Do Joint Audits Improve Audit Quality? Evidence from Voluntary Joint Audits

Article · December 2012with2,550 Reads
DOI: 10.1080/09638180.2012.678599
Abstract
This study examines whether the decision to voluntarily (i.e. without a statutory obligation) employ two audit firms to conduct a joint audit is related to audit quality. We use separate samples and empirical designs for public and privately held companies in Sweden, where a sufficient number of companies have a joint audit on a voluntary basis. Our empirical findings suggest that companies opting to employ joint audits have a higher degree of earnings conservatism, lower abnormal accruals, better credit ratings and lower perceived risk of becoming insolvent within the next year than other firms. These findings are robust to the use of a propensity score matching technique to control for the differences in client characteristics between firms that employ joint audits and those that use single Big 4 auditors (i.e. auditor self-selection). We also find evidence that the choice of a joint audit is associated with substantial increases in the fees paid by the client firm, suggesting a higher perceived level of quality. Collectively, our analyses support the view that voluntary joint audits are positively associated with audit quality in a relatively low litigious setting both for public and private firms.
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    • First, inherent limitations of cross-country studies (André et al., 2015) are avoided by studying only one country. Second, it allows us to analyze a sample in which self-selection is less of a concern compared to studies in a pure voluntary or a pure mandatory joint audit setting (e.g., Zerni et al., 2012), since more than 95% of the examined companies from our sample ultimately switched to the single audit. While the joint audit appears to be associated with higher audit costs, these higher audit costs do not lead to higher audit quality.
    [Show abstract] [Hide abstract] ABSTRACT: This paper focuses on the unique Danish setting in examining the consequences of abandoning a mandatory joint audit regime. We study the effects on audit costs (measured by audit fees) and audit quality (measured by abnormal accruals) of the abandonment of the mandatory joint audit in Denmark in 2005. We perform our analysis on non-financial listed Danish companies for the 2002–2010 period. Our results show that a joint audit is associated with higher fees, but that the association between joint audit and abnormal accruals is insignificant. This suggests that the higher audit fees cannot be explained by higher audit quality. Our results are robust to alternative measurements of fees and audit quality. Additional analyses show that the fee premium related to a joint audit decreases over time and that the Big 4 concentration in our sample has increased since the switch from mandatory to voluntary joint audit. Our results are consistent with the motivations driving the regulatory change in Denmark and are of interest to regulators and actors in the audit market.
    Article · Apr 2016
    • Our research instead focuses on the topic of voluntary joint audits, that is, on SMEs that decide to appoint a second auditor in order to support the BSA even in the absence of a legal obligation. In the wake of Zerni et al. (2012), we believe that the investigation of a voluntary joint audit can provide interesting hints for the definition of the potential influence of joint audits on earnings quality.
    [Show abstract] [Hide abstract] ABSTRACT: The purpose of this paper is to analyze the effect of a joint audit system on the quality of a firm's financial statements, investigating the association between the presence of a double auditor and the occurrence of small positive earnings, which can be considered the consequence of earnings management practices and a signal of poor earnings quality. Furthermore, we develop a second research question in order to assess the factors that determine the choice of voluntarily resorting to a joint audit system. This paper uses a sample of Italian industrial non-listed SMEs, stratified in order to fulfill certain requirements (in terms of asset value, turnover and number of employees) that make it mandatory to appoint at least one audit body (the statutory board) according to the Italian law. Logistic regression models have been used to test the research hypotheses. The main finding is the confirmation that a joint audit system does positively affect earnings quality and the reliability of firms' financial statements. Regarding the decision to be audited by two different auditors, the main determinants are more linked to the size and organizational complexity of the firm than to agency conflicts or leverage ratio.
    Full-text · Article · Jan 2016
    Roberto De Luca
    • Also, the impact of long tenure on auditor independence and objectivity is likely to be lower since audit and consulting fees will be proportionally distributed between two different auditors. Moreover, both auditors jointly can resist any pressure from managers and large shareholdes to form a favarable audit opinion (Zerni et al., 2012). Last, because it is too costly to bribe two different auditors (e.g.
    [Show description] [Hide description] DESCRIPTION: This paper investigates the effect of joint auditor pair and joint auditor tenure on corporate behavior. Using a sample of 208 year-observations of public companies traded on the Kuwait stock exchange (KSE) over the period 2008-2009, evidence indicates a positive association between the choice of Big 4-Big 4 (BB) auditor pair and the level of corporate behavior. This result is consistent across the three aspects of corporate behavior (i.e. trading history, communication and disclosure). However, the choice of other auditor pairs has no impact on the company’s behavior. In addition, corporate behavior is positively related to joint auditor tenure when joint auditor tenure is measured in a continuous form. Using binary indicators for joint auditor tenure, the results, in general, indicate that corporate behavior in terms of trading history and communication improves after the fifth year of auditor engagement.
    Full-text · Working Paper · Jan 2016 · Current Journal of Applied Science and Technology
    • For example, (Zerni et al., 2012) examined the use of voluntary joint audit on actual audit quality, as measured by levels of earnings conservatism and abnormal working capital accruals, and perceived audit quality, as measured by credit ratings and risk forecasts of insolvency. Using a sample of Swedish listed companies during the period 2001 through 2007, (Zerni et al., 2012) documented that companies employing voluntarily joint auditors have higher levels of earnings conservatism, lower levels of abnormal working capital accruals, higher credit ratings, and lower risks forecasts of insolvency than companies employing a single auditor.
    [Show abstract] [Hide abstract] ABSTRACT: The purpose of this paper is to investigate the effect of joint audit on earnings conservatism, our proxy for audit quality, of companies listed on the Egyptian stock exchange, by examining whether companies audited by two independent auditors are more conservative than companies audited by a single auditor. In addition, we investigate whether this relationship is affected by the type of joint audit regimes (i.e., voluntary versus mandatory), and the mix of joint auditors appointed (i.e., two big 4 auditors, or two non-big 4 auditors, or one Big 4 auditor paired with one non-big 4 auditor). To test our hypotheses, we use a sample of 32 companies listed on the Egyptian stock exchange during the period 2009 through 2013. The results of our multiple regression analyses show that companies audited by joint auditors are more conservative than companies audited by single auditors. However, we find no significant difference in levels of earnings conservatism between companies audited by joint auditors mandatorily and companies audited by joint auditors voluntarily. We also find no significant difference in levels of earnings conservatism between companies audited by two big4 auditors and companies audited by two non-big4 auditors, or by one big4 auditor paired with one non-big4 auditor.
    Article · Nov 2015
    • Also, the impact of long tenure on auditor independence and objectivity is likely to be lower since audit and consulting fees will be proportionally distributed between two different auditors. Moreover, both auditors jointly can resist any pressure from managers and large shareholders to form a favorable audit opinion (Zerni, Haapamäki, Järvinen & Niemi, 2012). Lastly, because it is too costly to bribe two different auditors (e.g.
    [Show abstract] [Hide abstract] ABSTRACT: This paper investigates the effect of joint auditor pair and joint auditor tenure on corporate governance behavior. Using a sample of 269 observation-years of public companies traded on the Kuwait stock exchange (KSE) over the period 2008-2009, evidence indicates a significant and positive association between the choice of joint auditor pair and corporate governance behavior. Clients of Big4-Big4 auditor pair exhibit better behavior of corporate governance than clients of Big4-nonBig4 auditor pair and clients of nonBig4-nonBig4 auditor pair, and this result is consistent across the three components of governance behavior. In addition, corporate governance behavior improves with higher joint auditor tenure when tenure is measured in a continuous form, and this result is more pronounced in the client’s trading history from the first year of joint auditor pair-client relationship. Using binary indicators for joint auditor tenure, the results indicate a U-shaped relation between a company’s trading history and joint auditor tenure with a significant increase in the year of change of both auditors, a marginal effect in the second and third years, and a subsequent significant reversal of effect after the fifth year of the engagement. Evidence also shows that the effect of joint auditor-client association on corporate communication and disclosure is significantly pronounced after the fifth year of auditor engagement. Therefore, longer joint auditor-client relation leads to better improvement in corporate governance behavior.
    Full-text · Article · Mar 2015 · Current Journal of Applied Science and Technology
    • This means that large shareholders might use their power to expropriate minority shareholders, which leads to suboptimal performance for them. Furthermore, Zerni, Haapamaki, Järvinen and Niemi[36]consider the link between voluntary joint audit in Sweden in 2001-2007 by 1.257 observations of listed non-financial Swedish companies and a sample of privately held Swedish companies. They state that companies with voluntary joint audits are connected with higher earnings conservatism, lower abnormal accruals, better credit ratings and lower risk forecasts of becoming insolvent within the next year.
    [Show abstract] [Hide abstract] ABSTRACT: Joint audits are recently controversial discussed to increase audit quality and decrease audit market concentration in Europe, complementing the existing and future rotation rules by the 8th EC directive. First, this article presents a theoretical foundation of joint audits. In this context, the main influences on low balling are presented. The e link between joint audits and audit quality is is controversial. Then, the main results of empirical research on joint audit is focused. A clear positive link between joint audits and audit quality cannot be found, but there is strong evidence for higher audit costs which could lead to an increased price competition. Insofar, a lower audit market concentration by joint audits is not generally connected with higher audit quality, because there are many corporate governance interactions. To test this hypothesis, we use a sample of 306 Germany and French companies between 2008 and 2012. Empirical results demonstrate unclear effect of the joint audit on audit quality in these two countries.
    Full-text · Article · Jan 2015
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