The Relationship amid Reservoir Consultant and Asset Adjusted Audit Fees - Research Proposal Example

Summary

Auditors can provide both auditing and non-auditing services to oil and gas companies (Causholli, Chambers, & Payne, 2015), and the fees they levy for the latter are a measure of the pressure they face from the companies which hire them to show that their counsel is appropriate and worth much more in the revenue it accrues (Causholli, Chambers, & Payne, 2014). Changes in spending habit of the companies become evident when the counsel is taken and implemented, and the expenditure can be quantified. Depending on the stringency of the laws of the land, highly paid consultants may not necessarily have qualifications commensurate with the fees they levy, and the quality of counsel given by consultants less well paid can be at par with that of the better paid consultants. The Sarbanes Oxley Law may have a positive effect on the quality of service offered by reservoir consultants in the oil and gas industry (Wirskye, 2003).

Research Problem Background

Apart from normal auditing services rendered to gas and oil companies, consultant auditors can provide non-auditing services as well (Causholli, Chambers, & Payne, 2015). Before the Sarbanes Oxley Act was ratified in 2002, acquiring sustainable business through this means (the sale of non audit services) was a difficult task, apart from the fact that clients sought to generate revenue from the involvement of consultants providing such services. Whereas other corporations have been documented as having such approaches to revenue generation fully integrated into their systems (Causholli, Chambers, & Payne, 2015), there is a paltriness of studies in the gas and oil industry in this regard. Furthermore, the lack of research in this field precludes the study of the effects that the Sarbanes Oxley Act has had in the industry in general, and particularly when the relationship between reservoir consultancy and asset adjusted audit fees are taken into account.

Generally, past research has shown that the fees charged for non audit services (such as reservoir consultancy) have no detrimental effect on the quality of service rendered (Causholli, Chambers, & Payne, 2015). However, with the advent of the Sarbanes Oxley Act came the call for compliance, which still is expected to have an influence on the cost of service as well as the quality of service rendered.

It is opined that whereas the cost of reservoir consultancy increases, no corresponding improvement in the services rendered shall be observed in the oil and gas industry. The quality of service thus rendered can be gauged by the revenue generated as a direct result of the consultation, with higher consultation fees being commensurate with greater revenue ((Choi, Kim, & Zang, 2010)Huang, Chang, & Chiou, 2016). The problem is that there is no framework with which to make plausible estimations of revenue generated from the implementation of reservoir consultancy directives.

Research Questions

The proposed study shall be guided by the following questions: Have consultancy fee increments through the years following the ratification of the Sarbanes Oxley Law of 2002 only been because of changes in the economy attributable to inflation, or do the changes have other explanations (Wilson, 2003)? Is an increase in asset adjusted fees a possible means through which oil and gas companies seek to flout the Sarbanes Oxley Law while feigning compliance? Are the asset adjusted audit fees charged by consultant auditors a match to their proficiency and skill in their trade?

Literature Review

Detrimental effects of fee increments have been suggested in previous studies, for example in Causholli, Chambers, & Payne (2014), where it was proposed that the independence of an auditor becomes compromised, as well as the quality of their services (Roussy, 2015), when the buying habits of clients undergo a positive change to cause an increase in demand of the said services. Having considered the periods prior to the increased demand and the periods thereafter, Causholli, Chambers, and Payne (2014) tested what they called discretionary accruals after adjusting for performance, also testing for shifts in the classifications of companies’ core expenses. From this study, it may be surmised that an attempt to comply with the Sarbanes Oxley law in the oil and gas industry shall be accompanied by a change in the resources sought by the affected company (Wilson, 2006). Even though the results of the Causholli, Chambers, and Payne (2014) study may not necessarily be generalized to every other industry, the differences between the oil and gas industry from other industries do not preclude the need for fundamental changes upon heeding to consultative counsel. Furthermore, the article indicates that the companies most affected by such changes are those whose earnings are in particularly high need to be managed (Causholli, Chambers, and Payne, 2014). In an industry such as the oil and gas industry, there does not appear to be much incentive to manage revenue; what with the vast oil and gas resources available globally. This observation is based on the fact that Causholli, Chambers, and Payne (2014) do not clearly define what they imply by revenue management. However, when taken from the perspective of Alba, Levitsky, Tordo, and Shahriari (2009), “The wealth arising from oil and mining operations must be distributed and managed transparently. Otherwise, it can easily end up funding corrupt practices, promoting social and economic inequalities, and generating intra-state or even inter-state conflicts” (p. 14).

Such corrupt practices are not just confined to the ones mentioned by Alba, Levitsky, Tordo, and Shahriari (2009), but also include corruption within the industry, and involve the auditors who are meant to uphold the high values required within the oil and gas industry.

The quality of an auditing exercise can be assessed either internally or through outsourcing of the activity to external auditors (Pizzini, Lin, & Ziegenfuss, 2015; Bartlett, Kremin, Saunders, & Wood, 2016) with no vested interests, which would reduce the chances of making rash decisions based on biased observations and interpretation of company data ((Bierstaker, Chen, Christ, Ege, & Mintchik, 2013; Driessen & Wakkerman, 2015). Nevertheless, companies can hire auditors who have specialized in their field, and benefit from the vast knowledge these people possess (Ferguson, Pündrich, & Raftery, 2014; Stewart, Kent, & Routledge, 2016). In an article by Mitra and Hossain (2014), during the process of financial reporting, some firms make discretionary adjustments to their accruals more than others, and those most affected by this trend are the companies in which internal weaknesses have been observed in the past. It follows from this observation that when there are specialist auditors involved, their familiarity with the businesses of their clients, their knowledge of the industry as a whole, and the expertise that they have all work together to make it rather difficult for the companies involved to falsify information regarding the status of their finances (Mitra & Hossain, 2014). Therefore, when studying the oil andgasindustry,itshallbe pertinent to determine whether the selected companies have external auditors or internal ones, and whether their credentials are such that they may be regarded as paragons of knowledge and expertise in the industry under study. This shall not only be an act of due diligence on the part of the researcher, but also one of the parameters to be studied in the process; determining how many specialist (consultant) auditors are available per company, and what ratio of these auditors are exclusively internal versus those who are exclusively externally placed. Based on the conclusions of Mitra and Hossain (2014), it will be prudent to calculate the extent to which the presence of the reservoir consultants in the selected oil and gas companies influence decisions of accrual management through a reduction of the levels of discretionary adjustments.

Although the relationship between the quality of service and the fees payable to consultants has been studied in the past, the setting of the study, among other variables markedly differ from those in the proposed study. In a study carried out by Jacob, Desai, and Agarwalla (2015), companies in India have a predilection for the highly qualified auditors, whom they regard as insurance against financial loss as well as providers of better quality services than others within the industry. Their findings suggest that these notions are somewhat misplaced, and hiring of less qualified auditors would not compromise on the quality of auditing done; because India has less stringent laws about compliance (Jacob, Desai, & Agarwalla, 2015). Therefore, as this study progresses, it shall not only be noted that the level of stringency of the Sarbanes Oxley Law exceeds that of the laws in India, but also that the presence of a highly qualified consultant in an oil and gas company does not rule out the possibility of compromise in the quality of assessment regardless of how high the asset adjusted audit fees have been placed (Farrell, Grenier, & Leiby, n.d.). This shall be in line with the work of Taylor (2011), who argues that there are subtle differences among auditors, which affect the quality of individual audits (Cahan, Jeter, & Naiker, 2011), and this shows that whereas an auditor may be highly valued, the quality of their work does not match the fees they charge (consider auditor resilience as discussed by Durocher, Gendron and Picard (2016), and by Brouard, Bujaki, Durocher, and Neilson (2016)).

Research Methodology and Design Overview

The research will take a quantitative approach to a cross sectional study of the oil and gas industry in the United States. Purposive random sampling shall be used to negate researcher bias, upon which each selected company shall be requested for informed consent to participate in the research. All acquiescent participants shall have been notified of the need for the researcher to peruse through the company financial statements as well as have interviews with the reservoir consultants they have on payroll. An assessment of each consultant shall be made albeit covertly, to determine the veracity of their claims to offer high end consultative counsel. Financials shall be reviewed for changes using moving averages dating back from five years prior to the Sarbanes Oxley Law until five years post ratification of the law, and comparisons made using analyses of variance to determine the extent to which the law has had an effect on the fees levied by reservoir consultants. The design shall be a non-experimental design, since the collection of data shall be done without controls to avoid data manipulation, and the data shall be accepted as presented by the participant firms. This shall not imply that experimental approaches to research in auditing cannot be applied (Basu, 2015). Each of the participant consultants’ fees shall be weighted against the perceived value of their counsel to the companies they are attached, with this perceived value being a calculation of a simple ratio of fees levied against revenue accrued per annum. In effect, the ratio shall be a measure of return on investment.

Rationale for Using a Quantitative Design

Most of the data with which the researcher shall work in this study shall be quantifiable data, which would disqualify the utilization of a qualitative research design. Furthermore, it has been stated earlier that the quality of counsel given can be assessed based on the revenue generated from adhering to the counsel, and such revenue also takes the form of quantifiable amounts of money. Additionally, the changes inherent in the implementation of new directives also have an effect on the finances, with spending patterns taking a noticeable change in trend. These, too, are quantifiable, and do not need a qualitative approach for them to be studied. This design is appropriate for answering the research question, because it is only through a quantitative approach that the extent of the effect of one variable (the independent variable) upon (an)other variable(s) (the dependent variable(s)) can be measured. Taking a qualitative approach to arrive at an answer to the research question would be like applying the wrong tool to a given purpose, which would only yield spurious results that cannot be generalized or be useful for future studies in the same field.