licence which allows the paper sharing, and preserves both the author identity and the right of first publication to this magazine. 

Authors are authorized to assume additional contracts separately, to not-exclusively distribution of the paper version published in this magazine (e.g.: publish in institutional repository or as a book chapter), with the author identity recognition and its first publication in this magazine. 

Authors are permitted and stimulated to publish and distribute their papers online (e.g.: in institutional repository or on their personal webpage), considering it can generate productive alterations, as well as increase the impact and the quotations of the published paper.

Creative Commons - Atribuição-NãoComercial-SemDerivações 4.0 Internacional.