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.

scholarly journals Auditor Style Dan Komparabilitas Laporan Keuangan

2019 ◽  
Vol 1 (1) ◽  
pp. 109-122
Author(s):  
Riski Wulandari ◽  
Henri Agustin ◽  
Mayar Afriyenti
Keyword(s):  
Stock Exchange ◽  
Financial Statements ◽  
Financial Statement ◽  
Accounting Standard ◽  
Audit Firm ◽  
Internal Working ◽  
Big 4 ◽  
Audit Firms ◽  
Reported Earnings ◽  
Working Rules

Auditor style defined as a unique set of internal working rules for the interpretation and enforcement of accounting standard within the auditor’s clienteles belongs to particular audit firm, especially Big 4 audit firms. As a consequence, financial statements of two companies audited by the same Big 4 auditor, subjected to the same audit style, tend to have comparable earnings which have a more similar accrual, than two companies audited by two different Big 4 auditors with different styles. This research attempts to examine the effect of this auditor style issue on manufacturing financial statement comparability listed in Indonesian Stock Exchange. For five years’ observations, through 2012-2016 this research demonstrated a result with auditor style affects the comparability of reported earnings within a Big 4 auditor’s clientele and found no effect of auditor style on financial statement comparability within a non-Big 4 auditor’s clientele

The Impact of Client and Misstatement Characteristics on the Disposition of Proposed Audit Adjustments

2011 ◽  
Vol 30 (2) ◽  
pp. 103-124 ◽  
Author(s):  
Jennifer Joe ◽  
Arnold Wright, and ◽  
Sally Wright
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Data Availability ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Time Period ◽  
Confidentiality Agreement ◽  
Financial Scandals ◽  
The Impact

SUMMARY We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several U.S. financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX). During this period, auditors and their clients faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB), and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments, including the effect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find that 24.2 percent of proposed adjustments were subsequently waived. The results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. Data Availability: Due to a confidentiality agreement with the participating audit firm the data are proprietary.

PCAOB Inspections and Large Accounting Firms

2011 ◽  
Vol 26 (1) ◽  
pp. 43-63 ◽  
Author(s):  
Bryan K. Church ◽  
Lori B. Shefchik
Keyword(s):  
Audit Quality ◽  
Linear Trend ◽  
Dominant Role ◽  
Data Availability ◽  
Financial Statement ◽  
Public Companies ◽  
Accounting Firms ◽  
Big 4 ◽  
Second Tier ◽  
Over Time

SYNOPSIS The purpose of this paper is to analyze the PCAOB's inspection reports of large, annually inspected accounting firms. The inspection reports identify audit deficiencies that have implications for audit quality. By examining the inspection reports in detail, we can identify the nature and severity of audit deficiencies; we can track the total number of deficiencies over time; and we can pinpoint common, recurring audit deficiencies. We focus on large accounting firms because they play a dominant role in the marketplace (i.e., they audit public companies that comprise approximately 99 percent of U.S.-based issuer market capitalization). We document a significant, downward linear trend in the number of deficiencies from 2004 to 2009. We also identify common, recurring audit deficiencies, determine the financial statement accounts most often impacted by audit deficiencies, and isolate the primary emphasis of the financial statement impacted. Our findings generally are consistent comparing Big 4 and second-tier accounting firms, though a few differences emerge. In addition, we make comparisons with findings that have been documented for small, triennially inspected firms. Data Availability: The data are available from public sources.

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.

Investor Reaction to the Prospect of Mandatory Audit Firm Rotation

2016 ◽  
Vol 92 (1) ◽  
pp. 183-211 ◽  
Author(s):  
Lauren C. Reid ◽  
Joseph V. Carcello
Keyword(s):  
Audit Quality ◽  
Market Reaction ◽  
Abnormal Returns ◽  
Data Availability ◽  
Control Group ◽  
Cross Sectional ◽  
Audit Firm ◽  
Auditor Tenure ◽  
Big 4 ◽  
Mandatory Audit Firm Rotation

ABSTRACT The PCAOB recently considered implementing mandatory audit firm rotation in hopes of better aligning auditors' interests with investors' interests, suggesting that the PCAOB views long auditor tenure as problematic. However, the accounting profession argues that long tenure actually improves audit quality. This study provides insight into investors' views by evaluating the market's reaction to events related to the potential adoption of rotation that occurred between 2011 and 2013. The results provide some evidence that the market reacts negatively (positively) to events that increased (decreased) the likelihood of rotation, although these results are sensitive to the market index used to calculate abnormal returns. More importantly, particularly given the lack of a U.S.-specific control group, cross-sectional tests provide strong evidence that the market reaction is more negative (positive) on dates that increased (decreased) the likelihood of rotation given longer auditor tenure. Moreover, we also find that the market reaction is more negative (positive) on dates that increased (decreased) the likelihood of rotation given a Big 4 auditor. Data Availability: Data are available from public sources identified in the text.

scholarly journals Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Rulemaking Docket Matter No. 37: PCAOB Release No. 2011-006, Concept Release on Auditor Independence and Audit Firm Rotation

2012 ◽  
Vol 6 (1) ◽  
pp. C15-C27 ◽  
Author(s):  
Keith L. Jones ◽  
Jagadison K. Aier ◽  
Duane M. Brandon ◽  
Tina D. Carpenter ◽  
Lisa M. Gaynor ◽  
...  
Keyword(s):  
Exposure Period ◽  
Auditor Independence ◽  
Data Availability ◽  
Professional Skepticism ◽  
Audit Firm ◽  
The Public ◽  
Public Comment ◽  
Public Company ◽  
Auditing Standards ◽  
Mandatory Audit Firm Rotation

SUMMARY In August 2011, the Public Company Accounting Oversight Board (PCAOB or Board) issued a concept release to solicit public comment on the potential direction of a proposed standard-setting project on means to enhance auditor independence, objectivity, and professional skepticism. The Concept Release sought comments on and explores in detail the possibility of mandatory audit firm rotation. The PCAOB provided for a 121-day exposure period (from August 16 to December 14, 2011) for interested parties to examine and provide comments on the concept release. The Auditing Standards Committee of the Auditing Section of the American Accounting Association provided the comments in the letter below (dated December 13, 2011) to the PCAOB on PCAOB Rulemaking Docket Matter No. 37: PCAOB Release No. 2011-006, Concept Release on Auditor Independence and Audit Firm Rotation. Data Availability: Information about and access to the release are available at: http://pcaobus.org/Rules/Rulemaking/Docket037/Release_2011-006.pdf

scholarly journals If auditors are like Belgian beers, which style would you prefer?

2016 ◽  
Vol 90 (9) ◽  
pp. 341-347
Author(s):  
Herman van Brenk ◽  
Liesbeth Bruynseels
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Black Box ◽  
Firm Level ◽  
Audit Firm ◽  
Internal Working ◽  
Audit Firms ◽  
Auditing Standards ◽  
Zoom In ◽  
Audit Team

Recent research by Francis, Pinnuck, and Watanabe (2014) has shown that financial reporting outcomes are influenced by the audit firm’s unique audit style. They argue that audit firm styles are driven by their “unique set of internal working rules that guide the auditor’s application of accounting and auditing standards” (Francis, Pinnuck & Watanabe, 2014). In our discussion, we zoom in on this study and call for further research on the factors that determine audit styles. Specifically, we emphasize the importance of extending this research from the audit firm level to the level of the audit office, audit team, and individual auditor. We conclude with the notion that intense collaboration between audit firms and academia is instrumental in opening the black box of audit styles to extend our knowledge on the root causes and drivers of audit quality.

Office-Client Balance and Metro Area Audit Market Competition

2020 ◽  
Vol 39 (4) ◽  
pp. 113-141
Author(s):  
Michael L. Ettredge ◽  
Matthew G. Sherwood ◽  
Lili Sun
Keyword(s):  
Relative Abundance ◽  
Audit Quality ◽  
Market Competition ◽  
Data Availability ◽  
Financial Statement ◽  
Audit Market ◽  
Metro Area ◽  
Big 4 ◽  
Jel Classifications

SUMMARY We propose a new audit supplier competition construct, the Office-Client Balance (OCB), which consists of the relative abundance of competing audit offices and audit clients in a metropolitan (metro) area. From this construct, we derive a metro level audit competition proxy reflecting surpluses or shortfalls of total metro audit office numbers relative to the national metro OCB norm: the OCB_TOT. Consistent with the predictions of Porter's Five Forces theory, we find that OCB_TOT is associated with lower fees, more auditor turnover, and more (less) office exits (entrances) in metro audit markets. These findings validate OCB_TOT as a proxy for audit market competition. Our results indicate that greater metro level competition among auditors (more positive OCB_TOT) is associated with higher audit quality, proxied by fewer financial statement misstatements. Several additional analyses suggest that OCB_TOT is useful in explaining clients' choices of local (versus remote) audit offices and Big 4 (versus non-Big 4) offices. Data Availability: Data used in this study are available from public sources. JEL Classifications: G18; L10; M42.

Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the IESBA ED Release (August 14, 2014), Proposed Changes to Certain Provisions of the Code Addressing the Long Association of Personnel with an Audit or Assurance Client

2015 ◽  
Vol 9 (1) ◽  
pp. C18-C22
Author(s):  
Willie E. Gist ◽  
Urton L. Anderson ◽  
Diane J. Janvrin ◽  
Marshall K. Pitman
Keyword(s):  
Public Interest ◽  
Code Of Ethics ◽  
Extended Period ◽  
Data Availability ◽  
International Ethics ◽  
Audit Firm ◽  
Auditing Standards

SUMMARY On August 14, 2014 the International Ethics Standard Board for Accountants (IESBA) requested public comments to its Exposure Draft (ED) (IFAC 2014a) on proposed changes to the 2014 Code of Ethics for Professional Accountants (IFAC 2014b). The proposal aims to enhance the independence provisions of the Code to respond to threats that may be created by using the same audit firm personnel for audit or assurance engagements over an extended period of time. Among other things, the amendments would require (1) strengthened general provisions for all audits threatened by a long association of firm personnel, and (2) an increase in the mandatory “cooling-off” period, from two to five years, for the engagement partner on the audit of a public interest entity. The comment period ended November 12, 2014. This commentary summarizes the contributors' views on selected proposals in the ED. Data Availability: The Exposure Draft and related request for specific comments are available at: http://www.ethicsboard.org. Paragraph referencing in the ED is extracted from the Code, set out in the 2014 Handbook of the Code of Ethics for Professional Accountants, available at: https://www.ifac.org/ethics/iesba-code/.

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.

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