Audit Firm Size and Going-Concern Reporting Accuracy

2006 ◽  
Vol 20 (1) ◽  
pp. 1-17 ◽  
Author(s):  
Marshall A. Geiger ◽  
Dasaratha V. Rama
Keyword(s):  
Firm Size ◽  
Type I ◽  
Type Ii ◽  
Reporting Accuracy ◽  
Audit Firm ◽  
Reporting Error ◽  
Going Concern ◽  
Big 4 ◽  
Audit Firms ◽  
Second Tier

Prior research suggests that the Big 4 audit firms are of higher quality than are non-Big 4 firms. However, existing tests for an association between audit firm size and reporting accuracy are indirect and provide mixed results. Our study extends this line of research by examining whether the Big 4 audit firms exhibit higher quality reporting by having fewer “audit-reporting errors” in the context of issuing going-concern modified reports. Our analyses examine both types of going-concern reporting errors (i.e., type I errors—modified opinions rendered to subsequently viable clients; and type II errors—unmodified opinions rendered to subsequently bankrupt clients) over an 11-year period. We also examine reporting error rate differences between the national second-tier firms and regional/local third-tier firms. Our findings indicate that both type I and type II error rates for Big 4 audit firms are significantly lower compared to non-Big 4 firms. In contrast, we find no significant differences between the national second-tier and regional/local third-tier audit firms with respect to either type of reporting error. Our results provide evidence about a Big 4 audit quality difference in reporting on client's going-concern problems.

The impact of non-timely 10-Q filings and audit firm size on audit fees

2018 ◽  
Vol 33 (5) ◽  
pp. 503-516 ◽  
Author(s):  
Tiffany Chiu ◽  
Feiqi Huang ◽  
Yue Liu ◽  
Miklos A. Vasarhelyi
Keyword(s):  
Regression Model ◽  
Firm Size ◽  
Audit Fees ◽  
Audit Risk ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact

Purpose Prior studies suggest that non-timely 10-Q filings indicate higher potential risks than non-timely 10-K filings. Furthermore, larger audit firms tend to be more risk-averse and conservative about reporting. Inspired by these research streams, this paper aims to investigate the influence of non-timely 10-Q filings on audit fees and the impact of audit firm size on this association. Design/methodology/approach The cross-sectional audit fee regression model used in this study is similar to that used in prior audit fee research (Simunic, 1980; Francis et al., 2005; Hay et al., 2006; Wang et al., 2013). The model includes the following five major characteristics that would influence auditors’ fee decisions: auditee size (LNAT), complexity (REIVAT, FOREIGN, SEG), financial condition (LOSS, ROA, GROWTH, ZSCORE), special events (ICW, RESTATE, INITIAL, GC) and auditor type (BIG4). To examine the effect of non-timely 10-Q filings on audit fees, the variable NT10Q is included in the audit fee model. Findings The results indicate that when both non-timely 10-K and non-timely 10-Q filings are included in the regression model, only non-timely 10-Q filings are significantly associated with higher audit fees, suggesting that the presence of non-timely 10-Q filings signals more serious underlying problem than non-timely 10-K filings in the audit fees decision processes. In addition, we find that audit fees for firms audited by Big 4 auditors are 26.4 per cent higher when those firms file non-timely 10-Q reports, whereas there is no significant association between non-timely 10-Q filings and audit fees for firms audited by non-Big 4 auditors. Practical implications As no attention has been paid to the investigation of the impact of non-timely 10-Q filings on audit fees, with the aim of filling the gap of this specific research area, this study examines the association between non-timely 10-Q filings and audit fees and the influence of audit firm size on this association. Originality/value The contribution of this paper is threefold: first, it is the first study to examine the association between non-timely 10-Q filings and audit fees. The results show that non-timely 10-Q filings are a better and earlier indicator of audit risk than non-timely 10-K filings. Second, the results reveal that the relationship between non-timely 10-Q filings and audit fees is affected by audit firm size. Specifically, Big 4 auditors tend to charge higher audit fees in the presence of non-timely 10-Q filings, reflecting that they are more sensitive to audit risk than smaller audit firms are. Third, an examination of the quarterly effect of non-timely 10-Q filings on audit fees indicates a stronger effect from the first quarter’s non-timely 10-Q filings, compared to the second or third quarter.

Auditor Tenure and Going Concern Opinions for Bankrupt Clients: Additional Evidence

2015 ◽  
Vol 35 (1) ◽  
pp. 163-179 ◽  
Author(s):  
William J. Read ◽  
Ari Yezegel
Keyword(s):  
House Of Representatives ◽  
Quadratic Model ◽  
Type Ii ◽  
Audit Failure ◽  
Going Concern ◽  
Auditor Tenure ◽  
Big 4 ◽  
Audit Firms ◽  
Discernible Effect ◽  
Audit Reports

SUMMARY Regulators and lawmakers in the U.S. periodically express concerns about a possible association between auditor tenure length and audit failure (SEC 1994; U.S. House of Representatives 2002). In this study, where we define audit failure as a bankrupt company not receiving a going concern modified audit opinion prior to bankruptcy (a Type II reporting error), we examine prior audit reports for a sample of 401 U.S. publicly held companies that filed for bankruptcy during the period 2002–2008. Using a quadratic model to control for potential nonlinearity in the relationship between auditor tenure and audit reporting, we find no significant association between auditor tenure and Type II errors for Big 4 audit firms. In contrast, for non-Big 4 audit firms we find evidence of a significant association that is nonlinear. Specifically, auditor tenure appears to adversely influence non-Big 4 firms' audit reporting for bankrupt clients in the initial years of an audit engagement and has no discernible effect in the later years. Thus, we provide evidence that long auditor tenure, of itself, is not associated with Type II reporting errors. In this respect, our findings may help to inform the continuing debate regarding the possible adverse effects of long auditor tenure. Overall, our results are robust to controlling for any extant endogeneity with respect to going concern opinions and choice of the length of audit firm tenure.

The Market Premium for Audit Partners with Big 4 Experience

2020 ◽  
Author(s):  
Aleksandra B. Zimmerman ◽  
Kenneth L. Bills ◽  
Monika Causholli
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Audit Firm ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
Second Tier ◽  
Market Premium

This study investigates how non-Big 4 firm audit partners’ Big 4 experience is valued by the audit market. The Big 4 audit firms have differentiated themselves as nationally recognized firms for whose services companies are willing to pay a premium. It is unclear, however, whether this reputation follows individual auditors when they move to a non-Big 4 audit firm. We find that audit fees are higher for non-Big 4 audit partners with Big 4 experience with the fee premium ranging from 17 to 26 percent depending on the extent of experience when they are employed by small audit firms but find no evidence of a fee premium for Big 4 experience at the second-tier audit firms. Furthermore, in additional analyses, we do not find strong, consistent evidence that audit quality is higher for clients of non-Big 4 audit partners with Big 4 experience than their counterparts without Big 4 experience.

scholarly journals Audit Firm Size, Audit Fee, Audit Reputation and Audit Quality: The Case of Listed Companies in Vietnam

2017 ◽  
Vol 9 (1) ◽  
pp. 429 ◽  
Author(s):  
Ngoc Kim Pham ◽  
Hung Nguyen Duong ◽  
Tin Quang Pham ◽  
Nga Thi Thuy Ho
Keyword(s):  
Firm Size ◽  
Audit Quality ◽  
Stock Exchange ◽  
Critical Role ◽  
Audit Fees ◽  
Listed Companies ◽  
Developed Countries ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms

Audit quality is considered as an essential factor affecting the reliability of financial information. The aim of this study is to assess the effects of audit firm characteristics, including audit reputation, audit fees and audit firm size, on audit quality. A sample of 192 companies listed on Hanoi and Ho Chi Minh Stock Exchange for the period of 2006-2014 was selected. Multiple regression was used to analyze the data. The findings show that Big 4 auditors in Vietnam provide high audit quality than non-Big 4 auditors. Interestingly, in Vietnam context, except for the audit firms in the Big 4 group, the findings suggest that smaller audit firms provide better audit quality. Additionally, the results reveal that the more audit fees the auditors receive, the lower audit quality they provide. The critical role of audit quality has attracted significantly scholarly attention, however, prior studies have mainly focused on firms in developed countries. Little is known about audit quality in an emerging economy context such as Vietnam. This study adds to the limited number of studies on audit quality of listed companies in emerging economies. 

Auditor Size and Going Concern Reporting

2018 ◽  
Vol 37 (2) ◽  
pp. 1-25 ◽  
Author(s):  
Nathan R. Berglund ◽  
John Daniel Eshleman ◽  
Peng Guo
Keyword(s):  
Type I Error ◽  
Type I ◽  
Type Ii ◽  
Type Ii Error ◽  
Financial Health ◽  
Positive Type ◽  
Going Concern ◽  
Big 4 ◽  
Going Concern Opinion ◽  
Matching Techniques

SUMMARY Auditing theory predicts that larger auditors will be more likely to issue a going concern opinion to a distressed client. However, the existing empirical evidence on this issue is mixed. We attribute these mixed results to a failure to adequately control for clients' financial health. We demonstrate how properly controlling for clients' financial health reveals a positive relationship between auditor size and the propensity to issue a going concern opinion. We corroborate our findings by replicating a related study and showing how the results change when financial health variables are added to the model. In supplemental analysis, we find that Big 4 auditors are more likely than mid-tier auditors (Grant Thornton and BDO Seidman) to issue going concern opinions to distressed clients. We also find that, compared to other auditors, the Big 4 are less likely to issue false-positive (Type I error) going concern opinions. We find no evidence that the Big 4 are more or less likely to fail to issue a going concern opinion to a client that eventually files for bankruptcy (Type II error). Our results are robust to the use of a variety of matching techniques. JEL Classifications: M41; M42.

scholarly journals External Auditor Selection Choice: A Multinomial Logistic Regression Approach

2019 ◽  
Vol 1 (1) ◽  
pp. 9
Author(s):  
Augustine Nwekemezie Odum ◽  
Egbunike Francis Chinedu
Keyword(s):  
Firm Size ◽  
Multinomial Logistic Regression ◽  
Research Work ◽  
Probit Regression ◽  
Audit Firm ◽  
Global Brand ◽  
Big 4 ◽  
Audit Firms ◽  
External Auditor ◽  
Big Four

This research work examines the factors that determine the selection of external auditor among Global Brand listed companies in Nigeria. The variables of Audit Big 4 firms which include Deloitte, Klynveld Peat Marwick Goerdeler, (KPMG) and Price Water House Coopers (PWC) where selected as choice target for this research work. Big four audit firm of Ernst’s & Young (E&Y) was excluded in the sample as it is found not to have provided audit services to any of the selected global brand listed company in Nigeria during the period covered by this study. The study employed the methodology of Multinomial Probit Regression (MPR) analysis in X-raying the data. Empirical evidence shows that there is a significant positive relationship between firm size and choice of external auditor’s selection for the big four audit firms of KPMG and Deloitte. The study also provides a revelation that the relationship between the variable of firm size is negative and statistically significant with audit firm of Price Water House Coopers (PWC). The research work carefully recommends that global brand companies in Nigeria with interest to hire audit services of Deloitte and KPMG must ensure that its total asset is significantly large. But suffice to state here that this may not apply to the audit firm of Price Water House Copper Corporation where the variable of audit fee is a significant determinant in the quest for employing it audit services.

scholarly journals External Auditor Selection Choice: A Multinomial Logistic Regression Approach

2019 ◽  
Vol 1 (1) ◽  
pp. 9
Author(s):  
Augustine Nwekemezie Odum ◽  
Francis Chinedu Egbunike
Keyword(s):  
Firm Size ◽  
Multinomial Logistic Regression ◽  
Research Work ◽  
Probit Regression ◽  
Audit Firm ◽  
Global Brand ◽  
Big 4 ◽  
Audit Firms ◽  
External Auditor ◽  
Big Four

This research work examines the factors that determine the selection of external auditor among Global Brand listed companies in Nigeria. The variables of Audit Big 4 firms which include Deloitte, Klynveld Peat Marwick Goerdeler, (KPMG) and Price Water House Coopers (PWC) where selected as choice target for this research work. Big four audit firm of Ernst’s & Young (E&Y) was excluded in the sample as it is found not to have provided audit services to any of the selected global brand listed company in Nigeria during the period covered by this study. The study employed the methodology of Multinomial Probit Regression (MPR) analysis in X-raying the data. Empirical evidence shows that there is a significant positive relationship between firm size and choice of external auditor’s selection for the big four audit firms of KPMG and Deloitte. The study also provides a revelation that the relationship between the variable of firm size is negative and statistically significant with audit firm of Price Water House Coopers (PWC). The research work carefully recommends that global brand companies in Nigeria with interest to hire audit services of Deloitte and KPMG must ensure that its total asset is significantly large. But suffice to state here that this may not apply to the audit firm of Price Water House Copper Corporation where the variable of audit fee is a significant determinant in the quest for employing it audit services.

Consequences of Going-Concern Opinion Inaccuracy at the Audit Office Level

2020 ◽  
Vol 39 (3) ◽  
pp. 185-208
Author(s):  
Qiao Xu ◽  
Rachana Kalelkar
Keyword(s):  
Market Share ◽  
Audit Quality ◽  
Type I ◽  
Type I Errors ◽  
Negatively Associated ◽  
Going Concern ◽  
Big 4 ◽  
Office Market ◽  
Going Concern Opinion ◽  
Office Level

SUMMARY This paper examines whether inaccurate going-concern opinions negatively affect the audit office's reputation. Assuming that clients perceive the incidence of going-concern opinion errors as a systematic audit quality concern within the entire audit office, we expect these inaccuracies to impact the audit office market share and dismissal rate. We find that going-concern opinion inaccuracy is negatively associated with the audit office market share and is positively associated with the audit office dismissal rate. Furthermore, we find that the decline in market share and the increase in dismissal rate are primarily associated with Type I errors. Additional analyses reveal that the negative consequence of going-concern opinion inaccuracy is lower for Big 4 audit offices. Finally, we find that the decrease in the audit office market share is explained by the distressed clients' reactions to Type I errors and audit offices' lack of ability to attract new clients.

The Effect of Stage of Development and Financial Health on Auditor Decision Behavior in the Going-Concern Task

1999 ◽  
Vol 18 (1) ◽  
pp. 37-54 ◽  
Author(s):  
Andrew J. Rosman ◽  
Inshik Seol ◽  
Stanley F. Biggs
Keyword(s):  
Information Acquisition ◽  
Type I ◽  
Type Ii ◽  
Financial Health ◽  
Inference Problem ◽  
Going Concern ◽  
Start Up ◽  
Mitigating Factors ◽  
Type Ii Errors ◽  
Problem Representations

The effect of different task settings within an industry on auditor behavior is examined for the going-concern task. Using an interactive computer process-tracing method, experienced auditors from four Big 6 accounting firms examined cases based on real data that differed on two dimensions of task settings: stage of organizational development (start-up and mature) and financial health (bankrupt and nonbankrupt). Auditors made judgments about each entity's ability to continue as a going concern and, if they had substantial doubt about continued existence, they listed evidence they would seek as mitigating factors. There are seven principal results. First, information acquisition and, by inference, problem representations were sensitive to differences in task settings. Second, financial mitigating factors dominated nonfinancial mitigating factors in both start-up and mature settings. Third, auditors' behavior reflected configural processing. Fourth, categorizing information into financial and nonfinancial dimensions was critical to understanding how auditors' information acquisition and, by inference, problem representations differed across settings. Fifth, Type I errors (determining that a healthy company is a going-concern problem) differed from correct judgments in terms of information acquisition, although Type II errors (determining that a problem company is viable) did not. This may indicate that Type II errors are primarily due to deficiencies in other stages of processing, such as evaluation. Sixth, auditors who were more accurate tended to follow flexible strategies for financial information acquisition. Finally, accurate performance in the going-concern task was found to be related to acquiring (1) fewer information cues, (2) proportionately more liquidity information and (3) nonfinancial information earlier in the process.

Audit firms and industry specialization in an emerging economy

2018 ◽  
Vol 14 (3) ◽  
pp. 338-362
Author(s):  
Karim Hegazy ◽  
Mohamed Hegazy
Keyword(s):  
Financial Services ◽  
Capital Investment ◽  
Emerging Economy ◽  
Annual Reports ◽  
Brand Name ◽  
Industry Specialization ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms

PurposeThis study aims to investigate the implications of audit industry specialization on auditor’s retention and growth within an emerging economy. Factors such as whether the firm is a Big 4, a firm with international affiliation, a local firm and the type of industry were studied to analyse the reasons behind audit firm retention and growth.Design/methodology/approachThis research is based on a field study related to audit firms providing services to listed companies in an emerging economy. The sample includes the top 100 publicly held companies’ in the Egyptian stock market during 2006-2011 for which their annual reports are analysed to determine the audit firms’ retention and growth. An assessment of the continuity of the auditors and the increase in the number of audit clients were also measured.FindingsThe results confirm that industry specialization has an important effect on the auditor’s retention, especially for industries where capital investment is significant such as buildings, construction, financial services, housing and real estate. Big 4 audit firms retained their clients because of their industry specialization and brand name. Evidence was found that good knowledge of accounting and auditing standards resulted in audit firms with international affiliation competing with the Big 4 for clients’ retention and growth.Originality/valueThis study contributes to the existing literature, as it is among the first to provide empirical evidence on auditor retention, growth and auditor’s dominance in an emerging economy such as Egypt.

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