Variable definitions
| Variable | Definition |
|---|---|
| Dependent variables | |
| LAF | The natural logarithm of a client firm’s audit fees in the current year |
| Variables of interest | |
| LNPEN | The natural logarithm of One plus a client firm’s total monetary penalties because of non-financial violations in the prior year |
| LNNUM | The natural logarithm of One plus a client firm’s total number of non-financial violations in the prior year |
| LNPEN_labor (consumer, environment or other) | The natural logarithm of One plus a client firm’s total monetary penalties because of labor-related (consumer-related, environment-related, or other) violations in the prior year; the other category encompasses government contracting, health care, competition and miscellaneous violations |
| LNNUM_labor (consumer, environment or other) | The natural logarithm of One plus a client firm’s total number of labor-related (consumer-related, environment-related or other) violations in the prior year; the other category encompasses government contracting, health care, competition and miscellaneous violations |
| Control variables | |
| LIQ | Current assets divided by current liabilities |
| CA_TA | Current assets divided by total assets |
| INVREC | The proportion of total assets in receivables and inventory |
| ROA | Operating income after depreciation divided by total assets |
| LOSS | Equals 1 if the client firm reports a negative operating income after depreciation, else 0 |
| INTANG | Intangible assets divided by total assets |
| GC | Equals 1 if the client firm receives a going concern opinion, else 0 |
| MW | Equals 1 if the client firm reports a material weakness of internal controls, else 0 |
| RESTATE | Equals 1 if the firm announces a financial restatement in current year, else 0 |
| LEV | Total liabilities divided by total assets. |
| Z | Following Altman (1968), the Z-score is calculated using the following model: Altman Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where: A = working capital / total assets B = retained earnings / total assets C = earnings before interest and tax / total assets D = market value of equity / total liabilities E = sales / total assets |
| SIZE | The natural logarithm of the market value of equity |
| MERGER | Equals 1 if the firm engaged in a merger or acquisition in the current year, else 0 |
| FRGN | Equals 1 if the firm has foreign operations, else 0 |
| LNBUS | The natural logarithm of the number of business segments |
| LNGEO | The natural logarithm of the number of geographic segments |
| BUSY | Equals 1 if the client firm’s fiscal year ends in December, else 0 |
| BIG4 | Equals 1 if the audit office is a Big 4 auditor, else 0 |
| SP | Equals 1 if the auditor is both a city-level and a national-level specialist, else 0; city-level (national-level) specialist is the audit office has the largest market share in a city (in nation) based on audit fees in the client’s two-digit SIC industry and its market share is at least 10 percentage points greater than that of the next audit office (following Mayhew and Wilkins, 2003; Balsam et al., 2003); we define a city as a Metropolitan Statistical Area (MSA) |
| LNTENURE | The natural logarithm of the number of years an audit office served as the auditor of the client |
| AUD_CH | Equals 1 if there is an auditor change in the current year, else 0 |
| LNAF | The natural logarithm of non-audit fees |
| DUAL | Equals 1 if CEO is also served as chairman at the client firm, else 0 |
| CEOEXP | Equals 1 if CEO is also a financial expert, else 0 |
| TURNOVER | Equals 1 if the client firm experiences a CEO turnover in current year, else 0 |
| LAG | The natural logarithm of the number of calendar days between fiscal year-end to the audit report signing date |
| AF | The number of analysts following the firm |
| ToSP | Equals 1 if the client firm switches its auditor from non-specialist (i.e. SP = 0) to specialist (i.e. SP = 1), else 0 |
| Variables used in robustness tests | |
| TREAT | Equal to 1 for the treatment group and 0 for the control group used in PSM approach in Section 7.2 |
| LNPEN2 | The natural logarithm of 1 plus a client firm’s total monetary penalties because of non-financial violations in the t – 2 year |
| LNNUM2 | The natural logarithm of 1 plus a client firm’s total number of non-financial violations in the t – 2 year |
| Variable | Definition |
|---|---|
| The natural logarithm of a client firm’s audit fees in the current year | |
| The natural logarithm of One plus a client firm’s total monetary penalties because of non-financial violations in the prior year | |
| The natural logarithm of One plus a client firm’s total number of non-financial violations in the prior year | |
| LNPEN_labor (consumer, environment or other) | The natural logarithm of One plus a client firm’s total monetary penalties because of labor-related (consumer-related, environment-related, or other) violations in the prior year; the other category encompasses government contracting, health care, competition and miscellaneous violations |
| LNNUM_labor (consumer, environment or other) | The natural logarithm of One plus a client firm’s total number of labor-related (consumer-related, environment-related or other) violations in the prior year; the other category encompasses government contracting, health care, competition and miscellaneous violations |
| Current assets divided by current liabilities | |
| CA_TA | Current assets divided by total assets |
| The proportion of total assets in receivables and inventory | |
| Operating income after depreciation divided by total assets | |
| Equals 1 if the client firm reports a negative operating income after depreciation, else 0 | |
| Intangible assets divided by total assets | |
| Equals 1 if the client firm receives a going concern opinion, else 0 | |
| Equals 1 if the client firm reports a material weakness of internal controls, else 0 | |
| RESTATE | Equals 1 if the firm announces a financial restatement in current year, else 0 |
| Total liabilities divided by total assets. | |
| Z | Following |
| The natural logarithm of the market value of equity | |
| Equals 1 if the firm engaged in a merger or acquisition in the current year, else 0 | |
| Equals 1 if the firm has foreign operations, else 0 | |
| The natural logarithm of the number of business segments | |
| The natural logarithm of the number of geographic segments | |
| Equals 1 if the client firm’s fiscal year ends in December, else 0 | |
| BIG4 | Equals 1 if the audit office is a Big 4 auditor, else 0 |
| Equals 1 if the auditor is both a city-level and a national-level specialist, else 0; city-level (national-level) specialist is the audit office has the largest market share in a city (in nation) based on audit fees in the client’s two-digit | |
| LNTENURE | The natural logarithm of the number of years an audit office served as the auditor of the client |
| AUD_CH | Equals 1 if there is an auditor change in the current year, else 0 |
| The natural logarithm of non-audit fees | |
| Equals 1 if | |
| Equals 1 if | |
| TURNOVER | Equals 1 if the client firm experiences a |
| The natural logarithm of the number of calendar days between fiscal year-end to the audit report signing date | |
| The number of analysts following the firm | |
| ToSP | Equals 1 if the client firm switches its auditor from non-specialist (i.e. |
| Equal to 1 for the treatment group and 0 for the control group used in | |
| LNPEN2 | The natural logarithm of 1 plus a client firm’s total monetary penalties because of non-financial violations in the t – 2 year |
| LNNUM2 | The natural logarithm of 1 plus a client firm’s total number of non-financial violations in the t – 2 year |
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