Client's business risk, public‐interest entities, and audit fees: The case of German credit institutions

• DOI: http://doi.org/10.1111/ijau.12099
• Published date: 01 November 2017
• Date: 01 November 2017

ORIGINAL ARTICLE

Client's business risk, public‐interest entities, and audit fees:

The case of German credit institutions

Jacob Justus Leidner |Hansrudi Lenz

University of Würzburg, Germany

Correspondence

Jacob Justus Leidner, University of Würzburg,

Sanderring 2, 97070 Würzburg, Germany.

Email: jacob.leidner@uni‐wuerzburg.de

This study examines a sample of 573 German credit institution‐year observations covering

2009–2011, a period when not all credit institutions were designated as public‐interest entities

(PIEs) in Germany. The results show that a credit institution's business risk is associated with audit

fees. In addition, the statistically significant findings reveal that PIE credit institutions pay approx-

imately 27.29% higher audit fees, on average. There is also some evidence of an association

between the interaction of a credit institution's business risk and PIE status and audit fees even

if, on average, the business risk of credit institutions seems not to vary systematically between PIEs

and non‐PIEs. Ultimately, since a dummy variable for PIE versus non‐PIE might not only, or even

primarily, capture effects attributable to PIE status, the results should be interpreted with caution.

KEYWORDS

Audit fees, client's business risk, credit institutions, Germany, public‐interest entities

1|INTRODUCTION

The European Union's (EU) latest audit (market) reform targeted

public‐interest entities (PIEs), which generally include credit institu-

tions according to the 2006 Statutory Audit Directive (European

Union, 2006).

1

However, the 2006 Statutory Audit Directive also

allowed European Member States to not regard all credit institutions

as PIEs. Germany exercised this option, which led to a circumstance

in which only credit institutions designated as PIEs (“PIE credit institu-

tions”) were subject to special provisions of statutory audits, whereas

non‐PIE credit institutions were not. For example, auditors of PIEs

are subject to disciplinary oversight inspections by the Auditor Over-

sight Commission (AOC). Therefore, it could be asked whether auditors

differentiate between audits of PIE credit institutions and non‐PIE

credit institutions. The German setting enables an examination of

whether the PIE status of credit institutions is associated with audit

fees because this status might increase the risk to the respective audi-

tors significantly enough to influence their audit efforts or risk pre-

miums, or both.

Using a sample of 573 German credit institution‐year observations

(excluding savings banks and cooperative banks) over the 2009–2011

period, this study first corroborates the findings of prior research that a

credit institution's business risk is significantly associated with audit

fees (e.g., Cameran & Perotti, 2014; Cullen, Gasbarro, Monroe, Shailer,

& Zhang, 2017; Doogar, Rowe, & Sivadasan, 2015; Fields, Fraser, &

Wilkins, 2004). In addition, it shows that PIE credit institutions tend

to pay significantly higher audit fees than credit institutions not

classified as PIEs. The effect also seems to be economically significant:

an approximately 27.29% increase in average audit fees, ceteris

paribus. Moreover, although, on average, the business risk of credit

institutions seems not to vary systematically between PIEs and

non‐PIEs, there is some evidence of an association between the inter-

action of a credit institution's business risk and PIE status and audit

fees. Further analyses, however, suggest that a dummy variable for

PIE versus non‐PIE might not only, or even primarily, capture effects

attributable to PIE status.

This study extends prior research by presenting empirical evidence

that PIE status is associated with audit fees of German credit

institutions, which might be due to variations in audit effort and/or

auditor's business risk premiums. Interestingly, the EU's new

regulatory framework on statutory audits (European Union, 2014) no

longer includes a Member State option to reduce the extent of the

EU PIE definition, and, therefore, all credit institutions are regarded

as PIEs for the purpose of specific provisions for statutory audits.

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This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided

the original work is properly cited.

© 2017 The Authors International Journal of Auditing Published by John Wiley & Sons Ltd.

Received: 28 April 2016 Revised: 21 April 2017 Accepted: 8 May 2017

DOI: 10.1111/ijau.12099

324 Int J Audit. 2017;21:324–338.wileyonlinelibrary.com/journal/ijau