Tax Avoidance: Does Tax-Specific Industry Expertise Make a Difference?

2012 ◽  
Vol 87 (3) ◽  
pp. 975-1003 ◽  
Author(s):  
Sean T. McGuire ◽  
Thomas C. Omer ◽  
Dechun Wang
Keyword(s):  
Significant Role ◽  
Tax Avoidance ◽  
Data Availability ◽  
Financial Statement ◽  
External Audit ◽  
Audit Firm ◽  
Consulting Services ◽  
Financial Statement Audit ◽  
Industry Expertise

ABSTRACT This study investigates whether the tax-specific industry expertise of the external audit firm influences its clients' level of tax avoidance. Our results suggest that clients purchasing tax services from their external audit firm engage in greater tax avoidance when their external audit firm is a tax expert. Because the external audit firm potentially influences clients' tax avoidance activities via the provision of tax consulting services and the financial statement audit, we also examine whether the overall expertise (i.e., the combined tax and audit expertise) of the external audit firm is associated with tax avoidance. We find that the external audit firm's overall expertise is generally associated with greater tax avoidance, which suggests that overall experts are able to combine their audit and tax expertise to develop tax strategies that benefit clients from both a tax and financial statement perspective. In combination, our results suggest that the tax-specific industry expertise of the external audit firm plays a significant role in its clients' tax avoidance. Data Availability: Data used in this study are available from public sources identified in the article.

Fraud Detection and Investigation: Microcomputer Consulting Services

1999 ◽  
Vol 14 (1) ◽  
pp. 99-115 ◽  
Author(s):  
Bonita K. Peterson ◽  
Thomas H. Gibson
Keyword(s):  
Fraud Detection ◽  
Internal Controls ◽  
Financial Statement ◽  
Sufficient Evidence ◽  
Red Flags ◽  
Fine Line ◽  
Consulting Services ◽  
Financial Statement Audit ◽  
Audit Team ◽  
University Setting

This nonfictional case of inventory fraud in a university setting exposes students to fraud detection and investigation. These skills are becoming increasingly important for auditors, as evidenced by the alarming rate of fraud. The accounting profession has acknowledged the seriousness of this issue with the issuance of SAS No. 82, Consideration of Fraud in a Financial Statement Audit, developed in part to improve detection of frauds by auditors. The case raises many of the fraud-related issues faced by accountants: recognizing red flags indicative of fraud; the importance of a good system of internal controls; the profile of the typical fraud perpetrator; the fine line auditors walk when investigating a fraud; the need to develop an audit team with the appropriate level of expertise which may require members from a variety of disciplines (e.g., investigative, legal and forensic areas); and the difficulty of obtaining sufficient evidence to prosecute and convict perpetrators.

scholarly journals Auditor Style and Financial Statement Comparability

2013 ◽  
Vol 89 (2) ◽  
pp. 605-633 ◽  
Author(s):  
Jere R. Francis ◽  
Matthew L. Pinnuck ◽  
Olena Watanabe
Keyword(s):  
Data Availability ◽  
Financial Statement ◽  
Audit Firm ◽  
Internal Working ◽  
Big 4 ◽  
Auditing Standards ◽  
Reported Earnings ◽  
Working Rules

ABSTRACT The term “audit style” is used to characterize the unique set of internal working rules of each Big 4 audit firm for the implementation of auditing standards and the enforcement of GAAP within their clienteles. Audit style implies that two companies audited by the same Big 4 auditor, subject to the same audit style, are more likely to have comparable earnings than two firms audited by two different Big 4 firms with different styles. By comparable we mean that two firms in the same industry and year will have a more similar accruals and earnings structure. For a sample of U.S. companies for the period 1987 to 2011, we find evidence consistent with audit style increasing the comparability of reported earnings within a Big 4 auditor's clientele. Data Availability: All data are publicly available from the sources identified in the text.

SOX 404(b) Audits: Evidence from Auditing the Financial Close Process of the Accounting System

2019 ◽  
Vol 34 (3) ◽  
pp. 77-103
Author(s):  
Diane J. Janvrin ◽  
Maureen Francis Mascha ◽  
Melvin A. Lamboy-Ruiz
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Accounting System ◽  
Audit Process ◽  
Financial Statement Audit ◽  
Multiple Method ◽  
Access Controls

ABSTRACT Auditing Standard No. 5 requires that auditors integrate their evaluation of large issuers' internal control over financial reporting (ICFR) into their financial statement audit process, but the PCAOB warns that auditors may not adequately test related manual and systems internal controls. We use a multiple method approach to examine how auditors evaluate one important component of ICFR, the financial close process, and whether they evaluate it differently when conducting a SOX 404(b) integrated versus a financial statement audit. Interviewees relied heavily on walkthroughs, and tended to perform only cursory reviews of entity-level controls related to the financial close process. In addition, they often failed to test the link between the general ledger and supporting systems, including evaluating related access controls. Financial statement-only auditors were more likely to re-perform key controls than rely on cursory walkthroughs. Auditors performing integrated audits appeared to over-rely on ICFR findings when conducting financial statement audits. Data Availability: Interview data are available from the first author. PCAOB inspection reports are publicly available.

Mandatory Audit Firm Rotation and Audit Quality

2015 ◽  
Vol 31 (3) ◽  
pp. 1089 ◽  
Author(s):  
Hakwoon Kim ◽  
Hyoik Lee ◽  
Jong Eun Lee
Keyword(s):  
Audit Quality ◽  
Global Financial Crisis ◽  
Auditor Independence ◽  
Financial Statement ◽  
Policy Makers ◽  
Audit Firm ◽  
Going Concern ◽  
Financial Statement Audit ◽  
Mandatory Audit Firm Rotation ◽  
First Time

Recently, regulators and policy makers who witnessed the global financial crisis during 20072009 began considering a variety of ways to enhance auditor independence and financial reporting quality, ultimately aiming at investor protection. Since the enactment of the SarbanesOxley Act of 2002 (SOX), the Mandatory Audit Firm Rotation (MAFR) requirement has once again received significant attention from regulators and policy makers around the world, including the European Union (EU) and the U.S. Public Companies Accounting Oversight Board (PCAOB). In this paper, we investigate whether MAFR enhances audit quality in Korea. We find that under MAFR, newly rotated auditors are more likely to issue first-time going-concern audit opinions to financially distressed firms during their initial (first-year) financial statement audit compared with under the Voluntary Audit Firm Change (VAFC). Moreover, firms audited by mandatorily rotated new auditors have less discretionary accruals and higher accrual quality than those audited by voluntarily switched new auditors during the initial audit engagement. These results of earnings quality are more pronounced for firms that received a first-time going-concern audit opinion during the initial financial statement audit under MAFR. Taken together, the findings suggest that MAFR produces better audit quality than the VAFC. Further, our study provides implications for regulators and policy makers of countries considering the adoption of MAFR.

Characteristics of the internal audit and external audit hours: evidence from S. Korea

2016 ◽  
Vol 31 (6/7) ◽  
pp. 629-654 ◽  
Author(s):  
Ho-Young Lee ◽  
Hyun-Young Park
Keyword(s):  
Internal Audit ◽  
Financial Statement ◽  
External Audit ◽  
Content Type ◽  
Internal Auditors ◽  
External Auditors ◽  
Audit Efficiency ◽  
Financial Statement Audit ◽  
Legal Expertise ◽  
Practical Implications

Purpose Using 5,055 sample firm-years in Korea between 2009 and 2013, this paper aims to examine the association between the characteristics of the internal audit and the number of external audit hours as a proxy for audit efficiency. Design/methodology/approach This study is motivated by the International Standard on Auditing No. 610: “Using the work of internal auditors”. This auditing standard guides external auditors in using the work of internal auditors to obtain audit evidence and consult internal auditors for direct assistance. The authors expect that external audit efficiency will increase when the work of competent internal auditors is used. Findings The authors find that the number of internal auditors relative to the number of employees is associated with the number of external audit hours. This result suggests that the greater the availability of internal auditors, the greater their contribution will be to the financial statement audit and the more efficient the audit. The authors find evidence that external auditors use the work of internal auditors with accounting and legal expertise to improve audit efficiency. They also find some evidence that the work of internal auditors with greater availability is more effective during initial external audit engagements. Originality/value This study adds to the extant literature on the contributions of internal auditors to external audits by using archival data and by measuring audit effort using a large database of audit hours. In addition, our findings have practical implications for firms and external auditors who are evaluating the role and value of using the work of internal auditors. The authors also believe that the findings will be of interest to regulators or auditing standards boards.

Reengineering the Audit with Blockchain and Smart Contracts

2019 ◽  
Vol 16 (1) ◽  
pp. 21-35 ◽  
Author(s):  
Andrea M. Rozario ◽  
Chanta Thomas
Keyword(s):  
Value Chain ◽  
Audit Quality ◽  
Financial Statement ◽  
Business Practices ◽  
Smart Contracts ◽  
External Audit ◽  
Expectation Gap ◽  
Financial Statement Audit ◽  
Regulatory Bodies ◽  
Audit Effectiveness

ABSTRACT Blockchain and smart contracts are evolving business practices by enhancing efficiencies and transparency in the value chain. The fusion of these innovations is also likely to transform auditing by automating workflows but more importantly, by enhancing audit effectiveness and reporting. This paper envisions the future financial statement audit by proposing an external audit blockchain that supports smart audit procedures. The external audit blockchain has the potential to improve audit quality and narrow the expectation gap between auditors, financial statement users, and regulatory bodies.

Proposed Modification of the Policy on Provision of Consulting Services by the External Audit Firm

Policy Papers ◽  
2014 ◽  
Vol 2014 (65) ◽  
Author(s):  
Keyword(s):  
Audit Committee ◽  
Board Meeting ◽  
External Audit ◽  
Audit Firm ◽  
Consulting Services ◽  
Audit Firms ◽  
External Auditor ◽  
Proposed Modification ◽  
Selection Of

At an informal Board meeting in January, there was broad support for removing the current blanket prohibition on the provision of non-audit-related consulting services by the Fund’s external audit firm and replacing it with a blacklist approach, subject to robust safeguards to ensure the independence of the external audit firm. This paper makes specific proposals to implement such a change. This would align the Fund’s policy on the provision of consulting services by the external audit firm with practices followed in major jurisdictions and allow the external auditor to perform certain consulting services with proper safeguards to maintain the auditor’s independence. The proposed safeguards include: (i) a blacklist of prohibited services; (ii) an independence declaration by the external audit firm; (iii) limitations on the consulting fees that can be paid to the external audit firm; (iv) an oversight role for the External Audit Committee (EAC); and (v) review of consulting services provided by audit firms prior to the selection of a new external audit firm for the Fund. The staff sought the views of the EAC, which concurs with the proposal to modify the policy on the provision of consulting services by the external audit firm along with the related safeguards.

Firm versus Partner Measures of Auditor Industry Expertise and Effects on Auditor Quality

2011 ◽  
Vol 30 (2) ◽  
pp. 201-229 ◽  
Author(s):  
Hsin-Yi Chi ◽  
Chen-Lung Chin
Keyword(s):  
Audit Quality ◽  
Data Availability ◽  
Firm Level ◽  
Audit Opinion ◽  
Audit Firm ◽  
Listed Firms ◽  
Big 4 ◽  
Audit Reports ◽  
Auditor Industry Expertise ◽  
Industry Expertise

SUMMARY This paper first examines whether the Big 4 audit quality is associated with auditor industry expertise, measured as both individual partner- and audit firm-level leadership. We focus on a sample of listed firms in Taiwan, where audit reports must be audited and signed by the two signing auditors as well as by an audit firm. For accruals analyses, we find that differential discretionary accruals due to industry expertise are driven by a combination of firm and partner expertise. For audit opinion analyses, we find that differential likelihood of a modified audit opinion (hereafter, MAO) is primarily attributable to signing auditor specialists. We also find that firm-level specialists alone are not associated with a higher likelihood of issuing a MAO. However, firm-level specialists, in combination with signing auditor specialists, can add something over and above the effects of the signing auditor specialists alone. Second, we further examine whether there is differential audit quality between signing auditors (i.e., lead and concurring auditors). We find that clients of lead signing auditor specialists, either alone or in conjunction with concurring auditor specialists, have smaller accruals and are more likely to receive a MAO compared to those of nonspecialists. However, concurring auditor specialists alone are not associated with higher audit quality, in terms of either smaller accruals or a higher MAO likelihood. Thus, we conclude that industry expertise is not homogeneous across individual auditors within the same audit firm in Taiwan. Data Availability: Data are available from the sources identified in the text.

Accelerated Filing Deadlines, Internal Controls, and Financial Statement Quality: The Case of Originating Misstatements

2015 ◽  
Vol 29 (3) ◽  
pp. 551-575 ◽  
Author(s):  
Colleen M. Boland ◽  
Scott N. Bronson ◽  
Chris E. Hogan
Keyword(s):  
Internal Control ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Similar Increase ◽  
Section 404 ◽  
Regulatory Changes ◽  
Rule Change ◽  
Initial Decrease

SYNOPSIS We examine whether regulations requiring accelerated filing deadlines and internal control reporting and testing affect financial statement reliability. Unlike prior research, we examine whether these regulatory changes are associated with an increase in the likelihood that misstatements originate in the period following the respective change. If the implementation of these rules causes a misstatement, then the misstatement would most likely occur in the period immediately following the rule change. We provide evidence that accelerated filers (AFs) experience an increase in the likelihood of an originating misstatement following the acceleration of filing deadlines from 90 to 75 days. Large accelerated filers (LAFs), however, do not experience a similar increase following this acceleration or the subsequent acceleration from 75 to 60 days. After the implementation of the SOX Section 404 internal control requirements, we find that the likelihood of an originating misstatement declined for AFs but not for LAFs. Taken together, the findings suggest that, although AFs experienced an initial decrease in financial statement reliability, this decrease was temporary. Data Availability: Data are publicly available from the sources identified in the text.

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