The effect of changing fiscal year-ends on audit fees and audit quality

Abstract

Purpose

This study aims to extend recent research analyzing the effect of auditor busyness on audit quality. Specifically, this study explores the effect on audit quality of a change of fiscal year-end to or from an audit firm’s busy period.

Design/methodology/approach

Empirical archival.

Findings

When firms change their fiscal year-end to a period when the auditor is less busy, client firms are rewarded with lower audit fees and auditors are rewarded with a reduction in required effort. This study finds no difference in the level of audit quality after a change in fiscal year-end.

Practical implications

There are significant implications for audit firms as they may gain cost advantages by successfully promoting off-season fiscal year-ends, and reduce the negative effect on employees associated with “busy season” stress. Similarly, client firms may find that audit costs are reduced when they adopt a less “busy” fiscal year-end.

Social implications

These results have policy implications for regulators because regulators often dictate the fiscal year-end for certain industries or traded securities. Such dictates may thus introduce inefficiencies into the market for audit services.

Originality/value

These results should guide regulators in their decisions to dictate fiscal year-ends and firms in their choice of reporting periods.

Citation

Pacheco Paredes, A.A. and Wheatley, C. (2020), "The effect of changing fiscal year-ends on audit fees and audit quality", Journal of Financial Economic Policy, Vol. 12 No. 3, pp. 365-382. https://doi.org/10.1108/JFEP-07-2019-0140