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Audit fee pricing and internationally-credible GAAP: a property rights analysis

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  • Paul Klumpes

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    Abstract

    This paper applies a property rights analysis to examine what optimal audit fee compensation schedule is required by foreign based firms in order to produce internationally-credible generally accepted accounting principles (GAAP) that are acceptable to the Securities and Exchange Commission (SEC). The SEC has property rights to take away from foreign firms their discretion over what form of internationally-credible GAAP they must comply with in order to enter US securities markets. This takings decision is costly for foreign firms because it requires them to incur higher marginal audit fees associated with complying with US GAAP and the Sarbanes–Oxley Act. Utilising an argument developed by the property rights literature, a model is presented which assumes four participants: (a) Congress; (b) the SEC; (c) foreign based firms; and (d) audit firms, who compete for political influence over the determination of internationally credible-GAAP. The optimal audit fee compensation schedule required to be incurred by foreign based firms in order to produce internationally-credible GAAP financial reports is found to depend upon with which of these interest groups the SEC’s preferences coincide. Evidence is provided which supports the proposition implied by the model that European firms overinvested in the audit expenditures required to comply with the US disclosure and legal requirements. Copyright Springer Science+Business Media, LLC 2013

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    File URL: http://hdl.handle.net/10.1007/s10657-010-9175-x
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    Bibliographic Info

    Article provided by Springer in its journal European Journal of Law and Economics.

    Volume (Year): 35 (2013)
    Issue (Month): 1 (February)
    Pages: 21-39

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    Handle: RePEc:kap:ejlwec:v:35:y:2013:i:1:p:21-39

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    Web page: http://www.springerlink.com/link.asp?id=100264

    Related research

    Keywords: Property rights; Internationally-credible GAAP; Audit fee pricing; G28; K20; M42;

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    1. Fischel, William A & Shapiro, Perry, 1988. "Takings, Insurance, and Michelman: Comments on Economic Interpretations of "Just Compensation" Law," The Journal of Legal Studies, University of Chicago Press, vol. 17(2), pages 269-93, June.
    2. Lineke Sneller & Henk Langendijk, 2007. "Sarbanes Oxley Section 404 Costs of Compliance: a case study," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(2), pages 101-111, 03.
    3. Seetharaman, Ananth & Gul, Ferdinand A. & Lynn, Stephen G., 2002. "Litigation risk and audit fees: evidence from UK firms cross-listed on US markets," Journal of Accounting and Economics, Elsevier, vol. 33(1), pages 91-115, February.
    4. Craig Doidge & G. Andrew Karolyi & Rene M. Stulz, 2001. "Why are Foreign Firms Listed in the U.S. Worth More?," NBER Working Papers 8538, National Bureau of Economic Research, Inc.
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    6. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
    7. Blume, Lawrence & Rubinfeld, Daniel L & Shapiro, Perry, 1984. "The Taking of Land: When Should Compensation Be Paid?," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 71-92, February.
    8. De Alessi, Louis, 1969. "Implications of Property Rights for Government Investment Choices," American Economic Review, American Economic Association, vol. 59(1), pages 13-24, March.
    9. Merino, Barbara Dubis & Neimark, Marilyn Dale, 1982. "Disclosure regulation and public policy a sociohistorical reappraisal," Journal of Accounting and Public Policy, Elsevier, vol. 1(1), pages 33-57.
    10. Stephen R. Foerster & G. Andrew Karolyi, 1999. "The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States," Journal of Finance, American Finance Association, vol. 54(3), pages 981-1013, 06.
    11. Ron Giammarino, 2005. "Loggers versus Campers: Compensation for the Taking of Property Rights," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(1), pages 136-152, April.
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