scholarly journals Empirical Evidence on Audit Quality under a Dual Mandatory Auditor Rotation Rule

2020 ◽  
pp. 1-29 ◽  
Author(s):  
Joanne Horton ◽  
Gilad Livne ◽  
Angela Pettinicchio
Keyword(s):  
Empirical Evidence ◽  
Audit Quality ◽  
Auditor Rotation

scholarly journals Does Auditor Independence Mediate the Relationship Between Auditor Rotation and Audit Quality?

2019 ◽  
Vol 4 (1) ◽  
pp. 1
Author(s):  
Lutfi Ardhani ◽  
Bambang Subroto ◽  
Bambang Hariadi
Keyword(s):  
Empirical Evidence ◽  
Random Sampling ◽  
Audit Quality ◽  
Public Trust ◽  
Positive Influence ◽  
Auditor Independence ◽  
Direct Influence ◽  
Auditor Rotation ◽  
The Relationship

This research was conducted based on issues related to the decline in public trust in the ability of auditors to produce quality audits. This study aims to provide empirical evidence about audit quality that is influenced by auditor rotation. This research aims at providing an empirical evidence of the influence of auditor rotation on audit quality. This is an explanatory study using 90 auditors in Indonesia as its sample. The sample is taken using random sampling and the data are collected using questionnaire and interview with several auditors. The research results indicate that auditor rotation is not found to have direct influence on audit quality. The research also fails to provide empirical evidences of the role of auditor’s independence auditor as an intervening variable. Nevertheless, the research does proves that auditor’s independence has positive influence on audit quality.  

An Analysis of Cross-Sectional Differences in Big and Non-Big Public Accounting Firms' Audit Programs

2006 ◽  
Vol 25 (1) ◽  
pp. 27-48 ◽  
Author(s):  
Hans Blokdijk ◽  
Fred Drieenhuizen ◽  
Dan A. Simunic ◽  
Michael T. Stein
Keyword(s):  
Risk Assessment ◽  
Empirical Evidence ◽  
Audit Quality ◽  
Audit Fees ◽  
Public Accounting ◽  
Accounting Firms ◽  
Big 5 ◽  
Public Accounting Firms ◽  
Audit Approach ◽  
Control Risk

A significant body of prior research has shown that audits by the Big 5 (now Big 4) public accounting firms are quality differentiated relative to non-Big 5 audits. This result can be derived analytically by assuming that Big 5 and non-Big 5 firms face different loss functions for “audit failures” and is consistent with a variety of empirical evidence from studies of audit fees, auditor changes, and the stock price reaction to audited earnings. However, there is no existing evidence (of which we are aware) concerning the underlying production differences between Big 5 and non-Big 5 audits. As a result, existing empirical evidence cannot distinguish between the possibility that Big 5 audits are simply perceived to be different (e.g., by investors) or actually differ in how they are produced. Our research objective is to identify the production characteristics of audit engagements that may explain the differences in expected audit quality between Big 5 and non-Big 5 firms. In this archival study, we examine the total audit effort and the allocation of effort to four audit phases—planning, (control) risk assessment, substantive testing, and completion—for a cross-section sample of 113 audits of Dutch companies in 1998/99 by 14 public accounting firms. We find that, after controlling for client characteristics: (1) both types of auditors exert about the same amount of total audit effort; (2) Big 5 auditors allocate relatively more effort to planning and (control) risk assessment, and relatively less to substantive testing and completion; and (3) client size, use of the business-risk-based audit approach, and reliance on client internal controls affect audit hours differently for the two auditor types. We conclude that the Big 5 firms actually produce a higher audit quality level, and that this quality difference is related to how audit hours are deployed in a more contextual and less procedural audit approach.

The impact of audit committee characteristics on internal audit professionalization: empirical evidence from Greece

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Christina Vadasi ◽  
Michalis Bekiaris ◽  
Andreas G. Koutoupis
Keyword(s):  
Empirical Evidence ◽  
Audit Committee ◽  
Audit Quality ◽  
Research Question ◽  
Internal Audit ◽  
Audit Committees ◽  
Annual Reports ◽  
Substantial Impact ◽  
Content Type ◽  
The Impact

Purpose This paper aims to provide empirical evidence of the association between audit committee characteristics and internal audit quality through internal audit professionalization. Design/methodology/approach The investigation of the research question was based on 45 usable responses that were received from a survey of chief audit executives from firms listed on the Athens Stock Exchange and combined with publicly available information from annual reports. Findings The results indicate that audit committee characteristics (independence, diligence through frequent meetings and interaction with internal audit through valuation) influence internal audit professionalization. In addition, they demonstrate that internal audit professionalization is also influenced by CEO duality and firm’s external auditor. Practical implications The findings of this study have implications for audit committees wishing to improve their overall effectiveness, by identifying areas with substantial impact on internal audit quality. Moreover, regulators of corporate governance bodies can also benefit from the results to strengthen audit committee’s efficiency regarding internal audit function oversight. Originality/value The results add to the literature on the discussion of internal audit professionalization and complement the work of other researchers in the field of audit committee’s impact on internal audit quality/effectiveness. This study attempts to fill a gap in the literature on the effect of audit committee characteristics on internal audit professionalization, an element introduced from an institutional theory perspective.

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

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.

An Examination of Audit Quality Surrounding Within-Firm Engagement Office Changes

2021 ◽  
pp. 0148558X2110596
Author(s):  
Adam J. Greiner ◽  
Julia L. Higgs ◽  
Thomas J. Smith
Keyword(s):  
United States ◽  
Knowledge Transfer ◽  
Empirical Evidence ◽  
Audit Quality ◽  
Resource Constraints ◽  
Discretionary Accruals ◽  
The United States ◽  
Primary Analysis ◽  
Quality Deterioration ◽  
Main Association

We examine the relation between within-firm office changes and audit quality in the United States. Our primary analysis documents a reduction in audit quality, measured using abnormal discretionary accruals and restatements, when the client is transferred to a smaller within-firm office (downsize effect). We are unable to find evidence that clients experience significant improvement in audit quality among transfers to a larger within-firm office (upsize effect). We then condition our sample on the change in the number of public clients of the receiving office to better understand the source of the underlying association. We find that our downsize effect is driven by offices experiencing a decrease in the number of public clients, suggesting that our main association is not entirely the result of resource constraints for the receiving office. We posit that this finding is consistent with audit quality deterioration among within-firm office changes to smaller offices driven, in part, by the receiving office’s inability to adequately overcome the knowledge transfer frictions that accompany a move to a new office. Our findings offer empirical evidence on consequences of within-firm office changes and are particularly relevant to regulators and preparers.

Comparing Auditor versus Non-Auditor Assessments of Auditor Liability: An Experimental Investigation of Experts' versus Lay Evaluators' Judgments

2012 ◽  
Vol 31 (3) ◽  
pp. 125-148 ◽  
Author(s):  
Andrew Reffett ◽  
Billy E. Brewster ◽  
Brian Ballou
Keyword(s):  
Experimental Investigation ◽  
Social Identity ◽  
Empirical Evidence ◽  
Legal System ◽  
Social Identity Theory ◽  
Audit Quality ◽  
Identity Theory ◽  
Emotional Reactions ◽  
Auditor Liability

SUMMARY Critics of the legal system argue that the use of lay jurors to adjudicate auditor negligence claims results in non-meritorious decisions of auditor liability. Palmrose (2006) therefore proposes that the courts rely on panels of experienced auditors to evaluate the merits of auditor negligence claims and make recommendations to the courts. There is, however, scant evidence to indicate how auditors' and lay evaluators' judgments might differ in cases of alleged auditor negligence. Our study addresses this gap in the literature by providing theory and empirical evidence that elucidates several systematic differences between auditors' and lay evaluators' judgments. Results of an experiment indicate that auditor evaluators are less reliant on plaintiff losses as evidence than lay evaluators, but—consistent with social identity theory—experience greater empathy for auditor defendants. Consequently, auditor evaluators consistently provide lower assessments of auditor liability than lay evaluators, irrespective of audit quality. In addition, results of the experiment indicate that different legally irrelevant inputs primarily determine both auditor and lay evaluators' negligence verdicts—emotional reactions for auditor evaluators and plaintiff losses for lay evaluators. Finally, results are mixed as to whether auditor evaluators' judgments are more sensitive to varying levels of audit quality than lay evaluators' judgments.

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