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Substantive or symbolic compliance with regulation, audit fees and audit quality

Author

Listed:
  • Fakhroddin MohammadRezaei

    (Kharazmi University)

  • Omid Faraji

    (College of Farabi, University of Tehran)

  • Zabihollah Rezaee

    (The University of Memphis)

  • Reza Gholami-Jamkarani

    (Qom Branch, Islamic Azad University)

  • Mehdi Yari

    (Qom Branch, Islamic Azad University)

Abstract

We examine whether Audit Fee Regulation (AFR) enhances auditors’ bargaining power in setting audit fees, consequently leading to superior quality audit services using the Iranian audit environment. We posit two hypotheses of “symbolic” and “substance” compliance. We find that neither audit fees nor audit quality has increased in the post-AFR era, supporting the symbolic hypothesis. The results are robust to several sensitivity tests, including difference-in-difference analysis. Contrary to the regulator’s expectation, our findings suggest that arbitrarily stimulating suppliers’ incentives without considering the priority and importance of demand-side incentives in a compliance-driven audit market and the flexibility to bypass the regulation result in symbolic (de jure) compliance with the regulation. We provide policy, practice, and research implications by suggesting that positive intended consequences of regulations in a compliance-driven audit market can be achieved when the regulation is robust with less latitude for discretion symbolic compliance.

Suggested Citation

  • Fakhroddin MohammadRezaei & Omid Faraji & Zabihollah Rezaee & Reza Gholami-Jamkarani & Mehdi Yari, 2024. "Substantive or symbolic compliance with regulation, audit fees and audit quality," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 21(1), pages 32-51, March.
    • Handle: RePEc:pal:ijodag:v:21:y:2024:i:1:d:10.1057_s41310-023-00178-4
    DOI: 10.1057/s41310-023-00178-4
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