Audit quality and market pricing of earnings and earnings components in China

2014 ◽  
Vol 22 (1) ◽  
pp. 20-34 ◽  
Author(s):  
Ahsan Habib ◽  
Haiyan Jiang ◽  
Donghua Zhou
Keyword(s):  
Audit Quality ◽  
Negative Impact ◽  
Chinese Stock Market ◽  
Market Pricing ◽  
Content Type ◽  
Earnings Components ◽  
Big 4 ◽  
Audit Firms ◽  
Second Tier ◽  
Flow Components

Purpose – The purpose of this paper is to investigate the effect of audit quality on the market pricing of earnings and earnings components in China. Design/methodology/approach – The paper measures audit quality using three tiers of audit firm designation, namely International Big 4 audit firms, local Top 10 audit firms and, finally, the local second-tier audit firms. Earnings are decomposed into accruals and cash flow components and accruals are further decomposed into discretionary and non-discretionary accruals. Findings – The paper finds that, although earnings and its components are priced positively by the Chinese stock market, Big 4 audit does not provide any incremental benefit to clients in terms of market pricing of clients’ financial numbers. The paper finds a negative impact of local Top10 audit on the pricing of earnings in China. However, the paper finds no incremental effect of local Top 10 audit on the market pricing of earnings components. Originality/value – Although prior research in China has used modified audit opinion as the audit quality matrix, the paper considers market valuation of earnings and earnings components for firms audited by different categories of auditors.

The role of the Big 4 and second-tier international networks in redeveloping China’s audit market

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Camillo Lento ◽  
Wing Him Yeung
Keyword(s):  
Audit Quality ◽  
Ordinary Least Squares ◽  
Second Phase ◽  
Tier 2 ◽  
Least Squares Regression ◽  
Content Type ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
Second Tier

Purpose This study aims to explore the audit quality supplied by the Big 4, large indigenous Chinese (LIC) and five largest second-tier international network (Tier 2) audit firms in China during the second phase of their audit market development. Design/methodology/approach Ordinary least squares regression is used on an archival sample of firm-year observations. Endogeneity and self-selection bias are addressed by creating a propensity score matched sample and using two-stage regression with the inverse Mills’ ratio. Findings Strong evidence is found for higher levels of actual audit quality for the Big 4 relative to both LIC and Tier 2 audit firms. Weak evidence is found regarding the audit quality superiority of Tier 2 relative to LIC audit firms. Furthermore, the actual audit quality differential between the Big 4 relative to the LIC and Tier 2 firms widens after adopting International Financial Reporting Standards, which is contrary to the intention of Chinese regulators. Originality/value To the best of the authors’ knowledge, this is the first known empirical study to trisect Big N and non-Big N audit firm proxies into the Big 4, LIC and Tier 2. Currently, only qualitative studies have fully appreciated the unique regulatory roles of these three firm structures in developing China’s audit market, which reflect tensions between reliance on foreign expertise and self-determination. In addition, this study adds to the ongoing global dialogue on Tier 2 as an alternative to the Big 4 and the benefits of international accounting network membership.

The role of audit quality in firm valuation

2016 ◽  
Vol 58 (5) ◽  
pp. 575-598 ◽  
Author(s):  
Mishari M. Alfraih
Keyword(s):  
Audit Quality ◽  
Value Relevance ◽  
Accounting Information ◽  
Institutional Setting ◽  
Content Type ◽  
Book Value ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Team

Purpose The purpose of this paper is to examine the effect of audit quality on the value relevance of earnings and book value. Because joint audit is mandated for all Kuwait Stock Exchange-listed firms, it is hypothesized that the higher the quality of the audit team (as measured by the number of Big 4 audit firms in the joint audit team), the higher the value relevance of earnings and book values for equity valuation. Design/methodology/approach Consistent with prior research, the value relevance of earnings and book value is measured by the adjusted R2 derived from the Ohlson’s 1995 regression model. The number of Big 4 audit firms represented on the firm’s audit team is used as a proxy for audit quality. Three tiers of audit quality exist, namely, two non-Big 4 audit firms, one Big 4 and one non-Big 4 audit firms or two Big 4 audit firms. To address this paper’s objective, the association between audit quality and the value relevance of earnings and book value were examined using four approaches. The final sample consists of 1,836 firm-year observations and covers fiscal years from a 12-year period (2002-2013). Findings Taken together, the four approaches used collectively provide empirical evidence that audit quality positively and significantly affects the value relevance of accounting measures to market participants. Importantly, the results reveal significant variations in the value relevance of earnings and book value jointly across the three possible auditor combinations. Research limitations/implications Although using auditor size as a proxy for audit quality is well established in the auditing literature, a limitation of that proxy is that it measures audit quality dichotomously, which implicitly assumes a homogeneous level of audit quality within each group. Practical implications The findings show the importance of high-quality and rigorous external audits in improving the value relevance of accounting information. Originality/value This study contributes to the extent literature on audit quality by exploring the role of audit quality in a unique institutional setting that imposes mandatory joint audits. Although prior studies have investigated the effect of joint audit pair choice on earnings management and audit fee premium, this study is the first to investigate the effect of joint audit pair choice on the value relevance of accounting information.

How do audit fees change? Effects of firm size and section 404(b) compliance

2019 ◽  
Vol 34 (4) ◽  
pp. 393-437
Author(s):  
Alexey Lyubimov
Keyword(s):  
Audit Fees ◽  
Section 404 ◽  
Content Type ◽  
Control Effectiveness ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
Second Tier ◽  
Changes Over Time ◽  
Over Time

Purpose The purpose of this paper is to investigate the effect of the size of the audit firm and compliance with Section 404(b) on how audit fees change over time. Design/methodology/approach This study uses panel data and an OLS regression to examine the relationship between audit fee changes, firms’ size and Section 404(b) compliance. Findings Section 404(b)-compliant companies experience a larger change in audit fees if they are audited by Big 4 firms than second-tier firms. Second-tier audit firms increase the fees primarily for the companies which do not comply with Section 404(b). Practical implications Regulators have been concerned with the Big 4 fee premium for four decades. This study informs regulators that the Big 4 continue increasing their fees at a higher rate than second-tier firms for their Section 404(b)-compliant clients (even though recent research shows that second-tier firms have increased quality to match the Big 4). This suggests that the Big 4 fee premium increases for this subset of clients, adding to the regulatory concerns. Originality/value While prior research has established the existence of the Big 4 fee premium, little is known about how this premium changes over time. Prior research shows that audit fees increase when internal controls are weak; however, little is known about how Section 404(b) compliance (once control effectiveness is controlled) affects fee changes. This paper addresses these voids in research.

scholarly journals How to regain public trust in audit firms? The case of the Financial Reporting Council

2018 ◽  
Vol 31 (3) ◽  
pp. 343-359 ◽  
Author(s):  
Mohamed Khaled Eldaly ◽  
Magdy Abdel-Kader
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Public Trust ◽  
Audit Committees ◽  
Structured Interviews ◽  
Content Type ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
The Uk

Purpose This study aims to provide a better understanding of the role of the Financial Reporting Council (FRC), as the unified regulator of the audit profession in the UK, in restoring public trust in audit profession in the UK. It further analyses the views of partners in the Big 4 audit firms on this role. Design/methodology/approach The research data were gathered by conducting 17 semi-structured interviews with the top management of FRC’s members and executive partners of the Big 4 firms in the UK. The interviews were complemented by analysing data available on the web pages of the Big 4 firms and published reports related to the FRC’s projects. Findings This study identified three main strategies followed by the FRC to promote the trust and enhance the choice of auditors in the UK audit market. These strategies are improving the audit quality, increasing the transparency of the big audit firms and reducing the barriers to compete in the big audit market. Practical implications An analysis of the FRC’s efforts may help auditors to identify what they are expected to do to improve the reliability of information provided in the capital market. Audit committees can get a better understanding of the criteria that they need to improve the process of auditors’ choice. Auditors will also better understand how and why current audit regulations have been issued. This may improve their satisfaction with regulations and standards, and their efficient implementation. Furthermore, it is believed that audit regulators need to get feedback additional to the formal feedback they receive to improve their performance and current regulations. Originality/value This paper contributes to the literature by discussing the auditors’ criticism to the Audit Inspection Unit’s inspectors and the way the inspectors defend themselves. The findings suggest that partners of the Big 4 believe that the FRC’s projects effectively participate in improving the audit quality, as well as providing wider information about the audit firms to the public. However, different actions need to be taken to enhance the choice of auditors and increase the number of big audit firms that compete in the market.

Audit quality differences amongst audit firms in a developing economy

2016 ◽  
Vol 6 (3) ◽  
pp. 269-290 ◽  
Author(s):  
Twaha K. Kaawaase ◽  
Mussa Juma Assad ◽  
Ernest G Kitindi ◽  
Stephen Korutaro Nkundabanyanga
Keyword(s):  
Financial Services ◽  
Audit Quality ◽  
Accounting Standards ◽  
Board Members ◽  
Regulatory Requirements ◽  
Content Type ◽  
Services Sector ◽  
Financial Services Sector ◽  
Big 4 ◽  
Audit Firms

Purpose – The purpose of this paper is to report findings of audit quality differences amongst audit firms in a developing country. Specifically, the authors examine the assumption of marked audit quality differences amongst large audit firms (Big 4s) and the small and medium practices (SMPs). Design/methodology/approach – First, the authors develop scales for assessing perceived audit quality in the financial services sector based on qualitative data obtained from 106 audit practitioners, 31 credit analysts and 13 board members. The authors use NVivo© to analyse the 13 transcribed interviews and follow “cross-case analysis” to visualize dimensions and scales of audit quality. Then the authors use measurement scales developed and obtain quantitative data from 183 board members and top executives in the financial services sector and test for perceived audit quality differences amongst audit firms using a Mann-Whitney U test. Findings – The findings suggest that audit quality is a multi-dimensional construct comprising of levels of discretionary accruals; compliance of audited accounts to accounting standards, law and regulations; and audit fees. Based on these measures, the authors find that Big 4 audit firms ensure more compliance with accounting standards, law and other regulatory requirements than SMPs. However, taking all the three audit quality dimensions together reveals no significant differences in audit quality levels between Big 4 and SMPs. Research limitations/implications – In terms of auditor selection and retention, it is important that audit firms are assessed based on their ability to constrain discretionary accruals, to produce audited accounts that comply with requirements of accounting standards, the law and regulations; and to examine the fees they charge in relation to quality of service, than on their size. Also, as the results of this study suggest that Big 4 audit firms might be needed for compliance with accounting standards, law and other regulatory requirements, their audit ties in with the most basic level of auditing requiring probity and legality which, in practice, requires a low level of judgement to be exercised by those performing the audit. It might be useful for Big 4 and other audit firms to embark also on higher level of auditing requiring higher level of judgement. Future research may wish to examine auditing firms’ proclivity to higher level judgment audit. Originality/value – Previous research reveals no consistent way of measuring audit quality and has been inconclusive on the subject of audit quality differential amongst audit firms. The authors create audit quality scales which can be used in assessing perceived audit quality in a developing country context and provide initial evidence of no significant differences between large audit firms and the SMPs regarding audit quality in Uganda.

To be or not to be – auditors’ ability to signal going concern problems

2015 ◽  
Vol 11 (2) ◽  
pp. 175-192 ◽  
Author(s):  
Torbjörn Tagesson ◽  
Peter Öhman
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Annual Reports ◽  
Content Type ◽  
Going Concern ◽  
Big 4 ◽  
Audit Firms ◽  
Research Opportunity ◽  
Audit Reports ◽  
The Impact

Purpose – This paper aims to chart Swedish auditors’ likelihood of issuing going concern warnings (GCWs), and to investigate the relationship between formal auditor competence, audit fees and audit firm, respectively, and the likelihood of issuing GCWs. Design/methodology/approach – The empirical data are based on annual reports and audit reports for 2,547 limited companies that went bankrupt in 2010 in the wake of the financial crisis and had filed a financial statement in the year before the bankruptcy. Findings – The findings indicate that Swedish auditors seldom issue GCWs. Moreover, there is a positive relationship between audit fee level and the likelihood of issuing GCWs, and Big 4 auditors being more likely to issue such warnings than other auditors. However, the analyses identify differences between audit firms (within the group of Big 4 firms and within the group of other audit firms) in terms of their predictions of client bankruptcies. This suggests a need for further investigation of firm-specific differences. Contrary to what was predicted, authorized auditors are not more likely to issue GCWs than approved auditors. Research limitations/implications – This paper did not investigate the impact of audit experience and tenure or the possibility that auditors may signal survival problems by resigning. Practical implications – Levying appropriate audit fees creates opportunities for thorough audits, but auditors’ formal competence based on training and qualification is not a factor that enforces audit quality. Based on the findings, the authors also suggest some clarifications of existing standards to reduce ambiguity regarding the reporting of survival problems. Originality/value – The Swedish setting is a context in which most companies are small, creditor interest in accounting and auditing is strong and auditors must issue a modified audit opinion if half of the shareholders’ equity is spent. This setting offers a unique research opportunity because the formal competence differs between Sweden’s two categories of certified auditors, and it allows exploration beyond the dichotomy of Big 4 versus other audit firms.

“Big 4 fee premium” and audit quality: latest evidence from UK listed companies

2013 ◽  
Vol 28 (8) ◽  
pp. 680-707 ◽  
Author(s):  
Domenico Campa
Keyword(s):  
Audit Quality ◽  
Listed Companies ◽  
Content Type ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
House Of Lords ◽  
Audit Fee ◽  
Research Questions ◽  
The Uk

PurposeUsing the most recent observations (2005‐2011) from a sample of UK listed companies, This paper aims to investigate whether Big 4 audit firms exhibit a “fee premium” and, if this is the case, whether the premium is related to the delivery of a better audit service.Design/methodology/approachUnivariate tests, multivariate regressions and two methodologies that control for self‐selection bias are used to answer the proposed research questions. Data are collected from DataStream.FindingsFindings provide consistent evidence about the existence of an “audit fee premium” charged by Big 4 firms while they do not highlight any significant relationship between audit quality and type of auditor with respect to the audit quality proxies investigated.Research limitations/implicationsEvidence from this paper might signal the need for legislative intervention to improve the competitiveness of the audit market on the basis that its concentrated structure is leading to “excessive” fees for Big 4 clients. Findings might also enhance Big 4 client bargaining power. However, as the paper analyses only one country, generalizability of the results might be a limitation.Originality/valueThis study joins two streams of the extant literature that investigate the existence of a “Big 4 audit fee premium” and different levels of audit quality among Big 4 and non‐Big 4 clients. Evidence supports the concerns raised by the UK House of Lords in 2010 that the concentrated structure of the audit market could be the driver of “excessive” fees for Big 4 clients as it does not find differences in audit quality between Big 4 and non‐Big 4 clients.

The Market Premium for Audit Partners with Big 4 Experience

2020 ◽  
Author(s):  
Aleksandra B. Zimmerman ◽  
Kenneth L. Bills ◽  
Monika Causholli
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Audit Firm ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
Second Tier ◽  
Market Premium

This study investigates how non-Big 4 firm audit partners’ Big 4 experience is valued by the audit market. The Big 4 audit firms have differentiated themselves as nationally recognized firms for whose services companies are willing to pay a premium. It is unclear, however, whether this reputation follows individual auditors when they move to a non-Big 4 audit firm. We find that audit fees are higher for non-Big 4 audit partners with Big 4 experience with the fee premium ranging from 17 to 26 percent depending on the extent of experience when they are employed by small audit firms but find no evidence of a fee premium for Big 4 experience at the second-tier audit firms. Furthermore, in additional analyses, we do not find strong, consistent evidence that audit quality is higher for clients of non-Big 4 audit partners with Big 4 experience than their counterparts without Big 4 experience.

scholarly journals The effect of auditor type on audit quality in emerging markets: evidence from Egypt

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohamed M. El-Dyasty ◽  
Ahmed A. Elamer
Keyword(s):  
Audit Quality ◽  
Least Square ◽  
Advanced Technology ◽  
Content Type ◽  
Auditor Choice ◽  
Big 4 ◽  
Audit Firms ◽  
Alternative Measures ◽  
Ordinary Least Square Regression ◽  
The Impact

Purpose Although a number of studies suggest that big audit firms provide higher audit quality in strict legal environments, empirical evidence remains inconclusive. As little is known about the effect of auditor type on audit quality in less strictly legal environments, this study aims to investigate the impact of auditor type on audit quality in the Egyptian market. Design/methodology/approach Data of Egyptian-listed companies during the period 2011–2018 are used. To examine the impact of auditor type on audit quality, ordinary least square regression and robust standard errors clustered at year and industry level are used. This study uses discretionary accruals as a proxy for audit quality. Several additional analyzes are conducted to assess the robustness of the main results, including alternative measures of audit quality and auditor type. Findings The results show that audit firms tend to provide higher audit quality when they are affiliated with a foreign audit firm. However, Big 4 auditors do not provide higher audit quality compare to their counterparts. Additionally, the governmental agency, accountability state authority, that monopolize audit function in state-owned companies do not appear to be associated with higher audit quality. Finally, local audit firms have a negative association with audit quality. This may be their strategy to secure future clients that seek low-quality audits. Research limitations/implications This study suggests that affiliation with foreign audit firms will help the Egyptian firms to develop their abilities by using advanced technology and techniques and transfer rare expertize to the Egyptian auditors. This study also shows that the strategy adopted by many Egyptian audit firms to affiliate with foreign auditors reflects the desire of these firms to be included in one tier alongside Big 4 audit firms to increase their market share under a claim of providing a higher audit quality. Originality/value This study adds to the rare but growing body of literature by investigating how auditor type affects audit quality in the context of less strictly legal environments. The results are important, as investors, standards-setters and regulators have growing concerns over audit quality since the Enron scandal. The findings suggest that audit quality depends on auditor type. These findings have important implications for investors, standards-setters and auditors interested in auditor oversight, audit quality and auditor choice.

Narrow diversification, wide diversification, and audit quality, evidence from China

2018 ◽  
Vol 26 (2) ◽  
pp. 248-263
Author(s):  
Jun Hao ◽  
Linxiao Liu ◽  
Zhaohui Xu
Keyword(s):  
Audit Quality ◽  
Negative Impact ◽  
Knowledge Spillover ◽  
Economies Of Scope ◽  
Diversification Strategy ◽  
Industry Specialization ◽  
Content Type ◽  
Earnings Volatility ◽  
Firm Diversification ◽  
Audit Firms

Purpose Audit firm diversification can take many forms. Strategic management theory suggests that if the diversification has a narrow focus, it can have a positive effect on performance through knowledge spillover. However, if the diversification is too wide, the lack of economies of scope may cause an even negative impact on performance. The purpose of this paper is to examine the effect of an audit firm’s diversification strategy on audit quality. Design/methodology/approach Specifically, the authors test whether auditors can benefit from knowledge spillover in their area of specialization. Findings The authors find that the magnitude of discretionary accruals and the balance of below-the-line item are significant lower for clients from narrowly diversified area than those from a widely diversified area, suggesting a higher audit quality due to possible knowledge spillover. In addition, the authors find such benefits are more pronounced with clients with high earnings volatility. Originality/value This study extends the studies on auditor industry specialization by examining the effect of audit firms’ diversification on audit quality and assessing potential differences on audit quality between narrow and wide diversification.

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