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IFRS and Audit Quality - A Systematic Literature Review
Abstract
The study has reviewed the literature on audit quality (AQ) in general and with reference to IFRS in particular for synthesizing the broader issues, the ongoing debates and controversies. A total of 263 papers published by eight global publishers (from June 2005 to 2020) were downloaded from the Tripura University’s digital library, and after rigorous filtering, 88 sample papers were retained. Applying boundaries for screening, it has focused on the continent of studies, objectives, variables, results, publishers and year of publications of the sample cited papers to summarize the research trends. Thus, the current study can spur researchers, practitioners, and academicians to gauge the impact and implications of IFRS on AQ and chart out future research agendas.
JEL Classification: M41, M42
... In addition, AEQ depends on the nature of the items, the informational environment, accounting expertise, and level of certainty (Galal, 2022). Quality is an elementary factor in any discussion by accounting regulators of setting global accounting standards (Deb et al., 2022;Osasere and Ilaboya, 2018). For example, one of the reasons for adopting the IFRS is to improve disclosure quality. ...
... Moreover, audit quality is an element of financial statement quality. Hence, the quality of financial statements is a collaborative outcome between client and auditor (Deb et al., 2022). Therefore, auditors should be a useful mechanism for evaluating and ensuring the quality of client estimates as part of the wider technique of auditing financial statements (ISA 540). ...
... Therefore, auditors should be a useful mechanism for evaluating and ensuring the quality of client estimates as part of the wider technique of auditing financial statements (ISA 540). Auditing accounting estimates is complicated due to the elements of uncertainty, business risks and managerial discretion (Deb et al., 2022;Oyewo et al., 2020). In this regard, Lau (2021) found that disclosing KAMs in terms of management estimates does not improve the value relevance of reported earnings, whereas the content of KAMs is used as a "red flag". ...
... In addition, AEQ depends on the nature of the items, the informational environment, accounting expertise, and level of certainty (Galal, 2022). Quality is an elementary factor in any discussion by accounting regulators of setting global accounting standards (Deb et al., 2022;Osasere and Ilaboya, 2018). For example, one of the reasons for adopting the IFRS is to improve disclosure quality. ...
... Moreover, audit quality is an element of financial statement quality. Hence, the quality of financial statements is a collaborative outcome between client and auditor (Deb et al., 2022). Therefore, auditors should be a useful mechanism for evaluating and ensuring the quality of client estimates as part of the wider technique of auditing financial statements (ISA 540). ...
... Therefore, auditors should be a useful mechanism for evaluating and ensuring the quality of client estimates as part of the wider technique of auditing financial statements (ISA 540). Auditing accounting estimates is complicated due to the elements of uncertainty, business risks and managerial discretion (Deb et al., 2022;Oyewo et al., 2020). In this regard, Lau (2021) found that disclosing KAMs in terms of management estimates does not improve the value relevance of reported earnings, whereas the content of KAMs is used as a "red flag". ...
... Improved comparability of financial statements across countries and industries, access to the international capital market, less capital costs, better market liquidity, and increased transparency are all advantages of reporting according to IFRS (e.g., Key & Kim, 2020;Mensah, 2021;Lunawat et al., 2023). However, it is not always the case, since there are negative effects including greater earnings management (e.g., Ahmed et al., 2013;Cameran et al., 2014;Ebaid, 2016), declined value relevance of intangibles (e.g., Cordazzo & Rossi, 2020), and increased cost of compliance (Deb et al., 2023). ...
... Because of implementing the more complicated accounting standards such as IFRS, auditors must deal with more complexities, investigate a larger variety of accounting alternatives and disclosures, and, in turn, exert more effort. Accordingly, IFRS implementation has been proven to offer a number of advantages, but also extra expenses in the form of higher audit fees (Nam, 2018;Azzali et al., 2021;Deb et al., 2023;Lunawat et al., 2023). ...
... Despite the paramount importance of audit quality to capital markets efficiency, there is still a continuous debate among researchers, corporates, TCWG, investors, auditors, regulators, and standard setters, investigating the definition, composition, and measurement of audit quality (Christensen et al., 2016;Deb et al., 2023;DeFond and Zhang, 2014;Fallatah et al., 2021;Francis, 2011;Kilgore et al., 2011;Rajgopal et al., 2021). Accordingly, a broader and deeper understanding of the complexities and details of audit quality needs to be developed through more comprehensive research, particularly on the role of auditor and client competency in driving audit quality (DeFond and Zhang, 2014;Montenegro and Brás, 2018). ...
... However, existing literature on audit quality remains controversial, where empirical investigations focus on accruals or fraud with prominent methodological challenges and ambiguous results yielding mixed and contradictory evidence (Aburisheh et al., 2023;Chadegani, 2011;Chen et al., 2023;Ciger, 2020;Deb et al., 2023;DeFond and Zhang, 2014;Fallatah et al., 2021;Francis, 2011;Gros and Worret, 2014;Montenegro and Brás, 2018;Tepalagul and Lin, 2015;Rajgopal et al., 2021;Santi et al., 2023;Velte, 2022;Willekens et al., 2023). Results of empirical research differ widely with respect to which measures for audit quality have been applied (Aobdia, 2019;Gros and Worret, 2014). ...
This paper aims at constructing a comprehensive practical framework for measuring the external audit quality of historical financial statements. An extensive review of prominent professional audit quality initiatives is conducted and complemented by prior literature review of audit quality measurement and interpretation. Exploratory analysis revealed that existing evidence of audit quality does not consistently support a specific measurement approach and some audit quality features are missing from existing frameworks, leading to inconsistency between audit quality conceptualization and operationalization. This research is a unique attempt to develop an integrated multidimensional conceptual framework and operational model for audit quality measurement using a single coherent construct that embraces key elements of inputs, process, outputs, interactions, and contextual factors, comprising interdependencies among the constructed measurement schematic dimensions. The study has important implications for researchers, stakeholders, corporates and managers, auditors, as well as regulators and standard setters in terms of audit quality assessment and benchmarking in a global capital market context.
... Some of the reasons forwarded by literature (Peng & Chau, 2023;Mayangsari & Suwarno, 2023;Tewelde et al., 2023;Ximenes & Guntur, 2023) include greater investor confidence, fostering stakeholder trust, maintaining market integrity, stricter regulatory compliance, avoidance of legal and ethical obligations, and MULTIDISCIPLINARY RESEARCH JOURNAL RECOLETOS facilitating global financial system integrity. Therefore, the requirement for audit quality derives its mandate from serving the public interest, placing it as a significant global industry trend in the post-pandemic era (Deb et al., 2023). In addition, global regulatory bodies have also mandated all audit firms to include audit quality as part of their attestation functions following newly-promulgated international standards on quality management (ISQM) (International Auditing and Assurance Standards Board [IAASB], 2020). ...
Audit quality is essential for maintaining public confidence in the audit profession. This paper explores the strategies utilized by Big 4 auditing firms in attaining the regulatory mandate of audit quality during the last decade and translates these into a conceptual model as a benchmark for other auditing firms. Using an in-depth document analysis of annual reports subjected to a blended (abductive) coding approach utilizing descriptive and longitudinal methods, this research found that value creation for significant stakeholders served as the foundation for implementing initiatives related to audit quality. Common priorities and practices include client engagement, strategic investments, technology innovation, market leadership, workforce empowerment, streamlined operations, regulatory compliance, and social responsibility. These findings reshape the way we view the identity of auditing firms as comprehensive organizational entities other than being mere external assurance providers and emphasize the significance of audit quality, particularly when viewed from a firm-level or managerial perspective.
... The review of Hairston and Brooks (2019) on regulatory improvements in derivative accounting echoes this evolution, emphasizing how changes like ASU 2017-12 enhance transparency and decision usefulness, which are critical for high-quality audits. Deb et al. (2023) thoroughly explore the relationship between international standards, particularly the implementation of IFRS, and audit quality. Their systematic review synthesizes findings suggesting that adopting IFRS generally leads to improved audit quality through enhanced transparency and comparability of financial statements. ...
This study investigates the impact of auditors' well-being and self-efficacy on audit quality within a high-stakes financial reporting context. Recognizing a gap in existing literature, which often examines these psychological constructs separately or outside of auditing, this research integrates them to assess their collective influence on audit outcomes. Through a survey of auditors, the study explores how well-being affects self-efficacy and audit quality and examines whether self-efficacy mediates the relationship between well-being and audit quality. Employing Structural Equation Modeling, the paper analyzes responses from a sample of auditors in southern African nations, providing a robust framework for understanding these dynamics. The findings reveal that well-being directly influences self-efficacy, which in turn enhances audit quality, highlighting self-efficacy as a key mediator. This study contributes to academic discourse by linking psychological factors to professional efficacy in auditing and offers practical insights for audit firms to improve auditor performance through targeted psychological and organizational support. The conclusions suggest that integrating well-being and self-efficacy into training and policy frameworks can significantly boost the effectiveness and reliability of audits in demanding environments.
Audit quality is crucial for upholding the integrity of the audit profession. However, due to its complex nature, auditing firms find it challenging to integrate audit quality as part of their organizational mandates. The main purpose of this study was to describe and analyze the status of audit quality within the global audit industry over the past decade thru the perspective of the Big 4 firms. Data were gathered from published annual reports spanning a ten-year period thru in-depth document analysis and were subjected to statistical, trends, and comparative analyses. Results revealed that the Big 4 have already been integrating audit quality concepts in their organizational operations even before formal audit quality management standards have been promulgated. They were able to identify proxies for effectively measuring audit quality. In addition, they also determined indicators that could potentially influence audit quality and classified them according to both organizational and operational parameters. These findings suggest that the Big 4 identify themselves as comprehensive organizational entities other than being mere external assurance providers. Smaller and local auditing firms can therefore look to the Big 4 for guidance on how to achieve and integrate audit quality within their own unique organizational and operational contexts.
Purpose
The current research investigates how the adoption of Artificial Intelligence (AI)—a set of technologies designed to enhance decision-making and automate processes—impacts Integrated Financial Reporting (IFR) in Gulf Cooperation Council (GCC) listed firms, which present the typical features of emerging economies. It is postulated that their IFR is enhanced as firms within these markets experience AI adoption. In addition, the study also focuses on the role of audit quality towards AI adoption and the IFR relationship within these regions. To this effect, the study examines the moderation effect of audit quality (using its sub-components i.e. audit fee, audit industry specialization and restatement) on the relationship between AI adoption experience and IFR in GCC.
Design/methodology/approach
The investigation draws upon panel data consisting of 2,912 non-financial firm-year observations covering the period from 2010 to 2023 across GCC markets. To achieve its purpose, the study applies the conventional ordinary least square (OLS) to estimate the effect of AI adoption experience on IFR. Subsequently, to guarantee the robustness of the results, this study utilizes the propensity score matching (PSM) technique.
Findings
The results from empirical analysis disclose a direct impact of AI adoption on the IFR of the firms within GCC markets. Furthermore, the study also discovers that the high level of audit quality moderates this positive relationship. Therefore, in the GCC regions, firms with higher AI adoption show higher IFR effectiveness, mainly in the presence of specialized auditors and increased audit fees, whereas their relationship is stronger in the absence of restatements. The results are robust when tested through the PSM technique.
Originality/value
The results of this study highlight the significance for policymakers to ensure comprehensive AI adoption in GCC markets, as well as the appointment of industry specialists and the standardization of audit fees to support the improvement of IFR in the regions.
This study examines the relation between audit personnel salaries and office-level audit quality. We measure audit personnel salaries at the associate, senior, and manager ranks for Big 4 audit offices from 2004 to 2013, using unique individual-auditor-level data obtained from the U.S. Department of Labor. We find that offices that pay lower salaries have a higher percentage of clients that experience restatements. In related analyses, we also find lower levels of audit quality when audit employees are paid less, relative to other lines of service in accounting firms. Finally, we document positive and significant associations between salary and fees, suggesting that audit offices pass some of the cost of higher labor onto their clients. Overall, our findings provide important initial evidence on the role of audit salary and its relation to audit quality and audit fees.
It is widely acknowledged that an effective enforcement system represents a crucial element to achieve significant improvements in financial reporting through the adoption of high-quality accounting standards. Indeed, the quality of financial reporting is considerably influenced not only by the standards to be adopted but also by their actual implementation, and consequently by enforcement mechanisms.The topic has generated considerable interest among scholars, who devoted their attention to developing different measures of the quality of the enforcement system. Building upon this literature, this paper aims at exploring the accounting enforcement system and focuses on controls over financial reporting considering two levels, namely the auditing activity and the controls performed by national enforcers.This paper extends the prior literature by proposing a dynamic measure of the accounting enforcement system capturing controls at those two levels. More specifically, the index here proposed focuses on the quality of the accounting enforcement operated by national enforcers in terms of proactivity, intended as the national enforcers’ capability to detect problems not highlighted in the auditors’ opinions, thus shifting the focus from an input to an output perspective. Indeed, the activities of auditors and national enforcers are strictly connected, given that the auditors’ opinion is the first public output of accounting controls and that is normally one of the bases for further investigation by national enforcers. An illustrative empirical analysis is carried out on the German and the Italian contexts to show the potential of the index for enforcement studies.
Whether Big N auditors provide higher audit quality than non-Big N auditors remains a debate. We add new evidence to this debate by utilizing the setting of Big N auditors' acquisitions of non-Big N auditors. We identify 331 treatment firms that switched to Big N auditors due to the exogenous shocks imposed by Big N acquisitions. Our difference-in-differences analyses show that treatment firms' audit quality improves after switching to Big N auditors. In comparison, mergers or acquisitions among non-Big Ns have little impact on audit quality. Our cross-sectional analyses suggest the audit quality improvement among treatment firms is more likely due to Big N auditors' general competence rather than their industry-specific expertise. Finally, we find that treatment firms experience no significant market reactions around the announcements of Big N acquisitions, indicating that the capital markets may not attach any premium to the improved audit quality associated with Big N auditors.
JEL Classifications: M41; M49.
We investigate the reasons why “adoption” of one set of globally accepted accounting standards is presently unachievable. By “adoption” we mean that a jurisdiction incorporates IFRS instantly as its national accounting as issued by the IASB. We state that the IASB has used a Legitimacy Theory strategy to gain acceptance of its standards by more than 120 countries across the globe but it has only gained pseudo-“adoption” (not as published by the IASB) of its standards by many countries. We contend that achieving policing and enforcement of its standards globally has proven to be empirically illusive. This legitimacy deficit may explain why convergence between the IASB and FASB is currently idle. We offer a possible solution to bridging the legitimacy gap of global adoption of IFRS. We propose an internationally respected regulator and suggest the IOSCO for this role through its participation in the IFRS Foundation Monitoring Board for policing and enforcement of IFRS for cross-listed firms reporting in compliance with IFRS so that the IASB’s output legitimacy may be achieved globally.
This study investigates the implications of the gap between International Financial Reporting Standards
(IFRS) and New Zealand International Financial Reporting Standards (NZIFRS) on financial reporting
transparency, accountability and corporate fraud. Content analysis of IFRS and NZIFRS was carried out to
determine if there are differences between IFRS and NZIFRS. Four IFRS, namely IAS 12, IFRS 13, IFRS 15,
IAS 17 and IFRS 16 were analysed on the basis of adoption concessions and Reduced Disclosure Regime
(RDR) for tier 1 and 2 entities. The findings from these standards led to a review of the associated IFRS to
further understand the implications of the standards on financial reporting transparency and decline in
incidences of corporate fraud. We found that the difference between IFRS and NZIFRS lies in the financial
reporting framework for tier 2 entities. However, we did not find a difference between IFRS and NZIFRS for
entities in tier 1 but we identified a decline in incidences of corporate fraud after IFRS was adopted. We
further identified the presence of information asymmetry for tier 2 which is capable of retaining Generally
Accepted Accounting Principles (GAAPs). These differences may increase the incidence of corporate fraud
among the entities in tier 2 of External Reporting Framework. This is due to an excessive concession from
IFRS implementation in New Zealand.
With reference to the Job Demands–Control Model, we empirically examine the effect of auditors’ work stress on audit quality using a sample of Chinese A-share listed companies and their signature auditors from 2009 to 2013. The results show that (1) there is generally no pervasive deterioration in audit quality resulting from auditors’ work stress; (2) there is a significant negative association between work stress and audit quality in the initial audits of new clients; and (3) the perception of work stress depends on auditors’ individual characteristics. Auditors from international audit firms and those in the role of partner respond more strongly to work stress than industry experts. Auditors tend to react more intensively when dealing with state-owned companies. We suggest that audit firms attach more importance to auditors’ work stress and rationalize their allocation of audit resources to ensure high audit quality.
This paper reviews the literature on the effects of International Financial Reporting Standards (IFRS) adoption. It aims to provide a cohesive picture of empirical archival literature on how IFRS adoption affects: financial reporting quality, capital markets, corporate decision making, stewardship and governance, debt contracting, and auditing. In addition, we also present discussion of studies that focus on specific attributes of IFRS, and also provide detailed discussion of research design choices and empirical issues researchers face when evaluating IFRS adoption effects. We broadly summarize the development of the IFRS literature as follows: The majority of early studies paint IFRS as bringing significant benefits to adopting firms and countries in terms of (i) improved transparency, (ii) lower costs of capital, (iii) improved cross-country investments, (iv) better comparability of financial reports, and (v) increased following by foreign analysts. However, these documented benefits tended to vary significantly across firms and countries. More recent studies now attribute at least some of the earlier documented benefits to factors other than adoption of new accounting standards per se, such as enforcement changes. Other recent studies examining the effects of IFRS on the inclusion of accounting numbers in formal contracts point out that IFRS has lowered the contractibility of accounting numbers. Finally, we observe substantial variation in empirical designs across papers which makes it difficult to reconcile differences in their conclusions.
We study whether audit-partner quality influences the probability of annual report misstatements (measured by restatements) and whether various levels of quality control attenuate such influences. We measure audit-partner quality with audit failure rate (i.e., the total number of audit failures associated with an audit partner divided by the total number of audit reports signed by the same partner). We report the following key findings. First, an audit partner's past audit failure rate is positively associated with the probability that the current year annual report that he/she audits is subsequently restated. This positive association is more pronounced for engagement partners (i.e., partners who actually conduct the audits) than for review partners (i.e., partners who review the audits). Incorporating audit-partner audit failure rates substantially increases the predictive power for future financial report restatements. Second, neither engagement-team-level nor audit-firm-level quality controls consistently attenuate engagement audit partners' influence on the probability of future restatements. Third, engagement audit partners' influence on the probability of future restatements becomes stronger for audits of more important clients. Taken together, the evidence suggests that, despite various levels of quality control, audit-partner quality significantly influences engagement quality and that such influences are exacerbated by the audit partners' own economic incentives.
JEL Classifications: M42.
Data Availability: Data used in this study are available from public sources.
Purpose
The accounting profession has argued strongly against claims that the provision of non‐audit services to audit clients leads to impaired auditor independence, instead claiming that the joint provision of non‐audit services and audit services creates knowledge spillovers that lead to a more efficient audit. This paper seeks to provide evidence concerning knowledge spillovers by examining the association between the audit report lag and non‐audit services.
Design/methodology/approach
The authors obtained a sample of 260 firm‐year observations from the financial reports of New Zealand public companies over the period 2004‐2005 and tested for associations between non‐audit services and audit report lag, controlling for other variables.
Findings
The paper finds evidence that non‐audit services are associated with a shorter audit report lag, but that this occurs in a subsequent period, not in the year in which the services are provided.
Practical implications
The results suggest that firms purchasing non‐audit services from their incumbent auditors benefit from knowledge spillovers by achieving a shorter audit report lag, but not immediately.
Originality/value
Previous studies have examined whether there is a relationship between non‐audit services and audit report lag in the concurrent period. This paper extends tests to also examine the relationship between NAS in one year and the audit in a subsequent year. These results are more consistent with knowledge spillovers that allow a more efficient audit than they are with loss of independence by the auditor, because loss of independence would take effect immediately, while knowledge spillovers might take time.
This article concerns inter-disciplinary research on questions about the socio-economic impact of the adoption and convergence of International Financial Reporting Standards (IFRS) with local standards in selected countries. The article approaches the research in two stages. The first stage concerns the findings and analysis relating to the general impact of the IFRS standards on Singapore and Malaysia. Findings reveal that respondents expressed reservations about cited IFRS adoption benefits, including increases of foreign investment and equity cost reductions; and stakeholder confidence has been eroded by the complex harmonising of principles-based ‘fair value’ requirements. Debate continues on the application of IFRS regarding standards on financial instruments, real estate and agriculture. Our qualitative research methodology of survey uses institutional theory and stakeholder theory for analysis.
The second stage posits further research for IAS12 Income Taxes, given accounting standards are one starting point for tax compliance, and that income taxes form part of financial statements. A test questionnaire was prepared and industry respondents were asked questions on the extent of IAS12’s challenges to practitioners in Australia.
This study is a comparison of the strategies employed in management research in two periods, 1995-97 and 1985-87. Through a content analysis of articles from the Academy of Management Journal, Administrative Science Quarterly, and the Journal of Management, we examined the use of research methods for addressing issues of "triangulation" and validity, including internal, external, construct, and statistical conclusion validity. Results indicate some potentially important trends in reports of research strategies as well as decreases in the internal, external, and construct validity of studies.
The present article attempts to provide a broad picture regarding the consequences of the mandatory adoption of the International Financial Reporting Standards (IFRS) around the world by reviewing extant empirical evidence relating to four comprehensive accounting standard setting criteria: decision usefulness, reduction of information asymmetry, economic consequences of standards and political aspects of standard. The review reveals that mixed evidence exists regarding the decision usefulness of accounting numbers under the IFRS. The majority of the extant studies reviewed find that the value relevance of accounting numbers and financial reporting comparability is enhanced following the adoption of the IFRS. However, mixed evidence exists regarding the effect of IFRS adoption on earnings management, timely loss recognition and other properties of accounting quality. The majority of the extant empirical studies reviewed find a reduction in information asymmetry (enhanced analysts forecast accuracy, consensus and other properties). Generally, the extant studies reviewed provide evidence regarding favourable economic consequences (lower cost of equity and increasing foreign investment) under the IFRS regime. Certain studies provide evidence regarding the role of political pressures and lobbying activities in the development of a number of standards by the International Accounting Standards Board. A number of studies find that the favourable consequences following the adoption of the IFRS regime dependent on the strength of reporting incentives for a firm and the strength of a country’s enforcement system. In the absence of sufficient evidence regarding the consequences of IFRS adoption in developing countries and the significant differences in the institutional features of such countries, the aforementioned conclusions are less likely to be generalizable to developing countries. The conclusion of the present study is likely to be useful for international and national authority bodies and the users of financial reports. The conclusions also provide significant suggestions for further research regarding the consequences of IFRS adoption.
The existing literature on audit opinion shopping provides inconsistent evidence on whether such shopping has any association with abnormal audit fees. In this paper, we hypothesize that firms engage in audit opinion shopping and pay an abnormal audit fee only when their degree of accounting quality is low. To examine the issue, we group firms on the basis of their change in return on assets (ROA), and show that abnormal audit fees improve audit opinions only among firms that engage local auditors and have a low degree of ROA, but report a large increase in ROA, especially when the ROA change is the result of abnormal accruals. We find no association between abnormal audit fees and audit opinion improvement for other firms.
The importance of fostering more accurate audits has been heightened by a series of highprofile accounting scandals at the beginning of the millennium. These scandals prompted more stringent regulations over corporate governance and financial reporting and the creation of audit oversight bodies as the Public Company Accounting Oversight Board (PCAOB) in the United States and the Public Oversight Board (POB) in the United Kingdom. In parallel, the growing globalization of business has brought forth calls for adherence to a common set of International Financial Reporting Standards (IFRS). Even if a common standard is promulgated, it will not lead to similar results if implementation differs across countries. Therefore, it is important to investigate the auditing regulatory regimes in different nations and the status of cross-border audit inspections. Accordingly, we begin by describing the cross-national institutions (e.g., the International Federation of Accountants [IFAC]) that impact national regulatory choices. Then we survey the audit regulatory practices of public company auditors of a select group of major economic powers and based on this analysis, we discuss the challenges and obstacles to engaging in intra-national audit, cross-national audit/inspections, and the challenges posed by differences in auditing standards used in various linked (e.g., by joint ventures, etc.) nations. We include in this discussion the effects of national culture, investor legal protection, economic development, and differing financial standard sources.
Purpose
– The purpose of this paper is to review and critique the current status of intellectual capital (IC) research as published in the Journal of Intellectual Capital (JIC) as it heads into its 15th year with a view to understanding the past and possible direction of future IC research.
Design/methodology/approach
– Articles published in the JIC are reviewed building on prior IC research and analysis by Guthrie et al. (2012) and Dumay and Garanina (2013). To help understand the impact of articles in the JIC the analysis is supplemented by including citation data from google scholar, journal impact data from the SCImago Journal & Country Rank portal, and the 2013 Australian Business Dean's Council (ABDC) journal ranking list. Also included is commentary from the JIC's senior editors based on their responses to questions asked via e-mail relating to their involvement in, and the future of, the JIC.
Findings
– The JIC faces a challenge as it is most recognised as an accounting journal despite its focus on managing IC. The research published in the JIC is multidisciplinary as it comes from a wide range of perspectives. However, there appears to be a paucity of research emanating from different perspectives, most notably from North American academics, and a lack of focus on the private and public sectors. However, new perspectives of IC, especially that associated with IC praxis and the third stage of IC research are emerging as transformational opportunities for future IC research, along with the opportunity to experiment with transdisciplinary research.
Originality/value
– The paper presents a comprehensive critical review of the articles published in the JIC along with measuring the impact of the articles using citation data from google scholar. Using this approach, the type of research and its impacts can be simultaneously assessed to offer insights into future transformational IC research opportunities, and how IC researchers and the JIC can also be transformational.
We argue that the association between auditor industry specialization and audit quality depends on how long the auditor has been a specialist. We measure audit quality using absolute discretionary accruals, income-increasing discretionary accruals, and book-tax differences. Our results, based on a sample of Big 4 audit clients from 2003–2015, indicate that auditors who have only recently gained the specialist designation produce a level of audit quality that does not surpass that produced by non-specialist auditors, and is generally lower than the audit quality produced by seasoned specialists. We estimate that the seasoning process takes two to three years. In contrast to prior research that finds no effect of specialization after propensity score matching, we find that seasoned specialists generally produce higher-quality audits than other auditors even after matching. This suggests that the audit quality effect associated with seasoned industry specialist auditors is not due to differences in client characteristics.
JEL Classifications: M42.
Data Availability: Data used in this study are available from public sources identified in the text.
Extensive debate exists among policy makers and economists about the employment of highly skilled immigrants in the United States. It remains unclear whether these immigrants perform complementary tasks in addition to their substitutive role relative to native graduates. Empirical studies examining these questions in a focused setting are scarce, principally because of the nonavailability of data. We examine these questions using the audit industry as a setting because of the availability of client, city, and office characteristic data at each audit office. This setting also allows us to answer whether immigration can address the growing human capital constraint in the audit industry. We find evidence of a complementary role of highly skilled immigrants. In addition, our results indicate a reputational spillover of client restatements at the audit office level to the labor markets. Our findings have immigration and education policy implications.
This paper was accepted by Shivaram Rajgopal, accounting.
In this study, we use a survey instrument to obtain perspectives from almost 800 auditors about present-day audit workloads and the relationship between audit workloads and audit quality. Our findings indicate that auditors are working, on average, five hours per week above the threshold at which they believe audit quality begins to deteriorate and often 20 hours above this threshold at the peak of busy season. Survey respondents perceive deadlines and staffing shortages as two of the primary reasons for high workloads and further believe that high workloads result in decreased audit quality via compromised audit procedures (including taking shortcuts), impaired audit judgment (including reduced professional skepticism), and difficulty retaining staff with appropriate knowledge and skills. We also find that auditors’ job satisfaction and their views on the audit profession are impacted negatively by audit workloads, particularly when the workloads are perceived as being heavy enough to impair audit quality. Overall, our findings provide support for the PCAOB’s concern regarding excessive workloads and suggest that the primary drivers of workloads (i.e., deadlines and staffing problems) might be the actual “root cause” of workload-related audit deficiencies.
A large auditing literature concludes that Big N auditors provide higher audit quality than non-Big N auditors. Recently, however, a high-profile study suggests that propensity score matching (PSM) on client characteristics eliminates the Big N effect [Lawrence A, Minutti-Meza M, Zhang P (2011) Can Big 4 versus non-Big 4 differences in audit-quality proxies be attributed to client characteristics? Accounting Rev. 86(1):259–286]. We conjecture that this finding may be affected by PSM’s sensitivity to its design choices and/or by the validity of the audit quality measures used in the analysis. To investigate, we examine random combinations of PSM design choices that achieve covariate balance, and four commonly used audit quality measures. We find that the majority of these design choices support a Big N effect for most of the audit quality measures. Overall, our findings show that it is premature to suggest that PSM eliminates the Big N effect.
This paper was accepted by Suraj Srinivasan, accounting.
This study examines the associations between four economic outcomes of the 2005 mandatory adoption of International Financial Reporting Standards (IFRS) and concurrent changes in two important accounting constructs, accounting comparability and reporting quality. My primary purpose is to evaluate the relative importance of cross-country accounting comparability and firm-specific reporting quality in explaining previously documented increases in Tobin's Q, stock liquidity, analyst forecast accuracy, and analyst forecast agreement following IFRS adoption. Given that improvements in both comparability and reporting quality are primary stated objectives of the International Accounting Standards Board (IASB), it is important to understand their relative roles in shaping the information environment of financial statement users following IFRS adoption. Using 1,861 first-time adopters in 23 countries, I find that firms with a larger improvement in comparability have larger increases in Q, liquidity, forecast accuracy, and forecast agreement following adoption, relative to other adopters. In contrast, improvements in reporting quality around adoption appear to have only a second-order effect that is generally limited to Q effects among those adopters with concurrent improvements in comparability. These results are robust to alternative design and variable specifications. Finally, I continue to find these results for samples restricted to countries with weaker pre-adoption institutional environments and countries that did not initiate proactive financial statement reviews, indicating that strong institutions and regulatory improvements are not driving the results. Overall, my results suggest that improvements in cross-country accounting comparability played an important role in the previously documented economic benefits that accrued to 2005 mandatory IFRS adopters.
Purpose
This paper aims to examine how the relationship between abnormal audit fees and audit quality changed after adoption of the International Financial Reporting Standards (IFRS) in Korea.
Design/methodology/approach
Using empirical data collected over the period from 2008 to 2013, this study analyzes the association between abnormally high/low audit fee and audit quality. This study uses linear regression to test the hypothetical relation using discretionary accrual as a proxy for audit quality.
Findings
This study finds that there exists no significant relationship between abnormally high audit fees and audit quality measured by the magnitude of discretionary accruals in the pre-IFRS adoption period. However, the relationship between abnormally high audit fees and the magnitude of discretionary accruals turns to be positive in the post-IFRS adoption period. These finding suggests that the IFRS enables some clients to engage more discretion in the choice of discretionary accruals and auditors charge higher audit fees in return for allowing the discretion for such clients.
Practical implications
This study provides insight to regulators of the need to review carefully the financial statements of firms with abnormally high audit fees, and to investors to be more cautious when using financial information about these firms.
Originality/value
To the best of authors’ knowledge, this is the first study to assess IFRS impact on audit fee-quality relation. Also, unique Korean audit market with intensifying competition and discounting audit fee provides interesting setting to review the impact of abnormal audit fee on audit quality.
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with: (i) quantifying regulatory costs and benefits, (ii) measuring disclosure and reporting outcomes, and (iii) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on IFRS adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. Moreover, evidence on causal effects of disclosure and reporting regulation is still relatively rare. We also lack evidence on the real effects of such regulation. These limitations provide many research opportunities. We conclude with several specific suggestions for future research. This article is protected by copyright. All rights reserved
We empirically test whether audit quality is affected when part of an SEC issuer's audit is outsourced to auditors other than the principal auditor ("participating auditors''). We find a significantly negative market reaction and a significant decline in earnings response coefficients (ERCs) for experimental issuers disclosed for the first time as having participating auditors involved in their audits. However, we find no market reaction and no decline in ERCs for a matching sample of issuers that are not disclosed as using participating auditors, nor for issuers disclosed for the second or third time as using participating auditors. We also find actual audit quality as measured by absolute value of performance-matched discretionary accruals is lower for the experimental issuers, although we find no difference in audit fees paid by the experimental and matching issuers in a multivariate model. Our findings suggest that the PCAOB's proposed rule requiring disclosure of the use of other auditors in addition to the principal auditor would provide information useful to investors in assessing audit quality for SEC issuers.
This paper is the first in a two-part series on conservatism in accounting. Part I examines alternative explanations for conservatism in accounting and their implications for accounting regulators. Part II summarizes the empirical evidence on conservatism, its consistency with alternative explanations, and opportunities for future research. The evidence is consistent with conservatism's existence and, in varying degrees, the various explanations. Conservatism is defined as the differential verifiability required for recognition of profits versus losses. Its extreme form is the traditional conservatism adage: "anticipate no profit, but anticipate all losses." Despite criticism, conservatism has survived in accounting for many centuries and appears to have increased in the last 30 years. The alternative explanations for conservatism are contracting, shareholder litigation, taxation, and accounting regulation. The evidence in Part II suggests the contracting and shareholder litigation explanations are most important. Evidence on the effects of taxation and regulation is weaker, but consistent with those explanations playing a role. Earnings management could produce some of the evidence on conservatism, but cannot be the prime explanation. The explanations and evidence have important implications for accounting regulators. FASB attempts to ban conservatism in order to achieve "neutrality of information" without understanding the reasons conservatism existed and prospered for so long are likely to fail and produce unintended consequences. Successful elimination of conservatism will change managerial behavior and impose significant costs on investors and the economy in general. Similarly, researchers and regulators who propose the inclusion of capitalized unverifiable future cash flows in financial reports should consider the costs generated by their proposal's effect on managerial behavior.
This paper suggests a new measure of one aspect of the quality of working capital accruals and earnings. One role of accruals is to shift or adjust the recognition of cash flows over time so that the adjusted numbers (earnings) better measure firm performance. However, accruals require assumptions and estimates of future cash flows. We argue that the quality of accruals and earnings is decreasing in the magnitude of estimation error in accruals. We derive an empirical measure of accrual quality as the residuals from firm-specific regressions of changes in working capital on past, present, and future operating cash flows. We document that observable firm characteristics can be used as instruments for accrual quality (e.g., volatility of accruals and volatility of earnings). Finally, we show that our measure of accrual quality is positively related to earnings persistence.
Are high audit fees a signal that the auditor exerted more effort or a signal that the auditor may be losing her independence? Prior literature offers conflicting evidence. In this paper, we reexamine the issue on a sample of clients who have both the incentive and the ability to use discretionary accruals to meet or beat the consensus earnings forecast. We find a negative relationship between the level of abnormal audit fees paid by the client and the likelihood of using discretionary accruals to meet or beat the consensus analyst forecast. The evidence is consistent with the notion that abnormal audit fees are indicative of greater effort on the engagement. In other words, the results suggest a positive relationship between abnormal audit fees and audit quality. We show that the conflicting evidence in prior research was caused by research designs that did not consider the incentives of the manager.
JEL Classifications: M42; M41.
Data Availability: All data are available from public sources quoted in the text.
This study investigates whether workload pressures, as proxied by the audit busy season (i.e., December fiscal year-end date) and auditor workload compression (i.e., relative concentration of companies with the same fiscal year-end date in an auditor's client portfolio), affect audit quality. Using a sample of 8,384 firm-year observations during the period 2006-2009, we find that busy season companies exhibit greater magnitudes of abnormal accruals and are more likely to meet or beat certain earnings benchmarks. Additional tests show that these associations are enhanced by the degree of auditor workload compression. Prior experimental and survey research indicates that workload pressures lead to dysfunctional behaviors and lower audit quality among individual auditors. Our archival findings suggest that these pressures can transcend the quality control mechanisms of a firm, affecting quality at the audit engagement level.
SYNOPSIS
This paper contributes to the deliberations on the potential consequences of requiring disclosure of the engagement partner's identity in the audit report. The PCAOB has recently suggested that this requirement will lead to enhanced audit quality due to increased engagement partner accountability and improved transparency of the audit process. The goal of our commentary is to examine this issue by considering factors that potentially affect audit quality in appearance and audit quality in fact, and applying insights from three distinct academic frameworks: source credibility, accountability, and the theory of affordances.
While prior evidence from source credibility research implies that a mandatory signature will likely increase audit quality in appearance, its impact on audit quality in fact remains unclear. Academic literature suggests that increased accountability will increase audit effort but is silent on the associated increase in audit effectiveness. As a result, mandatory disclosure is likely to increase the risk of over-auditing because audit services have the essential characteristics of a credence good. As for an increase in audit quality in appearance, the question remains whether the current perception of audit quality is too low or too high. The increase in public perceptions of audit quality without an associated increase in actual quality is a desirable accomplishment only when public perception of quality is below actual audit quality. Otherwise, the measure increases the gap between delivered audit quality and public perceptions of it. We suggest specific research opportunities in this area.
While prior literature documents that Big 4 auditors provide higher quality audits, recent evidence suggests that these differences are due to client characteristics (Lawrence, Minutti-Meza, & Zang, 2011). Evidence on the audit quality of mid-tier auditors is mixed (Boone, Khurana, & Raman, 2010; Cassell, Giroux, Myers, & Omer, 2013). This study investigates the audit quality of small auditor firms (i.e., those with 100 or fewer). Specifically, we examine the relationship between earnings manipulations and the use of small audit firms, controlling for client characteristics using propensity score matching. We find that small audit firms are less able to constrain managers' opportunistic use of discretionary accruals. However we find no evidence that small audit firms are associated with real activity manipulation. By investigating a specific group of audit firms that are the smallest in the audit market, this study extends our understanding of the role of audit firm size in audit quality.
This paper examines whether the identity of the individual audit partners provides informational value to capital market participants beyond the value provided by the identity of the audit firms. Using data from Taiwan, where firms are mandated to disclose the names of the engagement partners, we find a positive association between the partner's quality and the client firm's earnings response coefficient. We also find a positive market reaction when a firm replaces a lower quality partner with a higher quality one. Moreover, we find evidence that firms audited by higher quality partners experience smaller initial public offering (IPO) underpricing and are able to obtain better debt contract terms. Overall, these results suggest that the quality of engagement partners matters to capital market participants.
This paper proposes a framework for understanding management's decision-making on observable accounting policy choices. The framework is used to hypothesize how country, industry, and topic factors influence policy choice under International Financial Reporting Standards (IFRS). The hypotheses are tested on the choices made by the largest firms from 10 jurisdictions on a comprehensive set of IFRS policy topics, which are hand-collected from the financial statements. The results are consistent with the framework: country factors are particularly influential when the choice does not affect an important accounting number; and industry and topic factors influence the choice on some topics. Overall, we find that country factors have the greatest influence on IFRS policy choice.
Purpose
– The purpose of this paper is to examine how the mandatory shift from Norwegian Generally Accepted Accounting Principles (NGAAP) to International Financial Reporting Standards (IFRS) in Norway affected the valuation weights of earnings and book values, with the aim of gaining insights that are relevant for standard setters, investors and other users of accounting information.
Design/methodology/approach
– The authors extend the IFRS literature on structural shifts between the pre- and post-adoption periods by comprehensively controlling for factors that vary between the IFRS sample and the domestic Generally Accepted Accounting Principles (GAAP) sample. Moreover, the tests are designed to reveal the underlying accounting causes of the observed differences in value relevance.
Findings
– IFRS are balance sheet-oriented and emphasize measurement at fair value. By contrast, NGAAP are earnings-oriented and focus on historical cost. IFRS also differ from NGAAP by recognizing more intangible assets. Overall, IFRS are thus less conservative than NGAAP. It was found that expanded fair value accounting increases the value relevance of book values and decreases the value relevance of earnings. However, the improved matching of intangible asset expenditures with the future economic benefits of such intangible assets increases the persistence and value relevance of earnings relative to book values.
Originality/value
– This paper introduces a test methodology that is designed to identify the effects that specific accounting differences between the IFRS sample and the domestic GAAP sample have on value relevance. Consequently, this paper not only identifies the overall effects on value relevance but also contributes to the literature by identifying specific accounting differences between IFRS and GAAP that cause these overall effects, and thus obtain insights that are valuable for standard setters and other users of accounting information.
The highly prescriptive and technical provisions of Financial Reporting Standard (FRS) 136 – Impairment of Assets (FRS 136, 2009) represent a very substantial variation from past practice. This gives rise to questions about how Malaysian companies and their auditors have fared during the process of transition to a complex reporting regime. Hence, this study examines the degree of technical compliance with the disclosure requirements of FRS 136 (Amended by Annual Improvements to IFRSs 2009) by a sample of 20 large Malaysian shariah approved companies used as a proxy for audit quality. This research employed six analytical structures to distinguish audit quality among the Big 3 in an attempt to question the homogeneity of audit quality assumption. The evidence presented in this study suggests that there is no variation in audit quality among the Big 3 and contributes to the existing literature that audit quality among the largest audit firms is homogenous. The findings will be of interest to investors, analysts, regulators and in other jurisdictions undergoing transition to IFRS.
The audit report lag, defined as the period between a company's fiscal year-end and the audit report date, has been considered to be one of the few externally observable audit output variables allowing outsiders to evaluate audit efficiency. Prior research on the determinants of the audit report lag has investigated a common set of firm characteristics, including firm size, fiscal year-end, loss occurrence, presence of extraordinary items, client complexity, and audit opinion. However, there is scant research on the effect of changes in reporting regulations on the audit report lag. This paper examines empirically the effect on the audit report lag of a new set of Chinese accounting standards introduced in 2007 that were based on the fair value accounting system. We document empirical evidence of a significant increase in the audit report lag in China after the adoption of these new accounting standards. This increase, however, is more pronounced for clients audited by small audit firms.
This paper examines linkages between audit and nonaudit fees and accrual quality. We measure accrual quality by the Francis, Lafond, Olsson, and Schipper 2005 modification of the Dechow and Dichev 2002 measure. We posit that in settings where audit quality is compromised by a loss of auditor independence, managers use accruals more opportunistically and thereby drive down the accrual quality. Conversely, higher audit effort and quality translate to better accrual quality. Our dependent variables are the relative magnitude of nonaudit fees to audit fees and the absolute magnitudes of audit, nonaudit, and total fees. Results show that accrual quality has a significant negative association with the magnitude of nonaudit fees and a significant positive association with audit fees. This latter result is consistent with the proposition that higher audit fees reflect higher audit effort and better judgements about the propriety of accruals, but is not consistent with the proposition that audit fees are associated with economic bonding.
We examine the effect of auditor-in-charge characteristics on audit quality using the propensity to issue a going-concern opinion as the measure of audit quality. We extend the sparse literature on auditor-in-charge characteristics by investigating how audit quality is related to the number of audit assignments and the age of the auditor. First, there is a concern that a very large number of assignments negatively affect the time and effort invested in each assignment and that the auditor may take shortcuts in important audit procedures in order to save time. Second, based on theories on career stage, older auditors may lack inherent motivation to invest enough effort in training activities and learning auditing standards. We use a sample of 1,145 privately held small and medium-sized enterprises (SMEs) that filed for bankruptcy between October 2008 and September 2009. Our results show a negative association between the number of audit assignments held by the auditor-in-charge and audit quality, and we find that the age of the auditor-in-charge is negatively associated with audit quality. This study shows that auditor-in-charge characteristics are important determinants for audit quality in private companies and suggests that regulators should pay attention to these quality concerns and evaluate whether an upper limit on the number of assignments held would be an effective way of improving audit quality.
This study examines whether auditor industry specialization, measured using the auditor's within-industry market share, improves audit quality and results in a fee premium. After matching clients of specialist and nonspecialist auditors on a number of dimensions, as well as only on industry and size, there is no evidence of differences in commonly used audit-quality proxies between these two groups of auditors. Moreover, there is no consistent evidence of a specialist fee premium. The matched sample results are confirmed by including client fixed effects in the main models, examining a sample of clients that switched auditors, and using an alternative proxy that aims to capture the auditor's industry knowledge. The combined evidence in this study suggests that the auditor's within-industry market share is not a reliable indicator of audit quality. Nevertheless, these findings do not imply that industry knowledge is not important for auditors, but that the methodology used in extant archival studies to examine this issue does not fully parse out the effects of auditor industry specialization from client characteristics.
Contemporaneous studies generally find a negative relationship between audit partner busyness (APB), measured as the number of clients in an audit partner’s portfolio, and audit quality. Their argument is that a busy partner does not devote sufficient time to properly audit his average client. Contrary to these studies, we argue that when busyness is optimally chosen by the partner, in equilibrium, there is no causal relationship between APB and audit quality. Using Australian data for the 1999–2010 period, we show that APB is not reliably linked to audit quality, consistent with this equilibrium theory. We argue that causality can be ascribed to the APB-audit quality relationship when accounting scandals exogenously shocked the Australian audit market during the 2002–04 period and APB likely deviated from optimum levels. Supporting this disequilibrium view, we find that higher APB reduces a partner’s propensity to issue first-time going concern opinions during this period. Our evidence highlights the importance of the equilibrium condition in testing empirical associations between audit outcomes and endogenous auditor attributes, and shows that the detrimental effect of APB on audit quality is not as pervasive as contemporaneous studies suggest.
Conceptual
New ventures are internationalizing their operations from inception. This creates opportunities for growth and profitability. However, early internationalization creates serious challenges for effective governance. This article focuses on two key layers of governance (public and corporate) and how they interact to influence global entrepreneurial young firms, especially those “born globals” that enter foreign markets from inception (e.g., internet companies) or soon after their establishment, also known as early internationalizers. Though established companies also create new businesses dedicated to international business, they differ in fundamental ways from their younger counterparts that venture into international markets. Therefore, in this article, we focus on those global entrepreneurial young companies. We propose that the interaction of public and corporate governance systems has important implications for global entrepreneurial young firms' strategic choices as they seek to position themselves in their markets. Ideally, public and corporate governance systems combine to ensure the viability, survival and success of these firms.
Born global and early internationalizing new ventures encounter distinct problems centered on free riding and management of intellectual property. Public governance establishes the essential framework that can guide the resolution of these issues. Corporate governance systems interact with public governance to harmonize the interests of different claimants, especially in disputes that arise across national borders. Corporate governance systems not only ensure effective monitoring of owner-managers but define what they do and how to do it in a highly globalized environment.
The article shows how public and corporate governance systems interact over time, determining the fate of global new ventures. It also articulates how these systems define and protect intellectual property rights. The discussion highlights the role of governance in a global marketplace where intangibles define success and failure, pointing out the efficacy of traditional agency theory while underscoring the need for revising its boundaries. Future theorizing should consider diversity of managerial motives, and these motives are influenced by national institutions. As a result, we should not start with the assumption that the interests of firms and owners are perfectly aligned.
There is a need to understand the dynamic interplay between public and corporate governance systems, placing a greater focus on value creation across international borders. This interplay defines what managers (owner-managers) do and how they lead their ventures in a global environment, one that is characterized by political and institutional uncertainties. The discussion makes clear that national institutions shape the definition and performance of managerial decisions and roles.
Using a large sample of U.S. audit client firms over the period 2000–2005, this paper investigates whether and how the size of a local practice office within an audit firm (hereafter, office size) is a significant, engagement-specific factor determining audit quality and audit fees over and beyond audit firm size at the national level and auditor industry leadership at the city or office level. For our empirical tests, audit quality
is measured by unsigned abnormal accruals, and the office size is measured in two different ways: one based on the number of audit clients in each office and the other based on a total of audit fees earned by each office. Our results show that the office size has significantly positive relations with both audit quality and audit fees, even after controlling for national-level audit firm size and office-level industry expertise. These
positive relations support the view that large local offices provide higher-quality audits compared with small local offices, and that such quality differences are priced in the market for audit services.
We investigate whether the adoption of International Financial Reporting Standards (IFRS) in Greece affected tax-induced incentives for financial earnings management. Prior to the implementation of IFRS, there were powerful incentives for firms facing higher tax pressure to restrict (exacerbate) upward (downward) financial earnings management due to direct tax implications. IFRS adoption reduced book–tax conformity, thereby releasing financial income from tax implications. As expected, we find that tax pressure is a significant negative determinant of discretionary accruals in the pre-IFRS period. However, this effect dissipates under the new IFRS regime.
This study identifies an interesting instance where auditor service quality can be measured in more than one way. Instead of using auditor size as a proxy for auditor service quality, we measure auditor service quality directly in terms of the mean forecast error of earnings forecasts in prospectuses of initial public offerings (IPOs) in Singapore. More importantly, this calibration of auditor service quality allows us to test the hypothesis that auditor service quality is independent of auditor size. We find that there is no difference in the auditor service quality of the Big Six and the non-Big Six audit firms. The findings suggest that issuers who appoint the Big Six audit firms just before going public may just be paying quasi-rents.
This paper investigates the effects on audit quality and audit fees of requiring the engagement partner to sign the audit report in the United Kingdom (U.K.). The effect of requiring the engagement partner to sign the audit report is timely since the Public Company Accounting Oversight Board (PCAOB) is considering mandating a similar requirement in the United States (U.S.). In the first year after the introduction of the signature requirement, we find a significant decline in abnormal accruals and the propensity to meet an earnings threshold, and we find a significant increase in the incidence of qualified audit reports and in earnings informativeness. In addition, audit fees are significantly higher in the post-signature period than in the pre-signature period. Moreover, we compare U.K. firms with a matched sample of U.S. firms and firms in other European countries in periods both before and after the U.K. adopted a signature requirement. Our results are generally consistent with the argument of improved audit quality in U.K. firms after the signature requirement is adopted.
Data Availability: Data are available from public sources identified in the text.
To restore investors' confidence in the reliability of corporate financial disclosures, the Sarbanes-Oxley Act of 2002 mandated stricter regulations and arguably increased auditors' liability. In this paper, we analyze the effects of increased auditor liability on the audit failure rate, the cost of capital, and the level of new investment. We focus on a setting in which, with imperfect auditing, a firm has better information than investors about its prospects and seeks to raise capital for new investments in a lemons market. The equilibrium analysis derives corporate reporting and investing choices by the firm, attestation opinions by the auditor, and valuation by rational investors. Three empirically testable predictions emerge: although increasing auditor liability decreases the audit failure rate and the cost of capital for new projects, it also decreases the level of new profitable investments.
This study tests the hypothesis that below-normal audit fees signal important nuances in the balance of bargaining power between the auditor and the client, and that such power may ultimately influence audit quality. We find that audit quality, proxied by absolute discretionary accruals and meeting or beating analysts' earnings forecasts, declines as negative abnormal audit fees increase in magnitude, with the effect amplified as proxies for client bargaining power increase. We find that this effect is dampened in years following the Sarbanes-Oxley Act (SOX), suggesting that SOX was effective in enhancing auditor independence.