Study finds audit fee differences for international cross-listed companies are not simply driven by litigation costs

LAWRENCE — Researchers have long determined that foreign companies cross-listed on international and U.S. stock exchanges face higher audit fees as part of the listing process.

Added litigation costs are traditionally considered to be the main driver of the higher audit fees, but a new study by a University of Kansas accounting researcher has found that audit effort is nearly as important as litigation cost in explaining the higher audit fees associated with foreign cross-listed firms.

"We want the bar for cross-listing to be high because I don't think we want to expose investors to foreign companies that are exceedingly risky," said Scott Bronson, associate professor of accounting in the KU School of Business.

The study by Bronson and his co-authors — Aloke Ghosh of Baruch College, City University of New York, and Chris Hogan of Michigan State University — was published recently in the journal Contemporary Accounting Research.

The researchers estimate that between 29 percent and 48 percent of the incremental fees for cross-listed companies can be attributed to audit effort. The study confirmed past research that showed cross-listed companies do pay higher audit fees than companies listed in the United States and foreign companies listed solely in their home country.

Large international companies often cross-list to gain access to capital outside of their own country, and listing on a U.S. stock exchange is considered a strong seal of approval as a global company.

"Cross-listing is a signal of strength," Bronson said. "Plus, we have very robust capital markets."

The researchers developed a unique measure to help examine the auditing regulatory environment in a given country and how it influences audit fees. As part of that, they developed a "regulatory power" measure to determine the auditing strength in a cross-listed firm's home country. The researchers compared the regulatory environment in 23 countries around the world.

Bronson said the results of their study suggest that auditors charging more to audit cross-listed firms are doing so for legitimate reasons.

"The alternative is that the auditor is charging a fee premium to cover themselves in the event of a lawsuit rather than doing more work," he said. "We believe that we filled a void by showing that auditors are not simply price protecting; instead, they are performing more work to comply with more stringent U.S. standards."

These very large cross-listed companies are audited in accordance with the standards in their home country as well as U.S. auditing standards and, in many cases, these companies also have to reconcile their financial statements with the reporting standards in the United States.

"The goal," Bronson said, "is to protect any investor in our markets."