Corporate political connections, agency costs and audit quality

2016 ◽  
Vol 24 (4) ◽  
pp. 357-374 ◽  
Author(s):  
Arifur Khan ◽  
Dessalegn Getie Mihret ◽  
Mohammad Badrul Muttakin
Keyword(s):  
Agency Costs ◽  
Audit Quality ◽  
Agency Cost ◽  
Political Connections ◽  
Political Connection ◽  
Data Set ◽  
Research Attention ◽  
Content Type ◽  
Big 4 ◽  
The Relationship

Purpose The effect of political connections of agency costs has attracted considerable research attention due to the increasing recognition of the fact that political connection influences corporate decisions and outcomes. This paper aims to explore the association between corporate political connections and agency cost and examine whether audit quality moderates this association. Design/methodology/approach A data set of Bangladeshi listed non-financial companies is used. A usable sample of 968 firm-year observations was drawn for the period from 2005 to 2013. Asset utilisation ratio, the interaction of Tobin’s Q and free cash flow and expense ratio are used as alternative proxies for agency costs; membership to Big 4 audit firms or local associates of Big 4 firms is used as a proxy for audit quality. Findings Results show that politically connected firms exhibit higher agency costs than their unconnected counterparts, and audit quality moderates the relationship between political connection and agency costs. The results of this paper suggest the importance of audit quality to mitigate agency problem in an emerging economic setting. Research limitations/implications The findings of this paper could be of interest to regulators wishing to focus regulatory effort on significant issues influencing stock market efficiency. The findings could also inform auditors in directing audit effort through a more complete assessment of risk and determining reasonable levels of audit fees. Finally, results could inform financial statement users to direct investments to firms with lower agency costs. Originality/value To the knowledge of the authors, this study is one of the first to explore the relationship between political connection and agency costs, and the moderating effect of audit quality of this relationship.

Accounting conservatism, corporate governance and political connections

2017 ◽  
Vol 25 (2) ◽  
pp. 288-318 ◽  
Author(s):  
Nor Farizal Mohammed ◽  
Kamran Ahmed ◽  
Xu-Dong Ji
Keyword(s):  
Corporate Governance ◽  
Emerging Market ◽  
Political Influence ◽  
Ordinary Least Squares ◽  
Accounting Conservatism ◽  
Political Connections ◽  
Board Independence ◽  
Political Connection ◽  
Content Type ◽  
The Relationship

Purpose The purpose of this paper is to examine the relationship between accounting conservatism, corporate governance and political connection in listed firms in Malaysia where political influence plays a significant role in the capital market and in many business dealings. Design/methodology/approach By utilizing 824 firm-year observations comprising large listed companies over a period of four years from 2004, this study uses ordinary least squares regression models to investigate the relationship between accounting conservatism, corporate governance and political connections in Malaysia. Multiple measures of conservatism developed by Basu (1997) and Khan and Watts (2009) are employed. Findings The results show evidence of accounting conservatism (bad news being recognized earlier than good news) in Malaysia. Further, the results reveal that better corporate governance structure in terms of board independence is positively associated with accounting conservatism while management ownership is negatively associated with it. However, political connection has a negative moderating effect on the positive relationship between accounting conservatism and board independence. The results also suggest political connections have a positive association with firm’s future performance. Originality/value This study is the first in investigating the effect of political connections on accounting conservatism in Malaysian context and how political connections negatively affect the monitoring role of the corporate boards. By directly measuring political connection and controlling for various corporate governance mechanisms and firm-specific attributes, this study contributes to enhance the authors’ understanding of the political influence in financial reporting quality and firm performance in an emerging market setting.

The effect of engagement partner workload on audit quality

2021 ◽  
Vol 36 (8) ◽  
pp. 1068-1091
Author(s):  
Yun Cheng ◽  
Christine M. Haynes ◽  
Michael D. Yu
Keyword(s):  
Audit Quality ◽  
Firm Level ◽  
Content Type ◽  
Big 4 ◽  
The Us ◽  
Performance Benchmarks ◽  
Partner Characteristics ◽  
Partner Firm ◽  
The Individual ◽  
The Relationship

Purpose Auditing studies have shifted the research focus from the audit firm level to the individual audit partner level in recent years. Motivated by the call from Lennox and Wu (2018) to explore the effect of audit partners’ characteristics on audit quality in the US, this study aims to develop a new measure of engagement partner workload (EPW), which includes both the size and number of clients audited to test the effect of EPW on audit quality. This study also examines the moderating effect of the partner firm size on audit quality. Design/methodology/approach To test the effect of the EPW on audit quality, this study runs multivariate regressions of EPW on each specific client’s discretionary accruals and audit report delays. This study also runs a logistic regression of EPW on clients’ probability of having small profit increases to meet performance benchmarks. Findings Results of the hypotheses show that partner workload is positively related to audit quality. The results indicate that partners with larger, but fewer, clients conduct higher quality audits. Further analysis indicates that the relationship between partner workload and audit quality only holds for partners from the non-Big 4 firms. Originality/value This study contributes to the literatures of both audit quality and audit partner characteristics, and the results complement initial research aimed at identifying US partner-related characteristics that influence audit quality.

scholarly journals Political connections: a threat to auditor independence?

2015 ◽  
Vol 5 (2) ◽  
pp. 222-246 ◽  
Author(s):  
Effiezal Aswadi Abdul Wahab ◽  
Mazlina Mat Zain ◽  
Rashidah Abdul Rahman
Keyword(s):  
Design Methodology ◽  
Institutional Environment ◽  
Audit Fees ◽  
Auditor Independence ◽  
Political Connections ◽  
Panel Regression ◽  
Data Set ◽  
Content Type ◽  
The Relationship

Purpose – The purpose of this paper is to examine whether political connections further impair auditor independence by investigating the relationship between non-audit fees and audit fees and as to whether political connections moderate such relationship. Design/methodology/approach – This study employs panel regression analysis. The panel data set consists of 379 firm-year observations for three years from year 2001 to 2003. Findings – Based on 379 firm-year observations for the period of 2001-2003, grounded on two proxies of political connections namely politically connected firms and the proportion of Bumiputras directors, the authors find a positive and significant relationship between non-audit fees and audit fees, and the relationship becomes weaker, only for Bumiputra-dominated firms connected firms. Originality/value – This study contributes to the extant literature by examining the role of political connections in the context of auditor independence. In addition, this study is conducted in Malaysia, which provides a unique institutional environment with the existence of political connections that is built on ethnic grounds.

Shariah monitoring, agency cost and fund performance in Malaysian mutual funds

2020 ◽  
Vol 11 (5) ◽  
pp. 945-972
Author(s):  
Mohd Fikri Sofi ◽  
M.H. Yahya
Keyword(s):  
Corporate Governance ◽  
Empirical Evidence ◽  
Mutual Funds ◽  
Agency Costs ◽  
Fund Performance ◽  
Agency Cost ◽  
Advisory Panel ◽  
Data Set ◽  
Content Type ◽  
Shariah Governance

Purpose This paper aims to examine the effect of Shariah Advisory Panel (SAP) on both the level of agency cost and fund performance against conventional corporate governance, within corporate and Shariah governance settings, between Shariah and conventional mutual fund (CMF), in an emerging economy of Malaysia during the period 2008-2015. Design/methodology/approach Panel data regression is appropriately used within corporate governance research because of empirical issues of unobserved heterogeneity effects to avoid spurious evidence. The secondary data of 172 CMFs and 80 Shariah mutual funds are gathered hand-collected from annual reports and master prospectuses for the purpose of analysis between the period 2008 and 2015, generating 2,016 fund-year observations. Findings SAP is found to have a positive effect on agency costs. Consequently, it leads to empirical evidence that substantiates a negative and marginally significant association with fund performance when designated by accounting measure. Thus, the Shariah monitoring proxy is not a good mechanism for controlling agency costs inconsistent with performance maximizing (agency cost minimizing) outcomes. Research limitations/implications The unique data set of mutual funds used in this research may restrict the generalization of the findings unless mentioned and explained specifically the data characteristics. The single proxy for Shariah monitoring could be better off by having a list of different measures. Practical implications The paper highlights and suggests a consistent improvement in regulation that could be performed by policymakers pertaining to the non-trivial additional cost of implying Shariah governance. Originality/value This paper provides empirical evidence of the SAP effects from the view of a more complex monitoring structure in consequence of having an additional layer of governance, devoting on the trade-off between benefit and cost to shareholders.

Institutional environment, political connections of partial state ownership, and performance

2016 ◽  
Vol 43 (8) ◽  
pp. 856-870 ◽  
Author(s):  
Zengji Song ◽  
Abraham Nahm ◽  
Jun Yang
Keyword(s):  
Institutional Environment ◽  
State Ownership ◽  
Economic Consequences ◽  
Political Connections ◽  
Political Connection ◽  
Data Set ◽  
Content Type ◽  
Partial State ◽  
The Government ◽  
And Performance

Purpose – The purpose of this paper is to examine whether substantial differences in institutional environment in China lead to different levels of demand for political connection. Design/methodology/approach – Using a data set of 296 listed private sector enterprises (PSEs) in China, the authors empirically investigate the effects of institutional environmental factors upon political connection. Findings – The authors find that the lower the level of regional property right protection, the more powerful the government intervention, and the slower the economic development, the more motivated the PSEs were to build relationship with the government via partial state ownership. However, the degree of local corruption was not correlated with the demand for political connection. The authors also find that partial state ownership in PSEs exerted a positive effect on performance. Originality/value – Deviating from previous literature that has been mostly concerned about the economic consequences to firms caused by political connections, this paper examines the reasons for political connection among Chinese PSEs. The authors introduce a new dimension of political connection, namely, partial state ownership in PSEs.

scholarly journals Military Background, Political Connection, Audit Quality And Earning Quality

2020 ◽  
Vol 24 (1) ◽  
pp. 79
Author(s):  
Arif Widodo, Zaenal Fanani
Keyword(s):  
Audit Quality ◽  
Stock Exchange ◽  
Earnings Quality ◽  
Political Connections ◽  
Political Connection ◽  
Military Background ◽  
Earning Quality ◽  
Relationship Of ◽  
The Military ◽  
The Relationship

This research is try to determine the effect of military background and political connections on earning quality with audit quality as a mediator. This research uses a quantitative approach using a sample of mining sector company that listing in Indonesia Stock Exchange in the 2017-2018 periods. The conclusion of this research points out that military background has positive effect on audit quality and political connections negatively affect earning quality. While earning quality not effected by the military background, political connections do not effect audit quality, and earnings quality not effected by audit quality. Likewise, for the hypothesis, mediation of the audit quality has no effect on the relationship of military background and political connections to earnings quality.

Trade-offs in the relationship between competition and audit quality

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nam Ho
Keyword(s):  
Audit Quality ◽  
Metropolitan Statistical Area ◽  
New Approach ◽  
Content Type ◽  
Big 4 ◽  
Trade Offs ◽  
Level Data ◽  
The Usa ◽  
The Relationship ◽  
Insight Into

Purpose Fears over public accounting becoming increasingly concentrated have inspired several attempts to study the relationship between competition and audit quality. These studies have yielded conflicting results without a clear reason as to why. This paper aims to propose a new approach and empirically demonstrate a non-monotonic association between competition and audit quality. Design/methodology/approach Using metropolitan statistical area level data from the USA over the period of 2000–2014, the author shows that the effect that changes in the competition will have on audit quality depends upon the current competitive state of the market. Findings Audit quality is at its highest level when competition is neither too high nor too low. In addition, the point of inflection at which competition turns from being helpful to harmful is influenced by the saturation of the Big 4 auditors in the market. Practical implications These findings can help explain the mixed results of the literature and provide insight into the role that regulators can play in modulating competition. Originality/value This is the first paper to document a non-monotonic relationship between competition and audit quality. By introducing and exploring the validity of a non-monotonic component in the audit quality equation, the authors can better determine, which competitive structures generate desired levels of audit quality.

The effect of audit engagement partner professional experience on audit quality and audit fees: early evidence from Form AP disclosure

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Chenyong Liu ◽  
Chunhao Xu
Keyword(s):  
Fixed Effects ◽  
Audit Quality ◽  
Early Stage ◽  
Audit Fees ◽  
Least Square ◽  
Professional Experience ◽  
Accounting Firms ◽  
Content Type ◽  
Big 4 ◽  
The Relationship

PurposeThe purpose of this study is to examine the effect of audit engagement partner's professional experience on audit quality. The authors also investigate the relationship between the audit partner's experience and audit fees in both Big 4 and non-Big 4 accounting firms.Design/methodology/approachSince the Public Company Accounting Oversight Board (PCAOB) officially enacted Rule 3211 in 2017, US accounting firms are required to disclose detailed information of engagement partners in Form AP (PCAOB, 2015b). The authors obtained a sample of 2,283 audit partners from Form AP and hand collected their individual professional experience data through Certified Public Accountant (CPA) database, corporate disclosure and social media sites (e.g. Linkedin). Econometric models with fixed effects are used in this study to test our hypotheses. Two-stage least square (2SLS) model is used in the robustness test.FindingsThe authors find that the relationship between audit engagement partner's professional experience and audit quality is concave. It indicates that audit quality is increasing during the early stage of engagement partners' career and then decreases as the partners approaching the late-career phase. Further, the authors find that partner's professional experience is positively associated with audit fees in non-Big 4 accounting firms but not significantly associated with audit fees in Big 4 accounting firms.Practical implicationsThe finding of how auditor experience impacts audit quality can be useful for accounting firms to better plan their staffing in auditing engagements. This study’s results are also helpful for small accounting firms to optimize their pricing strategy.Originality/valueThis study provides new empirical evidence about the relation between auditor professional experience and audit quality. Furthermore, the authors extend the literature of audit fee determinants by testing the joint effects of audit firm-level factors and auditor individual-level professional experience on audit fees.

The relationship between political connections, auditor characteristics and auditor narcissism

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jalil Khaksar ◽  
Mahdi Salehi ◽  
Mahmoud Lari DashtBayaz
Keyword(s):  
Audit Quality ◽  
Stock Exchange ◽  
Political Connections ◽  
Industry Specialization ◽  
Content Type ◽  
Listed Firms ◽  
Political Relations ◽  
The Government ◽  
The Relationship ◽  
Auditor Characteristics

Purpose This study aims to assess the relationship between political connections, auditor characteristics (audit quality and industry specialization) and auditors’ intrinsic characteristics (narcissism) in listed firms on the Tehran Stock Exchange. In other words, this paper attempts to answer the question “whether political connections, audit quality and industry specialization contribute to the growth of narcissism and overconfidence of auditors of listed firms on the Tehran Stock Exchange or not.” Design/methodology/approach A multivariate regression model is used for hypothesis testing. The study’s hypotheses were also examined using a sample of 768-year firm listed on the Tehran Stock Exchange during 2013–2018 and by using the multiple regression pattern. Findings The obtained results indicate a negative and significant association between political relations, narcissism and overconfidence. The auditor’s overconfidence will go down by increasing political relations. Moreover, the results show a positive and significant relationship between audit quality, industry specialization and narcissism. On the other hand, to the best of authors’ knowledge, this study measured, for the first time, the severity of political connections by using the exploratory factor analysis of eight variables (long-term liabilities, firm size, financial leverage, export, human resources, major governmental shareholders, board members affiliated to the government and institutional ownership). Originality/value The authors figured out that few studies carried out, so far, in the emergent markets on political connections and their impacts on narcissism and overconfidence of auditors, so this paper aims to assess the effect of such a phenomenon in the emergent markets and contributes to the development of knowledge and science in this field.

scholarly journals Use of Big Four auditors and fund raising: evidence from developing and emerging markets

2018 ◽  
Vol 13 (2) ◽  
pp. 371-390
Author(s):  
Leif Atle Beisland ◽  
Roy Mersland ◽  
Øystein Strøm
Keyword(s):  
Emerging Markets ◽  
Audit Quality ◽  
Emerging Countries ◽  
Data Set ◽  
Content Type ◽  
Auditor Choice ◽  
For Profit ◽  
Debt Capital ◽  
The Relationship ◽  
Big Four

Purpose This study is motivated by recent research suggesting that the funding benefits of using Big Four auditors may not be as uniform as were previously assumed. The purpose of this paper is to analyze the relationship between use of Big Four auditors and access to debt capital by applying data from microfinance institutions (MFIs) in emerging countries, a population typically not investigated in accounting research. Design/methodology/approach The authors apply a unique hand-collected data set from 60 emerging markets and empirically investigate whether access to various debt categories is related to the use of Big Four auditors. Findings The authors find that access to international commercial debt, international subsidized debt and government agency debt is positively related to the use of a Big Four auditor. For local commercial debt, the authors find no association between auditor type and access to debt capital. The association between auditor choice and access to debt capital is stronger for nonprofit than for-profit MFIs. Originality/value This is the first audit quality study to include a broad sample of emerging countries, which in itself is an important contribution. As far as general audit quality research is concerned, the authors take the literature one step further by showing that the benefits of using a Big Four auditor may be dependent on the specific source of debt financing a firm or organization seeks to use. Moreover, the authors demonstrate that the for-profit vs nonprofit dimension influences the relationship between auditor choice and access to capital.

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