Audit Firm Tenure and Audit Quality in a Constrained Market

ABSTRACT Issues related to low-balling of initial year audit fees and the resultant impact on audit quality have received significant attention from regulators in many countries. Using 9,684 observations from China during the years 2002–2011, we find that there is a significant initial year audit fee discount following an audit firm change when both of the signing audit partners are different from the prior year. The evidence is mixed if one or both of the signing partners from the prior year also moves with the client to the new audit firm. We find evidence of audit fee discounting in our analysis of fee levels, but not in our analysis of changes in audit fees from the prior year. Sanctions for problem audits and greater earnings management are more likely when there is an audit firm change that involves two new signing partners together with initial year audit fee discounting.

Download Full-text

An Empirical Investigation of IPO Underpricing and the Change to the LLP Organization of Audit Firms

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2004.23.1.53 ◽

2004 ◽

Vol 23 (1) ◽

pp. 53-67 ◽

Cited By ~ 13

Author(s):

Steven R. Muzatko ◽

Karla M. Johnstone ◽

Brian W. Mayhew ◽

Larry E. Rittenberg

Keyword(s):

Initial Public Offering ◽

Audit Quality ◽

Limited Liability ◽

Litigation Risk ◽

Ipo Underpricing ◽

Audit Firm ◽

Legal Structure ◽

Audit Firms ◽

Public Offering

This paper examines the relationship between the 1994 change in audit firm legal structure from general partnerships to limited liability partnerships (LLPs) on underpricing in the initial public offering (IPO) market. The change in legal structure of audit firms reduces an audit firm's wealth at risk from litigation damages and reduces the incentives for intrafirm monitoring by partners within an audit firm. Prior research suggests that underpricing protects underwriters from litigation damages, and that the level of underpricing varies inversely with both the amount of implicit insurance provided by the audit firm and the quality of the audit services provided. We hypothesize the change in audit firm legal structure reduced the assets available from audit firms in IPO-related litigation and indirectly reduced audit quality by lowering intrafirm monitoring. As a result, underwriters have incentives as a joint and several defendant with the audit firms to increase IPO underpricing, particularly for high-litigation-risk IPOs, following audit firms' shifts to LLP status. Our findings are consistent with this hypothesis.

Download Full-text

The Effect of Office Changes within Audit Firms on Clients' Audit Quality and Audit Fees

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-52591 ◽

2020 ◽

Vol 39 (1) ◽

pp. 71-99

Author(s):

Carl W. Hollingsworth ◽

Terry L. Neal ◽

Colin D. Reid

Keyword(s):

Audit Quality ◽

Audit Fees ◽

Additional Analysis ◽

Audit Firm ◽

Audit Firms ◽

Audit Fee ◽

The Impact ◽

Audit Partner Rotation

SUMMARY While prior research has examined audit firm and audit partner rotation, we have little evidence on the impact of within-firm engagement team disruptions on the audit. To examine these disruptions, we identify a unique sample of companies where the audit firm issuing office changed but the audit firm did not change and investigate the effect of these changes on the audit. Our results indicate that companies that have a change in their audit firm's issuing office exhibit a decrease in audit quality and an increase in audit fees. In additional analysis, we partition office changes into two groups—client driven changes and audit firm driven changes. This analysis reveals that client driven changes are more likely to result in a higher audit fee while audit quality is unchanged. Conversely, audit firm driven changes do not result in a higher audit fee but do experience a decrease in audit quality.

Download Full-text

Clients' Expectations on Audit Judgments: A Note

Behavioral Research in Accounting ◽

10.2308/bria.2004.16.1.63 ◽

2004 ◽

Vol 16 (1) ◽

pp. 63-74 ◽

Cited By ~ 39

Author(s):

Venkataraman M. Iyer ◽

Dasaratha V. Rama

Keyword(s):

Audit Quality ◽

Financial Statements ◽

Early Years ◽

Relative Power ◽

Client Perceptions ◽

Audit Firm ◽

Auditor Tenure ◽

Start Up ◽

Nonaudit Services ◽

The Impact

Audited financial statements can be viewed as the product of negotiations between a company's management and its auditor. Relative power of these two parties is a major factor that determines the outcome of the negotiation. This study examines the impact of auditor tenure, importance of a client to an audit partner, nonaudit purchases, and prior audit firm experience of client personnel on client perceptions about their ability to persuade the auditor in the context of an accounting disagreement. We obtained responses to a survey from 124 CPAs in industry who are employed as CEOs, CFOs, controllers, or treasurers. Our results indicate that respondents from companies with short auditor tenures were somewhat more likely to indicate that they could persuade the auditor to accept their (client's) position in case of a disagreement. This finding is consistent with the argument that auditors are susceptible to influence in the early years as they are still in the process of recouping start-up costs, but is not consistent with concerns expressed by legislators and others that long auditor tenures will adversely affect audit quality. Respondents who believed their business was more important for the audit partner were also more likely to believe that they could persuade the auditor. However, the purchase of nonaudit services and prior audit experience were not related to client's perceptions about their ability to persuade the auditor.

Download Full-text

Auditor Tenure and the Timeliness of Misstatement Discovery

The Accounting Review ◽

10.2308/accr-51871 ◽

2017 ◽

Vol 93 (2) ◽

pp. 315-338 ◽

Cited By ~ 18

Author(s):

Zvi Singer ◽

Jing Zhang

Keyword(s):

Natural Experiment ◽

Audit Quality ◽

Client Engagement ◽

Audit Firm ◽

Auditor Tenure ◽

Sarbanes Oxley ◽

Auditor Change ◽

Negative Effect ◽

Extended Analysis ◽

Arthur Andersen

ABSTRACT Using the timeliness of misstatement discovery as a proxy for audit quality, we examine the association between audit firm tenure and audit quality in a setting that alleviates the endogeneity problem endemic to this line of research. We find that longer audit firm tenure leads to less timely discovery and correction of misstatements, which is consistent with a negative effect of long auditor tenure on audit quality. In addition, using the non-voluntary auditor change following the demise of Arthur Andersen in 2002 as a natural experiment, we show that the misstatements of its former clients were discovered faster than those of comparable companies that retained their auditors throughout the misstatement. This finding speaks to the benefit of a fresh look by a new auditor. An extended analysis shows that longer auditor tenure also leads to misstatements of greater magnitudes, and that the Sarbanes-Oxley Act has mitigated, but not eliminated, the negative effect of long auditor tenure. Last, we show that the negative association between auditor tenure and timely discovery of misstatements is mainly present in the first ten years of an audit engagement. Our study has implications for regulators who continue to express concern regarding lengthy auditor-client engagement. JEL Classifications: K22; K23; L51; M41; M42; M48.

Download Full-text

Audit firm transparency disclosures and audit quality

International Journal of Auditing ◽

10.1111/ijau.12230 ◽

2021 ◽

Author(s):

Shireenjit K Johl ◽

Mohammad Badrul Muttakin ◽

Dessalegn Getie Mihret ◽

Samuel Cheung ◽

Nathan Gioffre

Keyword(s):

Audit Quality ◽

Audit Firm

Download Full-text

Leaving a joint audit system: conditional fee reductions

Managerial Auditing Journal ◽

10.1108/maj-05-2013-0862 ◽

2014 ◽

Vol 29 (2) ◽

pp. 131-152 ◽

Cited By ~ 15

Author(s):

Claus Holm ◽

Frank Thinggaard

Keyword(s):

Audit Quality ◽

Theory Development ◽

Future Research ◽

Research Approach ◽

Content Type ◽

Audit Firm ◽

Audit System ◽

Interaction Terms ◽

Audit Firms ◽

Audit Fee

Purpose – The authors aim to exploit a natural experiment in which voluntary replace mandatory joint audits for Danish listed companies and analyse audit fee implications of using one or two audit firms. Design/methodology/approach – Regression analysis is used. The authors apply both a core audit fee determinants model and an audit fee change model and include interaction terms. Findings – The authors find short-term fee reductions in companies switching to single audits, but only where the former joint audit contained a dominant auditor. The authors argue that in this situation bargaining power is more with the auditors than in an equally shared joint audit, and that the auditors' incentives to offer an initial fee discount are bigger. Research limitations/implications – The number of observations is constrained by the small Danish capital market. Future research could take a more qualitative research approach, to examine whether the use of a single audit firm rather than two has an effect on audit quality. The area calls for further theory development covering audit fee and audit quality in joint audit settings. Practical implications – Companies should consider their relationship with their auditors before deciding to switch to single auditors. Fee discounts do not seem to reflect long-lasting efficiency gains on the part of the audit firm. Originality/value – Denmark is the first country to leave a mandatory joint audit system, so this is the first time that it is possible to study fee effects related to this.

Download Full-text

Audit Firm Tenure, Audit Firm Size and Audit Quality

GATR Global Journal of Business Social Sciences Review - GATR Global Journal of Business and Social Science Review (GJBSSR) Vol.7(1) Jan-Mar 2019 ◽

10.35609/gjbssr.2014.2.4(8) ◽

2014 ◽

Vol 2 (4) ◽

pp. 69-76

Author(s):

Padri Achyarsyah ◽

Molina Molina

Keyword(s):

Firm Size ◽

Significant Influence ◽

Audit Quality ◽

Hypothesis Test ◽

Professional Services ◽

Primary Data ◽

Accounting Firms ◽

Client Engagement ◽

Audit Firm ◽

Client Relationship

Objective - The objective of this paper is to examine the effect of audit firm tenure and audit firm size on audit quality. This study applies explanatory research in which questionnaire and interviews serve as the primary data. The population of this study is public accounting firms which are registered in the Indonesian capital market. Methodology/Technique - The study presents a survey using professional auditors. The multiple regression methode is used to conduct an hypothesis test of the effect of audit firm tenure and audit firm size on audit quality. Findings - The result of study depicted that audit firm tenure has no significant influence on the audit quality, while the audit firm size has significant influence on the audit quality. Audit quality deteriorate, when the length of the audit firm client engagement is longer. No particular concern to audit firm size since the big audit firm size has extensive training for their staffs and sufficient system in place. Novelty - The study contributes to auditing literature in the areas of audit quality. The length of the audit firm client relationship and audit firm size always rise the contradiction to the audit quality. The audit firm tenure and audit firm size support previous study, additional insight are gained toward in the elections of the audit firm that serves professional services in capital markets. Type of Paper - Empirical Keywords: Audit Firm Tenure; Audit Firm Size; Audit Quality; Auditor

Download Full-text

DETERMINAN KUALITAS AUDIT DAN FAKTOR-FAKTOR YANG BERPENGARUH TERHADAP AUDITEE SATISFACTION (STUDI EMPIRIS PADA AUDITOR INTERNAL BANK UMUM SYARIAH DI INDONESIA)

Media Riset Akuntansi Auditing & Informasi ◽

10.25105/mraai.v14i1.1752 ◽

2017 ◽

Vol 14 (1) ◽

pp. 27

Author(s):

Hermi ,

Keyword(s):

Structural Equation ◽

Audit Quality ◽

Primary Data ◽

Validity And Reliability ◽

Cross Sectional ◽

Firm Reputation ◽

Quality Audit ◽

Audit Firm ◽

Work Ethics ◽

Service Portfolio

The purpose of this study is to analyze the influence of Independence, Competence and Islamic work Ethics partially and simultaneously to the Audit Quality . The next purpose is to analyze the influence of Audit Quality, Audit Services Portfolio and Audit Firm Reputation partially and simultaneously against Auditee Satisfaction on Islamic Banks in Indonesia. This study is expected to provide benefit to the development of knowledge, particularly in the field of accounting and auditing, Government, Islamic Bank, Indonesian Institute of Accountants (IAI ), Indonesian Institute of Certified Public Accountants (IAP ), the auditors and the Audit Firm (KAP). The results are expected to provide information for various parties accurately and meaningfully as a solution to determine the variables that affect the Auditee Satisfaction and Audit Quality at Islamic Bank in Indonesia. Limitations of the study include: (1) The extent of the problem which studied in determining the factors that can affect the Audit Quality and Auditee Satisfaction in Islamic Bank in Indonesia , (2) Limitation of the study lies in the data acquisition, (3) This study only emphasized the perception of the factors that may affect Audit Quality and Auditee Satisfaction. This study used primary data through questionnaires with the population of internal auditors of Islamic Banks in Indonesia. This study used a quantitative approach and in terms of the type of investigation, this study is causal. Based on the time horizon the study is cross-sectional (one - shot ) because the data was collected only once . Before using the data to test hypothesis, the validity and reliability test should be done first.Data analysis uses Structural Equation Model (SEM) supported by AMOS software. Based on the test results, it shows that Independence, Competence and Islamic work Ethics partially or simultaneously affect the Audit Quality significantly. The next stage of testing Audit Quality partially has no significant effect on the Auditee Satisfaction. While Audit Service Portfolio and Audit Firm Reputation either partially or simultaneously have significant effect on the Auditee Satisfaction. Simultaneously the three variables Audit Quality, and Audit Services Portfolio and Reputation of Audit Firm have significant effect on the Auditee Satisfaction. . Keywords: Independence, Competence, Islamic Work Ethics, Audit Quality, Audit Services Portfolio, Audit Firm Reputation and Auditee Satisfaction.

Download Full-text

Relative Influences of Review and Engagement Auditor Rotation on Audit Quality: Evidence from China

Asian Journal of Business and Accounting ◽

10.22452/ajba.vol14no1.7 ◽

2021 ◽

Vol 14 (1) ◽

pp. 171-206

Author(s):

Sang Ho Kim ◽

Jianqun Xi

Keyword(s):

Regression Model ◽

Logit Model ◽

Audit Quality ◽

Discretionary Accruals ◽

Shared Responsibility ◽

First Year ◽

Audit Firm ◽

Auditor Rotation ◽

Audit Partner Rotation ◽

The Relationship

Manuscript type: Research paper Research aims: This study focuses on the effects of audit partner rotation on audit quality (AQ) in China. In particular, we examine the effects of review auditors (RAs) and engagement auditors (EAs) on AQ when they voluntarily and mandatorily rotate. Design/Methodology/Approach: The data in this study are retrieved from the Chinese Stock Market and Accounting Research (CSMAR) database. We develop an OLS regression model and logit model respectively to test the hypotheses developed. Finally, we have 13,856 firm-year observations collected for the first regression model, and 16,893 firm-year observations gathered for the second logit model from 2003 to 2015. Research findings: Findings show that RAs are more likely to behave opportunistically to retain clients by weighing up the benefits and costs of compromising audit quality in the first year after a rotation. The results imply that RAs may have an incentive to acquiesce the clients’ accounting irregularities in their first year of audit engagement when they are mandatorily rotated. However, we do not find this trend in terms of EAs’ rotation, suggesting that EAs are less affected by the auditor-client relationship compared to RAs. In addition, we find that RAs are less likely to issue modified audit opinions (MOPI) as the magnitude of negative discretionary accruals (DA) increases when they are voluntarily rotated. Theoretical contribution/Originality: Previous studies have investigated the relationship between mandatory audit partner rotation and audit quality. The results are mixed and inconclusive. Our study contributes to the extant literature by considering RAs’ opportunistic behaviour after mandatory rotation, which has not been explored in previous studies. In China, only a few studies have examined the relationship between mandatory audit partner rotation and audit quality. Our study is one of the first study focusing on the RA’s influence on AQ. Practitioner/Policy implication: The findings of our study can help Chinese authorities, listed firms and academics gain more understanding on whether mandatory audit partner rotation improves audit quality in practice. Since RAs have greater incentive to retain the existing client, we propose that RAs should bear more responsibility for the audit work, instead of the equally shared responsibility with EAs. Research limitation/Implications: Our study is subject to some limitations. First, our study adopts the performance-adjusted discretionary accruals as a proxy for audit quality. However, there can be a measurement error in estimating discretionary accruals. Second, we focus on the auditor rotation and exclude the case of audit firm rotation. Since the AQ can be affected by various factors, audit firm rotation can also affect AQ. Third, although we test the relative effects of RAs and EAs in audit work, we do not examine the effect of RAs’ characteristics such as their professional experience, educational background, and years of service. AQ can be affected by RAs’ characteristics.

Download Full-text