The impact of Big 4 consulting on audit reporting lag and restatements

2017 ◽  
Vol 32 (1) ◽  
pp. 19-49 ◽  
Author(s):  
Michele D. Meckfessel ◽  
Drew Sellers
Keyword(s):  
Audit Quality ◽  
Empirical Support ◽  
Financial Statements ◽  
Securities And Exchange Commission ◽  
Content Type ◽  
Practice Size ◽  
Big 4 ◽  
Public Company ◽  
The Impact ◽  
Practical Implications

Purpose This paper responds to concerns raised by the Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB) and scholars over the rapid growth of Big 4 consulting practices. This paper aims to explores the question: Does the regrowth of sizable consulting practices by the Big 4 influence audit reporting lag and restatement rates? Design/methodology/approach A population of the SEC-registered US audit clients of the Big 4 was used in this study. Longitudinal data on Big 4 audit clients from 2000 through 2009 were analyzed to determine the impact of consulting practice size on the clients’ audit reporting lag and restatement rate. Findings This paper finds that consulting practice size has a positive and statistically significant influence on audit reporting lag and restatement rate. The results are robust to alternative specifications of the sample and controlling for the level of non-audit services provided to audit clients. Practical implications The findings contribute to the discussion of the scope-of-services issue. They provide empirical support for Zeff’s (2003) and Wyatt’s (2004) intuition that the loss of Big 4 professional focus – not simply conflicts of interests – is a major factor affecting the audit quality. Originality/value The uniqueness of this paper is in how it counts restatements. Each year this paper counts that annual financial statements are restated as opposed to each disclosure of a restatement. This paper’s contribution is to examine the association between the regrowth of Big 4 accounting firm consulting practices with audit reporting lag and restatements.

The impact of audit reforms on objectivity during the performance of non-audit services

2014 ◽  
Vol 29 (3) ◽  
pp. 222-236 ◽  
Author(s):  
Richard G. Brody ◽  
Christine M. Haynes ◽  
Craig G. White
Keyword(s):  
Audit Quality ◽  
Content Type ◽  
Auditor Liability ◽  
Internal Auditors ◽  
External Auditors ◽  
Regulatory Perspective ◽  
External Auditor ◽  
The Impact ◽  
Practical Implications ◽  
Non Audit Services

Purpose – This research aims to explore whether recent audit reforms have improved auditor objectivity when performing non-audit services. Design/methodology/approach – In two separate experiments, the authors tested whether external and internal auditors' inventory obsolescence judgments are influenced by their client's (or company's) role as the buyer or seller in an acquisition setting. Findings – External auditors assessed the likelihood of inventory obsolescence objectively, regardless of their consulting role in the acquisition setting. Internal auditors assessed the likelihood of inventory obsolescence as higher when consulting for the buyer than when consulting for the seller, consistent with the supposition that the buyer would prefer to write-down inventory and negotiate a lower purchase price, whereas the seller would prefer the inventory not be written down. Practical implications – From a regulatory perspective, external auditors may be relying too much on the work of internal auditors if internal auditors' lack of objectivity as consultants extends to their assurance role. Originality/value – This paper extends prior research in the area of internal and external auditor objectivity and is the first paper to include both subject groups in the same experiment. It also addresses the current policy issues that may have a significant effect on audit quality and auditor liability.

The impact of audit quality on earnings management and cost of equity capital: evidence from a developing market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ben Le ◽  
Paula Hearn Moore
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
Big 4 ◽  
The Government ◽  
The Impact

Purpose This study aims to examine the effects of audit quality on earnings management and cost of equity capital (COE) considering the impact of two owner types: government ownership and foreign ownership. Design/methodology/approach The study uses a panel data set of 236 Vietnamese firms covering the period 2007 to 2017. Because the two main dependent variables of the COE capital and the absolute value of discretionary accruals receive fractional values between zero and one, the paper uses the generalised linear model (GLM) with a logit link and the binomial family in regression analyses. The paper uses numerous audit quality measures, including hiring Big 4 auditors or the industry-leading Big 4 auditor, changing from non-Big 4 auditors to Big 4 auditors or the industry-leading Big 4 auditor, and the length of Big 4 auditor tenure. Big 4 companies include KPMG, Deloitte, EY and PwC, whereas the non-big 4 are the other audit companies. Findings The study finds a negative relationship between audit quality and both the COE capital and income-increasing discretionary accruals. The effects of audit quality on discretionary accruals and the COE capital depend on the ownership levels of two important shareholders: the government and foreign investors. Foreign ownership is negatively associated with discretionary accruals; however, the effect is more pronounced in the sub-sample of state-owned enterprises (SOEs), the firms where the government owns 50% or more equity, than in the sub-sample of Non-SOEs. Originality/value To the best of the knowledge, no prior similar study exists that used the GLM with a logit link and the binomial family regression. Global investors may be interested in understanding how unique institutional settings and capital markets of each country impact the financial reporting quality and cost of capital. Further, policymakers of developing markets may have incentives to improve the quality of financial reporting and reduce the cost of capital which should result in attracting more foreign investments.

The impact of anonymous, two-way, computer-mediated communication on perceived whistleblower credibility

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jacob A. Young ◽  
James F. Courtney ◽  
Rebecca J. Bennett ◽  
Timothy Selwyn Ellis ◽  
Clay Posey
Keyword(s):  
Computer Mediated Communication ◽  
Empirical Support ◽  
Mediated Communication ◽  
Research Directions ◽  
Content Type ◽  
Computer Mediated ◽  
Reporting Systems ◽  
New Research ◽  
The Impact ◽  
Practical Implications

PurposeThe purpose of this study was to investigate the impact of two-way, computer-mediated communication on investigator perceptions of whistleblower credibility.Design/methodology/approachInvestigators were recruited to participate in an online experiment that tasked subjects with evaluating simulated two-way, computer-mediated communication between an investigator and whistleblower. Several rival explanations were also examined to account for potential confounds.FindingsWhile anonymous whistleblowers were perceived to be less credible than identified whistleblowers when reporting via one-way communication, perceived whistleblower credibility was not statistically different when using two-way communication. Further, investigators allocated statistically similar amounts to investigate anonymous and identified reports.Research limitations/implicationsBased upon the results of this study, several new research directions can be explored with respect to maintaining anonymity, assessing credibility and designing reporting systems.Practical implicationsThe results support the use of anonymous, two-way communication in whistleblowing reporting systems. Anonymous whistleblowers would benefit from the ability to maintain an active dialogue with investigators without jeopardizing their safety or the investigation.Social implicationsThis study provides empirical support for strengthening whistleblowing reporting channels through the adoption of anonymous, two-way, computer-mediated communication. Doing so can better preserve the anonymity of those willing to report wrongdoing and better protect them from potential retaliation.Originality/valueThis study is among the first to empirically test the longstanding theory that anonymous reports are perceived by investigators as less credible than those from identified individuals. This study is also among the first to consider and incorporate anonymous, two-way communication in whistleblowing reporting.

Board characteristics, external auditing quality and earnings management

2014 ◽  
Vol 4 (1) ◽  
pp. 79-96 ◽  
Author(s):  
Neila Boulila Taktak ◽  
Ibtissem Mbarki
Keyword(s):  
Earnings Management ◽  
Management Practices ◽  
Audit Quality ◽  
Good Practice ◽  
Board Structure ◽  
External Audit ◽  
Content Type ◽  
Board Characteristics ◽  
Big 4 ◽  
The Impact

Purpose – The purpose of this paper is to examine the impact of board characteristics and external audit quality on earnings management among major Tunisian banks over the period 2003-2007. Design/methodology/approach – Multivariate regressions are employed to test the effect of board structure and external audit quality on discretionary provisions as a proxy for earnings management. Findings – Results indicate that among the characteristics of the board, CEO duality is associated with higher levels of discretionary provisions. However, the presence of directors affiliated to the largest shareholder tends to constrain earnings management practices. The results reveal also that a co-audit belonging to the BIG 4 provides incentives to manage earnings while the capacity of the external auditor to disclose reservations impacts negatively the manager's discretion. Practical implications – First, it is not desirable to appoint a co-audit both belonging to the BIG 4. Second, the presence of affiliated directors reduces the discretionary practices except in cases where directors are affiliated to families. In this case, banks should strengthen the presence of independent directors. Finally, the delineation of the leeway left in the Tunisian accounting standards would provide more transparent financial information. Originality/value – This study contributes to the literature on governance and its impact on earnings management among Tunisian banks by introducing two variables that have not been tested before which are affiliated directors and co-audit. The paper will be of value to banks willing to comply with the Governance Good Practice Guide adopted recently in Tunisia.

US public auditing reforms may follow 2020

2020 ◽  
Keyword(s):  
Audit Quality ◽  
Securities And Exchange Commission ◽  
Fiscal Year ◽  
Donald Trump ◽  
Public Accounting ◽  
Content Type ◽  
The Public ◽  
Securities Law ◽  
Budget Proposal ◽  
Public Company

Subject US public accounting oversight and proposed reforms. Significance Earlier this month, President Donald Trump released his budget proposal for the 2021 fiscal year. Among the proposals is merging the Public Company Accounting Oversight Board (PCAOB) into the Securities and Exchange Commission (SEC) beginning in 2022. The move would further weaken US securities law and the accounting framework, which has steadily eroded in recent years. Impacts Shifting oversight over audit quality to the SEC would greatly reduce resources available for this function. House Democrats will be reluctant to give Trump legislative victories before November. Under Trump, the SEC will further shrink its enforcement activities; this process began before he became president.

Disclosure effects of the PCAOB part II reports

2017 ◽  
Vol 13 (4) ◽  
pp. 568-580
Author(s):  
Ifeoma Udeh
Keyword(s):  
Design Methodology ◽  
Audit Quality ◽  
Financial Statements ◽  
First Year ◽  
Dominant Focus ◽  
Content Type ◽  
Investor Confidence ◽  
Related Literature ◽  
Audit Firms ◽  
Practical Implications

Purpose The purpose of this paper is to examine the effect of the PCAOB part II report disclosures on US triennially inspected audit firms’ deregistration decisions, the likelihood and the timing of audit firms’ dismissals and resignations. Design/methodology/approach The paper anchored on US regulations used 158 publicly available records of disclosed PCAOB part II reports from 2004 to 2012. Findings The number of the quality control deficiencies disclosed in the part II report affects US triennially inspected audit firms’ decisions to deregister from the PCAOB. Additionally, audit firms’ dismissals and resignations, both occur mostly within the first year after the part II report disclosure, although audit firms that subsequently deregister are more likely to be dismissed. Practical implications The paper provides support that the disclosure of the PCAOB part II inspection report motivates audit quality improvement. Social implications The PCAOB inspection and subsequent disclosure of the part II inspection report enhances audit quality, which in turn, enhances investor confidence in the accuracy and reliability of audited financial statements. Originality/value The paper provides insights about the effect of the disclosures of PCAOB part II report, over and above any benefits from the PCAOB part I report disclosures, which is the dominant focus of related literature.

scholarly journals The impact of audit quality on real earnings management in the UK context

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Syed Numan Chowdhury ◽  
Yasser Eliwa
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Production Costs ◽  
Real Earnings Management ◽  
Sampled Data ◽  
Content Type ◽  
Listed Firms ◽  
Big 4 ◽  
The Uk ◽  
The Impact

Purpose The purpose of this paper is to examine whether audit quality influence real earnings management activities using a sample of UK listed firms that have strong incentives to manage earnings upward through meeting past year’s earnings as a benchmark in the post-adoption period of International Financial Reporting Standards (IFRS). Design/methodology/approach The authors use a sample of 4,774 firm-year observations of UK listed firms during the period 2005–2018. Univariate and multivariate analyses have been conducted to test the association after controlling for firm characteristics and institutional variables. Findings The study reports that the presence of Big 4 auditors is significantly and positively related with greater levels of sales and discretionary expenses manipulation. Though the authors do not find any conclusive evidence on production costs manipulation, the aggregated measure of real earnings management shows a significant positive association with the presence of Big 4 auditors. Practical implications The study implies that managers who have incentives to manage earnings upward around the UK firms take advantage of the accounting flexibility in defining policies while reducing information asymmetry among the investors to signal better future performance. The approach to detect earnings manipulation as described in the auditing standards fails to limit the managerial use of real activities due to limited scope and unclear guidance. Thus, due to the significant impact on public policies, the results should, therefore, be of interest to the regulators and standard setters. Originality/value To the best of the authors’ knowledge, this is the first study that examines the association between audit quality and real earnings management for the UK all-purpose operational firms in sampled data that just meet past year’s earnings as a benchmark in the post-IFRS period.

scholarly journals Do key audit matters (KAMs) matter? Auditors’ perceptions of KAMs and audit quality in Finland

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Antti Rautiainen ◽  
Jani Saastamoinen ◽  
Kati Pajunen
Keyword(s):  
Audit Quality ◽  
European Union Country ◽  
Added Value ◽  
Audit Process ◽  
Content Type ◽  
Electronic Survey ◽  
Work Effectiveness ◽  
The Impact ◽  
Audit Effectiveness ◽  
Practical Implications

Purpose Key audit matters (KAMs) in International Standard for Auditing, 701 seek to enhance the value of the auditor’s report by increasing the transparency of how the audit was performed. The purpose of this study is to investigate how professional auditors themselves perceive the impact of KAMs on audit quality and audit effectiveness. Design/methodology/approach Statistical analyses of an electronic survey of certified public auditors (CPAs) in Finland. Findings Regarding the perceptions of KAMs, the authors found two dominant views on auditing: quality and efficiency. In general, the respondents did not consider that KAMs improve audit quality. However, auditors focusing on efficiency considered that KAMs make the audit process more fluent. Further, the use of KAMs may facilitate audit effectiveness and cooperation between auditors and managers. The authors also found three factors related to the KAMs processes and auditing work: effectiveness, risks and workload. Practical implications Auditors may use KAMs to provide focus in their work. This facilitates balancing between the demands for added value while keeping the workload and audit risks at a tolerable level. Originality/value This study contributes to the emerging literature on KAMs as well as to the literature examining practitioner views of changes in auditing regulation. It is, as far as we know, the first study to report survey evidence on how CPAs themselves perceive KAMs and the effects of KAMs on audit work in an European Union country context.

Key audit matters: did IAASB unravel the knots of confusion in audit reports decisions?

2021 ◽  
Vol 36 (8) ◽  
pp. 1025-1052
Author(s):  
Mohamed Abdel Aziz Hegazy ◽  
Noha Mahmoud Kamareldawla
Keyword(s):  
Design Methodology ◽  
Financial Statements ◽  
Reporting Standards ◽  
Content Type ◽  
External Auditors ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Reports ◽  
The Relationship ◽  
Practical Implications

Purpose This study aims to investigate how external auditors properly classify the requirements of ISA 701 for key audit matters (KAM) compared with an emphasis of matter or other matters (EOM) in ISA 706 and going concern (GC) in ISAs 706 and 570. Such investigation is important to assess whether the explanatory matters included in ISAs 701, 706 and 570 are appropriate for external auditors so they can properly classify identified audit matters as either KAM, EOM or GC matters and considering the relationship among them. Design/methodology/approach The research used questionnaires sent to a sample of external auditors in five audit firms with international affiliations including two of the Big 4 audit firms. The Z-test for two proportions is conducted to assess whether external auditors were confused when interpreting the explanatory matters included in the ISAs. Findings The research suggests that the current ISA 701 explanations may not adequately help some auditors in their aim of properly identifying all KAM from among the different matters they reach during their audit. When classifying EOM and GC, most of the external auditors misclassified them as KAM. Practical implications This is a timely study. The results have implications for standard setters and regulators through revising the explanations included in the different audit reporting standards including ISA 701 and considering the relationships among them. Originality/value According to the authors’ knowledge, this study is considered among the first that surveyed the appropriateness of the explanations included in ISAs for KAM, EOM, GC and how auditors perceive such explanations when forming their opinion about their clients’ financial statements.

SEC adopts rules and forms to modernize reporting requirements for registered investment companies

2017 ◽  
Vol 18 (1) ◽  
pp. 25-42
Author(s):  
Stephen Cohen ◽  
Megan Johnson ◽  
Gary Brooks ◽  
Brooke Higgs
Keyword(s):  
Financial Services ◽  
Service Providers ◽  
Securities And Exchange Commission ◽  
Content Type ◽  
Fund Managers ◽  
Investment Companies ◽  
Reporting Requirements ◽  
Final Rule ◽  
The Impact ◽  
Practical Implications

Purpose To explain the new rules, forms, and amendments to current rules and forms (Final Rule) that the Securities and Exchange Commission (SEC) has adopted to modernize the reporting of information provided by registered investment companies (funds) and to improve the quality and type of information that funds provide to the SEC and investors. Design/methodology/approach Discusses the background leading up to the Final Rule, provides an overview and summary of the Final Rule’s key components, and highlights issues that may be raised by the new reporting regime. Findings The Final Rule will have a significant effect on many funds. Funds will experience a substantially increased reporting burden with respect to both the frequency of reporting and the granularity of information required. Practical implications Fund managers and fund service providers should begin to evaluate the impact of the Final Rule, the processes that will need to be implemented to prepare filings on new forms, and the changes in fund disclosure practices that will be required in response to the amendments to certain forms. Originality/value Practical guidance from financial services lawyers specializing in the investment management industry.

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