where LFEE represents the log of the audit fee charged to the client, LASSETS is the log of the client's total assets, SQSUBS is the square root of the number of subsidiaries operated by the client, INVREC is the proportion of the client's assets represented in accounts receivable and inventory, MSHARE is the audit firm's market share, LEVERAGE is the proportion of the client's total debt to its total assets, and i and t are subscripts for firm and year, respectively.
Only three of the variables in the model (LASSETS, SQSUBS, and INVREC, representing auditee size, complexity, and proportion of risky assets, respectively) are significant in 1980.
We do not adjust INVREC, LEVERAGE, or MSHARE, all ratios or percentages, assuming that the numerator and denominator in each case would require similar adjustments.
TABLE 8 Audit Fee Model Regression Coefficients(a) Year Intercept LASSETS SQSUBS INVREC 1980 -1.
One apparent trend is a downward drift in the coefficient for INVREC.
An increasing audit wage rate in itself increases the coefficients for LASSETS, INVREC, SQSUBS, and LEVERAGE.
The effect of the expanded scope on INVREC is less certain, and depends on whether the change in scope disproportionately affects firms with a greater intensity of accounts receivable and inventory.
In particular, we expect an effect on the coefficient for INVREC ([b.
If positive coefficients are observed for LASSETS, INVREC, SQSUBS, or LEVERAGE, then it would appear that wage rate or audit scope effects dominate production efficiencies.