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Last Updated 28 August 2014 CRICOS Code 00098G
School of Accounting Seminar Series Semester 2, 2014
Regulatory Reporting Relief and the Pricing of Audit Fees
Tina Huynh
The University of Sydney
Date: Friday October 10 2014 Time: 3.00pm – 4.00pm Venue: ASB 220
Business School
School of Accounting
Regulatory reporting relief and the pricing of audit fees
Tina HuynhDemetris Christodoulou
MEAFA research networkThe University of Sydney∗
Early Draft - please do not cite
∗All authors are members of the MEAFA research group at The University of Sydney Business School(http://sydney.edu.au/business/research/meafa). We acknowledge financial support from MEAFA, theAFAANZ Research Grant 2009/10 and The University of Sydney Business School Research Grant 2009.We acknowledge the beneficial comments from Graeme Dean and Sandra van der Laan.
1
Abstract
The study evaluates the deregulatory benefits of the Australian Class Order Deed ofCross-Guarantee (henceforth DXG). We examine whether exempting subsidiary compa-nies from the requirement to prepare and file audited financial statements affects theaudit costs of a corporate group. We conduct static and dynamic panel data analysison the audit fees of firms listed in the ASX200 between 2000-2007. Our results showthat, contrary to expectation, audit fees do not decrease upon adoption of the DXG,but increase in the long run for participating corporate groups. However, the extent towhich the corporate group takes advantage of financial reporting relief does not seem toaffect overall audit cost. This result suggests that the increased complexity in the auditassociated with the adoption of a DXG could lead to an increase rather than a reductionin audit effort.
1
1 Introduction
Given the prevalence of the corporate group as the dominant business form for organ-
ising commercial activity in capital markets, their effective regulation has become an
important matter of concern (Clarke and Dean 2007).1 While common law upholds the
separate legal entity principle, regulators acknowledge that parent companies and their
subsidiaries often closely coordinate their operations. Accordingly, such related compa-
nies are increasingly treated as a single economic entity for a range of purposes.2
One such regime is the Class Order Deed of Cross Guarantee (henceforth DXG). A
unique feature of the Australian regulatory environment, ASIC Class Order 98/1418
enables entities within a corporate group to report as a single reporting entity. Figure 1
illustrates how execution of the DXG instrument by a subset of subsidiaries creates a
‘closed group’. All parties to the DXG are required to mutually cross-guarantee the debts
of one another and prepare a separate set of consolidated financial statements for the
closed group. In return, closed group participants are relieved from having to prepare,
file and audit individual financial statements.3
The Australian Securities and Investment Commission (ASIC) maintains that financial
reporting relief under the DXG regime reduces the accounting and auditing costs of
corporate groups without negatively impacting other users of financial statements as
creditors are protected by virtue of the cross-guarantees (ASC 1991). In practice, how-
ever, the effectiveness of the regulatory intervention remains unknown as the DXGs have
never been tested. In recent high-profile corporate failures (e.g. Sons of Gwalia, Ansett,
1A corporate group is defined as a set of related companies, that are characterised by commonownership or control. In Australia, almost 90% of publicly listed companies are structured as a corporategroup (?van der Laan and Dean 2010).
2For financial reporting purposes, a corporate group is required to prepare a set of consolidatedfinancial statements (AASB 127 §9). Under the tax consolidation regime, a corporate group may beassessed jointly or separately for income tax (Australian Taxation Office (ATO) 2002).
3Closed group participants must be wholly-owned domestic entities. Certain non-wholly owned, i.e.controlled, and foreign wholly-owned subsidiaries may also become parties to the DXG and form an‘extended closed group’, however, they do not qualify for reporting relief.
2
HIH ) existing DXGs were typically ignored due to difficulties in disentangling creditor
and equity holder claims (Clarke and Dean 2007; van der Laan 2009). These problems,
among other factors, have led to calls for a review of the regulatory environment of
corporate activity (Corporations and Markets Advisory Committee (CAMAC) 2008b;
Treasury 2010).
2 Background
2.1 Deed of cross guarantee
Prior studies have examined the incidence and pattern of usage of the DXG (Dean et al.
1999; van der Laan and Dean 2010). They affirm its role as an important regulatory
instrument, particularly among large public companies.4 However, to date, only van der
Laan and Christodoulou (2012) have empirically examined the regulator’s claim that
reporting relief under the DXG regime reduces audit costs. Their results suggest that,
contrary to expectation, companies that take advantage of financial reporting relief pay
higher audit fees than companies without DXGs.
Indeed, a number of studies suggest that corporate groups may be executing DXGs for
reasons other than the one intended by the regulator. Following a survey of corporate
officers, Dean and Clarke (2005) conjecture that DXGs may be used as strategic device for
redacting disclosure, while Bradbury et al. (2009) indicate that proprietary cost savings
resulting from reduced disclosure requirements may be the driving force behind deed
adoption. An exploratory data analysis on corporate group composition has identified
numerous cases in the S&P/ASX 200 index where the execution of DXGs does not seem
to pursue reporting efficiency (Huynh et al. 2012).
4Even though only 16% of companies listed on the Australian Stock Exchange (ASX) executed aDXG during 2007, about 60% of the 150 largest companies (by market capitalisation) had entered intosuch an arrangement with the trend of adoption increasing (van der Laan and Dean 2010).
3
Figure 2 reproduces the corporate group composition for three Australian companies,
which have adopted DXGs, during the period 2000 − 2007 to illustrate the diversity in
group structure. Western Australian Limited (WAN) had 16−25 domestic wholly-owned
subsidiaries during this time, all of which executed the DXG (the adoption in 2004 is
represented by a vertical line). In contrast, David Jones Limited (DJS) only included
four of their 18 subsidiaries in the DXG between 2005 − 2007, despite all of them being
eligible to participate. The example of Coles Group Limited (CGJ) demonstrates the
non-static nature of the DXG as their subsidiaries appear to enter and exit the closed
group over the observation period.
2.2 Pricing of audit fees
Despite the benefits of the DXG regime being challenged, the regulator’s claim are
plausible and consistent with the extant audit pricing literature. A well established
audit fee pricing model builds on the seminal work by Simunic (1980), who suggests
that audit fees are determined by the level of audit effort and audit risk that the auditor
is required to take on in the course of an engagement. A meta-analysis by Hay et al.
(2006), who provide a comprehensive evaluation of audit fee determinants examined over
the last 25 years, supports the validity of this framework.
Adopting this framework, the execution of a DXG is considered a client attribute, which
reduces the required audit effort and thus should lower the cost of the audit. Dean and
Clarke (2005) provide an alternative view. Observing that subsidiaries are allowed to
frequently enter and exit a closed group formation, they argue that a DXG increases
the complexity of the audit and the company’s audit risk profile thus leading to higher
audit cost. Audit complexity has been identified as a significant determinant of audit
fees, which is often proxied by the number of subsidiaries or number of audit reports
issued (Hay et al. 2006).
4
Furthermore, van der Laan and Dean (2010) identified a large variation in closed group
participation. The regulator’s claims suggest that audit cost savings will be the greater,
the more subsidiaries are relieved of their financial reporting obligations. If this is the
case, corporate group structure may need to be considered in the Australian regulatory
setting.
The findings in van der Laan (2009) and van der Laan and Christodoulou (2012) also
identify the DXG as a key determinant in post-DXG Australian-based audit fee research,
which so far has largely relied on prescriptions of the US-based Simunic model (e.g.
Craswell and Francis 1999; Ferguson et al. 2003; Carson and Fargher 2007). As the
Simunic (1980) model was developed from interviews with US-based auditors in the
1970s, it does not account for jurisdiction-specific statutory requirements, such as the
DXG. Indeed, Hay et al. (2006) identify as an avenue for future research the investigation
of how the “regulatory environment that the firm operates in affect the market for audit
services and the fees that external auditors charge” (p. 182).
3 Hypotheses
Given the controversial nature of financial reporting relief further examination of the
effect of the DXG regime on the pricing of audit fees is warranted. van der Laan and
Christodoulou (2012) find that corporate groups, which have executed a DXG, pay higher
audit fees on average in comparison to corporate groups without a DXG. This result is
inconsistent with the regulator’s claims that reporting relief afforded under the DXG
regime leads to lower audit costs.
Their tests indicate that firms adopting a DXG for the first time indeed experience
reduced audit costs. Therefore it may be asserted that the audit cost savings associated
with a DXG are of a transient nature and dissipate over time. While the study finds
5
some supporting evidence for this assertion, no firm conclusions could be drawn due to
the small number of first time adopters in 2007.
Our longitudinal study observes a longer time period (eight years). The panel-data
setting provides an opportunity to test of whether audit cost savings are realised upon
adoption of the DXG (H1). It also allows us to test wether any such savings are persistent
over time and not merely realised by first-time adopters (H2).
H1 (the ‘impact’ hypothesis): The audit fees of a corporate group are reduced upon
execution of a Deed of Cross Guarantee.
H2 (the ‘persistence’ hypothesis): Participation in a Deed of Cross Guarantee yields
persistent audit cost savings.
An alternative explanation is that the magnitude of the audit fee savings depends on
the extent to which the DXG regime is applied. If audit fees are regarded as a function
of audit effort, it could be expected that audit cost savings are less pronounced where
the structure of the closed group does not significantly reduce the effort required to
audit the corporate group. Prior research has found a large variation in the proportion
of closed group entities relative to total subsidiaries (e.g. van der Laan and Dean 2010;
Huynh et al. 2012). It is expected that the more closely the closed group resembles the
consolidated group, the more likely is a reduction in audit fees paid (H3).
H3 (the ‘concentration’ hypothesis): The greater the participation of subsidiaries
in the closed group the greater the audit fee savings for the corporate group.
4 Research design
4.1 Longitudinal audit fee model
The study draws on the work of van der Laan and Christodoulou (2012), who examine
usage and effect of the DXG on audit fees based on a single-period cross-sectional model.
6
The analysis is extended to a longitudinal framework to capture the dynamic activity
that may follow the execution of a DXG.
Audit pricing literature adopts a production view of the audit process, where audit
fees are priced mostly by factors that determine the amount of work and the extent of
implied responsibility or risk that the auditor is required to undertake in the course of
the audit. For auditee i = 1, 2, . . . , I with auditor j = 1, 2, . . . , J and annual financial
reports audited for financial year t = 1, 2, . . . , T , audit fees are broadly considered to be
a function of:
AuditFeesijt = f(Auditeeijt, Auditorjt, Engagementijt) + εijt (1)
Auditeeijt indicates the client firm’s key attributes of size, complexity and inherent risk.
These factors are considered to be the foremost determinants of audit fees. Auditorjt
indicates the audit firms key attributes that cause audit fees to vary across auditors, and
Engagementijt indicates attributes that relate to the way the auditee and the auditor
are engaged in the course of the audit.
The indexing of the error term of equation (1), εijt, points to the panel data error
structure where observations vary by company i given the choice of auditor j, as well
as by time t. εijt contains unexplained factors that are either difficult to measure or
impossible to control for, but in either case they are directly related to the company,
the auditor and time, plus other shocks that are considered noise given the current
knowledge of the model and the data at hand.
εijt = aij + uit (2)
Panel data estimation takes into account any unobserved firm-specific effects that may
exist. If the unobserved firm-specific effect was included in the error term and correlated
7
with an explanatory variable, the estimator would potentially not be unbiased. The effect
of the explanatory variable of interest, participation in a DXG, could be overestimated
or underestimated.
The focus on longitudinal analysis is key for this study because it allows for a systematic
evaluation of the dynamic composition of closed groups. Specifically, the longitudinal
setting is used to examine differences between corporate groups and differences between
auditors with respect to the determination of audit fees. Thus, for firm i = 1, 2, ..., 135
and year t = 2000, 2001, ..., 2007, the audit fee model is specified as:
LAFit = β0 + β1LTAit + β2LDSit + β3LFSit + β4CTAit + β5LOSit
+ β6ROIit + β7CURit + β8DTEit + β9BIGit + β10Y REit
+ β11MODit + β12DXGit + εit (3)
Where:
8
LAF = Natural log of audit fees ($ AUD)
LTA = Natural log of total assets ($ AUD)
LDS = Natural log of total domestic subsidiaries
LFS = Natural log of total foreign subsidiaries
CTA = Ratio of current assets to total assets
ROI = Ratio of earnings before interest and tax to total assets
CUR = Ratio of current assets to current liabilities
DTE = Ratio of debt to equity
BIG = Big-N auditor indicator
YRE = Non-30 June financial year end indicator
MOD = Audit opinion indicator
DXG = DXG indicator
To determine whether audit cost savings in relation to the DXG regime are realised
upon initial adoption only, the DXG indicator variable (DXG) may be replaced with an
indicator variable for corporate groups that have adopted a DXG in the current financial
year (DXF ) and corporate groups that continue a DXG arrangement from a prior period
(DXC) respectively.
The model is then specified as:
LAFit = β0 + β1LTAit + β2LDSit + β3LFSit + β4CTAit + β5LOSit
+ β6ROIit + β7CURit + β8DTEit + β9BIGit + β10Y REit
+ β11MODit + β12DXFit + β13DXCit + εit (4)
Where in addition to the variables defined above:
9
DXF = DXG first time adopter indicator
DXC = DXG continuing adopter indicator
To test the ‘concentration’ hypothesis, an explanatory variable is added that proxies for
the relative participation of a corporate group’s subsidiaries in the closed group. This is
measured as either the ratio of closed group subsidiaries to total subsidiaries (the overall
participation, DXP ) or the ratio of closed group subsidiaries to subsidiaries eligible for
financial reporting relief (the discretionary participation, DXD). While the former is
a better gauge of the overall audit effort required, the latter takes into account that
some subsidiaries are not eligible to participate in the closed group because they are not
wholly-owned domestic entities.
Thus:
LAFit = β0 + β1LTAit + β2LDSit + β3LFSit + β4CTAit + β5LOSit
+ β6ROIit + β7CURit + β8DTEit + β9BIGit + β10Y REit
+ β11MODit + β12DXFit + β13DXCit + β14DXPit + εit (5)
Where in addition to the variables defined above:
DXP = Number of subsidiaries with DXG to total subsidiaries
(Total closed group participation rate)
DXD may be replaced with DXC, which is defined as:
DXD = Number of subsidiaries with DXG to wholly-owned domestic subsidiaries
(Closed group discretionary participation rate)
10
5 Data
5.1 Sample selection
All companies included in the S&P/ASX200 index are observed as at 30 June 2007, and
observations are repeated back to 2007 to produce an eight-year longitudinal dataset.
The S&P/ASX200 is described by Standard and Poor’s as ‘the primary gauge for the
Australian equity market’, and during 2007 it covered about 86% of the Australian equity
market capitalisation.5 van der Laan and Dean (2010) also note that even though only
16% of all companies listed on the ASX had a DXG in place at year-end 2007, more
than half of the S&P/ASX200 had entered into such an arrangement. Excluded from the
study are observations for 17 stapled securities, 24 real estate investment trusts, seven
foreign listings and one company that was listed late in 2007 and did not issue financial
statements until 2008 (Asciano Group Ltd).6 A further 16 companies are excluded
from the analysis due to missing variables. The final sample comprises 135 companies
resulting in an ‘unbalanced’ longitudinal dataset of 930 firm year observations between
2000 − 2007.
5.2 Data collection
Data is obtained from multiple sources. Closed group information is hand collected
from annual reports.7 Accounting standards require all reporting entities to disclose a
list of their subsidiaries and their place of incorporation in the notes to the financial
statements (Accounting Standard AASB 1024 1992, para. 39). In addition, companies
5For a description of the index, criteria for index inclusions, investment implications and relation toother indices see www.indices.standardandpoors.com.
6Stapled securities are listed combinations of shares and/or unit trusts, which are excluded because theinformation disclosed is not sufficient for disentangling the individual group structures that are ‘stapled’.Companies domiciled in overseas jurisdictions and real estate investment trusts are also excluded becausethey do not qualify for financial reporting relief under the DXG.
7Annual reports are downloaded from the Connect4 database, and where unavailable, from the AspectHuntley FinAnalysis database.
11
with a DXG have to separately identify subsidiaries that are members of the closed group
as well as prepare a set of financial statements for the closed group (see Corporations Act
2001 Cth, Chapter 2M s.302). Subsidiaries are counted and classified. This information
is matched to an extant database, which contains information from the actual deed
documents to ensure a high level of accuracy.
The annual reports also disclose audit fee data. Variables of interest include the identity
of the principal auditor, composition of audit fees (consolidated and parent statutory and
non-statutory audit fees), audit opinion and, where applicable, modifications to the audit
opinion. Other variables that may be relevant to the estimation of the audit fee model,
but are not available from commercial databases, such as formation of a tax consolidated
group, are also hand-collected. Key financial data for the consolidated group will be
downloaded from a commercial data provider (Aspect Huntley FinAnalysis).
6 Analysis
6.1 Statistical description & univariate analysis
Table 1 reports median, minimum and maximum values of all variables separately for
corporate groups with DXG (420 firm-year observations), groups without DXG (481)
and first-time adopters (21).
[Insert Table 1 here]
Corporate groups with DXG appear to be larger in size (measured by total assets) than
those without DXG. They also tend to be more complex (by number of domestic and
foreign subsidiaries). Furthermore, DXG groups are more highly leveraged (measure by
the debt to equity ratio) and display lower liquidity (measured by the current ratio) than
non-DXG groups. This could be due to their larger size as they may be able to take on
relatively more debt and secure short-term finance more easily.
12
As expected given the deed covenants, DXG groups are relatively less likely to have
incurred a loss in the last two years (LOS 12%). They also are exclusively audited by a
Big4-auditor. However, none of the firms in the sample received a modified audit opinion
during the observation period.
For those corporate groups that have adopted a DXG, the median overall participation
rate is 32%. The discretionary participation rate (measured by participating subsidiaries
relative to subsidiaries eligible for reporting relief) is higher (57%), which is plausible
given that only a subset of total subsidiaries are eligible to join the DXG. Interest-
ingly, the dispersion in variation is quite large. While some corporate groups appear to
maximise reporting efficiency by including all their subsidiaries in the DXG (maximum
100%), others include only a very small fraction of subsidiaries (minimum 2%), which is
contrary to the regulator’s intended purpose.
6.1.1 DXG and audit fees by firm size and auditor type
Figure 3 is a box-plot of statutory which presents audit fees (measured by its the natural
log) by quartiles of firm size (measured by natural log of total assets) separately for firms
audited by a Big4- or non-Big4-auditors.
[Insert Figure 3 here]
As expected, the larger corporate groups (measured by the natural log of total assets)
pay on average more for the statutory audit of their financial statements than smaller
corporate groups. Corporate groups that are audited by a Big4-firm also tend to be
charged higher fees than those without and in the largest quartile all groups are audited
by a Big4-firm. In this quartile, DXG groups also pay on average less than non-DXG
groups. This is consistent with the regulator’s claim that reporting relief reduces the
required audit effort. However, for the quartile with the smallest groups in the sample,
corporate groups with DXG pay higher audit fees than those without.
13
6.1.2 DXG and audit fees by firm size and participation rate
Figure 4 considers the closed group participation measured by the number of subsidiaries
in the DXG relative to total subsidiaries (DXP).
[Insert Figure 4 here]
This box-plot supports the previous observations and in addition, indicates that for DXG
groups, the audit fees are lower if the proportion of subsidiaries included in the DXG is
large. This trend can be observed across all firm size quartiles, but is less pronounced if
the discretionary participation rate is considered (DXD) as shown in Figure 5.
[Insert Figure 5 here]
6.2 Cross-sectional analysis
Table 2 reports the results for the cross-sectional analysis of three different models.
[Insert Table 2 here]
For the standard audit fee model, the main variables of interest are statistically sig-
nificant, but do not always display the expected direction. Firm size (measured by the
natural log of total assets) and having a Big4-auditor are positively associated with audit
fees paid, which is consistent with prior literature. While audit complexity as measured
by the number of foreign subsidiaries appear to also increase audit fees, the number of
domestic subsidiaries seem to have no statistically significant effect. On the other hand
liquidity appears to reduce audit fees, but leverage is also negatively associated, which is
contrary to expectations as one would assume a higher audit risk. The same applies to
the loss indicator (negative association) and the modified audit opinion indicator. For
both variables, one would have expected a positive association.
The second model adds an indicator variable that identifies corporate groups with DXG.
While it is only significant at the 10% level, the direction of the relationship is as expected.
14
In contrast to van der Laan and Christodoulou (2012) but consistent with the regulator’s
claims, the adoption of a DXG seems to reduce audit fees. Further distinction between
first-time adopters and continuing arrangements, this effect appears to be limited to
corporate groups that adopt a DXG for the first time, indicating that cost savings are
only realised upon initial adoption and not persistent. A dynamic analysis, however,
would provide stronger support to this result.
6.3 Longitudinal analysis
The analysis is repeated in a panel data setting. Table 4 reports the results for the
last model, which distinguishes between first-time adopters and continuing DXG groups,
only.
[Insert Table 4 here]
The results vary from the previous analysis, which is particularly pronounced for the key
variables of interest. While the coefficient for first-time adoption is negative as expected,
its impact on audit fees is not statistically significant. In contrast, the continuing DXG
group indicator is positive and significant at 1%. This result suggests DXG adoption does
not reduce audit fees, but actually leads to increased fees in the long term. Furthermore,
both complexity proxies (number of domestic and foreign subsidiaries) are significantly
positively associated with audit fees.
Table 4 also indicates that a large proportion of the variation in audit fees is explained
by firm-specific effects (rho = 73%). As these fixed effects are not necessarily considered
in the cross-sectional analysis but could be correlated to the variables of interest, the
longitudinal setting appears to be the more appropriate framework.
15
6.4 Group participation
Further analysis was undertaken on the effect of relative closed group participation.
However, initial examination indicate that neither total (DXP) nor discretionary partic-
ipation (DXD) are associated with the determination of audit fees. Figure 5 presents
scatter plots of the residual audit fees (as determined in the longitudinal model) on the
closed group participation rate. In both cases, there does not appear to be a linear re-
lationship. Including these two variables separately in the panel data regression model,
the variables also appear to be statistically insignificant.
[Insert Figure 5 here]
7 Concluding remarks
This paper evaluates the deregulatory benefits of the Australian Class Order Deed of
Cross-Guarantee (henceforth DXG). Examining corporate groups listed in the ASX200,
we do not find any support for ASIC’s claim that exempting subsidiary companies from
the requirement to prepare and file audited financial statements leads to a reduction
in audit costs for the corporate group. Contrary to expectation, our results indicate
that audit fees increase in the long run for participating corporate groups. However, the
extent to which the corporate group takes advantage of financial reporting relief does
not seem to affect overall audit cost. This result suggests that the increased complexity
in the audit associated with the adoption of a DXG could lead to an increase rather than
a reduction in audit effort.
16
Table 1: Descriptive Statistics
Observations without DXG
(n=420)
Observations with DXG excl. first time adopters
(n=481)
First time adopters (n=29)
Min Med Max Min Med Max Min Med Max Ln audit fees 8.29 12.34 17.25 10.80 13.58 16.68 10.84 13.07 15.29 Ln total assets 13.55 19.90 25.47 17.76 21.40 25.17 18.35 20.66 23.25 Ln domestic subs 0.00 2.48 5.47 0.69 3.53 7.19 1.39 3.04 5.44 Ln foreign subs 0.00 1.10 5.38 0.00 2.64 6.93 0.00 2.08 4.64 Current to total assets 0.01 0.32 0.92 0.01 0.34 0.92 0.02 0.23 0.74 Current ratio 0.07 1.49 36.46 0.04 1.27 20.62 0.17 1.27 5.85 Debt to equity -2.41 0.86 20.58 -10.40 1.16 25.28 0.46 1.13 13.74 Return on investment -0.41 0.09 0.99 -0.95 0.10 0.58 0.04 0.13 0.31 Participation rate
0.02 0.32 1.00 0.03 0.22 1.00
Disc. participation rate
0.02 0.57 1.00 0.04 0.38 1.00 Perc. No. Perc. No. Perc. No. Loss indicator 0.26 110
0.120 56
0.10 3
Big-4 indicator 0.83 348
1.000 479
0.90 26 Year end indicator 0.29 120
0.310 149
0.34 10
Mod. audit opinion 0.00 1
0.000 2
0.00 0
Table 2: Pooled OLS Regression
Standard Audit Fee
Model Audit Fee Model with
DXG Audit Fee Model with
DXC & DXF Coef. Coef. Coef.
Intercept -0.0683
-0.1073
-0.0992 Ln total assets 0.5852 *** 0.5868 *** 0.5867 ***
Ln domestic subs 0.0233
0.0325
0.0317 Ln foreign subs 0.2396 *** 0.2419 *** 0.2412 ***
Current to total assets 1.0440 *** 1.0602 *** 1.0543 ***
Current ratio -0.0362 *** -0.0379 *** -0.0377 ***
Debt to equity -0.0504 *** -0.0499 *** -0.0493 ***
Return on investment -0.3668 * -0.3823 * -0.3787 *
Loss indicator -0.1320 * -0.1397 ** -0.1412 **
Big-4 auditor 0.3582 *** 0.3791 *** 0.3749 ***
Non-30 June year end 0.0039
0.0059
0.0067 Modified audit opinion -0.4661 ** -0.4698 * -0.4737 *
DXG indicator
-0.0826 * DXG excl. first time
-0.0734
First time adopter -0.1981 * Observations 930
930
930
F 644.26
591.47
547.09 R-squared 0.8814
0.8819
0.8822
Root MSE 0.5053 0.5043 0.5042
Table 3: Panel Data Descriptive Statistics Variable Mean Std. Dev.
Variable Mean Std. Dev.
Ln audit fees overall 13.0813 1.4583
Loss indicator overall 0.1817 0.3858
between
1.3399
between
0.2884
within
0.5337
within
0.2552
Ln total assets overall 20.6990 1.7906
Big-4 auditor overall 0.9172 0.2757
between
1.6224
between
0.2422
within
0.7165
within
0.1232
Ln domestic subs overall 3.0164 1.2370
Non-30 June year overall 0.3000 0.4585
between
1.1323
end between
0.4560
within
0.4413
within
0.0793
Ln foreign subs overall 1.9748 1.5455
Mod. audit opinion overall 0.0032 0.0567
between
1.4957
between
0.0268
within
0.4552
within
0.0498
Current to total overall 0.3533 0.1954
DXG indicator overall 0.5484 0.4979 assets between
0.1658
between
0.4554
within
0.0968
within
0.2052
Current ratio overall 1.9514 2.7458
DXG excl. first overall 0.5172 0.5000
between
1.6407
time between
0.4669
within
2.1791
within
0.1865
Debt to equity overall 1.3877 2.0111
First time adopter overall 0.0312 0.1739
between
1.6910
between
0.1064
within
1.1866
within 0.1599
Return on overall 0.1087 0.1250 investment between
0.0985
within
0.0810
Table 4: Panel Data Regression – Fixed Effects Coef.
[95% Conf. Interval]
Intercept 1.3234 *** 0.6141 2.0327
Ln total assets 0.4992 *** 0.4615 0.5368
Ln domestic subs 0.1116 *** 0.0490 0.1743
Ln foreign subs 0.2076 *** 0.1547 0.2605
Current to total assets 0.4922 *** 0.2464 0.7381
Current ratio -0.0161 ** -0.0268 -0.0055
Debt to equity -0.0326 *** -0.0505 -0.0147
Return on investment 0.0631
-0.2138 0.3400
Loss indicator 0.1065 * 0.0216 0.1913
Big-4 auditor 0.3718 *** 0.2018 0.5418
Non-30 June year end 0.2959 * 0.0372 0.5547
Modified audit opinion -0.0369
-0.4473 0.3735
DXG excl. first time 0.2443 *** 0.1261 0.3624
First time adopter -0.0187 -0.1558 0.1185
No. of Observations 930
No. of groups 135 F(13,782) 143.87 R-squared (overall) 0.8516 corr(u_i, Xb) 0.0942 rho 0.725958
Figure 1: Closed group and extended closed group structures'
&
$
%
Corporate Group S + P #"
!
Ultimate
Parent P'
&
$
%
Extended Closed Group
'
&
$
%Closed Group(
D −DRDXG
−DNDXG
)DR
DXG domestic wholly-owned subs in DXG with relief
DNDXG domestic wholly-owned subs in DXG with no relief
(C − CDXG) CDXG domestic controlled subs in DXG
(F − FDXG) FDXG foreign subs in DXG (in NZ, UK, HK, SI)
Note: The figure illustrates a Venn diagram for the structure of a corporate group that
has executed a deed of cross guarantee (but has not adopted tax consolidation). Figure
?? provides the definitions for S, D, C and F . DRDXG is a subset of D and indicates
the domestic wholly-owned subsidiaries that are part of a Closed Group and therefore
receive financial reporting relief. The parties to the Extended Closed Group do not
receive reporting relief and comprise of the DNDXG domestic wholly-owned subsidiaries,
the CDXG domestic controlled subsidiaries and the FDXG foreign subsidiaries. FDXG is
restricted to only foreign subsidiaries domiciled in New Zealand, the United Kingdom,
Hong Kong or Singapore. The ultimate parent entity may participate in the closed
group, the extended closed group, both the closed group and the extended closed group,
or neither.
20
Figure 2: Corporate Group Structure Examples
Domestic subsidiaries with reporting relief under the DXG
Domestic subsidiaries without DXG
Foreign subsidiaries without DXG
Figure 2: Box Plot & Scatter Plot – Audit Fees, Firm Size and Big4-Auditor
Figure 3: Box Plot & Scatter Plot – Total Closed Group Participation
Figure 4: Box Plot & Scatter Plot – Discretionary Closed Group Participation
Figure 5: Participation and Discretionary Closed Group Participation
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