Does Increased Audit Partner Tenure Reduce Audit Quality?

2008 ◽  
Vol 23 (4) ◽  
pp. 553-572 ◽  
Author(s):  
David L. Manry ◽  
Theodore J. Mock ◽  
Jerry L. Turner
Keyword(s):  
Audit Quality ◽  
Discretionary Accruals ◽  
Financial Statement ◽  
Risk Level ◽  
Negatively Associated ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Using Data ◽  
International Audit

The Sarbanes-Oxley Act of 2002 requires the lead audit or coordinating partner and the reviewing partner to rotate off the audit every five years so the engagement can be viewed “with fresh and skeptical eyes.” Using data obtained from actual audits by multiple U.S. offices of three large international audit firms, we examine whether there is a relationship between evidence of reduced audit quality, measured by estimated discretionary accruals, and audit partner tenure with a specific client. We find that estimated discretionary accruals are significantly and negatively associated with the lead audit partner's tenure with a specific client. Thus, audit quality appears to increase with increased partner tenure. After controlling for client size and engagement risk, we find audit partner tenure significantly and negatively associated with estimated discretionary accruals only for small clients with partner tenure of greater than seven years, regardless of risk level. We also find that tenure is not significantly associated with estimated discretionary accruals for large clients. This suggests that as partner tenure increases, auditors of small client firms become less willing to accept more aggressive financial statement assertions by managers, and that partner tenure does not affect audit quality for large clients or for shorter-tenure smaller clients. Our results relating to audit partner tenure are consistent with the conclusions about audit firm tenure by Geiger and Raghunandan (2002); Johnson, Khurana, and Reynolds (2002);Myers, Myers, and Omer (2003); and Nagy (2005) and extend their findings by focusing on individual audit partners rather than on audit firms.

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.

The Consequences of Providing Lower-Quality Audits at the Engagement Partner Level

2019 ◽  
Vol 18 (3) ◽  
pp. 63-82 ◽  
Author(s):  
Wuchun Chi ◽  
Ling Lei Lisic ◽  
Linda A. Myers ◽  
Mikhail Pevzner ◽  
Timothy A. Seidel
Keyword(s):  
Audit Quality ◽  
Partner Selection ◽  
Recent History ◽  
Service Experience ◽  
Audit Firm ◽  
Audit Firms ◽  
Increased Risk ◽  
History Of ◽  
Using Data

ABSTRACT Using data from Taiwan, where a long history of engagement partner performance is available, we examine the reputational consequences that engagement partners suffer for having a recent history of past audit failures. We find that when an engagement partner's recent history of poor audit quality is observable to audit clients, they are more likely to lose clients and are less likely to be reassigned to serve other clients of the audit firm over the next five years. We also find that these engagement partners are more likely to stop serving as engagement partners in the next five years, and those who remain in client service experience a reallocation of assignments. Additionally, the clients that these partners continue to serve exhibit increased risk. Overall, our findings suggest that an engagement partner's prior audit quality influences clients' and audit firms' engagement partner selection.

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.

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.

Economic Dependence and Reputation Concern for the Audit Firm, Audit Groups, and Individual Auditors — The Case of Taiwan

2013 ◽  
Vol 16 (02) ◽  
pp. 1350012
Author(s):  
Pei-Gi Shu ◽  
Tsung-Kang Chen ◽  
Wen-Jye Hung ◽  
Tsui-Lin Chiang
Keyword(s):  
Discretionary Accruals ◽  
Economic Dependence ◽  
Accounting Firm ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Auditor Quality ◽  
Client Relationship ◽  
Reputation Concern ◽  
The Individual

Using a sample of 3,274 firm-year data from an internationally renowned accounting firm, we investigate the effects of auditor–client relationship on auditor quality (measured by absolute discretionary accruals (ABSDA)) from the perspectives of audit firm, audit group, and individual auditor, respectively. Our empirical results show that after taking account of the client size effect, the client's fee contribution to audit firm and to audit group is positively related to the client firm's ABSDA. The finding that audit firms and audit groups allow their important clients a higher level of ABSDA supports the economic-dependence hypothesis. Moreover, the economic dependence effect is more saliently found prior to the enactment of 2002 Sarbanes–Oxley Act. Furthermore, the other finding that senior individual auditors require their clients a lower level of ABSDA holds the reputation-concern hypothesis. A synopsis of the overall findings indicates that the argument of economic dependence prevails in the analysis of the audit firm and audit group, while the reputation concern prevails in the analysis of the individual auditor.

scholarly journals Does audit firm size contribute to audit quality? Evidence from two emerging markets

2014 ◽  
Vol 11 (2) ◽  
pp. 108-119 ◽  
Author(s):  
Chen-Chin Wang ◽  
Fan-Hua Kung ◽  
Kai-Hsun Lin
Keyword(s):  
Emerging Markets ◽  
Earnings Management ◽  
Information Asymmetry ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Audit Firm ◽  
Bid Ask Spread ◽  
Audit Firms ◽  
Quality Evidence

This study investigated whether the Big N audit firms in emerging markets can provide audits of high quality and mitigate information risk, by comparing the audit quality of Big N audit firms in Taiwan with those in China. The two countries share a similar cultural background and engage in frequent economic exchange; however, they have different legal systems and institutional environments. This study followed previous research in the use of bid-ask spread and discretionary accruals as proxy variables for information asymmetry and audit quality. Our results indicate that politico-economic differences between Taiwan and China influence the effectiveness of independent auditors when it comes to the mitigation of information asymmetry. Big N audit firms in Taiwan helped to mitigate information asymmetry and provided audit services of higher quality, whereas Big N firms in China were better able to constrain earnings management. Our results indicate that market concentration and market share have a stronger influence on reputation incentive and audit quality than does the size of an audit firm.

The Effect of Mandatory Audit Firm Rotation on Audit Quality and Audit Fees: Empirical Evidence from the Korean Audit Market

2014 ◽  
Vol 33 (4) ◽  
pp. 167-196 ◽  
Author(s):  
Soo Young Kwon ◽  
Youngdeok Lim ◽  
Roger Simnett
Keyword(s):  
Empirical Evidence ◽  
Audit Quality ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Data Availability ◽  
Audit Firm ◽  
Audit Market ◽  
Audit Firms ◽  
Mandatory Rotation ◽  
Mandatory Audit Firm Rotation

SUMMARY: Using a unique setting in which mandatory audit firm rotation was required from 2006–2010, and in which both audit fees and audit hours were disclosed (South Korea), this study provides empirical evidence of the economic impact of this policy initiative on audit quality, and the associated implications for audit fees. This study compares both pre- and post-policy implementation and, after the implementation of the policy, mandatory long-tenure versus voluntary short-tenure rotation situations. Where audit firms were mandatorily rotated post-policy, we observe that audit quality (measured as abnormal discretionary accruals) did not significantly change compared with pre-2006 long-tenure audit situations and voluntary post-rotation situations. Audit fees in the post-regulation period for mandatorily rotated engagements are significantly larger than in the pre-regulation period, but are discounted compared to audit fees for post-regulation continuing engagements. We also find that the observed increase in audit fees and audit hours in the post-regulation period extends beyond situations where the audit firm was mandatorily rotated, suggesting that the introduction of mandatory audit firm rotation had a much broader impact than the specific instances of mandatory rotation. Data Availability: Most of the financial data used in the present study are available from the KIS Value Database. The data for audit hours and fees were drawn from statements of operating results filed with the Financial Supervisory Services (FSS) in Korea.

The Effects of Audit Firms' Knowledge Sharing on Audit Quality and Efficiency

2019 ◽  
Vol 39 (2) ◽  
pp. 51-79 ◽  
Author(s):  
Rong-Ruey Duh ◽  
W. Robert Knechel ◽  
Ching-Chieh Lin
Keyword(s):  
Knowledge Sharing ◽  
Survey Data ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Data Availability ◽  
Audit Firm ◽  
Regulatory Changes ◽  
Audit Firms ◽  
Audit Efficiency ◽  
Analyze Data

SUMMARY This paper examines the effect of knowledge sharing in audit firms on audit quality and efficiency. We analyze data from a survey of audit professionals from 22 audit firms in Taiwan matched to publicly available data on individual audits conducted by those firms. The results indicate that knowledge sharing within an audit firm is positively associated with audit quality as manifested in lower absolute discretionary accruals and the issuance of more unfavorable audit opinions. We also find that knowledge sharing within audit firms is associated with higher audit efficiency as represented by shorter audit lags. More importantly, we find that both higher audit quality and audit efficiency are simultaneously associated with higher levels of knowledge sharing, suggesting that effective knowledge sharing may help to improve both audit quality and audit efficiency. Given the regulatory changes to enhance both audit quality and audit timeliness, these findings have implications for audit firms. Data Availability: Data used in this study are available from public sources. Survey data are available upon request.

How Small Audit Firm Membership in Associations, Networks, and Alliances Can Impact Audit Quality and Audit Fees

2015 ◽  
Vol 9 (2) ◽  
pp. P29-P35 ◽  
Author(s):  
Kenneth L. Bills ◽  
Lauren M. Cunningham
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Audit Committees ◽  
Association Network ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Public Company ◽  
Auditor Selection

SUMMARY This article summarizes “Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees” (Bills, Cunningham, Myers 2015), which examines the association between small audit firm membership in an association, network, or alliance (collectively referred to as an “association”), audit quality, and audit fees. We find that small audit firm association members provide higher-quality audits and charge higher fees than small audit firms that are not members of an association. When compared to similarly sized clients audited by the Big 4, we find that member firms provide audit quality similar to the Big 4 firms, but member firms charge lower fees than their Big 4 counterparts. We caution that these results may not be generalizable to the largest Big 4 clients for which there is not a similarly sized client audited by our sample of small audit firms. We infer audit quality from Public Company Accounting Oversight Board inspections, restatement announcements, and discretionary accruals. Our findings should be of interest to audit committees in charge of auditor selection and to small audit firms interested in the benefits of association membership.

Sign in / Sign up

Export Citation Format

Share Document