AUDKhanFamily Firm, Audit Fee and Auditor Choice- Australian Evidence

8/18/2019 AUD__Khan__Family Firm, Audit Fee and Auditor Choice- Australian Evidence

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Family firm, audit fee and auditor choice: Australian evidence

Arifur Khan*

Nava Subramaniam

School of Accounting, Economics and Finance, Deakin University, Australia

THIS IS A WORKING PAPER ONLY

PLEASE DO NOT QUOTE WITHOUT PERMISSION OF THE AUTHORS

_________________________

*School of Accounting, Economics, and Finance, Deakin University. 221 Burwood Highway, Burwood,Victoria, 3125 Australia. Tel: +61 03 924 46857, Fax: +61 03 924 46283, E-mail: [email protected].


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Family firm, audit fee and auditor choice: Australian evidence

Abstract: This study aims to examine the relation between family ownership and control, and

audit fee and auditor choice in Australian companies. The dominance of concentratedownership and related institutional features of Australia offers an interesting opportunity toexamine the key role family ownership and control plays as a determinant of audit fee as wellas auditor choice. Agency theory suggests a mixed perspective on the agency problems thatare inherent in family firms and thence their implications for audit pricing and auditor choice.We find that family firms pay higher audit fee than non-family firms. Moreover, family shareownership is related with higher audit fee. This is consistent with supply-side theory (i.e.,higher assessed client-related risks due to family owners‟ expropriation, poor monitoring ofmanagement, and higher information asymmetry) on the determinants of audit fee. We alsofind that compared to non-family firms, family firms are more likely to hire top-tieraccounting firms. This tendency may stem from greater agency problem between owners and

managers in family firms.

Keywords: Family ownership; audit fee and auditor choice


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1.

Introduction

This study examines the relation between family ownership and control and audit fee

and auditor choice in Australian companies. Family firms are the prevalent form of business

organization internationally; one measure of this is the portion of family enterprises to

registered companies (Cadbury, 2000). The estimated range is from 75% in the UK to greater

than 95% in India, Latin America and the Far and Middle East. Glassop (2009, cites

Smyrnios and Walker, 2003) stating that in Australia, 67% of the firms that constitute the

economy are family businesses. She also suggests that more than half of employment growth

is generated by these firms and around $3.6 trillion is contributed to the Australian economy.

Burkart et al., (2003) state that family ownership is common among firms that are publicly

traded as well as firms that are held privately and that the majority of firms in the world are

controlled either by the founder or the family or heirs of the founders.

There has been extensive research that examines the determinants of audit fee/ pricing

(see for example, Firth, 1985; Francis and Simon, 1987; Chan et al., 1993). These studies

have focused mainly on the firm specific factors such as auditee size, auditee complexity,

audit firm size etc. that influence the level of fee paid for providing audit services. None of

these studies incorporate the effect of ownership concentration, particularly family ownership

and control on audit fee as well auditor choice.1 Given that the ownership structures are less

diffuse than previously assumed (see for example, La Porta et al., 1999), this research aims to

understand the effect of concentrated ownership such as family ownership on audit and

financial reporting process and hence on the level of audit fee and auditor choice in

Australian companies.

According to agency theory, on one hand, the incentives for family firms to extract

private benefits as well as their propensity to influence the financial reporting process are

1

A study by Mitra et al. (2007) examines the impact of ownership characteristics on audit fee.


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high and thus are likely to raise agency costs. Consequently, increasing agency costs entail

higher audit risk assessment and audit efforts, resulting in higher audit fee. At the same token,

family ownership is seen to improve internal monitoring and reduce conflict of interest

inherent in manager-owner arrangements and thus reduce audit effort and fee subsequently.

Clearly, omitting concentrated ownership such as family ownership from the analyses of

audit pricing increases the risk of incorrect conclusions on the behaviour of the auditors.

While explaining the issue of auditor choice prior research tends to focus on the

differences between big 4 audit firms and smaller audit firms with respect to audit quality.

DeAngelo (1981) argue that the big 4 auditor provide better quality audits because they have

more reputational and legal risk. In the context of a relationship between ownership and

auditor choice in the UK, Lennox (2005) finds that managerial ownership is related to the

demand for big 4 audits in private firms but not in public firms. This suggests that private

firms may have more reason to engage a higher quality auditor to perform a monitoring

function than large, listed firms. Lennox further argues that the monitoring value of auditing

may be lower for public firms because these firms are subject to monitoring by a stock

market.

Previous study by Carey et al. (2000) investigates the demand for audit quality in

family firms and finds that the demand for voluntary audits increases when agency costs

increase. It is argued that the incentives for family firms to extract private benefits as well as

their propensity to influence the financial reporting process are high which raises agency

costs (Anderson and Reeb, 2003). Therefore, family firms are more likely to appoint big 4

auditors to ensure high quality audit. It is also argued that family ownership may improve

internal monitoring and reduce conflict of interest inherent in manager-owner arrangements.

This implies that family firms are less likely to appoint big 4 auditors to due to reduced


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agency costs. These two conflicting arguments suggest that the choice of big 4 auditor is an

empirical issue.

Agency theory provides a mixed perspective on agency problems in family firms. On

the one hand, families are assumed to be better monitors of managers than other types of

large shareholders, suggesting that lack of alignment between managers and owners (referred

to here as Agency Problem I) might be less prevalent in family than in non-family firms

(Anderson and Reeb, 2003). On the other hand, controlling families may have an incentive

and the ability to extract private benefits at the expense of minority shareholders (referred to

here as Agency Problem II) (Fama and Jensen, 1983; Shleifer and Vishny, 1997).

Accordingly Villalonga and Amit (2006) suggest that controlling families have greater

incentives for both monitoring and expropriation, and so Agency Problem II may overshadow

Agency Problem I in these firms.

Extant literature on audit fee and auditor choice in relation to family versus non-family

firms is scant and limited. The prevalence of family controlled firms in most countries (La

Porta et al., 1999) and the family‟s incentive to extract private benefits raises the question of

how family firm influence monitoring mechanisms such as auditing. In particular given that

different types of agency problems may be exacerbated and mitigated within family

controlled firms, further study into their implications for auditor choice as well as audit risk

assessments and thereon audit efforts and audit pricing appear timely and warranted.

The Australian market provides a desirable setting for this investigation as the legal

protection for shareholders is not as strong compared to that of the UK and US (La Porta et

al., 1999; Setia-Atmaja et al., 2009). Lamba and Stapledon (2001) suggest that the level of

ownership concentration in the Australian capital market is high and that it is characterized

by high private benefits of control. They suggest that one potential reason for the high level

of private benefits of control is that corporate control in the Australian market is less active


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and in turn makes the Australian market less efficient and taking over a company with major

shareholder is more complex which may possibly lead to distortions in the market and

concealment of management that are ineffective (Dignam, 2007). Evidence of fewer hostile

takeovers in Australia was provided by Dignam (2007) which suggests that there is a

divergence of interest between concentrated and dispersed shareholders in Australia in the

form of rent extraction compared to the US and the UK. Dignam and Galanis (2004) also

suggest that even though the size of the market in Australia is small compared to the US or

UK, there has been no particular success in the institutional investor activism in Australia

despite their significant presence in the Australian listed market. Finally, Australia, Canada

and the UK have lower risk of litigation compared to the US (Khurana and Raman, 2004).

This dominance of concentrated ownership and other institutional features of Australia (Dignam and

Galanis, 2004) therefore offer an opportunity to examine the key role ownership concentration,

namely family ownership play in determining audit pricing as well as auditor choice in Australia.

Based on Australian data for the year 2008, our result indicates that family firms pay

higher audit fee than non-family firms. Moreover, family share ownership is related with

higher audit fee. This is consistent with supply-side theory (i.e., higher assessed client-related

risks due to family owners‟ expropriation, poor monitoring of management, and higher

information asymmetry) on the determinants of audit fee. We also find that compared to non-

family firms, family firms are more likely to hire top-tier accounting firms. This tendency

may stem from greater agency problem between owners and managers in family firms.

We extend the literature relating to audit pricing and auditor choice from two

perspectives. First, we investigate the audit pricing and big 4 auditor choice in family firms.

Second, our study uses the dataset from an Australian environment that is different, in terms

of institutional characteristics, from that of developed countries as far as auditing and the

overall financial system are concerned.


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The remainder of the paper is structured as follows. Section 2 provides the theoretical

background. This is followed by an outline of the research design. The results are discussed

in section 4 and section 5 outlines further analyses and robustness tests. Section 6 presents

concluding remarks.

2. Literature review and hypotheses development

Agency theory suggests that family firms may either mitigate or exacerbate agency

problems. It is asserted that the propensity that firms will demand independent audits on a

timely basis is a function of the extent of divorce between ownership and control (Abdel-

Khalik, 1993). Demsetz and Lehn (1985) find evidence that controlling shareholders have

strong incentives to diminish agency problems and maximize firm value. Drawing from the

agency theory, Abdel-Khalik (1993) argues that one of the consequences of the

unobservability of the agents‟ behaviour is the tendency to enhance internal control and other

governance mechanisms. Using similar arguments, Chan et al. (1993) hypothesise that the

extent of audit services demanded will be a function of corporate ownership concentration,

where companies with a diverse ownership structure would require a much more extensive

and higher quality audits than the statutory minimum requirements. From the demand side

perspective it may thus be expected that companies with controlling shareholders, in

particular family control, will require less-extensive audit, proxied by the audit fee.

An alternative argument is that concentrated ownership creates incentives for

controlling shareholders such as family members to expropriate wealth from other

shareholders (Fama and Jensen, 1983). More generally, firms with large, undiversified

owners such as founding families may forgo maximum profits because they are unable to

separate their personal financial preferences with those of outside owners (Burkart et al.,

2003). Family members as controlling shareholders may extract private benefits from the


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firm at the cost of minority shareholders. They can influence the financial reporting process

as well. As a result, it is argued that having immediate family members on the board and the

management team could have a negative impact on the monitoring process of the company.

Such situations may increase the overall audit risk assessed by the auditors regarding their

clients and from the supply side perspective the auditors may in turn deploy more audit

efforts to minimise their audit risks resulting in higher audit fee.

There is however, no study that directly examines the relationship between family

control and audit fee in Australia. Additionally, existing literature on family control provide

competing and alternative predictions about the impact of family control on audit fee.

Therefore, the proposed research hypotheses are:

H1 : There is a significant difference in audit fee between family controlled firms and non-

family firms.

H1a : There is a significant relationship between family ownership and audit fee.

It is argued that big 4 audit firms provide high quality audit service which is characterised by

probability of detecting and reporting material financial errors and omissions (DeAngelo, 1981).

Additionally, because of their size big 4 audit firms are better able to withstand pressure and are more

likely to work independently. In this study, it is argued that big 4 audit firms will be more motivated

to withstand management pressure from family firms, because of their knowledge specialisation and

incentives to maintain their reputation. Thus it is expected that big 4 audit firms will charge a

premium for their quality. Non-big 4 firms, on the other hand, tend to compete more on audit price

and thus are likely to be more compliant to their family-controlled clients. Therefore, we hypothesise

that:

H2: Family firms pay higher audit fee to big4 auditors than non-big4 auditors.

Agency theory predicts that the demand for high quality auditing services increases

when agency costs increase. The expectation on the impacts that family ownership or control

has on the demand for audit quality are twofold in those family firms that deviate from the


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single owner – manager case. One line of research (e.g., Chrisman et al., 2004) suggests that

firms with family ownership have lower agency costs. This indicates that family firms have

therefore less demand for audit quality. Other studies suggest that agency costs are higher in

family firms (e.g., Morck and Yeung, 2003). This in turn would result in higher demand for

audit quality. Previous studies also suggest that the owner – manager agency costs in family

firms (or firms with other block holders) increase with an increase in nonfamily ownership

(Carey et al., 2000). DeAngelo (1981) contend that big 4 audit firms provide high quality

audit service which is characterised by probability of detecting and reporting material

financial errors and omissions. Additionally, because of their size big 4 audit firms are better

able to withstand pressure and are more likely to work independently. We, therefore, argue

that quality audit as well as the choice of big 4 auditor could be influenced by family

ownership and control. Thus we hypothesise that:

H3: Family ownership is associated with the demand for audit quality proxied by big 4

auditor.

H3a: Family control is associated with the demand for audit quality proxied by big 4 auditor.

3. Methodology

3.1 Data and sample

The sample selection procedure is reported in Panel A of Table 1. The sample consists

of all the non-financial companies listed with ASX in the year 2008 and available in Connect

4 database. Consistent with the prior literature, we exclude 376 financial and utility firms

since they are controlled by different regulations and likely to have different disclosure

requirements and governance structure. We exclude 52 non-financial firms due to missing

information. Our final sample comprises of the remaining firms with a total of 1432

observations. The family ownership data is manually collected from the annual reports of the


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companies. Therese reports are accessed through Connect 4 database. The financial variables

are collected from the FinAnalysis database.

From Panel B of Table 1, it is observed that family firms are present in around 16% of

the total sample. The family firms are prevalent in various sectors such as consumer staples

(8), energy (29), health care (31), industrials (52), information technology (33), material (66),

and telecommunication (6). We do not find any family firms in consumer discretionary

sector. This study control industry affiliations for empirical analysis.

3.2 Measur ing famil y ownership and control

In this study one of our primary concerns is the identification of family firms because,

prior literature provides no commonly accepted measure or criterion for identifying a family

firm. La Porta et al. (1999) argue that 20% cut off point is usually enough to have effective

control of firm. Moreover, a number of previous studies use a 20% cut off point to identify

family firms (Achmad, 2007, Villalonga and Amit, 2006, Setia-Atmaja et al., 2009).

Therefore, we define a firm as family controlled firm where an individual, or group of family

members, hold at least 20% of a firm‟s share (voting rights). Two variables are used to

estimate the impact of family firms: a binary variable that equals one for family firms and

zero otherwise (denoted as family control), and; the percentage of shares held by the family

as a group (denoted as family ownership). The variable family control captures the impact of

family control (i.e., 20% or more), while family ownership addresses the impact of different

levels of family holdings.

Family relationships and shareholdings pattern has been collected from annual reports

and company websites. According to ASX requirement, the listed companies are required to

disclose the pattern of shareholdings. This includes number of shares held by the directors,

top 20 shareholders and substantial shareholders. If a firm has at least one private individual


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controlling 20% or more shareholdings, it is considered as a family firm. For example, in the

annual report of Oakton Limited, Paul Holyoake reports a 38.86% shareholding. Thus,

Oakton Ltd. is categorised as a family company. In contrast, the annual report of Coles Myer

Ltd. Reports two substantial shareholders – Myer Family Investment Pty Ltd. and Maple

Brown Abbot Ltd. who own 5.03% and 5% shares, respectively. Coles Myer Ltd is therefore

classified as a non-family firm.

3.3 Model

We use two models in this study. They are discussed below:

Audit fee model

We use an OLS regression techniques to examine the relationship between family firm and

audit fee.

Audit fee =0

+ 1 (family firm) + 2 (control variables) + 11to3 (industry dummy) + 15to12 (year

dummy) + ε (1)

The dependent variable audit fee is measured by taking the natural log of audit fee. The

control variables used in this study are non-family insider ownership, non-family blockholder

ownership, board independence, audit complexity proxied by inventory ratio and receivables

ratio, firm size, leverage, big 4, loss and non-audit fee. We also introduce industry and year

dummies. Non-family insider ownership is measured by taking the percentage of shares

owned by the directors other than the family members. Non-family blockholder ownership is

measured by taking the percentage of shares owned by the substantial shareholders other than

family members. These ownership variables are controlled to address the impact of

ownership by other groups of stakeholders. Board independence is calculated by taking the

proportion of independent directors on the board. The independent directors are likely to be

effective monitors and therefore, firms with independent directors are likely to incur lower

amount of audit fee. Inventory ratio is a ratio of inventory and total assets of the company.


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Receivable ratio is a ratio of account receivables and total assets. Greater audit complexity

involves greater loss exposure in terms of audit risk. Moreover, the valuation of these items is

a complex task requiring a forecast of the future events and an analysis of subjectivity

determined issues on the part of client management (Simon and Taylor, 1997). Firm size is

measured by taking the natural log of total assets. Previous studies suggest that size is an

important determinant of audit fee (Simunic, 1980; Karim and Moizer, 1996; Ahmed and

Goyal, 2005). Leverage is calculated by taking the ratio of total debt and total assets. Big 4 is

a dummy variable equals one if the auditor is a big 4 auditor or a representative of a big 4

auditor and zero otherwise. It is expected that big4 audit firms will charge a premium for

their quality (Firth, 1997; Beattie et al., 2001). Prior research suggests that audit fee may be

determined by the amount of non-audit fee (see for example, Simunic, 1984; Palmrose, 1986

in the US; Ezzamel et al., 1996; McMeeking et al., 2006 in the UK. Therefore, we control for

the variable by taking the natural log of non-audit fee. Loss is a dummy variable equals one if

the company has a negative net profit after tax before extra ordinary items and zero

otherwise.

Auditor choice model

We use the following logit model to examine the relationship between family firm and

the choice of auditor.

Big 4 =0

+ 1 (family firm) + 2 (control variables) + 11to3 (industry dummy) + 15to12 (year

dummy) + ε

The dependent variable big 4 is a dummy variable equals one if the auditor is a big 4

auditor and zero otherwise. The definition of family firm is similar to the definition we used

in our audit fee model. The control variables used in this study are nonfamily insider

ownership, blockholder ownership, audit complexity proxied by inventory ratio and

receivables ratio, firm size, profitability and leverage. The definitions of all control variables


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are identical to the definitions of the control variables used in the audit fee model. Grossman

and Hart (1982) suggest that leverage can induce managers to avoid value-decreasing

decisions if higher leverage increases managers‟ threat of bankruptcy and loss of control.

Leverage may influence the choice of auditor. Following prior studies, controls for

differential audit complexity are included in the analyses (Chaney et al., 2004; Piot, 2005).

The variables size and complexity are included because audit effort is expected to increase

with the size and complexity of a client-firm‟s operations. Because Johnson and Lys (1990)

find that a firm‟s auditor choice is related to its profitability, the variable profitability, defined

as net profit after tax before abnormal items to total assets, is included as a control for the

potential effect of profitability.

4. Results

4.1 Summary statistics

In Table 2 we report the summary statistics of our sample companies. In Panel A we

present mean, median and standard deviation. The mean audit fee of the sample companies is

AUD 277,594. The mean family ownership is 40.5%. The mean ownership by the non-family

insider and blockholder are 16.7% and 28.3% respectively. The mean firm size is AUD 35.2

million. The negative average profitability probably suggests the adverse impact of Global

financial crisis on Australian companies.

Panel B of Table 2 presents difference of means tests for key variables between family

and non-family firms. Family firms represent around 16% of the sample. The proxies for

audit complexity variables, in particular inventory and receivable ratios, are statistically

indistinguishable between family and non-family firms. On average, family firms pay higher

audit fee than non-family firms. Blockholder and insider ownership are more prevalent in

family firms than in non-family firms. These differences are statistically significant. Family


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firms appear to be less profitable than their non-fmaily counterparts. However, this difference

is statistically insignificant. On average, 48% of family firms and 41% of non-family firms

choose big 4 auditors.

Table 3 provides a simple correlation matrix for the variables. Family controlled firms

and family ownership have a positive relationship with audit fee. These two variables are also

positively correlated with big 4 auditors. Consistent with previous studies (see for example,

Anderson and Reeb, 2003; Setia-Atmaja et al., 2009) this study finds that family ownership is

negatively related with firm size and leverage. This table also shows that big 4 auditors are

positively correlated with audit fee.

4.3 Famil y firms and audit f ee

We report the results of audit fee regressions in Table 4. In model 1 we examine the

impact of family control on audit fee. We find relatively strong evidence that family firm

pays higher audit fee than non-family firms. Specifically, we find that the coefficient estimate

on family control is positive and significant. This is consistent with the argument from the

supply side perspective that due to concentrated ownership family firm may experience

greater agency problem and incur higher amount of agency costs. This may influence auditor

to perceive higher assessed risk as well as charging higher audit fee to their family firm

clients. The fact that the coefficients of some other control variables are statistically

significant suggests that an audit fee of a firm is also influenced by other factors. In

particular, a positive significant coefficient of big4 auditor implies audit fee premium for

larger firms (Firth, 1997; Beattie et al., 2001). The positive significant coefficient of

blockholder ownership suggests that as a part of their monitoring blockholder may induce

firms to purchase high quality and extensive audit service. In response to such clients‟


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demand, auditors increase their engagement efforts and charge higher audit fee. The positive

significant coefficient of firm size implies that larger firms incur higher audit fee than smaller

firms (Simunic, 1980). A positive significant coefficient of non-audit fee suggests that

companies taking non-audit services pays higher audit fee than those who do not take such

services.

In mode 2 we examine the impact of family ownership on audit fee. We find a positive

significant coefficient of family ownership. This implies that larger percentage of family

ownership is related with higher amount of audit fee. This is also consistent with our

findings of family control in model 1. In model 3 we investigate whether family firms with

big4 auditors incur higher audit fee than family firms with non-big4 audit fee. We find a

positive (negative) significant coefficient of family firm interaction with big 4 (non-big4)

auditors. This implies that family firms pay big4 audit firms a premium for their quality audit

services.

4.4 Famil y f irms and auditor choice

We report the results of auditor choice regressions in Table 5. In model 1 we examine

the impact of family control on auditor choice. We find relatively strong evidence that family

firms are more likely to choice big 4 auditors than non-family firms. Specifically, we find

that the coefficient estimate of family control is positive and significant. This also implies

that family firms are likely to have greater demand for audit quality because of higher agency

costs. The statistically significant coefficients of some other variable suggest that the choice

of auditor of a firm is also influenced by other factors. In particular insider ownership is

negative and marginally significant which implies that firms with higher percentage of insider

ownership are less likely to have quality audit as well as choice big 4 auditors. This is


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consistent with the managerial entrenchment argument (Morck et al., 1988). A psotive

significant coefficient of blockholder ownership implies that presence of blockholders induce

managers to purchase higher quality audit. The positive and significant coefficient of audit

complexity proxied by inventory ratio implies that firms with more complexities are more

likely to have big 4 auditor. A positive significant coefficient of firm size implies that large

firms are more likely to have big 4 auditors. The marginally positive significant coefficient of

profitability implies that an increase in profitability is more likely to increase the possibility

to choice a big 4 auditor. In mode 2 we examine the impact of family ownership on auditor

choice. We find a positive significant coefficient of family ownership. This implies that firms

with larger percentage of family ownership are more likely to undergo rigorous audit and

choice big 4 auditors. This is also consistent with our findings of family control in model 1.

5. Conclusion

We examine the relation between family ownership and control and audit fee and

auditor choice in Australian companies. Our result indicates that family firms pay higher

audit fee than non-family firms. Additionally, family share ownership is related with higher

audit fee. This is consistent with supply-side argument (i.e., higher assessed client-related

risks due to family owners‟ expropriation, poor monitoring of management, and higher

information asymmetry) of the determinants of audit fee. We also explore the audit firm size

effect on the relationship between family ownership and audit fee. Our results suggest that family

firms pay higher audit fee to big 4 auditors. We also find that compared to non-family firms,

family firms are more likely to hire top-tier accounting firms. This tendency may stem from

greater agency problem between owners and managers in family firms.

We extend the literature relating to audit pricing and auditor choice from two

perspectives. First, we investigate the audit pricing and big 4 auditor choice in family firms.


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Second, our study uses the dataset from an Australian environment that is different, in terms

of institutional characteristics, from that of developed countries as far as auditing and the

overall financial system are concerned.


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Table 1: Sample description

Panel A

Number of firms available in Connect 4 1863

LessFinancial and utility firms 376

Firms without necessary information 52

Total 1432

Panel B

GICS Industry sector Family Nonfamily Total Proportion

Consumer Staples 8 42 50 0.1600

Energy 29 181 210 0.1381

Health care 31 117 148 0.2095

Industrials 52 132 184 0.2826

Information technology 33 70 103 0.3204

Material 66 536 602 0.1096

Telecommunication 6 27 33 0.1818

Consumer discretionary 0 102 102 0.0000

Total 225 1207 1432 0.1571


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Table 2: Summary statistics

Panel A: Summary statistics

Mean Median Std. Dev.

Inventory ratio 0.048 0.000 0.098

Receivable ratio 0.011 0.000 0.041

Big4 0.471 0.000 0.195

Board independence 0.690 0.714 0.180

Insider ownership 0.167 0.101 0.188

Family ownership 0.405 0.346 0.176

Firm size (in million AUD) 35.2 25.5 993.5

Blockholder ownership 0.283 0.241 0.213

Profitability -0.310 -0.063 1.886

Total Audit fees (in AUD) 277,594 51,150 1,331,856

Audit fees for audit service (in AUD) 247,500 66,041 980,866

Audit fees for non-audit service (in AUD) 118,350 7,123 592,513

Panel B: Difference of Means tests

Family Non-family P values

Inventory ratio 0.041 0.049 0.234

Receivable ratio 0.010 0.010 0.982

Big4 0.480 0.410 0.050

Board independence 0.659 0.697 0.002

Insider ownership 0.186 0.233 0.000

Firm size (in million AUD) 1,017.5 592 0.045

Blockholder ownership 0.31 0.18 0.000

Profitability -0.326 -0.245 0.548

Total Audit fees (in AUD) 389,647 259,216 0.000

Audit fees for audit service (in AUD) 265,698 165,721 0.026

Audit fees for non-audit service (in AUD) 200,489 142,703 0.032


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Table 3: Correlation matrix

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

(1) 1.000

P value -----

(2) 0.248 1.000

P value 0.000 -----

(3) 0.225 0.202 1.000

P value 0.000 0.000 -----

(4) 0.115 -0.082 -0.294 1.000

P value 0.014 0.081 0.000 -----

(5) 0.148 -0.149 -0.329 0.850 1.000

P value 0.002 0.001 0.000 0.000 -----

(6) -0.093 -0.048 -0.021 -0.025 -0.015 1.000

P value 0.048 0.304 0.658 0.595 0.758 -----

(7) -0.022 -0.085 -0.015 -0.055 -0.038 0.235 1.000

P value 0.639 0.072 0.758 0.241 0.419 0.000 -----

(8) 0.484 0.270 0.321 -0.013 -0.049 0.013 0.025 1.000

P value 0.000 0.000 0.000 0.780 0.293 0.789 0.590 -----

(9) 0.014 0.014 -0.020 -0.039 -0.020 -0.345 -0.381 -0.053 1.000

P value 0.759 0.761 0.667 0.403 0.668 0.000 0.000 0.260 -----

(10) 0.593 0.307 0.375 0.017 0.064 0.031 -0.015 0.849 0.002 1.000

P value 0.000 0.000 0.000 0.019 0.071 0.511 0.749 0.000 0.961 -----

(11) -0.201 -0.182 -0.285 0.763 0.885 0.001 -0.041 -0.063 -0.024 -0.096 1.000

P value 0.000 0.000 0.000 0.000 0.000 0.977 0.383 0.179 0.609 0.041 -----

(12) -0.003 -0.065 0.028 -0.010 -0.045 -0.001 0.074 0.022 0.039 0.008 0.003 1.000

P value 0.955 0.166 0.549 0.825 0.340 0.988 0.118 0.633 0.412 0.058 0.952 -----

(13) 0.067 0.028 0.057 0.032 -0.019 0.059 0.086 0.081 -0.138 0.014 -0.030 0.020 1.000P value 0.153 0.546 0.229 0.493 0.689 0.207 0.069 0.084 0.003 0.772 0.529 0.673 -----

(14) 0.019 -0.027 -0.028 -0.045 -0.033 0.233 0.512 0.110 -0.581 0.016 -0.031 -0.003 0.259 1.000

P value 0.086 0.568 0.055 0.043 0.078 0.000 0.000 0.019 0.000 0.728 0.505 0.954 0.000 -----

(1) Big 4; (2) board independence; (3) blockholder ownership (4) family control (5) family share ownership (6) inventory ratio (7) leverage (8) non-audit fee

(9)loss (10) total audit fee (11) insider ownership (12) receivable ratio (13) profitability ratio (14)firm size


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Table 4: Family ownership, control and audit fee

Model 1 Model 2 Model 3

Coefficient P value Coefficient P value Coefficient P value

Intercept 6.272 0.000 6.287 0.000 6.266 0.000

Family share ownership 0.931 0.003

Family control 0.308 0.002

Family control*Big4 0.264 0.025

Family control*(1-Big4) -0.350 0.002

Non-audit fees 0.539 0.000 0.540 0.000 0.569 0.000

Insider ownership -0.234 0.268 -0.489 0.187 -0.241 0.255

Inventroy ratio 0.064 0.817 0.091 0.742 0.065 0.815

Receivable ratio 0.276 0.722 0.038 0.961 0.284 0.713

Size 0.029 0.068 0.031 0.059 0.030 0.068

Big 4 0.529 0.000 0.525 0.000 0.547 0.000

Loss 0.014 0.836 -0.003 0.968 0.013 0.841

Leverage 0.340 0.141 0.291 0.206 0.341 0.140

Board independence 0.212 0.164 0.209 0.170 0.211 0.168

Blockholder ownership 0.574 0.000 0.588 0.000 0.561 0.000

Adjusted R squared 0.781 0.778 0.774

F stat 197.986 197.587 181.36


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Table 5: Family ownership, control and auditor choice

Model 1 Model 2

Coefficient P value Coefficient P value

Intercept -1.310 0.091 -1.341 0.084

Family share ownership 0.985 0.026

Family control 0.353 0.034

Insider ownership -1.209 0.033 -1.396 0.053

Blockholder ownership 1.940 0.000 1.974 0.000

Size 0.027 0.012 0.026 0.025

Leverage 0.295 0.624 0.271 0.647

Inventroy ratio 1.542 0.047 1.558 0.045

Receivable ratio 0.882 0.620 0.812 0.646

Profitability 0.098 0.103 0.100 0.100

Board independence 1.920 0.000 1.921 0.000

McFaden R squared 0.241 0.238

LR Stat 91.492 91.159

Documents

AUD__Khan__Family Firm, Audit Fee and Auditor Choice- Australian Evidence

AUDKhanFamily Firm, Audit Fee and Auditor Choice- Australian Evidence