The ever-increasing use of Fair Value Accounting (FVA) is preferable in promoting such benefits as relevant financial information and improving transparency of financial reporting compared to traditional accounting methods (McDonough et al. 2020). At the same time, the passage of FVA introduces substantial difficulties from the audit perspective in obtaining and confirming fair value inputs (Bradley & Sun 2021; Griffith 2020). Given the rising use of complex estimates of FVA, the problem of management bias can lead to demands for high-quality audit services. Consequently, more audit effort and time are required from auditors to provide assurance in financial reporting which eventually leads to higher audit fees (Sangchan et al. 2020). This study’s primary motivation is driven by the limited and inconclusive research on the monitoring costs resulting from Fair Value Disclosure (FVD) (Miah 2019). Therefore, it aims to examine the relationship between FVD and audit fees paid by Jordanian firms from 2005 through to 2018. It explores the relationship between the presence of FVD and audit fees and looks closely at the relationship between the proportion of fair-valued assets and audit fees.
Due to the uniqueness of this study’s institutional environment characteristics, the impact of a number of ownership structure factors (including family, government and financial institutional ownership) on the association between the proportion of fair-valued assets and audit fees is examined. The moderating role of the major two auditor industry expertise attributes: market share (MS) and portfolio share (PS) on the link between the proportion fair-valued assets and audit fees is also investigated. This study, moreover, considers further factors of the auditees’ industry type, such as whether the entity is in the financial or non-financial sector. An analysis is also conducted to produce new empirical evidence on the effect of the Global Financial Crisis (GFC) on the association between the proportion of fair-valued assets and audit pricing.
This study is based on the publicly available secondary data from a sample of annual reports published by Jordanian firms listed on the Amman Stock Exchange (ASE). This analysis employs an Ordinary Least Squares (OLS) regression to test the developed hypotheses. A number of additional analyses and sensitivity tests are also conducted to ensure that the main regression results are robust to different measurements and estimators. The regression analysis finds that a greater level of FVD (and proportion of fair-valued assets) is the major driver of higher audit fees. The results are more pronounced for firms with larger ratios of the subjective FVDs (Level 3 assets). Further, a significant and positive difference in the association between the proportion of fair-valued assets and audit fees is evident for finance industry vs. non-finance industry. Specifically, the moderating impact of industry type is significantly positive (negative) in relation to Level 2 (Level 1) assets but not significant for Level 3 assets. A significantly negative (positive) impact of the pre-crisis (post-crisis) period on the association between the proportion of fair-valued assets and audit fees is confirmed. The regression findings, moreover, confirm a negative impact of the moderating pre-crisis over fair value inputs, whereas a positive impact of post-crisis is documented only for Level 1 assets. These findings are in line with the agency and stakeholder theories as the conjunction between the different types of users and the likelihood of material misstatements, and managers’ fraud following the application of FVA have led to abuse of power. Shareholders have potentially been misled simply to serve managements personal interests.
The current study’s results are consistent with agency and stakeholder theories, and indicate that family ownership leads to a weaker relationship between the proportion of fair-valued assets and audit fees. Conversely, the analysis confirms the opposite for both governmental and financial institutional ownership factors. This is also consistent with signalling theory. The regression, moreover, confirms that the nature of the impact of moderating family ownership on the association between Level 1 assets and audit fees is significantly negative (not for Level 2 and Level 3 assets). The analysis confirms that state ownership in the case of the subjective fair values (Level 3 assets) leads to expensive audit fees being charged. The regression, moreover, confirms that the association between the highly uncertain fair values (Level 3 assets) and audit fees is strengthened when financial institution ownership exists. In line with the signalling theory, the analysis suggests that the association between the proportion of fair-valued assets and audit fees is strengthened when the client hires industry specialist auditors identified by MS. Conversely, industry specialists identified by the PS approach are not significantly moderating the relationship between the proportion of fair-valued assets and audit fees. With respect to fair value hierarchy level inputs, Level 1 was the only level found to be moderated by both scenarios with positive (negative) sign under the product differentiation scenario (shared efficiency scenario). The results furthermore support the agency and stakeholder theories.
This study pioneers the topic by examining post-FVA transformation consequences in a developing country, Jordan (Abdullatif 2016). It is the first attempt of its kind to examine the integration of the agency, signalling and stakeholder theories with fair value proxies to establish and evaluate the nature of the relationship between FVD and audit fees (Samaha & Khlif 2016). Results of this study provide policymakers and standard setters with updated empirical evidence originating from a non-Western setting about the post-implementation costs of IFRS/FVA. The findings also benefit regulatory authorities on monitoring and governing the audit profession, which could lead to considering the challenges of auditing the less verifiable fair values. This research assists Jordan’s government in providing more specific guidelines and recommendations that simplify and guarantee best practices of FVA. This contribution makes the findings of the study more relevant to wider settings. Arguably, the findings from Jordan as a study site can reasonably be generalised to other countries in the ME, especially to those that have not yet applied or recently have applied fair value model.