Disciplinary Sanctions and Audit Quality: Empirical Evidence from an External Oversight System

A significant body of prior research has shown that audits by the Big 5 (now Big 4) public accounting firms are quality differentiated relative to non-Big 5 audits. This result can be derived analytically by assuming that Big 5 and non-Big 5 firms face different loss functions for “audit failures” and is consistent with a variety of empirical evidence from studies of audit fees, auditor changes, and the stock price reaction to audited earnings. However, there is no existing evidence (of which we are aware) concerning the underlying production differences between Big 5 and non-Big 5 audits. As a result, existing empirical evidence cannot distinguish between the possibility that Big 5 audits are simply perceived to be different (e.g., by investors) or actually differ in how they are produced. Our research objective is to identify the production characteristics of audit engagements that may explain the differences in expected audit quality between Big 5 and non-Big 5 firms. In this archival study, we examine the total audit effort and the allocation of effort to four audit phases—planning, (control) risk assessment, substantive testing, and completion—for a cross-section sample of 113 audits of Dutch companies in 1998/99 by 14 public accounting firms. We find that, after controlling for client characteristics: (1) both types of auditors exert about the same amount of total audit effort; (2) Big 5 auditors allocate relatively more effort to planning and (control) risk assessment, and relatively less to substantive testing and completion; and (3) client size, use of the business-risk-based audit approach, and reliance on client internal controls affect audit hours differently for the two auditor types. We conclude that the Big 5 firms actually produce a higher audit quality level, and that this quality difference is related to how audit hours are deployed in a more contextual and less procedural audit approach.

Download Full-text

The impact of audit committee characteristics on internal audit professionalization: empirical evidence from Greece

Accounting Research Journal ◽

10.1108/arj-05-2020-0091 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Christina Vadasi ◽

Michalis Bekiaris ◽

Andreas G. Koutoupis

Keyword(s):

Empirical Evidence ◽

Audit Committee ◽

Audit Quality ◽

Research Question ◽

Internal Audit ◽

Audit Committees ◽

Annual Reports ◽

Substantial Impact ◽

Content Type ◽

The Impact

Purpose This paper aims to provide empirical evidence of the association between audit committee characteristics and internal audit quality through internal audit professionalization. Design/methodology/approach The investigation of the research question was based on 45 usable responses that were received from a survey of chief audit executives from firms listed on the Athens Stock Exchange and combined with publicly available information from annual reports. Findings The results indicate that audit committee characteristics (independence, diligence through frequent meetings and interaction with internal audit through valuation) influence internal audit professionalization. In addition, they demonstrate that internal audit professionalization is also influenced by CEO duality and firm’s external auditor. Practical implications The findings of this study have implications for audit committees wishing to improve their overall effectiveness, by identifying areas with substantial impact on internal audit quality. Moreover, regulators of corporate governance bodies can also benefit from the results to strengthen audit committee’s efficiency regarding internal audit function oversight. Originality/value The results add to the literature on the discussion of internal audit professionalization and complement the work of other researchers in the field of audit committee’s impact on internal audit quality/effectiveness. This study attempts to fill a gap in the literature on the effect of audit committee characteristics on internal audit professionalization, an element introduced from an institutional theory perspective.

Download Full-text

Minority Shareholders Rights and Audit Quality: Empirical Evidence from Turkey

journal of accounting finance and auditing studies (JAFAS) ◽

10.32602/jafas.2018.003 ◽

2018 ◽

Vol 4 (4) ◽

pp. 27-44

Author(s):

Aree Saeed Mustafa ◽

Abdullah Saeed Barwari

Keyword(s):

Empirical Evidence ◽

Audit Quality ◽

Minority Shareholders

Download Full-text

An Examination of Audit Quality Surrounding Within-Firm Engagement Office Changes

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x211059627 ◽

2021 ◽

pp. 0148558X2110596

Author(s):

Adam J. Greiner ◽

Julia L. Higgs ◽

Thomas J. Smith

Keyword(s):

United States ◽

Knowledge Transfer ◽

Empirical Evidence ◽

Audit Quality ◽

Resource Constraints ◽

Discretionary Accruals ◽

The United States ◽

Primary Analysis ◽

Quality Deterioration ◽

Main Association

We examine the relation between within-firm office changes and audit quality in the United States. Our primary analysis documents a reduction in audit quality, measured using abnormal discretionary accruals and restatements, when the client is transferred to a smaller within-firm office (downsize effect). We are unable to find evidence that clients experience significant improvement in audit quality among transfers to a larger within-firm office (upsize effect). We then condition our sample on the change in the number of public clients of the receiving office to better understand the source of the underlying association. We find that our downsize effect is driven by offices experiencing a decrease in the number of public clients, suggesting that our main association is not entirely the result of resource constraints for the receiving office. We posit that this finding is consistent with audit quality deterioration among within-firm office changes to smaller offices driven, in part, by the receiving office’s inability to adequately overcome the knowledge transfer frictions that accompany a move to a new office. Our findings offer empirical evidence on consequences of within-firm office changes and are particularly relevant to regulators and preparers.

Download Full-text

Comparing Auditor versus Non-Auditor Assessments of Auditor Liability: An Experimental Investigation of Experts' versus Lay Evaluators' Judgments

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-10291 ◽

2012 ◽

Vol 31 (3) ◽

pp. 125-148 ◽

Cited By ~ 8

Author(s):

Andrew Reffett ◽

Billy E. Brewster ◽

Brian Ballou

Keyword(s):

Experimental Investigation ◽

Social Identity ◽

Empirical Evidence ◽

Legal System ◽

Social Identity Theory ◽

Audit Quality ◽

Identity Theory ◽

Emotional Reactions ◽

Auditor Liability

SUMMARY Critics of the legal system argue that the use of lay jurors to adjudicate auditor negligence claims results in non-meritorious decisions of auditor liability. Palmrose (2006) therefore proposes that the courts rely on panels of experienced auditors to evaluate the merits of auditor negligence claims and make recommendations to the courts. There is, however, scant evidence to indicate how auditors' and lay evaluators' judgments might differ in cases of alleged auditor negligence. Our study addresses this gap in the literature by providing theory and empirical evidence that elucidates several systematic differences between auditors' and lay evaluators' judgments. Results of an experiment indicate that auditor evaluators are less reliant on plaintiff losses as evidence than lay evaluators, but—consistent with social identity theory—experience greater empathy for auditor defendants. Consequently, auditor evaluators consistently provide lower assessments of auditor liability than lay evaluators, irrespective of audit quality. In addition, results of the experiment indicate that different legally irrelevant inputs primarily determine both auditor and lay evaluators' negligence verdicts—emotional reactions for auditor evaluators and plaintiff losses for lay evaluators. Finally, results are mixed as to whether auditor evaluators' judgments are more sensitive to varying levels of audit quality than lay evaluators' judgments.

Download Full-text

AN INVESTIGATION ON THE EFFECT OF AUDIT COMMITTEE ON FINANCIAL REPORTING QUALITY IN PRE AND POST IFRS ADOPTION: EVIDENCE FROM MALAYSIAN COMPANIES

Humanities & Social Sciences Reviews ◽

10.18510/hssr.2020.824 ◽

2020 ◽

Vol 8 (2) ◽

pp. 25-35

Author(s):

Citrawati Jatiningrum ◽

Fauzi ◽

Rita Irviani ◽

Mujiyati ◽

Shahanif Hasan

Keyword(s):

Earnings Management ◽

Empirical Evidence ◽

Financial Reporting ◽

Audit Committee ◽

Audit Quality ◽

Reporting Quality ◽

Financial Reporting Quality ◽

Ifrs Adoption ◽

Significant Difference ◽

The Relationship

Purpose of study: This study sought to investigate the effect of the audit committee on Financial Reporting Quality (FRQ), explicitly focuses on the period pre- and post-mandatory IFRS adoption in Malaysia. The Financial Reporting Quality in this study proxied by earnings management. Malaysian. Methodology: The sample study has covered 81 listed companies on Bursa Malaysia, with 567 observations, which examined the time of 2009 to 2015. The relationship was analyzed by statistical multiple regression linear methods and also examined the significance of differences between pre and post IFRS adoption by paired sample t-test. Result: The main finding reveals that the relationship between the audit committee and financial reporting quality after IFRS adoption in Malaysia has more significant. However, empirical evidence showed that the post period of mandatory IFRS evidently no significant difference level of earnings management practice. This result indicates that the IFRS adoption cannot reduce managerial discretion yet and the possibility for EM manipulation for Malaysian companies. Implication/Application: This finding has critical implications for regulators and policymakers, that the consequences of IFRS adoption do not increase the quality of financial reporting when EM practices still continue in the different forms. Novelty/Originality of this study: This study gives empirical evidence that there are differences in relationship level between audit quality and earnings management in the period before and after IFRS mandatory adoption in Malaysia companies.

Download Full-text

DOES AUDITOR INDEPENDENCE, SKEPTICISM, AND PROFESSIONALISM INFLUENCE AUDIT QUALITY?

Jurnal Muara Ilmu Ekonomi dan Bisnis ◽

10.24912/jmieb.v4i2.7566 ◽

2020 ◽

Vol 4 (2) ◽

pp. 251

Author(s):

Putri Puspitarani ◽

Supeni Anggraeni Mapuasari

Keyword(s):

Empirical Evidence ◽

Cognitive Dissonance ◽

Audit Quality ◽

Auditor Independence ◽

Professional Organizations ◽

Survey Method ◽

Public Accounting ◽

Accounting Firms ◽

The Stability ◽

High Sense

Riset ini menyajikan bukti empiris faktor-faktor yang mempengaruhi kualitas audit yang bersumber dari kognisi auditor. Faktor kognisi yang diujikan antara lain independensi, skeptisme, dan profesionalisme. Independensi didefinisikan sebagai kemauan auditor untuk netral dan tidak bias dalam mengambil keputusan. Skeptisme adalah kemauan auditor untuk mempertanyakan dan melakukan prosedur audit tambahan ketika terjadi keraguan dalam penentuan pertimbangan audit. Profesionalisme merepresentasikan pemahaman dan sikap auditor atas hak dan kewajibannya yang diatur oleh organisasi profesi. Untuk menguraikan logika hipotesis, riset ini menggunakan teori disonansi kognitif. Auditor tentu mengalami berbagai dinamika dalam menjalankan tugasnya. Dinamika ini terkadang mengandung ketidaksesuaian antara kognisi yang dimilikinya dengan apa yang ditemukannya. Dalam kondisi tersebut, penelitian ini menduga bahwa auditor yang memiliki rasa independensi yang tinggi akan lebih mampu menghasilkan kualitas audit yang baik. Auditor dengan skeptisme yang semakin tinggi tentu akan mau untuk mengeluarkan upaya tambahan demi meraih kualitas audit yang sesuai. Sementara itu, profesionalisme mampu mendukung kemantapan auditor dalam mengupayakan kualitas audit yang tinggi. Dengan menggunakan metode survei yang disebarkan pada para auditor di kantor akuntan publik di kota jakarta, riset ini menemukan bahwa independensi, skeptisme, dan profesionalisme secara signifikan mendukung persepsi kualitas audit. Ini artinya, kantor akuntan publik dapat mempertimbangkan faktor-faktor ini dalam perumusan kebijakan rekrutmen dan pelatihan. This research presents empirical evidence of the factors that influence audit quality sourced from auditor cognition. Cognition factors tested included independence, skepticism, and professionalism. Independence is defined as the auditor's willingness to be neutral and not biased in making decisions. Skepticism is the auditor's willingness to question and carry out additional audit procedures when there is doubt in determining audit considerations. Professionalism represents the auditor's understanding and attitude towards his rights and obligations governed by professional organizations. To outline the logic of the hypothesis, this research uses the theory of cognitive dissonance. Auditors naturally experience various dynamics in carrying out their duties. This dynamic sometimes contains a mismatch between the cognition it has and what it finds. Under these conditions, this study suspects that auditors who have a high sense of independence will be better able to produce good audit quality. Auditors with increasing skepticism will certainly want to spend additional effort to achieve appropriate audit quality. Meanwhile, professionalism can support the stability of auditors in seeking high audit quality. Using a survey method distributed to auditors at public accounting firms in Jakarta, this research found that independence, skepticism, and professionalism significantly support the perception of audit quality.

Download Full-text

MODERATING INFLUENCE OF AUDIT QUALITY ON THE RELATIONSHIP BETWEEN CONCENTRATED OWNERSHIP AND ACCOUNTING CONSERVATISM: IN PAKISTANI LISTED FIRMS: EMPIRICAL EVIDENCE FROM GMM TECHNIQUE

Journal of Critical Reviews ◽

10.31838/jcr.07.05.02 ◽

2020 ◽

Vol 7 (05) ◽

Keyword(s):

Empirical Evidence ◽

Audit Quality ◽

Accounting Conservatism ◽

Listed Firms ◽

Concentrated Ownership ◽

The Relationship

Download Full-text

PENGARUH KUALITAS AUDIT TERHADAP FRAUDULENT FINANCIAL REPORTING DENGAN KOMITE AUDIT SEBAGAI VARIABEL MODERASI (Studi Empiris Pada Perusahaan Manufaktur yang terdaftar di BEI tahun 2016 – 2018)

PROSIDING SEMINAR NASIONAL CENDEKIAWAN ◽

10.25105/semnas.v0i0.5774 ◽

2019 ◽

pp. 2

Author(s):

Endah Catur Riyanti ◽

Hanna Christina W Putri ◽

Wikanto Artadi ◽

Haryono Umar

Keyword(s):

Empirical Evidence ◽

Financial Reporting ◽

Audit Committee ◽

Audit Quality ◽

Annual Report ◽

Stock Exchange ◽

Least Squares Regression ◽

Fraudulent Financial Reporting ◽

Insignificant Effect ◽

The Impact

This study aims to obtain empirical evidence the influence of Audit Quality on the Fraudulent Financial Reporting with Audit Committee as a Moderating Variable in Manufacture Companies listed in Indonesia’s Stock Exchange on 2016 – 2018. This paper uses generalised least squares regression to investigate the influence of Audit Quality on the Fraudulent Financial Reporting with Audit Committee as a moderating variable for a sample of manufacturing companies listed on Indonesia Stock Exchange over a three-year period from 2016 to 2018. The method of purposive sampling is used to gain the samples. The measurement of FFR is using Real Earning Management (Abnormal Cashflow). Audit Quality and Audit Committee are analyzed from the data within annual report. The result of the research findings show that Competence of Audit Committee has a positive insignificant effect on Fraudulent Financial Reporting. Meanwhile Audit Quality have a negative insignificant effect on Fraudulent Financial Reporting and Audit Committee strengthens positive insignificant of Audit Quality on Fraudulent Financial Reporting. The main contribution of this study is that it investigates Audit Committee strengthens influence of Audit Quality on Fraudulent Financial Reporting on Fraudulent Financial Reporting. Furthermore, this study is the initial paper to examine the impact of Audit Quality and Audit Committee on Fraudulent Financial Reporting in Indonesia.

Download Full-text