Auditor-Client Religiosity Convergence and Financial Misstatement

2021 ◽  
pp. 299-365
Author(s):  
Xingqiang Du
Keyword(s):  
Financial Misstatement

Does Auditor Explanatory Language in Unqualified Audit Reports Indicate Increased Financial Misstatement Risk?

2014 ◽  
Vol 89 (6) ◽  
pp. 2115-2149 ◽  
Author(s):  
Keith Czerney ◽  
Jaime J. Schmidt ◽  
Anne M. Thompson
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Positive Association ◽  
Financial Statements ◽  
Financial Statement ◽  
Financial Reporting Quality ◽  
Accounting Principles ◽  
Client Relationship ◽  
Financial Misstatement ◽  
Audit Reports

ABSTRACT According to auditing standards, explanatory language added at the auditor's discretion to unqualified audit reports should not indicate increased financial misstatement risk. However, an auditor is unlikely to add language that would strain the auditor-client relationship absent concerns about the client's financial statements. Using a sample of 30,825 financial statements issued with unqualified audit opinions during 2000–2009, we find that financial statements with audit reports containing explanatory language are significantly more likely to be subsequently restated than financial statements without such language. We find that this positive association is driven by language that references the division of responsibility for performance of the audit, adoption of new accounting principles, and previous restatements. In addition, we find that (1) “emphasis of matter” language that discusses mergers, related-party transactions, and management's use of estimates predicts restatements related to these matters, and that (2) the financial statement accounts noted in the explanatory language typically correspond to the accounts subsequently restated. In sum, our results suggest that present-day audit reports communicate some information about financial reporting quality.

The Effect of Misstatements on Decisions of Financial Statement Users: An Experimental Investigation of Auditor Materiality Thresholds

2002 ◽  
Vol 21 (1) ◽  
pp. 11-27 ◽  
Author(s):  
Brad Tuttle ◽  
Maribeth Coller ◽  
R. David Plumlee
Keyword(s):  
Economic Condition ◽  
Accounting Information ◽  
Critical Factor ◽  
Financial Statement ◽  
Asset Markets ◽  
Market Prices ◽  
Financial Misstatements ◽  
Experimental Asset Markets ◽  
Financial Misstatement ◽  
Materiality Thresholds

Auditors are faced with the dilemma of inferring materiality based, in part, on whether a given level of financial misstatement will affect the decisions of statement users. Misstatements in accounting information that are below the materiality threshold are not expected to change users' assessments of a company's economic condition. While the auditing profession accepts materiality in concept, its application in practice is more controversial. In certain settings, the nature of a misstatement, such as changing a small profit into a loss, may affect an auditor's materiality judgment. However, in many cases the magnitude of the misstatement is a critical factor in judging materiality. We focus solely on the issue of magnitude and examine whether financial misstatements that are at or below commonly applied materiality thresholds result in market prices that differ from those resulting from correctly stated information. We conduct a series of 12 experimental asset markets each consisting of 12 independent three-minute trading periods with six traders in each market. We then compare prices for companies generated by markets that are provided either correctly stated information, information containing misstatements that would typically be considered immaterial, or information containing material misstatements. Results indicate that undisclosed misstatements within materiality thresholds that are consistent with current audit practice do not affect market prices, while misstatements well above these thresholds do.

Determinants of Hedge Fund Internal Controls and Fees

2010 ◽  
Vol 85 (6) ◽  
pp. 1887-1919 ◽  
Author(s):  
Gavin Cassar ◽  
Joseph Gerakos
Keyword(s):  
Hedge Funds ◽  
Agency Costs ◽  
Hedge Fund ◽  
Short Selling ◽  
Internal Controls ◽  
Fund Managers ◽  
Asset Value ◽  
Net Asset Value ◽  
Financial Misstatements ◽  
Financial Misstatement

ABSTRACT: We investigate the determinants of hedge fund internal controls and their association with the fees that funds charge investors. Hedge funds are subject to minimal regulation. Hence, hedge fund managers voluntarily implement internal controls, and managers and investors freely contract on fees. We find that internal controls are stronger in funds with higher potential agency costs. Further, internal controls are stronger in funds domiciled in jurisdictions that provide investors with limited legal redress for fraud and financial misstatements. Short selling funds, however, are more likely to protect information about their investment positions by implementing weaker internal controls. With respect to fees, we find that the percentage of positive profits that the manager receives increases in the strength of the fund’s internal controls. Finally, removing the manager from setting and reporting the fund’s official net asset value, along with reputational incentives and monitoring by leverage providers, are all associated with lower likelihoods of future regulatory investigations of fraud and/or financial misstatement.

The Effects of Clients' Controversial Activities on Audit Pricing

2012 ◽  
Vol 32 (2) ◽  
pp. 67-96 ◽  
Author(s):  
Kevin Koh ◽  
Yen H. Tong
Keyword(s):  
Financial Performance ◽  
Audit Fees ◽  
Business Risk ◽  
Audit Pricing ◽  
Financial Misstatement ◽  
Unique Dataset

SUMMARY: We examine the effects of clients' involvement in controversial corporate activities on audit pricing. Clients' involvement in controversial activities raises concerns about management integrity and ethics. Moreover, clients involved in such activities are perceived to have higher risk of adverse financial performance. As a result, there is greater potential for financial misstatement, which increases the auditor's perceived business risk. We hypothesize that, given the higher perceived business risk, auditors charge higher fees to clients engaged in controversial activities. Using a unique dataset from Kinder, Lydenberg, and Domini, we identify clients that engage in controversial activities related to consumers, employees, the community, and the environment. Consistent with our hypothesis, we find that clients involved in controversial corporate activities pay higher audit fees compared to clients not involved in such activities.

The Pricing of IPO Audit Specialization and Subsequent Issuer Underpricing

2021 ◽  
Author(s):  
Jung Eun Park ◽  
Norman Massel
Keyword(s):  
Empirical Evidence ◽  
Initial Public Offering ◽  
Capital Markets ◽  
Discretionary Accruals ◽  
Costs And Benefits ◽  
Lower Likelihood ◽  
Financial Misstatement ◽  
Public Offering ◽  
Auditor Specialization

We study the costs and benefits to the issuer of engaging an initial public offering (IPO) auditor specialist. We measure IPO auditor specialization and then find that IPO specialist auditors earn significant fee premiums relative to IPO auditors without specialization and that clients with an IPO specialist auditor exhibit lower levels of underpricing relative to clients without an IPO specialist auditor. We also demonstrate that IPO specialist auditors provide higher quality audits than IPO auditors without IPO audit specialization, finding that their IPO clients have a lower likelihood of financial misstatement and have lower discretionary accruals. Collectively, our results have important implications for the auditing profession and capital markets because we demonstrate empirical evidence of the costs and benefits of engaging IPO specialist auditors.

Does the use of honorific appellations in audit reports connote higher financial misstatement risk? Evidence from China

2018 ◽  
Vol 26 (2) ◽  
pp. 154-181 ◽  
Author(s):  
Feng Chen ◽  
Xingqiang Du ◽  
Shaojuan Lai ◽  
Mary Ma
Keyword(s):  
Audit Quality ◽  
Positive Association ◽  
Auditor Independence ◽  
Accounting Firms ◽  
Content Type ◽  
Public Firms ◽  
Financial Misstatements ◽  
Financial Misstatement ◽  
Chinese Auditors ◽  
Audit Reports

Purpose From the sociolinguistic perspective, the purpose of this paper is to examine whether the honorific and actual-name appellations that Chinese auditors use to address clients in audit reports connote differential financial misstatement risk. Specifically, the authors hypothesize that auditors’ use of honorifics signals their inferior social status relative to their clients, thereby leading to compromised auditor independence, lower audit quality, and higher financial misstatement risk. Design/methodology/approach The authors use a sample of manually coded appellation data from audit reports of Chinese public firms between 2003 and 2012 to conduct the research. Findings The authors find significantly greater financial misstatements, both in terms of likelihoods and magnitudes, for companies addressed by honorifics than for those addressed by actual names. Moreover, compared to auditors’ consistent honorific usage, discretionary honorific usage has a stronger positive association with misstatements. The authors further show that the positive association between honorific usage and client misstatement risk weakens when the audit firm is a Top 10 accounting firms in China, is an industry specialist, is formed as a partnership, or resides in a more concentrated audit market. Originality/value This study contributes to the sociolinguistics literature in accounting and provides evidence supporting the reform proposed by the International Auditing and Assurance Standards Board to enhance the usefulness of audit reporting.

Sign in / Sign up

Export Citation Format

Share Document