Audit Quality and Specialist Tenure

2018 ◽  
Vol 94 (3) ◽  
pp. 113-147 ◽  
Author(s):  
Jennifer J. Gaver ◽  
Steven Utke
Keyword(s):  
Propensity Score ◽  
Propensity Score Matching ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Data Availability ◽  
Client Characteristics ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Big 4 ◽  
Jel Classifications

ABSTRACT We argue that the association between auditor industry specialization and audit quality depends on how long the auditor has been a specialist. We measure audit quality using absolute discretionary accruals, income-increasing discretionary accruals, and book-tax differences. Our results, based on a sample of Big 4 audit clients from 2003–2015, indicate that auditors who have only recently gained the specialist designation produce a level of audit quality that does not surpass that produced by non-specialist auditors, and is generally lower than the audit quality produced by seasoned specialists. We estimate that the seasoning process takes two to three years. In contrast to prior research that finds no effect of specialization after propensity score matching, we find that seasoned specialists generally produce higher-quality audits than other auditors even after matching. This suggests that the audit quality effect associated with seasoned industry specialist auditors is not due to differences in client characteristics. JEL Classifications: M42. Data Availability: Data used in this study are available from public sources identified in the text.

Do Big 4 Auditors Provide Higher Audit Quality after Controlling for the Endogenous Choice of Auditor?

2014 ◽  
Vol 33 (4) ◽  
pp. 197-219 ◽  
Author(s):  
John Daniel Eshleman ◽  
Peng Guo
Keyword(s):  
Propensity Score ◽  
Propensity Score Matching ◽  
Audit Quality ◽  
Data Availability ◽  
Accounting Restatements ◽  
Big 4 ◽  
Audit Firms ◽  
Weak Evidence ◽  
Matching Procedure ◽  
Jel Classifications

SUMMARY: Recent research suggests that Big 4 auditors do not provide higher audit quality than other auditors, after controlling for the endogenous choice of auditor. We re-examine this issue using the incidence of accounting restatements as a measure of audit quality. Using a propensity-score matching procedure similar to that used by recent research to control for clients' endogenous choice of auditor, we find that clients of Big 4 audit firms are less likely to subsequently issue an accounting restatement than are clients of other auditors. In additional tests, we find weak evidence that clients of Big 4 auditors are less likely to issue accounting restatements than are clients of Mid-tier auditors (Grant Thornton and BDO Seidman). Taken together, the evidence suggests that Big 4 auditors do perform higher quality audits. JEL Classifications: M41, M42 Data Availability: All data are publicly available from sources identified in the text.

Auditor Industry Specialization and Earnings Quality

2003 ◽  
Vol 22 (2) ◽  
pp. 71-97 ◽  
Author(s):  
Steven Balsam ◽  
Jagan Krishnan ◽  
Joon S. Yang
Keyword(s):  
Audit Quality ◽  
Earnings Quality ◽  
Discretionary Accruals ◽  
Prior Work ◽  
Brand Name ◽  
Absolute Level ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Auditor Industry Specialization ◽  
Earnings Response

This study examines the association between measures of earnings quality and auditor industry specialization. Prior work has examined the association between auditor brand name and earnings quality, using auditor brand name to proxy for audit quality. Recent work has hypothesized that auditor industry specialization also contributes to audit quality. Extending this literature, we compare the absolute level of discretionary accruals (DAC) and earnings response coefficients (ERC) of firms audited by industry specialists with those of firms not audited by industry specialists. We restrict our study to clients of Big 6 (and later Big 5) auditors to control for brand name. Because industry specialization is unobservable, we use multiple proxies for it. After controlling for variables established in prior work to be related to DAC and the ERC, we find clients of industry specialist auditors have lower DAC and higher ERC than clients of nonspecialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of nonspecialists.

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.

Further Evidence on the Effect of Regulation on the Exit of Small Auditors from the Audit Market and Resulting Audit Quality

2017 ◽  
Vol 37 (4) ◽  
pp. 95-115
Author(s):  
Neil L. Fargher ◽  
Alicia Jiang ◽  
Yangxin Yu
Keyword(s):  
Audit Quality ◽  
Financial Statements ◽  
Discretionary Accruals ◽  
Data Availability ◽  
The Public ◽  
Audit Market ◽  
Audit Firms ◽  
Jel Classifications

SUMMARY Following the introduction of SOX in 2002 and the introduction of PCAOB inspections starting from 2003, DeFond and Lennox (2011) found that a large number of small auditors exited the SEC client audit market during the 2002–2004 period and that these exiting auditors were of lower quality relative to non-exiting auditors. This paper seeks to verify whether SOX and the introduction of PCAOB inspections improved audit quality through incentivizing small auditors providing lower audit quality to exit the market. Using client discretionary accruals and the likelihood of the clients restating financial statements as proxies for audit quality, we do not find that the small auditors that exited the market for SEC client audits were of lower quality than successor small audit firms that did not exit the market. JEL Classifications: G18; L51. Data Availability: Data are available from the public sources cited in the text.

Non-CPAs and Office Audit Quality

2020 ◽  
Vol 34 (3) ◽  
pp. 169-191 ◽  
Author(s):  
Matthew G. Sherwood ◽  
Albert L. Nagy ◽  
Aleksandra B. Zimmerman
Keyword(s):  
Human Resources ◽  
Growth Regulators ◽  
Audit Quality ◽  
Data Availability ◽  
External Audit ◽  
Accounting Firms ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Jel Classifications

SYNOPSIS During the time surrounding the Sarbanes-Oxley Act of 2002, the Big 4 firms either spun-off or downsized their consulting practices. However, in recent years, consulting service lines of the large accounting firms have seen a dramatic resurgence and growth. Regulators have taken notice of, and expressed concern over, this renewed focus on consulting. The accounting firms claim that such services enhance audit quality, mainly due to the prominent role of non-accounting specialists in today's external audit function. This study examines whether the availability of non-CPAs in U.S. Big 4 firm offices is associated with audit quality. We find that greater access to non-CPAs in the office is associated with higher audit quality and conclude that office audit quality is not just a function of audit-specific human resources but also the availability of non-CPAs to support audit engagement teams. JEL Classifications: M41; M42. Data Availability: All data are publicly available from sources identified in the study.

Auditor Resignations and Auditor Industry Specialization

2008 ◽  
Vol 22 (3) ◽  
pp. 279-295 ◽  
Author(s):  
William J. Cenker ◽  
Albert L. Nagy
Keyword(s):  
Audit Quality ◽  
Local Level ◽  
Primary Analysis ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Big 4 ◽  
Audit Firms ◽  
Logistic Regressions ◽  
Auditor Specialization ◽  
Local Levels

SYNOPSIS: The increase of Big 4 auditor resignations in the newly regulated auditing environment creates a rich setting to examine the supply-side effects of auditor industry specialization. The authors estimate logistic regressions to examine whether audit firms consider industry specialization at both the local and national levels when deciding on whether to retain or resign from audit clients. The results show a negative relation between auditor industry specialization and auditor resignations when the auditor is a joint specialist (i.e., a specialist at both the national and local levels) and when the auditor is a local specialist only (i.e., a local specialist but not a national specialist). The national specialization alone variable (i.e., the auditor is a national specialist but not a local specialist) is not significant for our primary analysis; however, additional analyses reveal that the significance of this variable varies when incorporating alternative measurements for auditor specialization in the models. Thus, the overall evidence of the national specialization effect on the auditor’s resignation decision is mixed and inconclusive at this point. Based on the additional analyses, the joint and the local specialization effects generally appear to be robust. As such, we conclude that auditors perceive their firms’ industry expertise, particularly at the local level, as reducing both clientele mismatch and litigation risks, and hence improving audit quality.

Auditor Industry Specialization and Evidence of Cost Efficiencies in Homogenous Industries

2014 ◽  
Vol 90 (5) ◽  
pp. 1721-1754 ◽  
Author(s):  
Kenneth L. Bills ◽  
Debra C. Jeter ◽  
Sarah E. Stein
Keyword(s):  
Service Quality ◽  
Bargaining Power ◽  
Economies Of Scale ◽  
Audit Quality ◽  
Data Availability ◽  
Competitive Advantages ◽  
Audit Pricing ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Cost Efficiencies

ABSTRACT This study examines the audit pricing effects when auditors specialize in industries conducive to transferable audit processes. Our results indicate that industry specialists charge incrementally lower fees in industries with homogenous operations, and particularly in industries with both homogenous operations and complex accounting practices. Moreover, we discover that audit quality is no lower for clients audited by these specialists offering fee discounts, consistent with a conclusion that the reduction in fees indicates cost efficiencies rather than lower-quality audits. Further analysis indicates that the shared economies of scale only occur in a subsample of client firms with relatively high bargaining power. When considered in conjunction with prior research using a survivorship approach, our study provides evidence that certain industries lend themselves to specialization because auditors generate cost-based competitive advantages without compromising service quality. Data Availability: Data are publicly available from the sources identified in the paper.

scholarly journals Audit Quality and Earnings Management in the Tunisian Context

2012 ◽  
Vol 2 (2) ◽  
pp. 17 ◽  
Author(s):  
Zgarni Inaam ◽  
Hlioui Khmoussi ◽  
Zehri Fatma
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Real Earnings Management ◽  
Financial Security ◽  
Industry Specialization ◽  
Securities Law ◽  
Auditor Industry Specialization ◽  
Auditor Tenure ◽  
Big 4 ◽  
Financial Securities

In this study, we test the effect of the implementation of the financial security law (n° 2005-96) and the audit quality (Big 4 auditors, auditor industry specialization and audit tenure) on constraining the extent of real and accruals based earnings management in the Tunisian context. Using 319 firm-year observations during the period 2000-2010, our results suggest that auditor industry specialization and Big 4 auditors associated with lower levels of accruals earnings management. We also find that the Big 4 auditors enhance the extent of real earnings management (REM). Further, we document that longer auditor tenure is not associated with greater real and accruals earnings management. Finally, our findings suggest that the adoption of the financial securities law of 2005 is not effective on reducing earnings management in the Tunisian context.

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