Article

Non-Audit Service Fees and Audit Quality: The Impact of Auditor Specialization

March 2008
Journal of Accounting Research 46(1):199-246

Source
RePEc

Authors:

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.

The informational role of audit partner industry specialization

Article

Full-text available

Aug 2022
Rev Quant Finance Account

This paper examines the effect of auditor industry specialization on the association between information asymmetry and accounting information quality. Using data from Taiwan whose audit reports are required to be signed by audit partners and controlling for the endogenous auditor choice, the results show that the audit partner industry specialization moderates the positive relation between discretionary accruals and measures of information asymmetry (i.e., bid-ask spread and analyst forecast dispersion). Moreover, this positive relation is stronger for firms whose audit partners are industry specialists than for firms whose audit firms are industry specialists. Further analysis shows that the first audit partner’s expertise itself matters more for the association between earnings quality and information asymmetry, in comparison with the expertise of audit firm alone. The results are robust to alternative estimation method and models, and alternative measures of information asymmetry, earnings quality, and industry specialists. Overall, the evidence is consistent with the audit partner’s industry specialization reducing information asymmetry via its impact on higher earnings quality. Our analyses provide policy implications in the dual-partner signature rule implemented in Taiwan.

The role of the external auditor in managing environmental, social, and governance (ESG) reputation risk

Article

Full-text available

Aug 2022
REV ACCOUNT STUD

Companies are under increasing pressure to manage their reputation on environmental, social, and governance (ESG) issues. Auditors are a potential source of ESG risk management expertise and assurance due to a deep understanding of their client’s ESG-related reputation risk (“ESG risk”) and their assurance reporting expertise. However, provision of nonaudit services by the external auditor is controversial and public accountants are still defining their role in ESG risk control and reporting. We explore whether auditors help companies manage heightened ESG risk in times of reputation crisis, using abnormal negative ESG-related media coverage as a measure of “tainted reputation.” Findings show a positive association between tainted reputation and nonaudit services and between the interaction of tainted reputation and nonaudit services with future firm value. The positive interaction persists when we consider a proxy for other ESG risk management activities in our analyses and for other measures of ESG risk management effectiveness (future stock returns and future tainted reputation). Subsample analyses indicate that results are driven by companies audited by ESG industry specialist auditors, that the association between tainted reputation and nonaudit services is driven by companies owned by institutional shareholders, and that inferences from our results may not hold when ESG risk is dominated by its social component. Using restatements as a proxy, we find no evidence to suggest that the interaction of tainted reputation and nonaudit services is associated with impaired audit quality. Findings demonstrate an empirical linkage between tainted reputation and nonaudit services that is positively associated with future firm value measures.

Within or across Auditors? Understanding Knowledge Transfer in Audit Production

Article

Full-text available

Jun 2022

SYNOPSIS Knowledge transfer affects audit production: it is an underlying reason for specialization premiums and economies of scale. Using measures of client-level comparability to proxy for the internal (within-auditor) and external (across auditors) knowledge transfers that occur during audit production, our results indicate that internal knowledge transfer subsumes external knowledge transfer. Although this result may seem intuitive, recent research implies external knowledge transfer significantly impacts audit efficiency. Thus, the dominance of internal knowledge transfer is important to document. We also provide evidence that the benefits of auditor specialization are not uniform, as typically modeled in the literature. Specifically, we provide evidence that knowledge transfer enhances the efficiencies from auditor specialization. Finally, we find knowledge transfer is associated with greater audit efficiency, irrespective of auditor specialization or industry homogeneity. Overall, our results reaffirm the importance of within-auditor knowledge transfer and highlight the importance of considering client characteristics when examining knowledge transfer. Data Availability: Data are available from the public sources listed in the text. JEL Classifications: M41; M42.

International Real Estate Review

Article

Jun 2018

We examine the geographic component of investment in audit services in the REIT industry. As REIT firms have strong incentive for information transparency and maintain high audit quality, we expect that geographic distance, as a proxy for information flow, among REIT firms, their auditor, and the Securities and Exchange Commission (SEC) offices have effects on the audit and non-audit fees paid by REIT firms. We find that: 1) REIT firms pay more audit and non-audit fees to their auditor when their headquarters are located closer to the SEC offices; 2) REIT firms pay higher audit and non-audit fees when the office of their auditor is closer to the SEC, 3) REIT firms pay higher audit and non-audit fees when the office of their auditor is located closer to their headquarters, and 4) REIT firms that are close to both the SEC and their auditor pay the highest fees for both audit and non-audit services. The results are consistent with our expectation that REIT firms desire high quality audit services and are willing to pay higher fees for them. Also, the REIT industry may enjoy the knowledge spillovers between the audit and non-audit sides and the industry specialization of their auditor.

The Effect of Pure Audit Firms, Non-Provision of Non-Audit Services to Audit Clients, and a Statutory Fee Schedule on Audit Quality Perceptions

Article

Jan 2021

Does Audit Committee Disclosure of Partner-Selection Involvement Signal Greater Audit Quality?

Article

Jun 2021
Account Horiz

We investigate whether audit committees use voluntary disclosures to signal the committees' higher level of involvement in the audit partner-selection process, which contributes to higher levels of audit quality. Audit committees more involved in the partner-selection process should ensure the selection of a more rigorous partner. We test this conjecture by first identifying partners new to audit engagements. We then compare audit quality for companies whose audit committees disclose involvement in the selection of the new partner to those without this disclosure. We find that this disclosure is positively associated with audit quality (measured using discretionary accruals, misstatements, and meeting consensus analyst forecasts by a very small margin). Our results are more salient for complex companies and those with powerful audit committees. These findings highlight that audit committees use their disclosures to signal involvement in the partner-selection process and are relevant to the Securities and Exchange Commission. ABSTRACT We investigate whether audit committees use voluntary disclosures to signal the committees' higher level of involvement in the audit partner-selection process, which contributes to higher levels of audit quality. Audit committees more involved in the partner-selection process should ensure the selection of a more rigorous partner. We test this conjecture by first identifying partners new to audit engagements. We then compare audit quality for companies whose audit committees disclose involvement in the selection of the new partner to those without this disclosure. We find that this disclosure is positively associated with audit quality (measured using discretionary accruals, misstatements, and meeting consensus analyst forecasts by a very small margin). Our results are more salient for complex companies and those with powerful audit committees. These findings highlight that audit committees use their disclosures to signal involvement in the partner-selection process and are relevant to the Securities and Exchange Commission.

Does Audit Committee Disclosure of Partner-Selection Involvement Signal Greater Audit Quality?

Article

Jun 2021

SYNOPSIS We investigate whether audit committees use voluntary disclosures to signal the committees' higher level of involvement in the audit partner-selection process, which contributes to higher levels of audit quality. Audit committees more involved in the partner-selection process should ensure the selection of a more rigorous partner. We test this conjecture by first identifying partners new to audit engagements. We then compare audit quality for companies whose audit committees disclose involvement in the selection of the new partner to those without this disclosure. We find that this disclosure is positively associated with audit quality (measured using discretionary accruals, misstatements, and meeting consensus analyst forecasts by a very small margin). Our results are more salient for complex companies and those with powerful audit committees. These findings highlight that audit committees use their disclosures to signal involvement in the partner-selection process and are relevant to the Securities and Exchange Commission. Data Availability: The data used in this paper are publicly available from the sources indicated in the text. JEL Classifications: M41; M48.

Financial investment by non-financial firms: does it affect audit quality?

Article

Full-text available

Aug 2024
J Manag Govern

In the context of the global trend of increasing financial investment by non-financial firms, this study investigates how this process affects the audit quality of these firms. Employing data of Chinese listed non-financial firms from 2011 to 2020, we first examine whether the increasing proportion of financial assets in the total assets has an adverse impact on the audit quality of these firms. We then analyze the mediation effect of operational volatility on such impact by adopting the mediation test of the modified Sobel’s z and the bootstrap test. We find that a higher proportion of financial assets to total assets lowers the audit quality, confirming that the financialization of non-financial firms deteriorates their audit quality. Furthermore, the mediation tests show that operational volatility is an important channel for this negative effect.

Principles based accounting standards, audit fees and going concern: evidence using advanced machine learning

Article

Dec 2023
Int J Account Inform Manag

Meena Subedi

Purpose-- The current study uses an advanced machine learning method and aims to investigate whether auditors perceive financial statements that are principles-based as less risky. More specifically, this study aims to explore the association between principles-based accounting standards and audit pricing and between principles-based accounting standards and the likelihood of receiving a going concern opinion. Design/methodology/approach-- The study uses an advanced machine-learning method to understand the role of principles-based accounting standards in predicting audit fees and going concern opinion. The study also uses multiple regression models defining audit fees and the probability of receiving going concern opinion. The analyses are complemented by additional tests such as economic significance, firm fixed effects, propensity score matching, entropy balancing, change analysis, yearly regression results and controlling for managerial risk-taking incentives and governance variables. Findings-- The paper provides empirical evidence that auditors charge less audit fees to clients whose financial statements are more principles-based. The finding suggests that auditors perceive financial statements that are principles-based less risky. The study also provides evidence that the probability of receiving a going-concern opinion reduces as firms rely more on principles-based standards. The finding further suggests that auditors discount the financial numbers supplied by the managers using rules-based standards. The study also reveals that the degree of reliance by a US firm on principles-based accounting standards has a negative impact on accounting conservatism, the risk of financial statement misstatement, accruals and the difficulty in predicting future earnings. This suggests potential mechanisms through which principles-based accounting standards influence auditors’ risk assessments. Research limitations/implications-- The authors recognize the limitation of this study regarding the sample period. Prior studies compare rules vs principles-based standards by focusing on the differences between US generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) or pre- and post-IFRS adoption, which raises questions about differences in cross-country settings and institutional environment and other confounding factors such as transition costs. This study addresses these issues by comparing rules vs principles-based standards within the US GAAP setting. However, this limits the sample period to the year 2006 because the measure of the relative extent to which a US firm is reliant upon principles-based standards is available until 2006. Practical implications-- The study has major public policy suggestions as it responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US Securities and Exchange Commission (SEC), to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the International Accounting Standards Board (IASB) Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks such as climate change. Originality/value-- The study has major public policy suggestions because it demonstrates the value of principles-based standards. The study responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US SEC, to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information as business transactions and investor needs continue to evolve globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the IASB Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks like climate change. The study fills the gap in the literature that auditors perceive principles-based financial statements as less risky and further expands the literature by providing empirical evidence that the likelihood of receiving a going concern opinion is increasing in the degree of rules-based standards.

Principles Based Accounting Standards, Audit Fees and Going Concern: Evidence Using Advanced Machine Learning

Article

Jan 2023

Meena Subedi

Purpose –The current study utilizes an advanced machine learning method and aims to investigate whether auditors perceive financial statements that are principles-based as less risky. More specifically, the study explores the association between principles-based accounting standards and audit pricing and between principles-based accounting standards and the likelihood of receiving a going concern opinion. Design/methodology/approach – The study employs an advanced machine-learning method to understand the role of principles-based accounting standards in predicting audit fees and going concern opinion. The study also uses multiple regression models defining audit fees and the probability of receiving going concern opinion. The analyses are complemented by additional tests such as economic significance, firm fixed effects, propensity score matching, entropy balancing, change analysis, yearly regression results, and controlling for managerial risk-taking incentives and governance variables. Findings – The paper provides empirical evidence that auditors charge less audit fees to clients whose financial statements are more principles-based. The finding suggests that auditors perceive financial statements that are principles-based less risky. The study also provides evidence that the probability of receiving a going-concern opinion reduces as firms rely more on principles-based standards. The finding further suggests that auditors discount the financial numbers supplied by the managers using rules-based standards. The study also reveals that the degree of reliance by a US firm on principles-based accounting standards has a negative impact on accounting conservatism (both conditional and unconditional), the risk of financial statement misstatement, accruals, and the difficulty in predicting future earnings. This suggests potential mechanisms through which principles-based accounting standards influence auditors' risk assessments. Research limitations/implications – The authors recognize the limitation of this study regarding the sample period. Prior studies compare rules vs. principles-based standards by focusing on the differences between US GAAP and IFRS or pre and post-IFRS adoption, which raises questions about differences in cross-country settings and institutional environment and other confounding factors such as transition costs. This study addresses these issues by comparing rules vs. principles-based standards within the US GAAP setting. However, this limits the sample period to the year 2006 because the measure of the relative extent to which a US firm is reliant upon principles-based standards is available until 2006. Originality/value – The study has major public policy suggestions because it demonstrates the value of principles-based standards. The study responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US Securities and Exchange Commission (SEC), to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information as business transactions and investor needs continue to evolve globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the International Accounting Standards Board (IASB) Andreas Barckow’s recent public statement which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks like climate change. The study fills the gap in the literature that auditors perceive principles-based financial statements as less risky and further expands the literature by providing empirical evidence that the likelihood of receiving a going concern opinion is increasing in the degree of rules-based standards.

EY and KPMG Merger: How Strong Are Relationships Among Board Members and Their Audit Partners? A Network Perspective

Article

Jun 2023

This study investigates the avenue of outcomes that followed up the process of joining the operations between two audit firms in Denmark—Klynveld Peat Marwick Goerdeler (KPMG) and Ernst & Young (EY)—in 2014, under the EY label. In this research, we study clients’ behavior to audit staff defection in the auditor selection context to identify the impact of the change that occurred in the market for audit services on engagement partner selections. Company behaviors to the newly formed situation are examined against the tendency toward each of the following three behavioral patterns: (a) staying with the same audit firm, (b) following the engagement partner’s switch to another audit firm, and (c) selecting a third auditor. Utilizing the cutting-edge methodology for social network analysis called exponential random graph models (ERGMs), we study the relevant reactions in the period from 2012 to 2017. Results show that, at the audit firm level, earlier KPMG clients preferred to stay with the newly established KPMG. On the contrary, at the audit partner level, former KPMG clients had a strong tendency to follow their incumbent partners who had decided to switch to EY. Finally, those KPMG clients that decided to rotate audit firms did not commit this rotation to follow their incumbent partners.

Does the Implementation of the Three-Level Review System Really Enhance Audit Quality? Evidence from Modified Audit Opinions

Preprint

Jul 2021

To improve audit quality, some Chinese auditing firms have added a review by an extra signing auditor to the general review by a signing auditor team consisting of an engagement auditor and a partner, thus forming a three-level review system. Nonetheless, our research based on 36,033 firm-year observations from 2004-2019 reveals that compared to the general review system, auditor teams under the three-level review system are less likely to issue modified audit opinions when abnormal financial conditions arise. This result suggests that although, theoretically, the knowledge, experience and information advantages possessed by larger auditor teams can sharpen their judgment, their performance level is more susceptible to interference from divergent opinions, the diffusion of responsibility and less energy invested by individual auditors, ultimately impairing their judgment on the abnormal financial conditions of audited enterprises. That is, the three-level review system, which aims to improve audit quality, actually worsens audit quality. This conclusion remains valid after the problems of heteroscedasticity and endogeneity are addressed. We hope that our research will draw the attention of auditing firms, prompting them to reconsider the rationality of the three-level review system.

AUDITOR-FIRM CONFLICT: THEORETICAL CONCEPTS APPLICATION AND ANALYSIS OF THE POWER DYNAMICS INVOLVED

Article

Jun 2024

Eferakeya Idowu

This study undertakes a theoretical analysis of the auditor-firm conflict situation. It relied on the review of literature methodology and focused mainly on the auditor's appointment, firm economic pressure, management bargaining power, auditor's fear of losing a firm, firm's management economic power over the auditor, auditor's personal attributes and moral reasoning, auditor's tenure, audit fees, audit market competitiveness, non-audit services, audit firm size, and the firm’s financial condition. The Goldman and Barlev model, exchange, and dependency theories provided the basis to explain the likely power positions in the auditor-firm relationship. Employing the deductive analysis, the study indicated the presence of an asymmetry power structure where the auditor and firm can have low and high-power positions. On this basis, the study proffered resolution measures that include the imposition of reputational and litigation costs; strengthening of audit committees; the need for regulations on the auditor’s appointment and remuneration; impose disciplinary measures on firms and auditors, and ensure strong enforcement of standards. These measures are capable of curtailing the auditor's and firm actions in reducing violation of auditing standards; improve the auditor's independence, reduce the firm's pressure on the auditor, and bring about the balance of power positions. The paper has implications for understanding the auditor-firm conflict situation and provides opportunities for strengthening audit policy and audit standards development.

Non-Audit Services (NAS) and Auditor Independence (AI): Moderating Role of Regulatory Environment

Article

Full-text available

Sep 2024

Objectives: This study aimed to examine the influence of non-audit services (NAS) on audit independence (AI) among non-financial companies listed on the Nigerian Stock Exchange (NSE). Specifically, it investigated the relationship between NAS fees and AI, with a focus on how regulatory quality moderates this relationship. Theoretical Framework: The study is grounded in agency theory, which suggests that conflicts of interest may arise when auditors provide NAS, potentially compromising their independence. The research also explores the role of regulatory quality in mitigating such conflicts, contributing to the broader understanding of corporate governance in emerging markets. Method: An ex-post facto research design was employed, analysing secondary data from 280 firm-year observations across 20 companies in nine industry groups on the NSE over a 15-year period (2006-2020). Audit independence was proxied by discretionary accruals, while NAS was measured using the NAS fee ratio (NFR) and the natural logarithm of NAS fees (LNNF). The hypotheses were tested using Autoregressive Distributed Lag (ARDL) models with the aid of Stata v15. Results and Discussion: The findings reveal that higher NAS fees (LNNF) are significantly associated with reduced audit independence, as indicated by increased discretionary accruals. However, this negative impact is moderated by the quality of the regulatory framework, which helps preserve AI. Contrary to initial expectations, the NAS fees ratio (NFR) was found to be positively associated with discretionary accruals, further emphasizing the critical role of regulatory quality in safeguarding audit independence. Research Implications: The study underscores the importance of robust regulatory frameworks in maintaining audit independence in the presence of NAS. It offers practical insights for policymakers and regulators to enhance corporate governance and financial reporting integrity in Nigeria. Originality/Value: This research contributes to the literature by providing empirical evidence from an emerging market, demonstrating the significance of regulatory quality in moderating the relationship between NAS and audit independence. It offers valuable guidance for policymakers, regulators, and practitioners aiming to strengthen corporate governance practices.

Auditor-Firm Conflict: Theoretical Concepts Application and Analysis of the Power Dynamics Involved

Article

Full-text available

Aug 2024

Eferakeya Idowu

This study undertakes a theoretical analysis of the auditor-firm conflict. It relied on the review of literature methodology contextualized on auditor's appointment, firm economic pressure, management bargaining power, auditor's fear of losing a firm, firm's management economic power over the auditor, auditor's personal attributes and moral reasoning, auditor's tenure, audit fees, audit market competitiveness, non-audit services, audit firm size, and the firm's financial condition. The study relied on the Goldman and Barlev model, exchange, and dependency theories to explain the likely power positions in the auditor-firm relationship. Deductively, the study based on the contexts indicated the presence of an asymmetric power structure where the auditor and firm have low and high power positions. The study, however, proffered resolution measures such as reputational and litigation costs, strengthening of audit committees, control over auditor's appointment and remuneration, effective discipline of firms and auditors, and strong enforcement of standards. The measures can curtail the auditor's and firm's actions in reducing violations of auditing standards, improving the auditor's independence, reducing the firm's pressure on the auditor, and bringing about a balance of power positions. The paper has implications for understanding the auditor-firm conflict situation and provides opportunities for strengthening audit policy and audit standards development.

The Effects of Prohibition of Non-Audit Services on the Audit Quality and Fees: A Study on Bangladesh

Article

Full-text available

Sep 2015

In this paper we have tried to find an answer to the question: does the prohibition of non-audit services affect the audit quality and audit fees in Bangladesh. A questionnaire survey was used to pickup opinions from a sample of auditors who are working at Big-4 and non-Big-4 audit firms. The results suggest that preventing joint NAS and audit services will lead to the decrease in the number of auditors who provide audit services and hence audit fees would increase. Furthermore, auditors select NAS on the account of audit services due to the less effort required and the higher income gained. It is expected that audit services will be carried out by small audit firms of less experienced and unqualified staff. Demographics as auditors' academic degree and experience have influenced the respondent auditors' perceptions on some of the questions. It was found that type of audit firm has no impact on auditors' perceptions, where all auditors expressed the same views on the impact of the NAS on the audit fees and the audit quality. It is hope that the findings of this study would pave the way for policy setters to find out the mechanisms that would help in controlling audit fees and ensure a high level of audit quality in the audit market of Bangladesh.

Partner narcissism in a private market setting: Consequences for audit reporting decisions and audit pricing

Article

Full-text available

Dec 2023

This study investigates the association between audit engagement partners' narcissism (measured by the size of their signature) and audit reporting decisions and audit pricing in a private market setting. We analysed 133,267 (78,994) firm‐year observations from (financially distressed) Belgian firms audited by 795 individual engagement partners from 2008 to 2017. Our results suggest that narcissism is positively associated with the likelihood that audit partners issue going‐concern opinions to their financially distressed clients and with audit fees. An array of robustness checks corroborates these results. Additional results show that audit partner narcissism is positively associated with reporting conservatism. Interestingly, additional analyses also show that narcissism reverses the effect of gender on audit reporting decisions and audit pricing. Collectively, the evidence from this study suggests that partner narcissism is positively associated with conservative audit reporting decisions and audit pricing in a private market setting.

Effect of Non–Audit Services on Auditor Independence of Deposit Money Banks in Nigeria

Article

Sep 2023

This research looked at how non-audit services affected the partnership between auditors and Nigerian deposit money institutions. Descriptive survey methodology was used for this investigation. The study was directed by two research aims. All 24 of Nigeria's deposit money banks make up the populace. The population was sampled using a systematic sampling method, and the sample size was 36 managers (three from each of 12 banks). The researcher used a questionnaire she designed to gather the data. “Pearson's product-moment correlation (PPMC) was used to verify or refute the hypotheses and investigate the study issues. The research showed that the auditor independence of listed deposit money banks in Nigeria is positively correlated with the provision of non-audit services” (indicated by taxation and management advice services). Non-audit services and auditor independence were also shown to have a substantial correlation with the aforementioned Nigerian deposit money institutions, the research found. Auditors at Nigerian deposit money institutions were urged, among other things, to reduce the number of non-audit services they provide to customers in order to focus more on auditing.

Effect of Auditor Specialization, Auditor Characteristics, Board Independence on Audit Quality through intellectual capital : Study on service companies

Article

Full-text available

Mar 2023

This study aims to examine the effect of auditor specialization, auditor characteristics, and board independence on audit quality through intellectual capital in service companies in West Java. The research was conducted using a quantitative approach with a sample of 384 service companies in West Java. Data were analyzed using Partial Least Square-Structural Equation Modeling (PLS-SEM) with SmartPLS 4.0 software. The results of this study showed that auditor specialization, auditor experience, and board independence had a positive and significant effect on audit quality. Meanwhile, intellectual capital has a significant mediating effect on the relationship between auditor specialization, auditor experience, and board independence on audit quality. The findings of this study provide important insights into the factors that contribute to the enhancement of audit quality in service companies. This study suggests that service companies in West Java should consider hiring specialized auditors, experienced auditors, and independent boards to improve audit quality. Additionally, companies should also focus on the development of intellectual capital, which plays an important role in enhancing audit quality.

A Review of Theories on Auditor Industry Specialisation

Article

Full-text available

Sep 2022

Partner Narcissism in a Private Market Setting: Consequences for Audit Reporting Decisions and Audit Pricing

Article

Full-text available

Nov 2023
Int J Audit

This study investigates the association between audit engagement partners’ narcissism (measured by the size of their signature) and audit reporting decisions and audit pricing in a private market setting. We analyzed 133,267 (78,994) firm-year observations from (financially distressed) Belgian firms audited by 795 individual engagement partners from 2008 to 2017. Our results suggest that narcissism is positively associated with the likelihood that audit partners issue going-concern opinions to their financially distressed clients and with audit fees. An array of robustness checks corroborates these results. Additional results show that audit partner narcissism is positively associated with reporting conservatism. Interestingly, additional analyses also show that narcissism reverses the effect of gender on audit reporting decisions and audit pricing. Collectively, the evidence from this study suggests that partner narcissism is positively associated with conservative audit reporting decisions and audit pricing in a private market setting.

Metaphysics of Internal Control

Article

Full-text available

Jan 2022

Graham Gal

On the Interrelation between Corporate Governance, Audit and Earnings Quality: A Review of the Underpinning Theories

Article

Full-text available

Sep 2022

The Effects of Internal Controls on the Audit Completeness and Reliability of Earnings Announcements

Article

Sep 2022

SYNOPSIS We examine how internal control effectiveness influences the audit completeness of earnings announcements and the consequences on earnings reliability. One of the intentions of the Sarbanes-Oxley Act of 2002 (SOX) was for internal controls to improve financial reporting. Although we show that effective internal controls directly reduce earnings announcement revisions as SOX would intend, we also find evidence that it provides management with the confidence to release their earnings disclosure earlier (with a less complete audit), indirectly increasing the likelihood of earnings announcement revisions. As a result, the beneficial impact of internal control effectiveness on earnings reliability is significantly undermined in a regulatory environment where companies are permitted to disclose preliminary earnings to the public. Our study provides important insights for regulatory policymaking and for accounting practitioners who are responsible for producing reliable financial disclosure. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; M42; M48.

Cyber risk and voluntary Service Organization Control (SOC) audits

Article

Full-text available

Aug 2022
REV ACCOUNT STUD

Jordan Schoenfeld

Firms routinely manage their financial reporting systems on external cloud platforms that are susceptible to cyberattacks and data integrity issues. Therefore, the AICPA developed a special type of voluntary audit called a “Service Organization Control” audit (SOC audit) that evaluates this risk. This study conducts one of the first systematic analyses of the benefits and costs of these voluntary audits. Using hand-collected data from public firms, I find that (1) 29% of firms in the S&P 500 (representing

10.9 trillion in market value) receive these audits; (2) business-model exposure to technology predicts a firm’s decision to receive these audits; (3) the scope of these audits includes internal controls over data integrity; and (4) these audits are one of the largest predictors of the variation in audit-related fees, amounting to a

900,000 average annual increase in these fees at the firm level (by comparison, tax preparation fees average about $1.3 million). SOC audits are thus an important and concrete example of the broader social and governance mandates of new stakeholder-focused reporting frameworks, such as the SASB’s Conceptual Framework.

Is tenure important in the sustainability assurance context? An empirical analysis of the informative value of assurance statements

Article

Full-text available

Aug 2022

This paper examines the communicative value of assurance reports by investigating whether the impact on information asymmetries is contingent on the length of the contractual relationship between clients and assurance providers, which can compromise the provider's independence. Using a firm-level dataset of publicly listed international firms from 2007 to 2016, we estimate several regression models for panel data by employing the generalized method of moments estimator to address the endogeneity issue. Results find that the greater the communicative value in assurance statements, the lower the information asymmetries. However, this effect is constrained when the assurance provider’s independence is compromised due to an excessively long-term contractual relationship. In other words, assurance statements with more informative value enhance the firm´s transparency and increase users´ confidence in the sustainability information provided. However, the loss of independence linked to longer tenure jeopardizes the communicative value of the assurance report and contributes to reducing information asymmetries.

Equity Incentives and Audit Partner Reporting Decisions for Private Company Audits

Article

Jan 2022

Do High-Quality Auditors Improve Non-GAAP Reporting?

Article

Full-text available

May 2022

Prior research finds that clients of high-quality auditors report higher-quality GAAP earnings. We extend this research to investigate whether auditor quality is associated with the quality of voluntarily disclosed non-GAAP earnings measures. Using a sample of Australian firms disclosing annual non-GAAP metrics, we find that clients of high-quality auditors are more likely to voluntarily disclose non-GAAP earnings numbers. However, clients of high-quality auditors make adjustments in calculating non-GAAP earnings (non-GAAP exclusions) that are less predictive of future earnings and less value relevant than those of other firms. These results indicate that their adjustments are of higher quality. We also find similar results for U.S. firms using a sample of quarterly non-GAAP earnings disclosures. Overall, our evidence indicates that commonly used indicators of audit quality for GAAP reporting are positively associated with the quality of voluntarily disclosed non-GAAP earnings measures. JEL Classifications: J33; M41.

Does CEO–Auditor Dialect Connectedness Trigger Audit Opinion Shopping? Evidence from China

Article

Full-text available

May 2022
J BUS ETHICS

Using the original information from the identification cards of CEOs and signing auditors to hand-collect the data on CEO–auditor dialect connectedness (CADC), we examine the effect of CADC on audit opinion shopping (AOS), and further investigate the moderating effect of auditor reputation. Using a sample of Chinese listed firms during the period of 2007–2019, our findings reveal that the likelihood of AOS is significantly higher for firms with CADC than for their counterparts. This finding suggests that CADC impairs auditor independence and triggers AOS. Moreover, the effect of CADC on AOS is less pronounced for BIG10-audited firms than for non-BIG10-audited firms, implying that auditor reputation attenuates the relation between CADC and AOS. Furthermore, the above findings are robust to alternative proxies for CADC and AOS, and our conclusions are still valid after using the Heckman two-stage regressions, the propensity score matching approach, the change model method and the regression discontinuity design to control for the endogeneity issue. Lastly, the impact of CADC on AOS stands only for engagement auditors, but not for review auditors. Overall, our study enriches the existing literature on AOS and auditor independence.

Determinants of Accounts Level and Entity Level Key Audit Matters: Further Evidence

Article

Apr 2022

We examine firm-specific factors (firm life cycle, firm size, complexity, litigation risks, intangible intensity), audit-specific factors (audit firm, audit fee, non-audit fee) and auditor-specific factors (auditor’s experience, specialization, gender and accounting degree), as determinants of the number of KAMs, account-level KAMs (ALKAMs), and entity-level KAMs (ELKAMs) for a sample of Australian firms. Our findings suggest that KAMs’ disclosure varies based on client firm-specific characteristics, audit firm-specific characteristics and audit partners’ characteristics. We find that firms’ life cycle, size, complexity, intangible intensity, audit firm identity, audit fees, auditors’ specialization, experience, gender and accounting degree affect the number and types of KAMs’ disclosure. Our findings negate the concern of stereotyping in KAMs disclosures and suggest that KAMs’ disclosure varies based on many contextual factors. Our findings have important implications for audit firms, corporate boards, investors and regulators.

The relationship between stock repurchase completion rates, firm reputation and financial reporting quality: A commitment‐trust theory perspective

Article

Jun 2022

In this study, we examine firms' commitment to stock repurchase announcements as a proxy for trust within the investing community. Using a commitment-trust theory perspective, we show that firms with higher repurchase (share buyback) completion rates have higher financial reporting quality. We proxy financial reporting quality using a composite measure of financial reporting aggressiveness and also using management’s propensity to meet or beat analysts' expectations. These firms mitigate (enhance) the negative (positive) effect of repurchases on financial reporting quality. Higher completion rates mitigate the negative effect of accretive stock repurchase on financial reporting quality. Further results show that higher corporate governance and financial constraints dampen this relationship between completion rates and financial reporting quality. Our results, which are robust to various sensitivity tests, indicate that higher stock repurchase completion rates reflect good business morality and a firm’s commitment to its investors, as exhibited by higher financial reporting quality.

The Downside of CFO Function-Based Language Incongruity

Article

Full-text available

Sep 2021

The prior literature on role congruity theory has revolved around demographic-based expectations, emphasizing role incongruity derived from a mismatch between prescriptive expectations of distinct roles. In this paper, we depart from this traditional focus on between-role incongruity and explore an alternative source of role incongruity by examining how language can trigger the within-role incongruity of function-based expectations. Through an analysis of conference call transcripts and contracts for 7,649 deals during 2003–2018, we show that the incongruity of function-based expectations manifested through the language of the CFO increases banks’ perceived hazards, leading them to employ more debt contract covenants. In addition, by investigating the moderating effects of corresponding CEO language and media sentiment, we show how the social context and sentiment toward the firm weaken this incongruity effect. We discuss the theoretical implications of our study for future research on the sources of role incongruity and the antecedents of contract design.

Nonaudit services, audit committee characteristics and accruals quality in Malaysia

Article

Full-text available

Aug 2021

Purpose The study examines the relationship between nonaudit services (NAS) and accruals quality in Malaysia. The study also considers several important characteristics of audit committee as the determinant for accruals quality. Next, the study examines whether these characteristics mitigate the relationship between NAS and accruals quality. Design/methodology/approach The study employs descriptive analysis, univariate tests and multivariate regression to investigate the potential effect of NAS on acruals quality. Data for audit committee characteristics were hand collected from annual reports downloaded from Bursa Malaysia's website. Findings Based on 1,118 firm-year observations for the period 2009–2011, the study finds that NAS negatively impact accruals quality. This empirical result indicates that the economic bond that is created between auditors and clients restricts the auditors from performing their duty objectively. A fully independent audit committee weakens the negative relationship between NAS and auditor independence. Research limitations/implications The sample period represents a limitation since it only covers three years of data. This limitation is largely driven by the nature of data collection of NAS fees. Practical implications These results contribute to Malaysia's policy deliberation to account for the effects of NAS on auditor independence and the oversight role of an audit committee. This study contributes to theoretical perspectives on accruals quality and corporate governance in Malaysia. Originality/value The novelty of this research, coupled with institutional data in Malaysia, claims the originality of this research.

A bibliometric analysis of the audit quality at global level

Conference Paper

Full-text available

Jul 2021

Andreea Claudia Crucean

The paper aims to highlight the main topics debated in the literature regarding the financial audit quality, that were indexed Web of Science, focusing on articles published between 2001 and 2020. Based on the literature review, the purpose of the article is to highlight the most important concepts that can influence the quality of services provided by financial auditors, but also to provide a framework for future research on the financial audit quality area, using bibliometric analysis. The paper pointed out which are the most relevant keywords that were correlated with audit quality, but also which are the most important authors who debated this topic in their research, and also who were the most cited authors in the articles analyzed, as well as the countries with the highest number of publications. The data were analyses with VOSviewer software based on the topic of the audit quality on keywords, authors, citations and geographical distribution. It was obtained 3173 articles which are indexed Web of Science, of which the most relevant keywords were: audit quality, audit fees, independence, auditor tenure, corporate governance and earnings managements. The largest number of articles have been published in countries such as: USA, Australia, and Canada, and the best known authors have been: Gul F., Francis J., and Li C. Also, Gul F., Knedel R., and Lobo G.J. were the most cited authors for articles relating to audit quality.

أثر آداء مراقب الحسابات لخدمات بخلاف المراجعة للشركات متوسطة وصغيرة الحجم على آدائها المالى– دليل من بورصة النيل المصرية

Article

Mar 2024

هانى خليل فرج

Non-Audit Services and the Cost of Debt in Private Firms

Article

Jan 2024

Female Presence in Audit Committee and Their Influence on Audit Quality Within Non-Financial Sector in Pakistan

Article

Dec 2022

Afshan Ali Wu Deli

The purpose for this paper is to recognize female presence in ACs and experience female CFO as working in ACs as a chief in Audit firms, impact of the female with Audit fee and non-audit fee on audit quality, just as their relationship with ﬁnancial reports of the non-financial sector of Pakistan. Using a combination of publicly available and manually collected data, using OLS regression, Fixed Effects Regression and Random effects and the Pakistan non-financial industries subsequently 2015 to 2019.Results show that this investigation tracks down an affirmative relationship between female directors on ACs and AQ. More, it proves that this affiliation is reliant upon the community bookkeeping aptitude of female ACs individuals and female presence in the ACs. This research adds to AQ literature and to the exploration distinguishing attributes driving female directors' checking. In addition, it adds to the clashing proof identified with female accounting specialists on ACs and accounting reports observing, that the outcomes propose that the blended proof might be determined by the scientists' inability to isolate economic ability. Likewise adds to the discussion on economic or non-economic mastery improves economic detailing observing. Additionally, it applies the hypothetical structure of uniting RDT (resource dependence theory) and AT (agency theory) to women directors on ACs. Moreover, the investigation upholds strategy producers' endeavors towards more noteworthy presence of Women directors, it suggests this they ought to likewise deliberate the public bookkeeping aptitude of women directors.

Industry Specialization and Audit Quality: Evidence from Audit Firm Switches in China*

Article

Oct 2022

Numerous studies have investigated the consequences of auditor switching. This study contributes to the existing literature by examining the impact of industry specialization on audit quality using audit firm switches in China. We find that changing from a non‐specialist to a specialist at the auditor partner level rather than the audit firm level decreases discretionary accruals, and increases value relevance and the likelihood of modified audit opinions and going‐concern opinions. These results suggest that upward partner‐level industry specialization help clients gain improvement in audit quality, which attenuates the negative impact of an audit switch.

AN HISTORICAL APPROACH TO THE RELATIONSHIP BETWEEN EXCESS AUDITOR REMUNERATION AND AUDIT QUALITY: DO THE ROLES OF AUDITOR ATTRIBUTES MATTER? PJAEE, 18 (18) (2021) AN HISTORICAL APPROACH TO THE RELATIONSHIP BETWEEN EXCESS AUDITOR REMUNERATION AND AUDIT QUALITY: DO THE ROLES OF AUDITOR ATTRIBUTES MATTER?

Article

Full-text available

Sep 2022

Agbonrha-Oghoye Imas Iyoha

The expansion of business in the twelfth-century necessitated the need for engagement of the services of auditors to curtail the excesses of management. The objective of this study is to examine the moderating effects of auditor attributes on the relationship between excess auditor remuneration and audit quality. Precisely the study examines the moderating effects of auditor tenure, auditor independence, and audit firm size on the relationship between excess auditor remuneration and audit quality. This study employed simple random sampling techniques to select fifty-two quoted Nigerian companies and data were extracted from the financial reports of the selected companies for fifteen years (2006-2020). The study employed the least square regression technique. The results showed that there is no significant relationship between excess audit pricing and audit quality. The result also showed that auditor tenure and audit firm size have a negative moderating influence on the relationship between excess audit remuneration and audit quality while auditor independence has a positive influence on the relationship between excess audit remuneration and audit quality. This study recommended that elongated auditor tenure should be discouraged to enhance quality audit and audit firms should be discouraged from charging a fee that may impair auditor independence.

Bank Competition and Borrower Conservatism

Article

Full-text available

Jul 2022

We study the influence of bank competition on U.S. public borrowers’ accounting conservatism by exploiting the staggered adoption of the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA) of 1994, which increased the threats of new bank entrants and actual bank entry. We find that borrowers’ conditional conservatism fell after IBBEA. Conservatism fell more for firms located in states with weak incumbent banks and states with more out-of-state entrants, especially entrants with better monitoring technologies. The decrease in conservatism partially stems from borrowers’ increased investment and risk-taking incentives. Conservatism fell more for firms relying more on bank loans, especially those that borrowed loans for the first time after IBBEA and for firms having lower dedicated institutional ownership and board independence. We also find that loans included fewer covenants and that bank loan borrowers became less likely to choose Big N auditors and industry specialist auditors after IBBEA. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G21; G28; K23; M41.

Deferred Tax Asset Valuation Allowances and Auditors' Going Concern Evaluations

Article

Jun 2022

The valuation allowance for deferred tax assets is an audited disclosure that reflects management’s expectations regarding the future profitability of a company. Building on prior literature that establishes this disclosure as an indicator of future distress, we examine whether the valuation allowance is associated with auditors’ going concern evaluations. We find evidence that the existence and magnitude of the valuation allowance, as well as changes in the allowance, are positively associated with the likelihood that a company receives a first-time going concern opinion. We also find some evidence that valuation allowances are associated with reduced Type I and Type II going concern opinion misclassifications. Our results suggest that the information related to management’s plans and expectations that is reflected in the valuation allowance is incrementally relevant to auditors in their assessment of a company’s likelihood of failure. Data Availability: Data are available from the public sources cited in the text.

Audit Partner Industry Specialization and the Cost of Debt: Evidence from Thailand

Article

May 2022

Kanyarat (Lek) Sanoran

Previous research reports a lower cost of debt when auditors are industry specialists at the national- and city-levels and at the firm- and office-levels. This study examines whether the cost of debt decreases with auditor industry specialization at the engagement partner level. Most audits are conducted on private companies and audit partners mainly gain industry expertise on private company audits. This paper uses data from public and private companies in Thailand and investigates the moderating effects of company type and the global financial crisis (GFC) on the association between auditor industry specialization and the cost of debt. The results indicate that audit partner industry specialization is negatively associated with the cost of debt only in the GFC period. In contrast to findings from prior studies, I find no additional benefit from hiring an industry specialist during the non-crisis period. JEL Classifications: G21; M42.

The Accounting Financial Expertise of the Audit Committee Chair And Oversight Effectiveness

Article

Apr 2022

Prior research finds the presence of accounting financial expertise (AFE) on the audit committee (AC) enhances financial reporting quality. The current study provides a broad examination of the effect of the AFE residing in the AC chair on the monitoring of financial reporting quality and the audit process. Based on a sample of over 13,840 observations from U.S. public companies, we find that AFE of the AC chair is associated with lower levels of earnings management and enhanced monitoring of the audit process. When augmented by AC members with AFE, AC chair AFE is also negatively associated with reduced misstatement risk. This finding suggests appointing an AFE to the AC may not in itself be sufficient to fully enhance oversight quality, unless the committee also has a chair who possesses AFE. Finally, chair AFE is also found to enhance the likelihood of reporting material control weaknesses and goodwill impairments.

Industry Specialization and Audit Quality: Evidence from Audit Firm Switches in China*

Article

Mar 2022

Numerous studies have investigated the consequences of auditor switching. This study contributes to the existing literature by examining the impact of industry specialization on audit quality using audit firm switches in China. We find that changing from a non‐specialist to a specialist at the auditor partner level rather than the audit firm level decreases discretionary accruals and increases value relevance and the likelihood of modified audit opinions and going‐concern opinions. These results suggest that upward partner‐level industry specialization improves audit quality for clients, which attenuates the negative impact of an audit switch.

Seasoned equity issuers’ prospectus filings: How informative is their tone?

Article

Feb 2022

Seasoned equity issuers file Forms S and 424B with the Securities and Exchange Commission. We find that 424B filings’ weak‐modal tone is positively related to offer price discounts and negatively related to offer‐day stock returns. Increases in cautionary (weak‐modal, uncertain, and negative) tone from the initial to final filing are followed by lower abnormal stock returns. Preliminary evidence indicates that cautionary tone relates positively to litigation risk and increased after the passage of the Sarbanes‐Oxley Act. Our findings suggest that the cautionary tone of seasoned equity issuers’ prospectuses has negative information content, which is gradually incorporated into the stock prices.

Tax Non-Audit Services and Client Income Tax Estimation Error

Article

Aug 2021

The provision of non-audit services (NAS) to audit clients can generate knowledge spillovers that enhance auditors' judgments or self-review and self-interest threats that impair auditors' independence. Prior research finds mixed evidence of a relation between tax NAS and clients' (actual and potential) material GAAP violations in accounting for income taxes. As auditors are likely to avoid material GAAP violations, we re-examine this issue using a measure that reflects immaterial or within-GAAP estimation error in clients' income tax expense. We find that greater amounts of tax NAS are associated with greater income tax estimation error, consistent with tax NAS threating auditors' independence. The association is partially offset by auditor expertise and concentrated in engagements where auditors face both self-review and self-interest threats. Our findings inform the ongoing policy debate regarding whether accounting firms should provide tax NAS to their audit clients. Data Availability: Data are publicly available from the sources indicated in the text. JEL Classifications: M41; M44; M49.

Investments in Auditor-Provided Non-Audit Services and Future Operating Performance

Article

Aug 2021

The “organization capital” of a firm consists of its internal investments in its business units, processes, know-how, employee skills, and information systems. We investigate whether a firm's investments in auditor-provided non-audit services (NAS) can supplement its own internal investment in organization capital, resulting in improved operating performance. We find that investments in NAS are positively related to a firm's subsequent operating performance consistent with NAS augmenting a firm's organization capital. Firms with low organization capital in general, high complexity, or disruption due to acquisitions benefit the most from purchasing NAS from their auditor. We also show that firms engaging auditors with a high level of expertise manifest higher levels of future operating performance. We find no evidence that the improvement in operating performance subsequent to NAS investment is due to earnings management or lower audit quality. JEL Classifications: M41; M49; L84.

The Impact of Audit Committee Characteristics on Audit Quality: Evidence from Saudi Arabia

Article

Full-text available

Jul 2021

Helmi Boshnak

This study examines the impact of audit committee (AC) characteristics on audit quality in the Saudi listed firms. In addition, this study is also evaluating the Saudi CG Code amended in 2017. The data for the study is obtained from secondary (annual reports) data. The sample firms are 210 firms listed on the Saudi Stock Exchange (Tadawul) over the period of 2017-2019. The audit firm type is used as a proxy for quality in this study. Multiple regression analysis is used to assess the relationship between AC characteristics and audit quality. The regression models show that firms with AC educational background in accounting and finance, and larger firms with higher state and institutional ownership are more likely to engage a big four audit firm, in so doing signalling greater audit quality. The results support agency and institutional theories concerning audit quality. In contrast, firms with more experts on the AC and higher leverage are more likely to select non-big four auditing firms which require lower audit fees. However, the size, number of meetings, and degree of independence of the AC do not significantly affect the level of audit quality. In addition, a combined AC effectiveness score is found to have a negative though insignificant impact on audit quality, contradicting governance regulation and theory expectations that effective ACs should improve audit quality. The results of this study present some key implications for CG regulators and other stakeholders. CG regulators should understand that the simple presence of an AC that meets baseline CG regulatory requirements does not automatically ensure its efficacy or improve auditing process quality. Therefore, boards and shareholders must continue to monitor and review AC decisions, particularly where they relate to auditor engagement, even where committees are, prima facie, deemed effective. The study contributes to the existing body of literature on the role of the audit committee in improving audit quality by addressing the paucity of evidence for emerging economies, and the case of Saudi Arabia in particular. The findings should prove useful for regulators and policy makers, academic researchers, accountants, financial experts, and audit practitioners in the Middle East and wider Arab region, particularly for those countries currently reviewing and setting guidelines for effective audit committees. Moreover, the findings should emphasise the importance of the concept of audit quality and its drivers in a Saudi Arabian corporate setting.Keywords: Audit Quality, Audit Committee Characteristics, Audit Committee Effectiveness, Corporate Governance, Corporate Governance Code, Saudi Arabia.JEL Classifications: G3, M4DOI: https://doi.org/10.32479/irmm.11437

The Impact of Non-Audit Services on Earning Response Coefficient

Article

Full-text available

Jan 2021

The present study aims to investigate the impact of non-audit services on earnings response coefficient. It is a library and analytical-scientific research and is based on panel data analysis. In this study, the financial data of 74 companies accepted in Tehran Stock Exchange during the period 2011-2016 have been reviewed.The results demonstrate that non-audit services have a significant negative relationship with earnings response coefficient.Although non-audit services will have benefits such as increased financial statements understandability, auditors’ knowledge-sharing, better relationships between managers and auditors and reduced agency costs, this type of services threatens auditor independence and subsequently, earnings quality will be affected. Thus,the findings of the present study confirm the view thatby providing non-audit services, auditor independence is affected, resulting in a negative reaction to earnings.

Securities-Based Crowdfunding by Startups: Does Auditor Attestation Matter?

Article

May 2021

We examine financing outcomes for small businesses seeking to sell public securities in a setting characterized by high information asymmetry, weak requirements for auditor participation, and a complete absence of Big N auditors. Issuers that raise capital from small, unsophisticated investors through crowdfunding, under the Securities and Exchange Commission's Regulation Crowdfunding (RegCF), often need no auditor attestation or need only weak attestation in the form of reviews, not audits, of their financial statements. We find that auditor reviews are positively associated with both the probability of crowdfunding success and the total amount raised. Further, we compare outcomes for issuers that procure auditor reviews voluntarily and mandatorily, and document that issuers with voluntary reviews have better outcomes. We conjecture that for issuers that voluntarily procure reviews, the reviews serve as signals of high future prospects. Finally, the positive effect of reviews is concentrated in PCAOB-registered auditors. JEL Classifications: G18; M41; M42; M48.

Error Detection by Industry-Specialized Teams During Sequential Audit Review

Article

Full-text available

Jun 2002

To improve audit effectiveness, public accounting firms have organized their practices to include hierarchical review by teams organized along industry lines. We examine how industry specialized auditor teams detect errors, using a sophisticated experimental design. Our analysis of nominal teams created from seniors and managers working individually shows that seniors add value to the team by detecting more mechanical errors while managers detect more conceptual errors. Working within specialization, managers and seniors both contribute in a nonredundant way to the team’s overall effectiveness. We also find that the nominal teams outperform real teams in the detection of mechanical but not conceptual errors. These results only hold when the auditors work within in their industry specialization. Out of specialization the auditors are not effective at detecting errors, and real teams perform below the nominal team benchmark in the detection of both mechanical and conceptual errors.

What Do Industry-Specialist Auditors Know?

Article

Full-text available

Sep 1999

Recent shifts in audit practice have dprovided more substantive and pervasive roles for specialized industry knowledge (e.g., see Bell et al. [1997]). Specifically, most of the largest firms now are structured along industry lines and designate most, if not all, of their auditors as industry specialists (Emerson [1993]). This change suggests that a preferred way for auditors to acquire industry knowledge is via specialized indirect experience (e.g., training) coupled with focused direct experience (e.g., working exclusively on audit engagements in a particular industry). Our experimental investigation of what industry-specialist auditors know is intended to probe the knowledge implications of industry specialists? focused training and narrow, but deep, direct experiences.

Does Big 6 Auditor Industry Expertise Constrain Earnings Management?

Article

Full-text available

Feb 2003

Gopal V. Krishnan

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.

Audit Firm Industry Specialization and Client Disclosure Quality

Article

Full-text available

Mar 2004

This paper provides evidence that clients select auditors as part of their overall disclosure strategy. We hypothesize that in addition to higher quality audits, industry-specialist audit firms assist clients in enhancing disclosures. We also posit that the choice of an industry-specialist auditor signals a clients intention to provide enhanced disclosures. However, we predict that industry-specialist audit firms are less important in regulated industries where enhanced disclosures add little value. Consistent with our hypotheses, we document a positive association between industry-specialist audit firms and analysts rankings of disclosure quality in unregulated industries, but no relation in regulated industries.

Disclosure of Fees Paid to Auditors and the Market Valuation of Earnings Surprises

Article

Full-text available

Nov 2006

We investigate if the SEC’s recently mandated disclosure of fees for audit and nonaudit services paid by firms to their incumbent auditors affected the market’s perception of auditor independence and earnings quality. Following the initial fee disclosures in 2001, we find that the market valuation of quarterly earnings surprises (earnings response coefficient) was significantly lower for firms with high levels of nonaudit fees than for firms with low levels of such fees. In contrast, in the year prior to the new fee disclosures, there was no reduction in earnings response coefficients for firms that subsequently reported high nonaudit fees. Our evidence suggests that mandated fee disclosures provided new information that was viewed by the market as relevant to appraising auditor independence and earnings quality.

Agency Problems, Auditing, and the Theory of the Firm: Some Evidence

Article

Full-text available

Feb 1983

This paper examines the history of auditing in the U.K. and the U.S. to test whether audits of companies arose as the consequence of governmental regulation or as a voluntary monitoring activity to reduce agency costs and increase firm value. The paper finds that audits existed early in the development of the modern corporation (as early as 1200) and evolved gradually into the type of audit required by the first English companies act (1844). The evidence suggests that the audit's monitoring activity is important, if not crucial, to the formation of firms. The audit's long survival suggests it is a part of the efficient technology for organizing firms. Differences in the timing of the evolution of professional auditors in the U.K. and U.S. prior to legally required auditing appear to reflect differences in the timing of capital market development in the two countries.

Evidence on the Joint Determination of Audit and Non-Audit Fees

Article

Full-text available

Feb 2003

In this study we investigate whether the characteristics of clients, auditors, and the auditor-client relationship simultaneously determine audit and non-audit fees. As done in prior studies, we maintain that fees proxy for the level of service provided and follow the physical flow of knowledge. Estimating single-equation models of audit and non-audit fee models, we confirm prior findings of an association between audit and non-audit fees. Studies conclude that such evidence is consistent with knowledge spillovers between the two services. However, we document empirically that audit and non-audit fees are simultaneously determined. Because the data indicate audit and non-audit fees are jointly determined, we then investigate whether previously documented associations between audit and non-audit fees are the result of biased estimation induced by using endogenous variables in single-equation models. In contrast to results from single-equation estimations, we find no association between audit and non-audit fees using a simultaneous specification of the fee system, suggesting that single-equation estimations suffer from simultaneous-equations bias. In sum, the findings are not consistent with the existence of economies of scope from the joint performance of audit and non-audit services after controlling for the joint behavior of audit and non-audit fees. Given the ongoing debate over the level of allowed non-audit services by auditors, the argument for the joint provision of audit and non-audit services is less justified than if joint-supply benefits had been documented. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2003.

The implications of using stock-split adjusted I/B/E/S data in empirical research

Article

Oct 2003

The purpose of this study is to highlight issues of interest to researchers employing the I/B/E/S earnings and forecast data. I/B/E/S has traditionally provided per share data on a split-adjusted basis, rounded to the nearest penny. In doing so, per share amounts are comparable over time. However, because not all prior forecasts and earnings per share amounts divide precisely to a penny, adjusting for stock splits and rounding to the nearest penny can cause a loss of information. Researchers are prohibited in many cases from determining the amounts actually reported in prior years, leading to misclassified observations. We obtain actual (unadjusted) earnings and forecast data from I/B/E/S and compare results to those generated using the adjusted I/B/E/S data. We replicate prior studies and find that conclusions are affected when using the actual I/B/E/S data.

A Model for the Market for MAS and Audit Service: Knowledge Spillovers and Auditor–Auditee Bonding

Article

Jan 1988

Audit Firm Industry Specialization as a Differentiation Strategy: Evidence from Fees Charged to Firms Going Public

Article

Sep 2003

This paper examines IPO audit fees to assess the use of industry specialization as a differentiation strategy by audit firms. We extend existing theory on the impact of industry specialization on audit fees by incorporating Porter's (1985) theory of competition and differentiation. We suggest that market share enables audit firms to gain competitive advantages in terms of cost and service. However, the impact of such advantages on fees depends on whether the audit firm has successfully differentiated itself from competitors within client industries. Our results indicate that as audit firm industry market share increases without a differentiation in market share, the audit fee charged for a given IPO decreases. In the context of Porter (1985), this result suggests that the client is able to bargain for a portion of the auditor's cost savings because the audit firm has not successfully differentiated itself from competitors. In contrast, we show that audit firms that possess significantly higher market shares than their industry competitors earn fee premiums, suggesting that audit firms that have successfully differentiated themselves retain a stronger bargaining position with their clients.

The Standard of Objectivity for Internal Auditors: Memory and Bias Effects

Article

Oct 1985

David Plumlee

The Effect of Beating and Missing Analyst Forecasts on the Information Content of Unexpected Earnings

Article

Apr 2002

This study investigates whether the market rewards (penalizes) firms for meeting (not meeting) analysts' earnings forecasts. Specifically, we examine the market response to positive and negative forecast errors. In addition, we examine whether the sensitivity of stock prices to positive or negative forecast errors is affected by the firms' history of consistently beating or missing analysts' forecasts. The results indicate that the earnings multiple applied to positive unexpected earnings is significantly greater than for negative unexpected earnings. In addition, we find that after controlling for the magnitude of the forecast error and bad news preannouncements, the market penalty for missing forecasts is significantly greater in absolute terms than the response to beating forecasts. We document evidence that, while the market recognizes and partially discounts the systematic component of positive analysts' forecast errors, a higher multiple is attached to the unsystematic component of unexpected earnings of firms that consistently beat analysts' forecasts. Overall, the evidence suggests that the increasing frequency of positive forecast errors as documented in previous research is a rational response by managers to market-related incentives.

The Relation Between Auditors' Fees for Non-Audit Services and Earnings Management

Article

Jan 2002

This paper examines whether auditor fees are associated with earnings management and the market reaction to the disclosure of auditor fees. Using data collected from proxy statements, we present evidence that non-audit fees are positively associated with small positive earnings surprises, the magnitude of absolute discretionary accruals, and the magnitude of income-increasing and income-decreasing discretionary accruals. In contrast, audit fees are negatively associated with these earnings management indicators. These results are robust to a variety of alternative variable definitions and model specifications. Specifically, contrary to the claims of Ashbaugh et al. (2002), the results are robust to the use of performance-matched discretionary accruals. Moreover, contrary to the claims of Francis and Ke (2002), the results for small positive earnings surprises are robust regardless of whether the comparison group is all other earnings surprises or small negative earnings surprises. Our final set of results provide evidence of a significant negative association between non-audit fees and share values on the date the fees were disclosed, although the effect is small in economic terms.

The Relation between Auditors' Fees for Nonaudit Services and Earnings Management

Article

Mar 2002

Discussion Comments on ‘The Relation Between Auditors’ Fees for Non-Audit Services and Earnings Management

Article

Mar 2002

Client Importance, Nonaudit Services, and Abnormal Accruals

Article

Oct 2003

The economic theory of auditor independence (DeAngelo 1981b) suggests that auditors' incentives to compromise their independence are related to client importance. Using ratios of client fees and of nonaudit fees divided by the audit firm's U.S. revenues or a surrogate for the audit-practice-office revenues as measures of client importance, we investigate their association with Jones-model abnormal accruals. In a sample of 1,871 clients of Big 5 audit firms we do not find a statistically significant association between abnormal accruals and any of the client importance measures. Our theory development also suggests that auditor incentives to compromise independence should increase with the extent of client opportunities and incentives to manage earnings, and decrease with the strength of corporate governance and auditor expertise. We also do not find a statistically significant association between abnormal accruals and client importance in subsets of the samples partitioned by proxies for these factors.

Auditor Industry Specialist Research Design

Article

Sep 2004

Auditor industry specialization has generated significant interest in the academic community. However, a review of prior research suggests a lack of consensus as to how auditor industry specialization should be measured. This paper analyzes data from the 1989-1997 time period and: (1) examines the underlying concepts of specialization that are embodied in the different measurement approaches to industry specialists and the reasons why these measures yield inconsistent results and conclusions, (2) presents a framework to assist researchers in selecting the most appropriate auditor industry specialization metric to apply, and (3) proposes an alternative metric for research designs in particular investigative settings. Our analyses, results, and discussion highlight the differences inherent in industry specialization metrics and offer an interpretation of why such differences exist and provide some guidance for auditor industry metric selection.

Audit Fees, Nonaudit Fees, and Auditor Reporting on Stressed Companies

Article

Sep 2003

The SEC and legislators have expressed concerns that independence may be negatively impacted if auditors perform significant nonaudit services for their audit clients, and that providing lucrative nonaudit services to clients may make it more likely that auditors will “see things the client's way.” Such concerns are particularly salient in the context of issues that involve significant auditor judgment, as in the case of reporting decisions related to going-concern uncertainties for financially stressed clients. In this study we examine the association between the magnitude of audit and nonaudit fees and auditor report modification decisions for financially stressed manufacturing companies. In our analysis we control for financial stress, company size, reporting lag, default status, audit committee effectiveness, and management plans. The results indicate a significant positive association between the magnitude of audit fees and the likelihood of receiving a going-concern modified audit opinion, but we find no significant association between nonaudit fees and audit opinions. Additional analyses also find no significant relationship between the ratio of nonaudit service fees to audit fees and reporting decisions, and indicate that our results are robust across alternative model, variable, and sample specifications. We also control for the potential endogeneity of audit opinions, audit fees, and nonaudit fees, and find the same positive association of audit fees with opinions, but no association between nonaudit fees and audit opinions. Overall, we find no evidence of a significant adverse effect of nonaudit fees on auditor reporting judgments for our sample of distressed companies.

Methodological Issues Related to Estimation of Financial Distress Prediction Models

Article

Jan 1984

Mark E. Zmijewski

Auditing, Consulting, and Auditor Independence

Article

Nov 1985

Dan A. Simunic

An Analysis of Auditor Litigation and Audit Service Quality

Article

Jan 1988

Z.-V. Palmrose

Earnings Management During Import Relief Investigation

Article

Sep 1991

Jennifer J. Jones

Client Size, Auditor Specialization and Fraudulent Financial Reporting

Article

Jun 2004
Manag Audit J

This study examines the effect that client size has on the relation between industry-specialist auditors and fraudulent financial reporting. Most of the major accounting firms have organized their audit practices along industry lines, reflecting a belief that industry specialization leads to higher quality audits. Furthermore, regulatory bodies and extant research suggests that larger clients have greater bargaining power and are more likely to be able to convince the auditor to acquiesce to aggressive accounting. Also, it may be more difficult for an auditor to possess industry expertise for larger clients who are likely to be more complex and operate in more than one industry. Consistent with previous research, we generally find a significant negative relation between auditor industry specialization and client financial fraud. Also, as expected, the negative relation between auditor industry specialization and financial fraud is weaker for larger clients. This study provides evidence that the positive benefits of auditor industry specialization in deterring financial fraud is affected by client size.

Lawsuits Against Auditors

Article

May 1995

In this paper we compare two matched samples of 117 corporations whose auditors are and are not sued, to provide information on lawsuits. Lawsuits tend to be filed against auditors of client firms that have liquidity problems and poor stock price performance. There is little evidence of poorer accounting performance or accounting manipulation in the year in which wrongdoing is alleged to have occurred. The likelihood of a lawsuit against an auditor is greater if the audit report is qualified, the less structured is the audit and the larger the proportion of the auditor's revenues generated by the client. We also use multivariate models to compare the two samples. However, the multivariate analysis' data requirements reduce the number of observations in each sample to 21. Nevertheless, the multivariate analysis also suggests that we can discriminate between the litigation and control firms using the variables that are significant in the univariate analysis.

Does the Provision of Non-Audit Services Affect Investor Perceptions of Auditor Independence?

Article

Jul 2005

A number of recent studies examine whether the joint provision of audit and nonaudit services (NAS) impairs auditor independence, and yield mixed results. We examine whether investors perceive auditor independence as being impaired when auditors supply nonaudit services, by investigating the association between fee-based measures of nonaudit service purchases and the earnings response coefficient (ERC). We find that the nonaudit fee ratio and the level of nonaudit fees were negatively associated with ERCs in 2001. When we use unexpected fees (a measure of over- or underpayment of nonaudit fees), we find a negative association between NAS purchases and ERC, but this occurs mainly in the second and third quarters following the release of the proxy. Further investigation reveals that the quarterly differences may be driven by the increasing flow of information (i.e., the first-time disclosures of fees and media analyses of these disclosures) that became available to investors during our sample period. We speculate that, during the course of the year 2001, the increase in information allowed investors to engage in better comparative analyses of the fee disclosures. We interpret our results as indicating that investors did perceive NAS as impairing auditor independence.

Auditor Industry Specialization and Client Disclosure Quality

Article

Feb 2000

We examine the relation between audit firm industry specialization and client disclosure quality. Our motivation for conducting this research arises from the claims made by each of the Big5 public accounting firms that industry specialization enables each to provide superior service and quality to clients in its target industries. We document a positive association between industry-specialized audit firms and analysts' rankings of disclosure quality in unregulated industries, but no relation in regulated industries. Alternative measures of auditor industry specialization support our conclusions. Our results suggest industry-specialized audit firms add value to clients in unregulated industries in the form of improved disclosure quality.

Do Non-Audit Services Compromise Auditor Independence? Further Evidence

Article

Feb 2003

This paper challenges the findings of Frankel, Johnson and Nelson (FJN) (2002). The results of our discretionary accruals tests differ from FJN's when we adjust discretionary current accruals for firm performance. In our earnings benchmark tests, in contrast to FJN we find no statistically significant association between firms meeting analyst forecasts and auditor fees. Our market reaction tests also provide different results than those reported by FJN. Overall, our study indicates that FJN's results are sensitive to research design choices, and we find no systematic evidence supporting their claim that auditors violate their independence as a result of clients purchasing relatively more nonaudit services.

Audit Firm Industry Specialization as a Differentiation Strategy: Evidence from Fees Charged to Firms Going Public

Article

Jul 2002

This paper examines IPO assurance fees to assess the use of industry specialization as a differentiation strategy by audit firms. Theory suggests that as an audit firm's share of a client industry increases their costs will decrease and their service quality to that industry will increase. In this setting, the impact of industry specialization on fees is indeterminate. We extend existing theory by considering both the supply and the demand for industry specialization. We conclude that the market for audit services is generally price-competitive, suggesting that auditors will be forced to share cost savings with clients. However, when an audit firm is able to differentiate its services from competitors it should be able to earn a modest premium. We test and find support for our conjectures using U.S. IPO audit fee data from 1991 to 1997.

Auditor Industry Specialization and Earnings Quality

Article

Sep 2003

This study examines the association between measures of earnings quality and auditor industry specialization. Prior work has examined the association between auditor brand name and earnings quality, using auditor brand name to proxy for audit quality. Recent work has hypothesized that auditor industry specialization also contributes to audit quality. Extending this literature, we compare the absolute level of discretionary accruals (DAC) and earnings response coefficients (ERC) of firms audited by industry specialists with those of firms not audited by industry specialists. We restrict our study to clients of Big 6 (and later Big 5) auditors to control for brand name. Because industry specialization is unobservable, we use multiple proxies for it. After controlling for variables established in prior work to be related to DAC and the ERC, we find clients of industry specialist auditors have lower DAC and higher ERC than clients of non-specialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of non-specialists.

Client Importance, Non-Audit Services, and Abnormal Accruals

Article

Jun 2003

Several recent studies examine the association between fees for audit and non-audit services, and auditor independence impairment. However, auditors' incentives to compromise their independence are proxied in different studies by different measures. The economic theory of auditor independence (Watts and Zimmerman 1981; DeAngelo 1981) suggests that auditors' incentives to compromise their independence are related to client importance, the ratio of quasi rents specific to the client divided by all other quasi rents. Following previous studies we use the ratio of a client's total fees to audit firm's total revenues as our first proxy for client importance. Because it has been argued that non-audit services have a higher margin than do audit services and therefore generate more quasi rents (revenues minus marginal costs), we also use a second measure of client importance, the ratio of non-audit fees from a client to the audit firm's total US revenues. If auditors care more about revenues of their practice office rather than the whole firm, then client importance should be assessed at the local office level. So we also use two additional proxies for client importance, client total fees and non-audit fees divided by a surrogate measure of practice-office revenues. To develop this surrogate measure we assume that clients are audited through the audit firm's practice office closest in distance to the client's headquarters, and allocate audit firm revenues to practice offices in proportion to the sum of log(sales) of clients of each office. Consistent with prior research we use abnormal accruals estimated using the (modified) Jones model as our measure of earnings, and therefore audit, quality. After controlling for industry effects and determinants of abnormal accruals based on previous studies, we do not find a significant cross-sectional association between the absolute value of abnormal accruals and any of the client importance ratios in our sample of 1,871 firms for the year 2000. Following suggestions in Greenwald (1975) we show that the lack of significance is unlikely to have resulted from low power of our tests. Our model development also suggests that independence impairment could be higher in sub-samples of clients that have greater opportunities or incentives to manage earnings, or those with weaker corporate governance structures. In addition, auditor expertise may create client dependence on auditor, and thereby strengthen auditors' independence. We measure earnings management opportunities using business and geographical diversification. We use leverage, market-to-book ratios, sales growth, and the number of shares and options owned by executives as a percentage of shares outstanding as proxies for client incentives. The strength of corporate governance is proxied by whether the chairman and CEO positions are separate, the percentage of non-employee directors, and percentage of shares owned by 5 percent block-holders. Auditor expertise is proxied by whether they are the industry specialist. We fail to find a significant association abnormal accruals and client importance measures for any of the sample partitions.

Does Meeting Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices

Article

Jun 2002
J ACCOUNT RES

This paper investigates whether the market rewards firms meeting current period earnings expectations, and whether any such reward reflects the implications of meeting expectations in the current period for future earnings or reflects a distinct market premium. We document that abnormal annual returns are significantly greater for firms meeting expectations, controlling for the information in the current year’s earnings. We then test whether firms meeting expectations experience higher returns simply because their expected future earnings are also higher. We find firms meeting expectations have significantly higher earnings forecasts and realized earnings than firms that do not. We find that controlling for these higher future earnings, firms meeting expectations in one or two years do not receive a greater valuation than their fundamentals would suggest. We find, however, that the market assigns a higher value to firms that meet expectations consistently, controlling for an estimate of the firm’s fundamental value.

Do Non-Audit Service Fees Impair Auditor Independence? Evidence From Going Concern and Audit Opinion

Article

Sep 2002
J ACCOUNT RES

We find no significant association between non–audit service fees and impaired auditor independence, where auditor independence is surrogated by auditors’ propensity to issue going concern audit opinions. We also find no association between going concern opinions and either total fees or audit fees. In addition, our findings are robust to controlling for unexpected fees, to controlling for endogeneity among our variables, and to several alternative research design specifications. Our results are consistent with market–based incentives, such as loss of reputation and litigation costs, dominating the expected benefits from compromising auditor independence.

Audit Size and Audit Quality

Article

Dec 1981
J ACCOUNT ECON

Linda Elizabeth DeAngelo

Regulators and small audit firms allege that audit firm size does not affect audit quality and therefore should be irrelevant in the selection of an auditor. Contrary to this view, the current paper argues that audit quality is not independent of audit firm size, even when auditors initially possesses identical technological capabilities. In particular, when incumbent auditors earn client-specific quasi-rents, auditors with a greater number of clients have ‘more to lose’ by failing to report a discovered breach in a particular client's records. This collateral aspect increases the audit quality supplied by larger audit firms. The implications for some recent recommendations of the AICPA Special Committee on Small and Medium Sized Firms are developed.

Auditor Brand Name Reputation and Industry Specialization

Article

Dec 1995
J ACCOUNT ECON

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.

Does Size Matter? The Influence of Large Client on Office-Level Auditor Reporting Decisions

Article

Feb 2000
J ACCOUNT ECON

Large clients create an economic dependence that may cause auditors to compromise their independence and report favorably to retain valuable clients. Economic dependence is measured as a client's size relative to the size of the office that contracts for the audit and issues the audit report. We find no evidence economic dependence causes Big Five auditors to report more favorably for larger clients in their offices. However, larger clients also pose greater litigation risk, and we do find that Big 5 auditors report more conservatively for larger clients, suggesting that reputation protection dominates auditor behavior.

The Rewards to Meeting or Beating Earnings Expectations

Article

Oct 2000

This paper finds that firms that meet or beat current analysts’ earnings expectations (MBE) enjoy a higher return over the quarter than firms with similar quarterly earnings forecast errors that fail to meet these expectations. Further, such a premium to MBE, although somewhat smaller, exists in the cases where MBE is likely to have been achieved through earnings or expectations management. The findings also indicate that the premium to MBE is a leading indicator of future performance. This premium and its predictive ability are only marginally affected by whether the MBE is genuine or the result of earnings or expectations management.

Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy

Article

Jan 1968

Edward Altman

Auditor Independence, Non-Audit Services, and Restatements: Was the U.S. Government Right?*

Article

Jun 2004

The trustees of funded defined benefit pension schemes must make two vital and inter-related decisions - setting the asset allocation and the contribution rate. While these decisions are usually taken separately, it is argued that they are intimately related and should be taken jointly. The objective of funded pension schemes is taken to be the minimization of both the mean and the variance of the contribution rate, where the asset allocation decision is designed to achieve this objective. This is done by splitting the problem into two main steps. First, the Markowitz mean-variance model is generalised to include three types of pension scheme liabilities (actives, deferreds and pensioners), and this model is used to generate the efficient set of asset allocations. Second, for each point on the risk-return efficient set of the asset-liability portfolio model, the mathematical model of Haberman (1992) is used to compute the corresponding mean and variance of the contribution rate and funding ratio. Since the Haberman model assumes that the discount rate for computing the present value of liabilities equals the investment return, it is generalised to avoid this restriction. This generalisation removes the trade-off between contribution rate risk and funding ratio risk for a fixed spread period. Pension schemes need to choose a spread period, and it is shown how this can be set to minimise the variance of the contribution rate. Finally, using the result that the funding ratio follows an inverted gamma distribution, shortfall risk and expected tail loss are computed for funding below the minimum funding requirement, and funding above the taxation limit. This model is then applied to one of the largest UK pension schemes - the Universities Superannuation Scheme

The 21st Century Public Accounting Audit

T B Bell
M E Peecher
I Solomon

BELL, T. B.; M. E. PEECHER; AND I. SOLOMON “The 21st Century Public Accounting Audit.” KPMG International (2005)

Accountant’s Integrity and Financial Reporting

10-14

G Benston

BENSTON, G. “Accountant’s Integrity and Financial Reporting.” Financial Executive August (1975): 10-14

00)*** LOSS α 12 -0.027 (-6.02)*** -0.026 (-5.93)*** -0.026 (-5.84)*** -0.026 (-5.97)*** -0

Ue Mv

UE*MV α 11 1.003 (7.20)*** 1.178 (8.26)*** 1.046 (7.09)*** 1.144 (8.17)*** 0.987 (6.78)*** 1.176 (8.30)*** 1.035 (7.00)*** LOSS α 12 -0.027 (-6.02)*** -0.026 (-5.93)*** -0.026 (-5.84)*** -0.026 (-5.97)*** -0.026 (-5.88)*** -0.026 (-5.88)*** -0.026 (-5.82)*** UE*LOSS α 13 -0.892 (-2.82)*** -1.090 (-3.30)*** -1.097 (-3.28)*** -0.963 (-3.01)*** -0.963 (-2.98)*** -1.144 (-3.44)*** -1.133 (-3.36)*** RESTR α 14 -0.020 (-1.53) -0.020 (-1.59) -0.020 (-1.55) -0.020 (-1.58) -0.019 (-1.52) -0.020 (-1.55) -0.019 (-1.50)

Auditor Resignations: Clientele Effects and Legal Liability

Jan 2000
173-205

SHU, S. Z. " Auditor Resignations: Clientele Effects and Legal Liability. " Journal of Accounting and Economics 29 (2000): 173-205.

51)*** 0.587 (5.68)*** 0.580 (5.61)*** 0

Ue Grw

UE*GRW α 5 0.408 (1.70) 0.292 (1.19) 0.319 (1.29) 0.266 (1.07) 0.321 (1.28) 0.242 (0.97) 0.278 (1.11) VOL α 6 0.568 (5.51)*** 0.587 (5.68)*** 0.580 (5.61)*** 0.586 (5.67)*** 0.583 (5.65)*** 0.586 (5.68)*** 0.583 (5.66)*** UE*VOL α 7 -7.375 (-1.41) -19.674 (-3.03)*** -21.129 (-3.21)*** -21.646 (-3.13)*** -23.283 (-3.33)*** -21.793 (-3.24)*** -22.759 (-3.34)*** LEV α 8 -0.060 (-1.49) -0.047 (-1.17) -0.044 (-1.08) -0.047 (-1.16) -0.042 (-1.04) -0.044 (-1.10) -0.042 (-1.04)

362 (-3.26)*** -0.018 (-2.92)*** -0.020 (-3.22)*** -0.450 (-3.16)*** -0.477 (-3.33)*** GRW α 4

Ue Fee

UE*FEE α 3 -0.323 (-2.95)*** -0.362 (-3.26)*** -0.018 (-2.92)*** -0.020 (-3.22)*** -0.450 (-3.16)*** -0.477 (-3.33)*** GRW α 4 -0.002 (-1.59) -0.002 (-1.69)* -0.002 (-1.73)* -0.002 (-1.64)* -0.002 (-1.74)* -0.002 (-1.78)* -0.002 (-1.85)*

Discussion of the Jointness of Audit Fees and Demand for MAS: A Selfselection Analysis

Jan 1990
323-328

SOLOMON, I. " Discussion of the Jointness of Audit Fees and Demand for MAS: A Selfselection Analysis. " Contemporary Accounting Research 7 (1990): 323-328.

Discussion of the Relation Between Auditors' Fees for Non-Audit Services and Earnings Management

Jan 2002
107-114

And R Libby

KINNEY, W. R., AND R. LIBBY. " Discussion of the Relation Between Auditors' Fees for Non-Audit Services and Earnings Management. " The Accounting Review 77 (2002): 107–114.

Final Rule: Revision of the Commission's Auditor Independence Requirements

Securities And
Exchange Commission

SECURITIES AND EXCHANGE COMMISSION. " Final Rule: Revision of the Commission's Auditor Independence Requirements. " (2000) 17 CFR Parts 210 and 240.

Non-Audit Service Fees and Audit Quality: The Impact of Auditor Specialization

Abstract

No full-text available

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Mark L. DeFond