Auditor Choice and the Informativeness of 10-K Reports

2021 ◽  
pp. 0148558X2110624
Author(s):  
Karel Hrazdil ◽  
Dan A. Simunic ◽  
Nattavut Suwanyangyuan
Keyword(s):  
Financial Reporting ◽  
Audit Fees ◽  
Annual Reports ◽  
Client Characteristics ◽  
Cross Sectional ◽  
Accrual Quality ◽  
Auditor Choice ◽  
Joint Product ◽  
Big 4

This study provides new evidence on the influential role of external auditors in enhancing the informativeness of form 10-K annual reports to shareholders. Specifically, we find that the client’s choice of a Big 4 auditor (PwC, EY, KPMG, and Deloitte) versus a non-Big 4 auditor contributes to cross-sectional variations in 10-K disclosure volume. We also document that the benefit of enhanced disclosures provided by Big 4 auditors is more pronounced for audit clients with poorer accrual quality and those with higher information asymmetry. Furthermore, we introduce the portion of 10-K length unexplained by operating complexity and observable client characteristics as a new proxy for audit firm effort. Specifically, we find that abnormally long disclosures are associated with higher audit fees and longer audit report lag, which implies that an incremental level of audit effort can be inferred from the discretionary component of 10-K disclosures. As audit effort is costly, a greater volume of 10-K disclosures can be expected to be associated with an improvement in the quality of financial reporting. Overall, our findings show that auditors play more than a simple attestation role in the financial reporting process, and that the quality of financial reporting in a company’s 10-K annual report is a joint product of the effort and decisions of both a company’s managers and its auditors.

The quality of earnings in Shariah-compliant companies: evidence from Malaysia

2015 ◽  
Vol 6 (1) ◽  
pp. 19-41 ◽  
Author(s):  
Wan Adibah Wan Ismail ◽  
Khairul Anuar Kamarudin ◽  
Siti Rahayu Sarman
Keyword(s):  
Financial Reporting ◽  
Earnings Quality ◽  
Reporting Quality ◽  
Quality Model ◽  
High Quality ◽  
Cross Sectional ◽  
Accrual Quality ◽  
Content Type ◽  
Reported Earnings

Purpose – The purpose of this study is to examine the quality of reported earnings in the corporate reports of Shariah-compliant companies listed on Bursa Malaysia. Design/methodology/approach – This study hypothesises that companies with Shariah compliance status have higher quality of earnings because of greater demand for and supply of high-quality financial reports. The quality of reported earnings is measured using the cross-sectional Dechow and Dichev (2002) accrual quality model. The study uses a balanced panel data of 3,048 observations from 508 companies during a six-year period of 2003-2008. Findings – This paper finds robust evidence that Shariah-compliant companies have significantly higher earnings quality compared to other firms. The results provide support for the arguments that Shariah-compliant companies supply a higher quality of reported earnings to attract foreign investment, have greater demand for high-quality financial reporting because of their Shariah status and are subject to greater scrutiny by regulators and institutional investors. Research limitations/implications – This study contributes to the existing literature on Islamic capital market, business ethics, firms’ governance and financial reporting quality. The study would give a better understanding on issues relating to earnings quality of Shariah-compliant companies and would be especially useful for financial statement users, including investment analysts. Originality/value – This paper provides evidence on the quality of earnings in Shariah-compliant companies and offers new arguments that explain why such companies possess higher quality of earnings compared to their counterparts.

scholarly journals Audit Quality And Accrual Quality: Do Big 4 Auditors Indeed Enhance Accrual Quality Of ‘Powerful’ Clients?

2017 ◽  
Vol 33 (2) ◽  
pp. 343-350 ◽  
Author(s):  
Sorah Park
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Stock Exchange ◽  
Accrual Quality ◽  
External Auditors ◽  
Big 4 ◽  
Accounting Scandals ◽  
Quality Of Accounting Information ◽  
Audit Reports

External auditors are considered ‘watchdogs’ which closely monitor corporate financial reporting process and provide guidelines for investors and financial institutions. However, recent accounting scandals in Korea indicate that external auditors may cater their audit reports to their clients’ needs. Based on a sample of listed companies on the Korea Stock Exchange from 2001 to 2010, this study finds the evidence consistent with such conjecture. First, large business conglomerates in Korea (so called ‘chaebols’) audited by Big 4 have lower accrual quality than the others, indicating that Big 4 auditors may not serve as watchdogs to enhance accrual quality of ‘powerful’ clients. However, powerful clients who pay greater non-audit service fees to Big 4 auditors have higher accrual quality than the others. This result suggests that non-audit services provided by Big 4 may not necessarily harm the quality of accounting information, contrary to the traditional view in the literature.

scholarly journals A longitudinal study of audit quality differences among independent auditors

2019 ◽  
Vol 21 (2) ◽  
pp. 234-246 ◽  
Author(s):  
Manh Dung Tran ◽  
Khairil Faizal Khairi ◽  
Nur Hidayah Laili
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Financial Statements ◽  
Cross Sectional ◽  
Content Type ◽  
Listed Firms ◽  
Goodwill Impairment ◽  
Big 4 ◽  
High Level

Purpose The purpose of this paper is to investigate the differences of audit quality of financial statements among auditors, including Big 4 and non-Big 4 auditors. Design/methodology/approach By employing cross-sectional analysis of compliance (a proxy of audit quality) of goodwill impairment testing of listed firms in the context of Hong Kong, the variation of audit quality of financial statements of auditees has been shown. Findings Audit quality of Big 4 auditors is viewed to be higher than that of non-Big 4 audit firms and the homogeneity of audit quality among Big 4 auditors is not long accepted, but variation. Practical implications Even though unqualified opinions have been given on the auditors’ reports, the quality of financial statements audit is a skeptical issue because of the high level of non-compliance of goodwill impairment testing under International Financial Reporting Standards. Originality/value This study does emphasize the higher audit quality of financial statements of Big 4 auditors than that of non-Big 4 auditors and stresses the variation of audit quality among Big 4 auditors.

scholarly journals Accounting quality versus auditor choice under strong tax-GAAP conformity: the case of Brazil

2007 ◽  
Vol 18 (43) ◽  
pp. 84-96 ◽  
Author(s):  
Carlos Mello-E-Souza
Keyword(s):  
Financial Reporting ◽  
Discretionary Accruals ◽  
Reporting Standards ◽  
Accounting Quality ◽  
Cross Sectional ◽  
Strong Linkage ◽  
Auditor Choice ◽  
Financial Reporting Standards ◽  
Big 4 ◽  
The Cross

Brazilian companies with a Big 4 auditor have better accounting quality than those with a local auditor, when accounting quality is measured either by compliance with GAAP or by conservatism. However, the cross-sectional pattern of discretionary accruals-often used to measure accounting quality in other countries-is unrelated to quality in Brazil. In fact, companies with Big 4 auditors tend to recognize income more aggressively than companies with a local auditor. This is the opposite of what happens in other countries and it is consistent with local auditors interpreting the tax code (rather than GAAP) more aggressively than Big 4 auditors, due to the strong linkage that exists between the Brazilian tax code and financial reporting standards.

U.S.-Listed Foreign Companies' Choice of a U.S.-Based versus Home Country-Based Big N Principal Auditor and the Effect on Audit Fees and Earnings Quality

2015 ◽  
Vol 29 (3) ◽  
pp. 631-666 ◽  
Author(s):  
Sharad C. Asthana ◽  
K. K. Raman ◽  
Hongkang Xu
Keyword(s):  
Financial Reporting ◽  
Home Country ◽  
Earnings Quality ◽  
Audit Fees ◽  
Foreign Companies ◽  
Two Factors ◽  
Just Price ◽  
Reporting Environment ◽  
The U.S

SYNOPSIS We examine why U.S.-listed foreign companies choose to have a U.S.-based (rather than home country-based) Big N firm as their principal auditor for SEC reporting purposes and the effects of that choice for audit fees and earnings quality. We find that the likelihood of the Big N principal auditor being U.S.-based is decreasing in client size and the level of investor protection in the home country, and increasing in the proportion of income earned outside the home country. We also find compelling evidence that U.S.-based Big N auditors are associated with higher-quality earnings (albeit for a higher fee), despite two factors—the greater distance between the U.S.-based (vis-à-vis home country-based) Big N auditor and the client, and the likelihood that much of the audit work is done outside the U.S.—which potentially could lower the earnings quality of the U.S.-listed foreign client when the Big N principal auditor is U.S.-based. Overall, our study suggests that the higher fees associated with a U.S.-based Big N principal auditor is not just price protection; rather, U.S.-based Big N principal auditors are also improving the financial reporting environment by reporting higher-quality audited earnings for their U.S.-listed foreign clients. JEL Classifications: L11; L15; M42.

Determinants of audit fees in quoted financial and non-financial firms

2021 ◽  
Vol 3 (2) ◽  
pp. 30-40
Author(s):  
Wasiu Ajani Musa ◽  
Ramat Titilayo Salman ◽  
Ibrahim Olayiwola Amoo
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Secondary Data ◽  
Sampling Technique ◽  
Audit Fees ◽  
Three Dimensions ◽  
Annual Reports ◽  
Lagrangian Multiplier ◽  
Financial Firms ◽  
Lm Test

Regulators have ensured the compulsory disclosure of audit fees in the financial statement to overcome abnormal fees and instill credibility in the financial report since audit pricing is contingent upon audit quality. However, discrepancies between audit fee dimensions are evidenced in the abnormal audit fees, resulting in accounting scandals. Hence, this study assessed the determinants of audit fees in quoted financial and non-financial firms by building a model underpinned by agency theory (Mitnick, 2006) and economic theory of product differentiation (Beath & Katsoulacos, 1991). Secondary data were utilized from companies’ annual reports between 2009 and 2018 using the purposive sampling technique. Furthermore, Breusch-Pagan Lagrangian multiplier (LM) test and the Hausman test indicated the consistency of the models. The static panel regression estimations showed that auditee size, risk, auditor size, reputation, engagement lag, and International Financial Reporting Standards (IFRS) implementation significantly affect audit fees in both sectors. This study concluded that the three dimensions largely determine audit fees. This study instructively proposed that assurance clients should devise an outline of guidelines and practices to guide activities in the sectors by monitoring the variables that impact audit fees

scholarly journals Opportunities to improve the measurement of audit quality: a call for collaboration between the profession and academics

2016 ◽  
Vol 90 (9) ◽  
pp. 352-351 ◽  
Author(s):  
Jeroen van Raak ◽  
Ulrike Thürheimer
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Class Action ◽  
Financial Statement ◽  
Accrual Quality ◽  
Wide Range ◽  
External Stakeholders ◽  
Insight Into ◽  
Considerable Doubt

Audit research relies on a wide range of publicly available measures to examine which factors influence the quality of financial statement audits. While research to date has to rely largely on remote proxies due to a lack of access to proprietary data, there is considerable doubt about the validity of these proxies and the inferences drawn based on these proxies. In order to provide insight into the reliability of these measures, Rajgopal, Srinivasan & Zheng (2015) investigate whether commonly used proxies for audit quality (i.e. auditor size, abnormal audit fees, accrual quality, and the propensity to meet and beat analyst targets) are associated with deficiencies reported in SEC investigations and class-action lawsuits. Such alleged deficiencies reflect how external stakeholders assess audit performance. Their study indicates that the use of such proxies is highly problematic and that the performance of these measures, with the exception of auditor size, is poor.

Family ownership and financial reporting quality: Iranian evidence

2018 ◽  
Vol 8 (3) ◽  
pp. 339-356 ◽  
Author(s):  
Mahmoud Mousavi Shiri ◽  
Mahdi Salehi ◽  
Fatemeh Abbasi ◽  
Shayan Farhangdoust
Keyword(s):  
Financial Reporting ◽  
Family Firms ◽  
Stock Exchange ◽  
Accounting Information ◽  
Reporting Quality ◽  
Audit Fees ◽  
Financial Reporting Quality ◽  
Family Ownership ◽  
Content Type

PurposeIn the process of reporting accounting information, the auditor’s objective is to detect possible misstatements and errors in accounting information. Audit evidence aids auditors in providing reasonable assurance about the quality of financial reporting. Studying the quality of family firms’ financial reporting is of higher importance relative to non-family firms due to lower risk of accounting manipulation. Therefore, the purpose of this paper is to examine the relationship between family ownership structure and financial reporting quality from an auditing perspective.Design/methodology/approachTo analyze the research hypotheses, the authors use a sample data consisted of 221 companies listed on the Tehran Stock Exchange (including 52 family and 169 non-family firms) over a five-year span from 2011 to 2015.FindingsUsing multivariate regression analysis of panel data, our results indicate that audit risk in family firms is lower than their counterparts. Likewise, the findings are indicative of lower audit fees paid by family firms as compared to non-family ones. The authors also find that auditors put more effort in family firms and thus audit effort is more significant for these kinds of firms.Originality/valueThe study focuses on family ownership and financial reporting quality in a developing country like Iran and the results of the study may be beneficial to other developing nations, as Iran stock market possesses some unique features which are not normally prevailing in other equity markets, even in the Middle East.

The efficiency of corporate boards and firms’ audit fees: the case of the FTSE financial institutions

2018 ◽  
Vol 30 (3) ◽  
pp. 297-317 ◽  
Author(s):  
Rabih Nehme ◽  
Mohammad Jizi
Keyword(s):  
Financial Institutions ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Financial Statements ◽  
Audit Fees ◽  
Governance Structure ◽  
Negative Consequences ◽  
Reverse Causality ◽  
Content Type

Purpose The quality of financial reporting for the financial institutions is vital for the public, as the negative consequences of manipulated financial statements will not only affect shareholders but also the regulators’ reputation and the society at large. The purpose of this paper is to assess the association between different corporate governance mechanisms and their impact on audit and reporting quality. The gender factor is introduced from a diverse boards’ perspective to highlight any impact of female presence on the quality of financial statements. Design/methodology/approach The authors examine a sample of financial institutions listed on the FTSE-350 index for the years 2011 to 2015. The financial sector has its own and different regulations, and financial reporting framework and auditors are expected to behave into more scrutiny. Bloomberg database is used to obtain governance and financial data, while firms’ annual reports are used to collect audit fees and audit committee information. A panel data regression is used to test hypotheses. The authors also control for unobservable heterogeneity, reverse causality and endogeneity. Findings The results suggest that boards with larger size and higher independence pay higher audit fees to enhance the monitoring capacity and protect the wider group of stakeholders. The results also show that women on boards are likely to reduce the risk of manipulated financial statements, as women are more inclined toward truthfulness, cautiousness and conservatism. In addition, the reported results show that audit committees with more independent members are more inclined toward obtaining higher quality audit to enhance firm’s reporting quality. Originality/value Given the recent governments’ intervention to avoid financial institutions’ negative impact on the economy, this study is relevant and provide policymakers insights into the existing relationships between audit fees and financial institutions’ governance structure.

Goodwill Impairment and Audit Effort

2021 ◽  
Author(s):  
Al (Aloke) Ghosh ◽  
Cunyu Xing
Keyword(s):  
Audit Fees ◽  
Evidence Based ◽  
Cross Sectional ◽  
Goodwill Impairment ◽  
Effort Level ◽  
Big 4 ◽  
Auditor Quality ◽  
Survey Responses

Using abnormal audit fees to capture any added charges associated with incremental audit effort beyond the effort level needed under normal or expected circumstances, we find that the incremental audit effort is positively associated with goodwill to total assets. Additionally, when goodwill is impaired, auditors exert incrementally more effort for testing the magnitude of a goodwill impairment loss than when goodwill is not impaired. Further, we document predictable temporal and cross-sectional variations in audit effort with goodwill. As the standards on accounting for goodwill became more (less) stringent, there is a corresponding increase (decrease) in audit effort. The effort also varies cross sectionally with auditor quality (Big 4 versus non-Big 4). Using audit delay as an alternative proxy for audit effort, we find that only a goodwill impairment loss is associated with longer audit delays. Finally, we provide corroborating evidence based on survey responses obtained from expert auditors. Our results contradict the perception that auditors do not exert incrementally more effort when testing goodwill for impairment.

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