Do government-experienced auditors reduce audit quality?

2019 ◽  
Vol 34 (6) ◽  
pp. 722-748
Author(s):  
Murat Ocak ◽  
Gökberk Can
Keyword(s):  
Audit Quality ◽  
Data Access ◽  
Discretionary Accruals ◽  
Small Sample ◽  
Content Type ◽  
Audit Firm ◽  
Audit Firms ◽  
Government Experience ◽  
The Impact ◽  
Independent Audit

Purpose Recent studies regarding auditor experience generally focus on auditor overall experience in accounting, auditing, finance and related fields (Hardies et al., 2014), auditor sector and domain experience (Bedard and Biggs, 1991; Hammersley, 2006), auditor experience as CPA (Ye et al., 2014; Sonu et al., 2016) or big N experience (Chi and Huang, 2005; Gul et al., 2013; Zimmerman, 2016) or auditors’ international working experience (Chen et al., 2017). But there is little attention paid to where auditors obtained their experience from? And how do auditors with government experience affect audit quality (AQ)? This paper aims to present the effect of auditors with government experience on AQ. Design/methodology/approach The authors used Turkish publicly traded firms in Borsa Istanbul between the year 2008 and 2015 to test the hypothesis. The sample comprises 1,067 observations and eight years. Two main proxies of government experience are used in this paper. The first proxy is auditor’s government experience in the past. The second proxy is the continuous variable which is “the logarithmic value of the number of years of government experience”. Further, auditor overall experience in auditing, accounting, finance and other related fields are also used as a control variable. Audit reporting aggressiveness, audit reporting lag and discretionary accruals are used as proxies of AQ. Besides this, the authors adopted the model to estimate the probability of selecting a government-experienced auditor, and they presented the regression results with the addition of inverse Mills ratio. Findings The main findings are consistent with conjecture. Government-experienced auditors do not enhance AQ. They are aggressive, and they complete audit work slowly and they cannot detect discretionary accruals effectively. Spending more time in a government agency makes them more aggressive and slow, and they do not detect earnings management practices. The Heckman estimation results regarding the variable of interest are also consistent with the main estimation results. In addition, the authors found in predicting government-experienced auditor choice that family firms, domestic firms and firms that reported losses (larger firms, older firms) are more (less) likely to choose government-experienced auditors. Research limitations/implications This study has some limitations. The authors used a small sample to test the impact of government-experienced auditors on AQ because of data access problems. Much data used in this study were collected manually. Earnings quality was calculated using only discretionary accruals. Real activities manipulation was not used as the proxy of AQ in this paper. The findings from emerging markets might not generalize to the developed countries because the Turkish audit market is developing compared to Continental Europe or USA. Practical implications The findings are considered for independent audit firms. Audit firms may employ new graduates and train them to offer more qualified audit work for their clients. The results do not mean that government-experienced auditors should not work in an audit firm, or that they should not establish an audit firm. It is clear that government-experienced auditors provide low AQ in terms of audit reporting aggressiveness, audit report lag and discretionary accruals. But as they operate more in the independent audit sector, they will become successful and provide qualified audit work. One other thing we can say is that it is perhaps better for government-experienced auditors to work in the tax department of independent audit firms. Originality/value This paper tries to fill the gap in the literature regarding the effect of auditor experience on AQ and concentrates on a different type of experience: Auditors with government experience.

Individual auditor characteristics and audit quality: evidence from nonprofits in the US

2020 ◽  
Vol 32 (4) ◽  
pp. 551-575
Author(s):  
Nancy Chun Feng
Keyword(s):  
Nonprofit Organizations ◽  
Internal Control ◽  
Audit Quality ◽  
Quality Measures ◽  
Content Type ◽  
Audit Firm ◽  
Audit Firms ◽  
The Impact ◽  
Auditor Characteristics

PurposeUsing a sample of US nonprofit organizations, where the identity of the auditor in charge of the audit is revealed, I investigate whether individual auditor characteristics (gender, engagement size and tenure) are associated with audit quality.Design/methodology/approachTo investigate how individual audit partner characteristics affect audit quality, I follow Petrovits et al. (2011) and Fitzgerald et al. (2018) who investigate client characteristics and partner tenure as determinants of ICDs in nonprofits. I add three characteristics of the auditor in charge – gender, engagement size and tenure – to their models. In additional analyses, I use subsamples partitioned by client risk and audit firm size, and find that individual auditor characteristics generally play a more significant role in the issuance of ICDs and QAOs for riskier clients than for less risky clients.FindingsMy results show that female auditors are more likely to report internal control deficiencies and issue qualified audit opinions (QAOs) to nonprofits. I also find that auditors with more Single Audit engagements within the same year are less likely to report ICDs. In addition, auditor tenure is negatively associated with the likelihood of issuing an ICD report, suggesting that auditors become complacent as the length of the auditor–client relationship lengthens or, alternatively, that they are better able to assist their clients in correcting ICDs and in maintaining stronger internal control environments as they gain client-specific knowledge over time. Additional analysis suggests tenure and engagement load results are sensitive to the sample specification employed.Research limitations/implicationsOne caveat of this study is that self-selection bias may be present when a client chooses an audit firm, the audit firm selects a client, and the audit firm assigns a partner to the engagement. Future study with more advanced econometric models is needed to mitigate self-selection bias. Another limitation is that my sample consists of nonprofit organizations and may not be generalizable to for-profit firms. Another caveat of this study is that the tenure variable is truncated compared to prior literature (e.g. Fitzgerald et al., 2018). Also given the rarity of audit quality measures in the nonprofit setting, internal control deficiencies and qualified opinions are used as proxies for audit quality because they reflect both the quality of audit work and the quality of organizations' internal control and financial reporting. Future studies with data including additional audit quality measures could shed more light on the topic.Originality/valueThis study contributes to the literature in several ways. First, this study offers a more comprehensive examination on the impact that a broader set of individual auditor characteristics on audit quality in the nonprofit setting, compared to Fitzgerald et al.'s (2018) study. Second, the findings should be of interest to policymakers who recently mandated engagement partner disclosures from US audit firms (PCAOB, 2015b). Finally, another distinctive feature of this study is that I examine the impact of individual auditor characteristics on audit quality in a setting where Big 4 audit firms are not dominant.

The Effect of Office Changes within Audit Firms on Clients' Audit Quality and Audit Fees

2020 ◽  
Vol 39 (1) ◽  
pp. 71-99
Author(s):  
Carl W. Hollingsworth ◽  
Terry L. Neal ◽  
Colin D. Reid
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Additional Analysis ◽  
Audit Firm ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact ◽  
Audit Partner Rotation

SUMMARY While prior research has examined audit firm and audit partner rotation, we have little evidence on the impact of within-firm engagement team disruptions on the audit. To examine these disruptions, we identify a unique sample of companies where the audit firm issuing office changed but the audit firm did not change and investigate the effect of these changes on the audit. Our results indicate that companies that have a change in their audit firm's issuing office exhibit a decrease in audit quality and an increase in audit fees. In additional analysis, we partition office changes into two groups—client driven changes and audit firm driven changes. This analysis reveals that client driven changes are more likely to result in a higher audit fee while audit quality is unchanged. Conversely, audit firm driven changes do not result in a higher audit fee but do experience a decrease in audit quality.

Leaving a joint audit system: conditional fee reductions

2014 ◽  
Vol 29 (2) ◽  
pp. 131-152 ◽  
Author(s):  
Claus Holm ◽  
Frank Thinggaard
Keyword(s):  
Audit Quality ◽  
Theory Development ◽  
Future Research ◽  
Research Approach ◽  
Content Type ◽  
Audit Firm ◽  
Audit System ◽  
Interaction Terms ◽  
Audit Firms ◽  
Audit Fee

Purpose – The authors aim to exploit a natural experiment in which voluntary replace mandatory joint audits for Danish listed companies and analyse audit fee implications of using one or two audit firms. Design/methodology/approach – Regression analysis is used. The authors apply both a core audit fee determinants model and an audit fee change model and include interaction terms. Findings – The authors find short-term fee reductions in companies switching to single audits, but only where the former joint audit contained a dominant auditor. The authors argue that in this situation bargaining power is more with the auditors than in an equally shared joint audit, and that the auditors' incentives to offer an initial fee discount are bigger. Research limitations/implications – The number of observations is constrained by the small Danish capital market. Future research could take a more qualitative research approach, to examine whether the use of a single audit firm rather than two has an effect on audit quality. The area calls for further theory development covering audit fee and audit quality in joint audit settings. Practical implications – Companies should consider their relationship with their auditors before deciding to switch to single auditors. Fee discounts do not seem to reflect long-lasting efficiency gains on the part of the audit firm. Originality/value – Denmark is the first country to leave a mandatory joint audit system, so this is the first time that it is possible to study fee effects related to this.

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.

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.

Audit quality following the Public Company Accounting Oversight Board’s operation

2017 ◽  
Vol 17 (5) ◽  
pp. 927-946
Author(s):  
She-Chih Chiu ◽  
Chin-Chen Chien ◽  
Hsuan-Chu Lin
Keyword(s):  
Audit Quality ◽  
Univariate Analysis ◽  
Self Regulation ◽  
Discretionary Accruals ◽  
Content Type ◽  
Positive Effects ◽  
Audit Firms ◽  
Public Company ◽  
The Usa ◽  
Big Four

Purpose The purpose of this paper is to investigate the extent to which the transition from self-regulation to heteronomy has changed the gap in audit quality between Big Four and non-Big Four auditors. Design/methodology/approach This study analyzes publicly held companies in the USA between 1999 and 2012 using univariate analysis, multivariate analysis and quantile regression analysis. Audit quality is measured with discretionary accruals. Findings This study shows an insignificant difference in audit quality between the clients of Big Four and non-Big Four auditors after Public Company Accounting Oversight Board (hereafter, PCAOB) began its operations. In the analysis of the effects of PCAOB inspections on the audit quality of audit firms that are inspected annually and triennially, the findings show that the inspections have more positive effects when carried out annually. This suggests that the frequency of inspection is positively associated with audit quality. Overall, these results provide evidence that recent improvements in audit quality have been caused by changes in regulatory standards. Originality/value The paper provides three major original contributions. First, the authors add to the literature on audit quality by further demonstrating a reduced gap in audit quality between Big Four and non-Big Four audit firms due to heteronomy. Secondly, this study contributes to the debate as to whether independent inspections on audit firms are beneficial or not and suggests that the PCAOB inspections help increase audit quality. Finally, the results of this work contribute to the growing literature examining discretionary accruals.

Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees

2015 ◽  
Vol 91 (3) ◽  
pp. 767-792 ◽  
Author(s):  
Kenneth L. Bills ◽  
Lauren M. Cunningham ◽  
Linda A. Myers
Keyword(s):  
Audit Quality ◽  
Matched Control ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Audit Firm ◽  
Association Member ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
Control Samples

ABSTRACT In this study, we examine the benefits of membership in an accounting firm association, network, or alliance (collectively referred to as “an association”). Associations provide member accounting firms with numerous benefits, including access to the expertise of professionals from other independent member firms, joint conferences and technical trainings, assistance in dealing with staffing and geographic limitations, and the ability to use the association name in marketing materials. We expect these benefits to result in higher-quality audits and higher audit fees (or audit fee premiums). Using hand-collected data on association membership, we find that association member firms conduct higher-quality audits than nonmember firms, where audit quality is proxied for by fewer Public Company Accounting Oversight Board (PCAOB) inspection deficiencies and fewer financial statement misstatements, as well as less extreme absolute discretionary accruals and lower positive discretionary accruals. We also find that audit fees are higher for clients of member firms than for clients of nonmember firms, suggesting that clients are willing to pay an audit fee premium to engage association member audit firms. Finally, we find that member firm audits are of similar quality to a size-matched sample of Big 4 audits, but member firm clients pay lower fee premiums than do Big 4 clients. Our inferences are robust to the use of company size-matched control samples, audit firm size-matched control samples, propensity score matching, two-stage least squares regression, and to analyses that consider changes in association membership. Our findings should be of interest to regulators because they suggest that association membership assists small audit firms in overcoming barriers to auditing larger audit clients. In addition, our findings should be informative to audit committees when making auditor selection decisions, and to investors and accounting researchers interested in the relation between audit firm type and audit quality.

Does client industry importance affect auditor independence?

2019 ◽  
Vol 35 (4) ◽  
pp. 575-595
Author(s):  
Qiang Cao ◽  
Nanwei Hu ◽  
Lizhong Hao
Keyword(s):  
Design Methodology ◽  
Discretionary Accruals ◽  
Auditor Independence ◽  
Data Availability ◽  
Research Setting ◽  
Difference Model ◽  
Limited Sample ◽  
Content Type ◽  
Audit Firm ◽  
The Impact

Purpose The purpose of this paper is to examine whether client industry importance affects auditor independence. Design/methodology/approach This study analyzes audit firm merger data from China Stock Market and Accounting Research and uses a difference-in-difference model to find whether client industry importance is associated with auditor independence. This study uses discretionary accruals and propensity to issue modified audit opinions as proxies for auditor independence. Findings Results show that the greater the decline in client industry importance, the more significant the increase in auditor independence. In addition, the magnitude of decline in client overall importance is also positively associated with the extent of increase in auditor independence; however, this result disappears after controlling for client industry importance. Research limitations/implications The authors acknowledge that this study has limitations. First, audit firm mergers provide a unique research setting. However, the findings of this study in such setting may not be generalizable to other situations. Second, this study has a limited sample size because of data availability, which could impact the robustness of the results. Originality/value Results from this study are important because investors and regulators have increasing concerns over auditor independence since the Enron scandal. To the best of the authors’ knowledge, this study is the first to examine the impact of client industry importance on auditor independence and in a unique setting of audit firm merger to separate auditor independence from auditor competence, and hence controlling for self-selection bias. Results of this study provide evidence that client industry importance has significant influence over auditor independence.

Auditor rotations and audit quality

2019 ◽  
Vol 27 (4) ◽  
pp. 639-660 ◽  
Author(s):  
Devi Sulistyo Kalanjati ◽  
Damai Nasution ◽  
Karin Jonnergård ◽  
Soegeng Sutedjo
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Stock Exchange ◽  
Multivariate Regression Analysis ◽  
Cumulative Number ◽  
Firm Level ◽  
Content Type ◽  
Audit Firm ◽  
Audit Firms ◽  
Using Data

Purpose The purpose of this paper is to investigate the association between audit rotation – at the audit partner and audit firm level – and audit quality. As mentioned in the literature, audit rotation has several benefits, and one of them is it can bring a fresh look to audit tasks and subsequently improve audit quality. Moreover, audit itself can help a client to improve its financial reporting. However, ineffective communication between predecessor and successor audit partners or audit firms, and pseudo-rotation can hamper that benefit. Design/methodology/approach This study uses multivariate regression analysis to test its hypotheses. Using data from companies listed on the Indonesia Stock Exchange, the sample consists of 688 company-year observations covering the period 2003–2016. Findings This study finds that the cumulative number of audit partner rotations is positively associated with audit quality, indicating that rotations at the audit partner level will enhance audit quality. Conversely, it finds that the cumulative number of audit firm rotations is negatively associated with audit quality. Practical implications The study’s findings may assist regulators in crafting standards regarding audit rotation. As the findings show, audit partner rotation will improve audit quality, but the audit firm rotation will decrease audit quality. As this study tries to explain the decreasing audit quality from audit firm rotation could be a consequence of ineffective communication or pseudo audit firm rotation. Regulators should try to tackle these problems. Originality/value Instead of using tenure as a proxy for a rotation, this study creates a new proxy named the cumulative number of audit partner and audit firm rotations to provide evidence on the benefits of audit rotation.

The association between PCAOB-identified audit deficiencies and small audit firms’ characteristics

2014 ◽  
Vol 29 (8) ◽  
pp. 717-735 ◽  
Author(s):  
Fei Kang ◽  
Magdy Farag ◽  
Robert Hurt ◽  
Cheryl Wyrick
Keyword(s):  
Human Capital ◽  
Audit Quality ◽  
Limited Liability ◽  
Organization Structure ◽  
Firm Characteristics ◽  
Firm Level ◽  
Content Type ◽  
Negatively Associated ◽  
Audit Firm ◽  
Audit Firms

Purpose – The purpose of this study is to examine the association between certain audit firm characteristics and the number of Public Company Accounting Oversight Board (PCAOB)-identified audit deficiencies. Design/methodology/approach – Using a hand-collected sample of PCAOB inspection reports for small audit firms with 100 or less issuer clients from 2007 through 2010, an ordinary least squares model is applied by regressing the number of deficiencies on a set of audit firm characteristics. Findings – Results show that the number of PCAOB-identified audit deficiencies is positively associated with the number of issuer clients and negatively associated with the number of branch offices, the human capital leverage and the organization structure as Limited Liability Partnership firms. Additional analysis also shows that the PCAOB inspection length is positively associated with the number of deficiencies, the number of branch offices and the number of issuer clients, but negatively associated with the organization structure as limited liability company firms. Moreover, the PCAOB inspection lag is positively associated with the number of deficiencies and the number of issuer clients. Research limitations/implications – Results of this study cannot be generalized beyond public accounting firms with 100 or fewer issuer clients. In addition, there is a possibility that other measurements of firm-level characteristics that impact the number of PCAOB-identified audit deficiencies were not captured in the study. Practical implications – This study explains the association between audit firm characteristics and PCAOB-identified audit deficiencies. Our results caution small audit firms about not having enough professional staff, low human capital leverage and serving too many issuer clients, as those factors may potentially impair audit quality. Originality/value – This study helps to explain the relationship between audit deficiencies and controllable, measurable firm-level characteristics. It is, therefore, differentiated from previous studies, most of which were focused on PCAOB-identified audit deficiencies as measures of audit quality and stakeholder reactions to PCAOB reports.

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