Exploring the Term of the Auditor-Client Relationship and the Quality of Earnings: A Case for Mandatory Auditor Rotation?

2003 ◽  
Vol 78 (3) ◽  
pp. 779-799 ◽  
Author(s):  
James N. Myers ◽  
Linda A. Myers ◽  
Thomas C. Omer
Keyword(s):  
Financial Performance ◽  
Earnings Quality ◽  
Cash Flows ◽  
Firm Age ◽  
Management Decisions ◽  
Industry Growth ◽  
Auditor Rotation ◽  
Auditor Tenure ◽  
Client Relationship

In this study, we document evidence on the relation between auditor tenure and earnings quality using the dispersion and sign of both absolute Jones-model abnormal accruals and absolute current accruals as proxies for earnings quality. Our study is motivated by calls for “mandatory auditor rotation,” which are based on concerns that longer auditor tenure reduces earnings quality. Multivariate results, controlling for firm age, size, industry growth, cash flows, auditor type (Big N versus non-Big N), industry, and year, generally suggest higher earnings quality with longer auditor tenure. We interpret our results as suggesting that, in the current environment, longer auditor tenure, on average, results in auditors placing greater constraints on extreme management decisions in the reporting of financial performance.

Are There Adverse Consequences of Mandatory Auditor Rotation? Evidence from the Italian Experience

2013 ◽  
Vol 34 (1) ◽  
pp. 1-24 ◽  
Author(s):  
Mara Cameran ◽  
Jere R. Francis ◽  
Antonio Marra ◽  
Angela Pettinicchio
Keyword(s):  
Audit Quality ◽  
Earnings Quality ◽  
The United States ◽  
First Year ◽  
The European Union ◽  
Auditor Rotation ◽  
Italian Experience ◽  
Auditor Tenure ◽  
Mandatory Rotation

SUMMARY Mandatory auditor rotation was recently proposed for the European Union and is also under consideration in the United States. There has been little research into either the benefits or costs of rotation in a true mandatory setting that could inform intelligent policy making. Our paper helps fill this gap by examining Italy, where mandatory rotation of auditors has been required since 1975. We find that outgoing auditors do not shirk on effort (or quality), but final-year fees are 7 percent higher than normal, which may indicate opportunistic pricing. The fees of incoming auditors are discounted by 16 percent even though they have abnormally higher engagement hours in the first year (17 percent), which is suggestive of lowballing. However, subsequent fees are abnormally higher and exceed the initial fee discount. Thus, the costs of mandatory rotation are nontrivial. Higher costs could be acceptable if rotation improves audit quality, but we find evidence of the opposite. Namely, the quality of audited earnings is lower in the first three years following rotation, relative to later years of auditor tenure. Since rotation is costly and earnings quality improves with longer auditor tenure, the evidence from Italy does not support the case for mandatory rotation.

Auditor Tenure and Audit Reporting Failures

2002 ◽  
Vol 21 (1) ◽  
pp. 67-78 ◽  
Author(s):  
Marshall A. Geiger ◽  
K. Raghunandan
Keyword(s):  
Multivariate Analysis ◽  
Inverse Relationship ◽  
Financial Statements ◽  
Audit Opinion ◽  
Auditor Rotation ◽  
Auditor Tenure ◽  
Client Relationship ◽  
Audit Reports ◽  
The Relationship

Recently, the SEC has called for research regarding the relationship between audit tenure and audit failures. In this study, we address this issue by examining prior audit reports for a sample of companies entering into bankruptcy during the period 1996–1998. We use a multivariate analysis to test for the association between the type of audit opinion issued on the financial statements immediately prior to bankruptcy and the length of auditor tenure. Our results indicate that there were significantly more audit reporting failures in the earlier years of the auditor/client relationship than when auditors had served these clients for longer tenures. The results do not support the arguments of those who propose mandatory auditor rotation and suggest that, contrary to the concerns expressed by the SEC, there is an inverse relationship between auditor tenure and audit reporting failures.

scholarly journals Pengaruh Struktur Modal, Likuiditas, Profitabilitas dan Umur Perusahaan terhadap Kualitas Laba:

2022 ◽  
Vol 4 (3) ◽  
pp. 663-682
Author(s):  
Khoirunnisa Nur Hasanah ◽  
Teguh Erawati
Keyword(s):  
Capital Structure ◽  
Quantitative Research ◽  
Stock Exchange ◽  
Earnings Quality ◽  
Secondary Data ◽  
Financial Statements ◽  
Financial Statement ◽  
Firm Age ◽  
Information Need

This study aims to prove the effect of capital structure, liquidity, profitability and firm age on earnings quality. The type of research used is quantitative research and secondary data. The sample of this research is mining companies listed on the Indonesia Stock Exchange (IDX) in 2017-2020 using purposive sampling. This study shows that capital structure has no significant effect on earnings quality, liquidity has no significant effect on earnings quality, profitability has no significant effect on earnings quality and firm age has no significant effect on earnings quality. The implications of this research are related to earnings quality. Investors and other users of financial statement information, need to consider the liquidity factor because this factor has a significant impact on the quality of earnings in the company. This shows that users of financial statements, especially investors, need to consider the liquidity factor when making investment decisions in affiliated companies. Keywords: Capital Structure, Liquidity, Profitability, Company Age, Earnings Quality

scholarly journals The relation of auditor tenure to audit quality: Empirical evidence from the German audit market

2013 ◽  
Vol 2 (1) ◽  
pp. 27-43 ◽  
Author(s):  
Patrick Krauß ◽  
Henning Zülch
Keyword(s):  
Audit Quality ◽  
The European Union ◽  
Short Term ◽  
Audit Firm ◽  
Audit Market ◽  
Auditor Tenure ◽  
Client Relationship ◽  
Mandatory Audit Firm Rotation

This study investigates whether and how the length of an auditor-client relationship affects audit quality. Using a sample of 1,071 firm observations of large listed companies for the sample period of 2005 to 2011, the study is one of the first to empirically analyze this auditing issue for the German audit market. The empirical results demonstrate that neither short term nor long term audit firm tenure seems to be a significant factor with regard to audit quality in Germany. In the wake of the ongoing discussion in the European Union regarding the optimal audit tenure length for the quality of the conducted statutory audits, our findings do not support the idea of a mandatory audit firm rotation rule.

Discussion of the Quality of Accruals and Earnings: The Role of Accrual Estimation Errors

2002 ◽  
Vol 77 (s-1) ◽  
pp. 61-69 ◽  
Author(s):  
Maureen F. McNichols
Keyword(s):  
Measurement Error ◽  
Earnings Management ◽  
Earnings Quality ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
Future Research ◽  
Estimation Errors ◽  
Empirical Estimates

Dechow and Dichev (2002) model earnings quality as the magnitude of estimation errors in accruals, and provide empirical estimates of this construct based on the relation between accruals and cash flows. I characterize the innovation and limitations in this approach, and provide empirical evidence of measurement error in their empirical specification. I also adapt their model to assess the specification of the Jones' (1991) model and document that this model provides estimates of discretionary accruals that are significantly associated with cash flows, which are likely to be substantially nondiscretionary. I conclude with suggestions for future research on earnings quality and earnings management.

Does Mandatory Adoption of IFRS Enhance Earnings Quality? Evidence From Closer to Home

2019 ◽  
Vol 54 (01) ◽  
pp. 1950003 ◽  
Author(s):  
Gopal V. Krishnan ◽  
Jing Zhang
Keyword(s):  
Financial Reporting ◽  
Earnings Quality ◽  
Cash Flows ◽  
Fiscal Year ◽  
Financial Reporting Standards ◽  
Policy Debates ◽  
Mandatory Adoption ◽  
The Difference ◽  
Accounting Convergence

The global accounting convergence and the often discussed probable adoption of International Financial Reporting Standards (IFRS) by U.S. regulators is a timely topic. We contribute to the literature by examining a more recent mandatory IFRS adoption by Canada. Canadian GAAP (CGAAP) is often considered a close substitute for U.S. GAAP. One key feature of this setting is that two earnings numbers are available for fiscal year 2010 since Canadian firms were required to reconcile earnings under CGAAP with earnings under IFRS. We run a “horse race” of earnings quality between earnings under CGAAP and IFRS. We find that on average, relative to IFRS-earnings, earnings under CGAAP have greater association with next period cash flows and higher degree of persistence. Further, when the difference between earnings under CGAAP and IFRS is large, IFRS-earnings are less value-relevant and less persistent. These results strongly support the notion that higher earnings quality is associated with CGAAP. Finally, the results also indicate that differences between CGAAP and IFRS with regard to accounting for financial instruments and investments significantly impair the quality of IFRS-earnings. Our findings are potentially informative to any revival of policy debates on the possible adoption of IFRS by U.S. firms.

scholarly journals The effect of audit firm tenure in artificial rotation on audit quality

2015 ◽  
Vol 17 (3) ◽  
pp. 439
Author(s):  
Junaidi Junaidi ◽  
Harun Pamungkas Apriyanto ◽  
Nurdiono Nurdiono ◽  
Eko Suwardi
Keyword(s):  
Audit Quality ◽  
Stock Exchange ◽  
Audit Firm ◽  
Auditor Tenure ◽  
Audit Firms ◽  
Client Relationship ◽  
Going Concern Opinion ◽  
The Relationship

This study aimed to examine the effect of auditor tenure in artificial rotation on audit quality. Tenure shows the relationship between the audit firms and a client that is measured in years. Artificial rotation of auditor (audit firm) indicates a condition that, conceptually, there has been a change of auditors leading to the auditor relationship with the client to be disconnected, whereas substantive auditor-client relationship is ongoing. Formally, the auditor does not violate the rules and is still able to audit for the same client. Yet, in the long-term, it could affect the audit quality. The longer auditor tenure, the closer auditor-client relationship is. Thus, the auditor accommodates the interests of the client at the client's financial statements, including the practice of discretionary accruals as a proxy for audit quality. The samples were selected by purposive sampling method of the companies listed in Indonesia Stock Exchange from the year 2002-2010, with multiple linear regression approach. It shows that tenure, and total assets do not affect the quality of the audit while the size of the audit firm, and debt statistically have significant effect on audit quality. Future studies may extend the period of observation, and using other audit quality measures, such as fraud, and the propensity of auditor to issue going concern opinion..

scholarly journals The role of accrual estimation errors to determine accrual and earnings quality

2016 ◽  
Vol 24 (2) ◽  
pp. 98-115 ◽  
Author(s):  
Javad Izadi Zadeh Darjezi
Keyword(s):  
Standard Deviation ◽  
Cash Flow ◽  
Earnings Quality ◽  
Cash Flows ◽  
Working Capital ◽  
Bottom Line ◽  
Significant Information ◽  
Accrual Quality ◽  
Content Type

Purpose Managers, investors and security analysts all pay special attention to the bottom line of income statements and they miss significant information included in accruals about the quality of earnings. A considerable portion of the earnings-quality literature examines the possibility of using the accruals to shift reported income among fiscal periods. One of the main roles of working-capital accruals is to adjust the recognition of cash flows. This paper aims to focus on earnings quality by examining the working-capital accruals quality using the method of Dechow and Dichev (2002). Design/methodology/approach Following the Dechow and Dichev (2002) model, the result of this paper shows that accrual quality is related to the absolute magnitude of accruals negatively. Also, the standard deviation of accruals, cash flows, sales and earnings is positively related to firm size. The result demonstrates and suggests that these observable firm characteristics can be used as instruments for measuring accrual quality. According to this framework, the author expects that the larger the unsigned abnormal accrual measure, the lower the earnings quality. Therefore, firms with low accrual quality have more accruals that are unrelated to cash flow realisations and so have more noise and less persistence in their earnings. Findings After examining earnings and accrual quality, this paper finds that average UK company behaviour was quite similar to the behaviour found earlier in the USA. This paper’s findings show that greater volatility of sales, cash flow, accruals and earnings results in a lower accrual quality. Without a doubt, some of the analysis in this paper, especially that using different equations to calculate working-capital accruals, leads us to a valuable improvement of the earlier studies. Originality/value In this paper, the author follows the method of Dechow and Dichev (2002) and define accrual quality as the extent to which accruals map into cash-flow insights based on the UK data. To find the quality of working-capital accruals, the author uses the standard deviation of the residuals as accrual quality that resulted from the author’s firm-specific OLS regressions of working-capital accruals based on last, current and one-year-ahead operating cash flow. Unlike prior research, to avoid a restriction to working-capital accruals, we use different equations to cover more items of working-capital accruals.

scholarly journals The Effect of Liquidity, Company Age and Company Size on Earnings Quality (Studies on Property and Real Estate Sector Companies Period 2017-2019)

2021 ◽  
Vol 1 (2) ◽  
pp. 105-114
Author(s):  
Retnoning Ambarwati ◽  
Feri Dwi Hastuti
Keyword(s):  
Real Estate ◽  
Firm Size ◽  
Sampling Method ◽  
Stock Exchange ◽  
Earnings Quality ◽  
Test Method ◽  
Company Size ◽  
Firm Age ◽  
Real Estate Sector

This study aims to analyze the effect of liquidity, firm age, firm size on earnings quality. The independent variables used are liquidity, company age, company size. The dependent variable is earnings quality. Population p enelitian are p ompany that stands in Real Estate Sector listed on the Indonesia Stock Exchange (BEI) Period 2017-2019. The sampling method used is the purposive sampling method with a total of 21 companies during the observation period of 3 consecutive years with 65 samples. Data analysis tools: classical assumption test method, multiple linear regression analysis test, and hypothesis testing. The hypothesis of this study is liquidity , Age Company , and Company Size partial effect on k Quality of earnings in the Real Estate Property companies listed on the Stock Exchange in 2017-2019 .  The results showed that the liquidity of the firm size had no effect on earnings quality, while firm age had an effect on earnings quality. H acyl R 2 coefficient determinant ( R 2 ) shows at 0.353 or 35.3%, meaning that the liquidity factor (X1), Age Company (X2), Company Size (X3) affects the quality of earnings (Y) on the company's property and real estate listed on the IDX in 2017-2019, the remaining 64.7% is influenced by other factors not examined in this study such as profitability, audit quality, capital structure and so on.

scholarly journals Earnings quality measurements and determinants: the case of listed firms in Vietnam

2021 ◽  
Author(s):  
Hieu Pham Minh ◽  
Quyen Nguyen Do
Keyword(s):  
Earnings Management ◽  
Earnings Quality ◽  
Panel Data Analysis ◽  
Firm Characteristics ◽  
Firm Age ◽  
Listed Firms ◽  
Accruals Quality ◽  
Effect Regression ◽  
Negative Impacts

The study aims to review different measurements of earnings quality and investigate its determinants which are mainly derived from firm characteristics of Vietnamese listed companies from 2011 to 2019. Panel data analysis is implemented, and fixed-effect regression is employed along with post-estimation tests to achieve robust findings. The research results indicate that dividend yield and firm size are positively related to earnings quality while financial leverage, growth, profitability, and accounting losses have negative impacts on earnings quality. Meanwhile, firm age as well as the Circular 200 have positive partial impact on the quality of earnings of listed firms in Vietnam. Keywords: Earnings management, Earnings quality, Accruals quality

Sign in / Sign up

Export Citation Format

Share Document