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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

Suggested Citation

  • Paul Klumpes, 2013. "Audit fee pricing and internationally-credible GAAP: a property rights analysis," European Journal of Law and Economics, Springer, vol. 35(1), pages 21-39, February.
  • Handle: RePEc:kap:ejlwec:v:35:y:2013:i:1:p:21-39 DOI: 10.1007/s10657-010-9175-x
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    References listed on IDEAS

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    1. Doidge, Craig & Karolyi, G. Andrew & Stulz, Rene M., 2004. "Why are foreign firms listed in the U.S. worth more?," Journal of Financial Economics, Elsevier, vol. 71(2), pages 205-238, February.
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    1. repec:kap:ejlwec:v:44:y:2017:i:3:d:10.1007_s10657-014-9460-1 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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