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Abstract
This study investigates whether accounting firms match the experience level of individual auditors with the risk level of clients in order to control audit risk. We find that accounting firms tend to assign more experienced auditors to non-state-owned clients that typically have higher tendency to engage in earnings management. Such an assignment pattern is more pronounced for non-Big 4 accounting firms. Further analysis suggests that auditors' experience helps reduce clients' earnings management level, proxied by abnormal accruals, and thus improves the audit quality. This study enriches the literature on the allocation of human resources and the risk control mechanism in the audit services industry, which has been seldom explored in prior studies.
... This result is similar to prior studies, which found that experience has positive and significant impacts on audit judgment. Haeridistia and Agustin (2019), Halim et al. (2018), Cahan and Sun (2015), Ye et al. (2014), Ghozali and Januarti (2013), Asare et al. (2009), Kotchetova et al. (2006), Messier and Martinov-Bennie (2005), and Bhattacharjee and Moreno (2002) found that experience influenced on audit quality, audit performance, and audit judgment. Therefore, it can be concluded that more experienced auditors provide a higher level of professional judgment than their counterparts. ...
This study investigates auditor attributes that may influence an auditor’s judgment in a financial audit. The purpose of this study is specified to show the impact of auditor’s attributes on professional judgment on the financial auditing process. An empirical research methodology is carried out to show the impact of the attributes on professional judgments. With this approach, hypotheses have been formulated and tested using empirical data and existing theories. A quantitative survey method was followed to collect the data for this study. A questionnaire was sent to selected auditors in Myanmar SAI to collect the data relating to the factors that influence auditors’ judgment, such as gender, age, education, knowledge, position level, experience, training, location, and job cognition. The findings of this study show that variables such as age, professional degree, education level, and knowledge are highly significant in auditor judgment. The limitation of this research is the sample size, and sample characteristics are different in Myanmar SAI from other SAIs. Almost 85% of respondents are female in Myanmar SAI. Therefore, it is considered a limitation of this study.
Earnings management remains a popular topic of debate and discussion among investors, regulators, analysts, and the public. One mechanism that might mitigate earnings management is auditors' industry expertise. Using a large sample of clients of Big 6 auditors, this research examines the association between auditor industry expertise, measured in terms of both auditor market share in an industry and an industry's share in the auditor's portfolio of client industries and a client's level of absolute discretionary accruals, a common proxy for earnings management. Clients of non-specialist auditors report absolute discretionary accruals that are, on average, 1.2 percent of total assets higher than the discretionary accruals reported by clients of specialist auditors. This finding is consistent with the notion that specialist auditors mitigate accruals-based earnings management more than non-specialist auditors and therefore, influence the quality of earnings.
This study examines whether and how the Big 3 audit firms in Japan respond to clients' business risk and whether their responses vary. Two possible approaches to addressing clients' higher business risk are increasing audit effort (e.g., increasing total audit hours or assigning more experienced staff to the audit team) and charging a risk premium to cover possible future losses without increasing audit effort. Although the auditing standards and audit fee determination guidelines issued by the Japanese audit profession apparently assume that an auditor chooses the first approach to respond to clients' high business risk, the approach adopted by each Big 3 firm is an empirical issue. By analyzing data on audits conducted by the Big 3 Japanese firms using structural equation modeling and ordinary least squares regression, we find that responses to clients' higher business risk vary among the firms. While two of the firms increase audit effort and charge a risk premium for audits with higher business risk, the third firm responds to clients' business risk only by increasing audit effort. In addition, the strength of the relationships between clients' business risk and audit effort/fees varies among the firms.
This study examines the impact of auditor specialization on bank loan loss provisions for a large cross-section of US banks for the period 2002–2006. We find a positive relationship between earning (before provision) and loan loss provision, suggesting that bank managers use LLP to smooth earnings in the post-SOX period. However, this relationship is significantly moderated by audit industry expertise, providing strong evidence that industry specialization constrains income smoothing. In further analysis, we find some evidence that auditor specialization is more effective in reducing potentially incoming-increasing earnings management. Our results hold after controlling for self-selection bias and are robust to alternative measures of industry specialization. Overall, our findings support the conclusion that audit industry expertise plays an effective monitoring role in constraining management’s discretionary accounting choices.
Little is known about how audit partners make the client-acceptance decision. In this paper, a model is developed and tested that characterizes the client-acceptance decision as a process of risk evaluation and risk adaptation. The model proposes that auditors will evaluate client-related risks (e.g., financial viability, and internal control) and use that evaluation to determine if the audit firm will suffer a loss on the engagement via a lack of engagement profitability or future litigation. The model proposes that auditors will adapt to the client-acceptance risks by using three strategies: (1) screening clients based on their risk characteristics; (2) screening clients based on the audit firm's risk of loss on the engagement; and (3) more proactively adapting using strategies including adjusting the audit fee, making plans about necessary audit evidence, making plans about personnel assignment, and/or adjusting the amount of data collected during the client-acceptance process.
To test the model, an experiment was conducted using 137 highly experienced audit partners as participants. The results show that the partners considered the relationships between client-related risks and used their evaluation of those risks to evaluate the audit firm's risk of loss on the engagement. In terms of risk adaptation, partners screened clients based on the clients' risk characteristics and based on the audit firm's risk of loss on the engagement. Contrary to prediction, the partners did not use more proactive risk-adaptation strategies (e.g., adjusting the audit fee, making plans about necessary audit evidence, etc.) to make less “acceptable” clients more acceptable. It appears that avoiding risk, rather than proactively adapting to risk, is descriptive of how audit partners currently make the client-acceptance decision.
A significant concern in behavioral research in accounting has been the effect of experience on judgment and decision-making. As widely recognized, there are, however, several dimensions to experience, including general domain experience and task-specific experience. One important dimension that has received limited attention is industry experience. For instance, in an audit context, greater industry experience is expected to lead to greater effectiveness and efficiency as auditors develop a knowledge-base of the unique risks and audit approaches for a particular industry. The purpose of this study is to investigate the impact of industry experience on the generation of hypotheses of likely errors in conducting analytical procedures. Other audit planning tasks are also examined (e.g., risk assessment and extent of testing). Seventy-two auditors, 34 with significant retailing experience and 38 without such experience (both groups ranging in rank from senior to partner), completed a comprehensive, realistic case for a retailing client. Four material errors, three relating to a retailing environment, were present in the case. The findings indicate that industry experience significantly enhanced hypotheses generation in identifying errors but did not result in expected risk assessments or revisions to planned extent. Proportionately greater audit hours were, however, assigned to more experienced audit staff for misstated accounts.
This paper examines the impact of state ownership on earnings management. In contrast with the conventional belief that state ownership is the root of corporate inefficiency, we find lower levels of earnings management among state-owned enterprises than privately-owned firms in China even after controlling for the effect of tunneling. Further investigation suggests that the protection of state enterprises by the government might have played an important role in mitigating the pressure on managers to manipulate firm-specific information. Moreover, we find that the divergence in earnings quality between state-owned and privately-owned firms becomes less evident as the economy becomes more and more market driven.
This paper studies the relationship between auditor human capital and audit firm survival. Specifically, the effects are investigated of the human capital of auditors on the survival chances of newly established audit firms. Human capital is analyzed both at the time of entry of a new audit firm and during the lifetime of an audit firm. The data set contains 1693 firms that entered into the Dutch audit market in the period 1930–1992. To analyze the data, the technique of event history analysis is applied. There are two key results of the study. First, a higher level of education of the firm's auditors, both at founding and during the lifetime of an audit firm, generally increases audit firm performance. Second, the effects of experience at founding and experience during the lifetime of an audit firm vary considerably. Higher levels of experience at founding have a positive influence on audit firm performance. However, higher levels of experience during the lifetime of an audit firm, i.e., the aging of the firm's auditors, have a negative effect on firm performance.
The development of both brand name reputation and industry specialization by Big 8 auditors is argued to be costly and therefore to increase audit fees. For a sample of 1484 Australian publicly listed companies we estimate audit fee premia for Big 8 auditors. On average, industry specialist Big 8 auditors earn a 34% premium over nonspecialist Big 8 auditors, and the Big 8 brand name premium over non-Big 8 auditors averages around 30%. These results support that industry expertise is a dimension of the demand for higher quality Big 8 audits and a basis for within Big 8 product differentiation.
Prior studies suggest that auditors with short tenure are associated with lower earnings quality because of the lack of client-specific knowledge and/or low balling. In this study, we examine whether industry specialization of auditors and low balling affect the association between auditor tenure and earnings quality. We find that the association between shorter auditor tenure and lower earnings quality is weaker for firms audited by industry specialists compared to non-specialists. In addition, we do not find results consistent with the low balling explanation.
Technological changes and audit firm mergers over the last decade raise the question as to whether the decision aids reported in prior research are representative of the types of decision support currently employed in audit firms. To address this issue, a study was conducted of the audit support systems used at five international audit firms and the types of decision support embedded within their audit support systems. The concepts of system restrictiveness and audit structure were combined to develop a definition of audit support system restrictiveness, and the firms' systems were classified using this definition. Substantial differences in audit support system restrictiveness were found to be associated with the type of decision support embedded within these systems. In order to guide future research, existing audit decision aid studies were mapped to the types of embedded decision support and several future research opportunities were identified.
ABSTRACT We posit that the effect of non-audit fees on audit quality is conditional on auditor industry specialization. Industry specialist auditors are more likely than nonspecialists to be concerned about reputation losses and litigation exposure, and to benefit from knowledge spillovers from the provision of non-audit services. We find evidence that audit quality measured by increased propensity to issue going-concern opinion, increased propensity to miss analysts' forecasts, as well as higher earnings-response coefficients increases with the level of non-audit services acquired from industry specialist auditors compared to nonspecialist auditors. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2008.