The Impact of Litigation against an Audit Firm on the Market Value of Nonlitigating Clients

1998 ◽  
Vol 13 (2) ◽  
pp. 117-134 ◽  
Author(s):  
Diana R. Franz ◽  
Dean Crawford ◽  
Eric N. Johnson
Keyword(s):  
Audit Quality ◽  
Market Value ◽  
Market Response ◽  
Publicly Traded ◽  
Audit Firm ◽  
Audit Failure ◽  
A Value ◽  
The Impact ◽  
Private Litigation ◽  
Over Time

This study investigates how litigation against an audit firm affects the market value of its publicly traded clients. We examine the impact of private litigation alleging audit failure on the audit firm's clients not involved in the lawsuit. Our results indicate that clients not involved in the litigation experience significant negative returns at the announcement of litigation against their audit firm. These results suggest that the market interprets litigation against an audit firm as a signal of decreased audit quality and that the market places a value on audit quality when pricing a firm's securities. The results are also consistent with an audit insurance explanation, which views the audit firm as a source of potential financial indemnification to investors and predicts that damage to the auditor's underwriting ability will be reflected in reduced securities prices for the firm's clients. When the analysis was restricted to companies in the same industry where the alleged audit failure occurred, the market response is significantly more negative when the audit firm is considered a specialist in that industry than when the audit firm is not a specialist. Finally, the market response is weaker later in the sample period, consistent with the findings of prior research that the frequency of nonmeritorious suits has increased over time.

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.

Clients' Expectations on Audit Judgments: A Note

2004 ◽  
Vol 16 (1) ◽  
pp. 63-74 ◽  
Author(s):  
Venkataraman M. Iyer ◽  
Dasaratha V. Rama
Keyword(s):  
Audit Quality ◽  
Financial Statements ◽  
Early Years ◽  
Relative Power ◽  
Client Perceptions ◽  
Audit Firm ◽  
Auditor Tenure ◽  
Start Up ◽  
Nonaudit Services ◽  
The Impact

Audited financial statements can be viewed as the product of negotiations between a company's management and its auditor. Relative power of these two parties is a major factor that determines the outcome of the negotiation. This study examines the impact of auditor tenure, importance of a client to an audit partner, nonaudit purchases, and prior audit firm experience of client personnel on client perceptions about their ability to persuade the auditor in the context of an accounting disagreement. We obtained responses to a survey from 124 CPAs in industry who are employed as CEOs, CFOs, controllers, or treasurers. Our results indicate that respondents from companies with short auditor tenures were somewhat more likely to indicate that they could persuade the auditor to accept their (client's) position in case of a disagreement. This finding is consistent with the argument that auditors are susceptible to influence in the early years as they are still in the process of recouping start-up costs, but is not consistent with concerns expressed by legislators and others that long auditor tenures will adversely affect audit quality. Respondents who believed their business was more important for the audit partner were also more likely to believe that they could persuade the auditor. However, the purchase of nonaudit services and prior audit experience were not related to client's perceptions about their ability to persuade the auditor.

The Impact of PCAOB AS5 and the Economic Recession on Client Portfolio Characteristics of the Big 4 Audit Firms

2013 ◽  
Vol 32 (4) ◽  
pp. 95-127 ◽  
Author(s):  
Joseph H. Schroeder ◽  
Chris E. Hogan
Keyword(s):  
Financial Risk ◽  
Economic Recession ◽  
Data Availability ◽  
Publicly Traded ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Risk Characteristics ◽  
The Impact

SUMMARY We examine the impact of PCAOB Auditing Standard No. 5 (AS5) and the economic recession on risk characteristics and degree of auditor/client misalignment in the publicly traded client portfolios of Big 4 firms. AS5 and the economic recession both likely resulted in an increase in audit firm personnel capacity as well as a decline in current and future revenue prospects, leading to concerns that the Big 4 firms may pursue clients that present greater risk to the portfolio. We find that the overall portfolio in 2009 presents greater financial risk, attributable to the impact of the recession on continuing clients. A net decrease in audit and auditor business risks is also attributable to continuing clients over this period, as increases for new clients are offset by reductions due to departing clients. Overall, the results, which should be of interest to regulators, indicate that Big 4 firms continued to balance their portfolio with risk in mind. Data Availability: Data are publicly available from sources identified in the paper.

scholarly journals Faktor – Faktor Yang Mempengaruhi Real Earnings Management Pada Perusahaan Manufaktur di BEI

2020 ◽  
Vol 25 (2) ◽  
pp. 163
Author(s):  
Linda Santioso, Emily Janice, Andreas Bambang Daryatno
Keyword(s):  
Earnings Management ◽  
Firm Size ◽  
Audit Committee ◽  
Audit Quality ◽  
T Test ◽  
Real Earnings Management ◽  
External Audit ◽  
Audit Firm ◽  
Financial Expertise ◽  
The Impact

This research aims to find out and analyze the impact of audit committee financial expertise, audit quality that is proxied by external audit firm size, and profitability on real earnings management. The method used in this research was purposive sampling with a total sample of 59 manufacturing companies listed in Indonesian Stock Exchange (IDX). The type of data used was secondary data acquired through financial statements extracted from www.idx.co.id. Data analysis methods used in this research were classical assumption analysis, descriptive statistical test, f test, t test, and the test of determination coefficient. T test was used to test this study’s hypothesis. Final result of the study showed that audit committee financial expertise and audit quality proxied by external audit firm size do not have any significant effect on real earnings management, while profitability has been shown to have a positive effect on real earnings management.

scholarly journals Audit Fees and Financial Performance of Deposit Taking Saccos in North RIFT, Kenya

2020 ◽  
Vol 6 (5) ◽  
pp. 15-27
Author(s):  
Dorris Serem ◽  
Dr. Rashid Fwamba ◽  
Dr. Alala Benedict
Keyword(s):  
Financial Performance ◽  
Audit Quality ◽  
Secondary Data ◽  
Financial Statements ◽  
Audit Fees ◽  
Positive Influence ◽  
Auditor Independence ◽  
Audit Firm ◽  
Firm Experience ◽  
The Impact

The collapse of Deposit-Taking SACCOS and financial institutions in Kenya has caught the attention of the public and supervisory agencies to query the quality of audit. SACCO Societies Regulatory Authority on its inspection report indicated that SACCOs have been implicated in maladministration, scams and fraudulent dealings that led to their eventual collapse. SASRA also revoked licenses and rejected audited financial statements of some Deposit Taking SACCOs between 2013 to 2017.These financial scandals have been traced to poor audit quality. The study aimed to test the impact of audit quality on financial performance of Deposit-Taking SACCOs in North Rift Region, Kenya. The study sought to establish the influence of audit fees on financial performance; determine the influence of audit firm tenure on financial performance; establish the influence of auditor independence on financial performance and to determine the influence of audit firm experience on financial performance of Deposit-Taking SACCOs in North Rift Region, Kenya. This study was based on Agency theory, Role theory and the Concept of audit expectation gap, and Stakeholders’ theory. This research adopted descriptive cross-sectional research design. The target population for the study was 266 staff of all the 16 registered Deposit-Taking SACCOs in North Rift Region, Kenya. The sample size was 48 respondents comprising of chief executive officers, finance officers and internal auditors of the Deposit-Taking SACCOs selected using purposive sampling method. Primary and secondary data was used. Questionnaires collected primary data while audited annual financial statements of SACCOs provided secondary data. Inferential and descriptive statistics was used in analyzing data through SPSS version 25. It emerged that audit fees, audit firm tenure and audit firm experience have a significant positive influence on financial performance of Deposit-Taking SACCOs in North Rift Region, Kenya. Auditor independence had an insignificant positive influence on financial performance of Deposit-Taking SACCOs in North Rift Region, Kenya. The study concluded that audit quality has a positive noteworthy impact on financial performance of Deposit-Taking SACCOs in Kenya. The study recommends that regulatory authorities should formulate strict rules on audit fee charges and oversee the implementation of the same. Also, SASRA should ensure DT-SACCOs implement auditor rotation in compliance with auditing regulations and standards. DT-SACCOs to consider auditor’s professional competence and experience before initiating any audit engagement. Finally, DT-SACCOs and auditors should reinforce the professional code of ethics in regard to auditor independence in terms of familiarity between auditor and the client that may lead audit work into jeopardy.

The Effect of Form AP on Auditor Liability when Engagement Partner Disclosure Shows a History of Restatements

2021 ◽  
Author(s):  
Michael J Mowchan ◽  
Philip M.J. Reckers
Keyword(s):  
Audit Quality ◽  
Auditor Liability ◽  
Audit Firm ◽  
Audit Failure ◽  
Partner Disclosure ◽  
History Of ◽  
Catch 22 ◽  
New Form ◽  
A Current

Engagement partner disclosures required by the new Form AP allow litigants to associate audit engagement partners with both current and past restatements. We investigate how knowledge of a partner's history of restatements, along with audit firm interventions following poor audit quality, impact audit firm liability in litigation stemming from a partner's second, unrelated client restatement. Interestingly, we do not find that a partner's association with a current and past restatement, alone, increases audit firm liability. However, we do find that jurors interpret firm interventions intended to restore audit quality as indicators that the partner contributed to the second audit failure and that audit firm oversight was inadequate. Specifically, we find that both requiring a probationary engagement co-partner after an initial restatement and partner dismissal after a second restatement individually increase juror assessments of audit firm liability. Collectively, our findings represent a Catch-22 of Form AP engagement partner disclosure, whereby audit firm interventions to restore audit quality are expected by regulators, but can increase auditor liability in subsequent litigation settings.

Tax services, consequence severity, and jurors' assessment of auditor liability

2013 ◽  
Vol 29 (1) ◽  
pp. 50-75 ◽  
Author(s):  
John M. Thornton ◽  
Michael K. Shaub
Keyword(s):  
Audit Quality ◽  
Auditor Independence ◽  
Tax Planning ◽  
Court Case ◽  
Content Type ◽  
Auditor Liability ◽  
Audit Failure ◽  
The Impact ◽  
Independence In Appearance

Purpose – The purpose of this research is to determine whether the type of tax services provided by a public accounting firm to its audit client and the consequence severity of an audit failure impact jurors' assessment of audit quality and auditor liability. Design/methodology/approach – The authors administer a court case to 168 jurors manipulating three levels of tax services provided to an audit client (none, tax preparation, and aggressive tax planning services); two levels of consequence severity of the alleged audit failure, observing the impact on jurors' assessment of audit quality, auditor responsibility for audit failure; and damages awarded the plaintiff. Findings – Consistent with recent US regulations, jurors perceive the quality of the audit to be lower when auditors provide aggressive tax planning services, but not for tax preparation services. Damages are greater when auditors provide aggressive tax planning services across both levels of consequence severity. Research limitations/implications – The results indicate that the type of tax services provided may impact jurors' views of audit quality and damage assessments against auditors. The questionnaire uses previously validated measures, but the results may not be generalizable to jurors in all jurisdictions. Practical implications – Though empirical evidence is mixed at best about the impact of auditors providing non-audit services on auditor independence in fact, auditor independence in appearance, and thus audit quality, such impacts may affect the way jurors perceive the situation. Originality/value – The study directly tests the implications for auditor liability of new restrictions on tax services and more accurately measures the impact of consequence severity, using actual jurors.

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.

Threats to Auditor Independence: The Impact of Relationship and Economic Bonds

2011 ◽  
Vol 30 (1) ◽  
pp. 121-148 ◽  
Author(s):  
Ping Ye ◽  
Elizabeth Carson ◽  
Roger Simnett
Keyword(s):  
Audit Quality ◽  
Joint Effect ◽  
Auditor Independence ◽  
Audit Firm ◽  
Going Concern ◽  
Long Duration ◽  
Going Concern Opinion ◽  
Negative Effect ◽  
Nonaudit Services ◽  
The Impact

SUMMARY: This study examines the association of a comprehensive set of auditor-client relationship bonds (audit firm tenure, audit engagement partner tenure, long duration director-auditor relationships, and alumni affiliation) with the level of economic bonds provided to an audit client (nonaudit services [NAS]). We further examine the effect of these economic and relationship bonds on auditor independence in the context of nonaudit services fees and the propensity to issue going-concern opinions. It is these economic and relationship bonds that have attracted the interest of regulators in their consideration of audit quality. This study was undertaken in Australia in 2002, which provided a context in which all these relationships could be examined before new regulations were introduced. Results show that audit firm tenure and alumni affiliation are associated with clients purchasing auditor-provided NAS, with stronger associations for clients with low agency costs. We further find that long audit engagement partner tenure and a joint effect of auditor-provided NAS and alumni affiliation have a negative effect on the auditor’s propensity to issue a going-concern opinion.

scholarly journals Determinants Of Enforcement Action By The Financial Supervisory Service Of Korea From The Perspective Of Audit Firms

2015 ◽  
Vol 31 (3) ◽  
pp. 821 ◽  
Author(s):  
Min-Jung Kang ◽  
Ho-Young Lee ◽  
Yong-Sang Woo
Keyword(s):  
Audit Quality ◽  
Financial Statements ◽  
Audit Fees ◽  
Firm Characteristics ◽  
Client Characteristics ◽  
Audit Firm ◽  
Audit Failure ◽  
Enforcement Action ◽  
Audit Firms ◽  
Specific Factors

<p>In this study, we examine the determinants of enforcement action by the Financial Supervisory Service of Korea from the perspective of audit firms. Enforcement action is an indication of audit failure. Both client- and audit firm-specific factors are involved in its occurrence. Most published studies of enforcement after audit failure focus on client characteristics because details about audit firms from financial statements and information about organizational structure are not publicly available. However, examining the issues surrounding enforcement from the perspective of audit firms may also be valuable in elucidating the potential determinants of audit failure resulting in enforcement action. Utilizing publicly available data from audit firms in South Korea, we identify several audit firm characteristics as determinants of enforcement action. The results of our empirical analysis reveal that the likelihood of audit failure is positively associated with the ratio of accounts receivable to total assets, the ratio of audit fees to total revenue, the ratio of partners to the total number of CPAs, CEO ownership, and age of audit firms. In addition, the likelihood of audit failure is negatively associated with ownership concentration and profitability. These associations are more pronounced in non-affiliated audit firms than affiliated audit firms. Several useful implications for regulators are described for improving audit quality by means of enforcement action.</p>

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