Was Andersen’s audit quality lower than its peers?

2015 ◽  
Vol 30 (8/9) ◽  
pp. 911-962 ◽  
Author(s):  
Krishna Kumar ◽  
Lucy Lim
Keyword(s):  
Big Five ◽  
Design Methodology ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Content Type ◽  
Earnings Response Coefficients ◽  
Going Concern ◽  
Lower Likelihood ◽  
Earnings Response ◽  
Pooled Samples

Purpose – This paper aims to examine whether Andersen’s audit quality in the five years preceding its collapse lagged that of other Big-Five auditors. Design/methodology/approach – This paper compares Andersen’s audit quality and the other Big-Five auditors using five methodologies, namely, earnings response coefficients, magnitudes of abnormal accruals, propensities to issue going-concern opinions, usefulness of going-concern opinions in predicting bankruptcy and the frequency of Accounting and Auditing Enforcement Releases. The comparisons are based on both pooled samples of all observations and propensity-score-based matched-pairs. Findings – The preponderance of evidence shows that Andersen’s audit quality did not differ materially in audit quality from other Big-Five auditors prior to its failure. However, it was found that Andersen’s independence was compromised in the year leading to its collapse (2000), as indicated by the lower likelihood to issue going-concern opinions. Originality/value – This paper complements and improves on Cahan et al. (2011) by using more measures of audit quality, as no one measure is perfect, showing that their results using discretionary accruals are sensitive to the model used and showing that there is a more powerful direct measure of audit quality, namely, going-concern opinions.

Who Did the Audit? Audit Quality and Disclosures of Other Audit Participants in PCAOB Filings

2014 ◽  
Vol 90 (5) ◽  
pp. 1939-1967 ◽  
Author(s):  
Carol Callaway Dee ◽  
Ayalew Lulseged ◽  
Tianming Zhang
Keyword(s):  
Audit Quality ◽  
Market Reaction ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Multivariate Model ◽  
Significant Decline ◽  
Earnings Response Coefficients ◽  
Absolute Value ◽  
Earnings Response ◽  
First Time

ABSTRACT We empirically test whether audit quality is affected when part of an SEC issuer's audit is outsourced to auditors other than the principal auditor (“participating auditors”). We find a significantly negative market reaction and a significant decline in earnings response coefficients (ERCs) for experimental issuers disclosed for the first time as having participating auditors involved in their audits. However, we find no market reaction and no decline in ERCs for a matching sample of issuers that are not disclosed as using participating auditors, nor for issuers disclosed for the second or third time as using participating auditors. We also find actual audit quality as measured by absolute value of performance-matched discretionary accruals is lower for the experimental issuers, although we find no difference in audit fees paid by the experimental and matching issuers in a multivariate model. Our findings suggest that the PCAOB's proposed rule requiring disclosure of the use of other auditors in addition to the principal auditor would provide information useful to investors in assessing audit quality for SEC issuers.

Auditor Industry Specialization and Earnings Quality

2003 ◽  
Vol 22 (2) ◽  
pp. 71-97 ◽  
Author(s):  
Steven Balsam ◽  
Jagan Krishnan ◽  
Joon S. Yang
Keyword(s):  
Audit Quality ◽  
Earnings Quality ◽  
Discretionary Accruals ◽  
Prior Work ◽  
Brand Name ◽  
Absolute Level ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Auditor Industry Specialization ◽  
Earnings Response

This study examines the association between measures of earnings quality and auditor industry specialization. Prior work has examined the association between auditor brand name and earnings quality, using auditor brand name to proxy for audit quality. Recent work has hypothesized that auditor industry specialization also contributes to audit quality. Extending this literature, we compare the absolute level of discretionary accruals (DAC) and earnings response coefficients (ERC) of firms audited by industry specialists with those of firms not audited by industry specialists. We restrict our study to clients of Big 6 (and later Big 5) auditors to control for brand name. Because industry specialization is unobservable, we use multiple proxies for it. After controlling for variables established in prior work to be related to DAC and the ERC, we find clients of industry specialist auditors have lower DAC and higher ERC than clients of nonspecialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of nonspecialists.

Consequences of the implementation of expanded audit reports with key audit matters (KAMs) on audit quality

2020 ◽  
Vol 35 (8) ◽  
pp. 1095-1119
Author(s):  
Weerapong Kitiwong ◽  
Naruanard Sarapaivanich
Keyword(s):  
Design Methodology ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Regression Analyses ◽  
Content Type ◽  
Weak Evidence ◽  
Financial Restatements ◽  
Audit Reports ◽  
The Impact ◽  
Made In

Purpose This paper aims to ask whether the implementation of the expanded auditor’s report, which included a requirement to disclose key audit matters (KAMs) in Thailand since 2016, has improved audit quality. Design/methodology/approach To answer this question, the authors examined audit quality two years before and two years after its adoption by analysing 1,519 firm-year observations obtained from 312 companies. The authors applied logistic regression analyses to the firm-year observations. Findings The authors found some weak evidence that KAMs disclosure improved audit quality because of auditors putting more effort into their audits and audits being performed thoroughly after the implementation of KAMs. Interestingly, the number of disclosed KAMs and the most common types of disclosed KAMs are not associated with audit quality. Only disclosed KAMs related to acquisitions are more informative because the presence of this type of disclosed KAMs signals the greater likelihood of financial restatements being made in a later year. Originality/value Unlike previous studies on the impact of KAMs disclosure on audit quality, which used discretionary accruals as proxy for audit quality, this study used the occurrence of financial restatements.

Reexamining the influence of large clients on office-level auditor reporting decisions

2016 ◽  
Vol 31 (1) ◽  
pp. 4-16
Author(s):  
Lucy Lim
Keyword(s):  
Big Five ◽  
Logistic Model ◽  
Design Methodology ◽  
Audit Fees ◽  
Content Type ◽  
Going Concern ◽  
Discretionary Accrual ◽  
Reporting Decisions ◽  
Auditor Reporting ◽  
Office Level

Purpose – This paper revisits the Reynolds and Francis’ (2001) study via the use of a more current dataset, incorporation of improvements into the accrual model and the use of actual fee data vs estimates. Using the improved analyses, the purpose of this paper is to examine whether more conservative auditors’ reports on larger clients are still evident. Design/methodology/approach – The paper follows Reynolds and Francis (2001) in using a regression model with White-adjusted t-statistics for the discretionary accrual model and a logistic model for going concern analysis. The most current discretionary accrual model is used to improve the original model, use actual fee data (not available previously), and add analyses using the two components of total fees (i.e. audit and non-audit fees). Findings – As opposed to Reynolds and Francis (2001), the results show that the Big Five auditors are less conservative with higher-paying clients as they allow their clients to have more discretionary accruals. While Reynolds and Francis (2001) found that auditors are more likely to report going concern opinions for higher-paying clients, the results in this paper does not show any difference in the propensity of auditors to issue going concern opinions. Originality/value – This study replicates Reynolds and Francis (2001) using more recent US data, applying the most recent discretionary accrual model, using the actual fee data, and adding analyses using total fees decomposition.

Cross-quarter differential market reactions

2016 ◽  
Vol 28 (2) ◽  
pp. 219-235
Author(s):  
Andrew Lee ◽  
Chu Yeong Lim ◽  
Tracey Chunqi Zhang
Keyword(s):  
Audit Committee ◽  
Design Methodology ◽  
Earnings Quality ◽  
Earnings Announcements ◽  
Listed Companies ◽  
Market Reactions ◽  
Content Type ◽  
Earnings Response Coefficients ◽  
Earnings Response ◽  
Effect Hypothesis

Purpose The purpose of this paper is to investigate the audit effect hypothesis for the cross-quarter differential market reactions to earnings announcements. Design/methodology/approach Earnings response coefficients are focused upon as indicators of perceived earnings quality. Findings The evidence suggests that investors of Singapore listed companies respond more strongly to earnings announcements in the fourth quarter than other interim quarters. The findings support the notion that investors attach different degrees of reliability to interim quarter earnings relative to final quarter earnings. Originality/value Findings in this paper shed new light on the audit effect hypothesis and are relevant to accounting regulators and audit committee members seeking to enhance the credibility of earnings announcements.

The effect of auditor narcissism on audit market competition

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hojat Mohammadi ◽  
Mahdi Salehi ◽  
Meysam Arabzadeh ◽  
Hassan Ghodrati
Keyword(s):  
Financial Markets ◽  
Significant Relationship ◽  
Design Methodology ◽  
Audit Quality ◽  
Stock Exchange ◽  
Market Competition ◽  
Competitive Pressure ◽  
Content Type ◽  
Listed Firms ◽  
Audit Market

Purpose This paper aims to assess auditor narcissism’s effect on audit market competition (auditor concentration, clients’ concentration and competitive pressure). Design/methodology/approach This paper’s method is descriptive-correlational based on published information from listed firms on the Tehran Stock Exchange from 2012 to 2018 using a sample of 188 firms (1,310 observations). The method used for hypothesis testing is linear regression using panel data. Findings The results show a negative and significant relationship between auditor narcissism and audit market competition and its indices, including auditor concentration, clients’ concentration and competitive pressure. Moreover, a positive and significant relationship was observed between audit quality and audit market competition and its indices, including auditor concentration, client concentration and competitive pressure. Originality/value To analyzes competition indices in the audit market (auditor concentration, clients’ concentration and competitive pressure). The variable is assessed once more using the exploratory factor analysis of the so-called three variables single variable, named audit market competition. So the central question of the study is investigated within a broader sense. Moreover, as the present study is carried out in the emergent financial markets with extremely competitive audit markets to figure out the effect of auditors’ intrinsic characteristics on such markets’ competitiveness, it can provide useful information in this field.

The effect of real activities manipulation on going concern audit opinions for financially distressed companies

2018 ◽  
Vol 17 (4) ◽  
pp. 514-539
Author(s):  
Hongkang Xu ◽  
Mai Dao ◽  
Jia Wu
Keyword(s):  
Audit Quality ◽  
Positive Association ◽  
Content Type ◽  
Going Concern ◽  
Accruals Management ◽  
Reporting Decisions ◽  
Going Concern Opinion ◽  
Distressed Firms ◽  
Real Activities Manipulation ◽  
Auditor Reporting

Purpose This study aims to examine the effect of real activities manipulation (RAM) on auditors’ decision of issuing going concern (GC) opinions for distressed companies. Design/methodology/approach This study estimates and examines three types of RAM: reduction of discretionary expenses, sales manipulation and overproduction. It investigates the effect of RAM on auditor reporting conservatism by including the three measures of RAM methods in logistic regressions that explain the issuance of going concern opinions. The authors perform the analysis specifically on distressed firms for 2004-2013 period. Findings This study finds a significant and positive association between RAM and the likelihood of receiving going concern opinion in the financial distressed firm sample, suggesting that client’s abnormal business activity affects the auditor reporting conservatism. Practical implications This study provides evidence that auditors make going concern reporting decisions in consideration of the client’s abnormal operating decisions and management’s opportunism. Originality/value Recent literature argues that auditors have little recourse other than to resign if a client uses RAM to impact earnings or the financial statements, and hence the enhanced audit quality in the post-SOX period is due to the shift from using accruals management to RAM (Cohen et al., 2008; Chi et al., 2011; Kim and Park, 2014). The evidence provided in this study indicates that auditors report more conservatively (rather than simply resign) in response to the aggressive RAM.

How does reciprocal rent-seeking between politicians and auditors influence audit quality? - Evidence from China

2021 ◽  
Author(s):  
Ku He ◽  
Xiaofei Pan ◽  
Gary Gang Tian ◽  
Yanling Wu ◽  
Chun Cai
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Rent Seeking ◽  
Political Connections ◽  
Chinese Market ◽  
Earnings Response Coefficients ◽  
Capital Costs ◽  
Study Results ◽  
Earnings Response ◽  
Audit Opinions

In this study, we propose a reciprocal rent-seeking game between politicians and individual auditors with political connections, and examine how these auditors' political connections influence their audit quality. Using hand-collected data from the Chinese market from 2008 to 2013, we find that politically connected auditors have a significantly lower tendency to issue modified audit opinions (MAOs). In addition, we also find that politicians' career prospects are significantly adversely influenced by MAOs being issued in their jurisdictions, while auditors' political connections enable them to charge higher audit fees, acquire larger market share, and reduce the likelihood of encountering regulatory sanctions. Further evidence suggests that compared with their non-connected counterparts, the politically connected auditors tend to issue less accurate audit opinions, reduce client firms' earnings response coefficients (ERCs), and increase client firms' capital costs. Collectively, our study results suggest that individual auditors' political connections facilitate the reciprocal rent-seeking activities between these auditors and politicians, which ultimately undermines audit quality.

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.

Immigrants in the EU5 labour markets: what happened during the economic crisis?

2019 ◽  
Vol 41 (1) ◽  
pp. 68-83 ◽  
Author(s):  
Claudio Quintano ◽  
Paolo Mazzocchi ◽  
Antonella Rocca
Keyword(s):  
Labour Market ◽  
Big Five ◽  
Design Methodology ◽  
Dynamic Factor ◽  
Time Series Models ◽  
Cross Sectional ◽  
Content Type ◽  
Relative Disadvantage ◽  
Temporal Dimensions ◽  
The Uk

Purpose The purpose of this paper is to understand: whether the changes that have occurred in migrants’ conditions over time are smaller than the differences in their conditions existing across countries; and whether the comparison between immigrants and native-born conditions allows the verification of the levels of disparities between them and, therefore, the relative disadvantage suffered by migrant. After a general overview of the 28 European Union countries, this paper analyses the changes that have occurred from 2006 to 2017 in the conditions of migrants in the labour market in the big five European countries (Italy, Spain, France, Germany and the UK). Design/methodology/approach Various statistical methodologies were used. First, to gain an overall picture, taking into account both the spatial and the temporal dimensions, dynamic factor analysis (DFA) was applied. Second, time-dependent and cross-sectional time-series models were estimated to better understand the DFA results. Findings The results highlight very different scenarios in terms of labour market vulnerabilities, both affecting immigrants and native-born workers. The results also highlight the existence of a very complex framework, due to the high heterogeneity of immigrants’ characteristics and labour market capacities to integrate migrants and also to promote good conditions for the native-born population. Originality/value The picture emerging from this study and the evaluation of the policies and legislation in force to cope with migration and to promote integration suggests some reflections on the most efficacious actions to take in order to improve migrants’ integration, counteracting social exclusion and promoting economic growth.

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