The Effect of Divergence between Cash Flow Right and Voting Right on Audit Hour and Audit Fee per Audit Hour

Abstract

This study examines the association between ownership structure of

client firms measured by the divergence between cash flow rights and

voting rights, and audit hour and audit fee per audit hour. Auditors could spend more audit hours or increase the audit fees per audit hour

for the risky firms which have greater divergence between cash flow

right and voting right. Using 436 firm-year observations collected over

2003~2005 period from Korean stock market, we investigate this

relationship. The empirical results reveal that the audit hour increases

as the divergence increases. However, there is a great difference in the

empirical results depending on the firm size. Although small firms show

the positive association between the divergence and audit hour, large

firms reveal the negative association between the two. In addition, there

is no change in the hourly audit fee rate for total sample and small firm

samples. In contrast, the hourly fee rate increases as divergence

increases for the large firm sample. In summary, auditors increase

hourly fee rate but decrease audit hour as the divergence of large firms

increases. These findings are very interesting and provide new insights

to regulators, academics, as well as practitioners.