Big 4 Office Size and Audit Quality

2009 ◽  
Vol 84 (5) ◽  
pp. 1521-1552 ◽  
Author(s):  
Jere R. Francis ◽  
Michael D. Yu
Keyword(s):  
Risk Factors ◽  
Earnings Management ◽  
Audit Quality ◽  
Management Behavior ◽  
Going Concern ◽  
Big 4 ◽  
Client Risk ◽  
Office Size ◽  
Audit Reports ◽  
Auditor Characteristics

ABSTRACT: Larger offices of Big 4 auditors are predicted to have higher quality audits for SEC registrants due to greater in-house experience in administering such audits. We test this prediction by examining a sample of 6,568 U.S. firm-year observations for the period 2003–2005 and audited by 285 unique Big 4 offices. Results are consistent with larger offices providing higher quality audits. Specifically, larger offices are more likely to issue going-concern audit reports, and clients in larger offices evidence less aggressive earnings management behavior. These findings are robust to extensive controls for client risk factors and to controls for other auditor characteristics. While the evidence suggests audit quality is higher on average in larger Big 4 offices, we make no claims that audit quality is unacceptably low in smaller offices.

scholarly journals An Analysis of Auditors' Going-Concern Reporting Accuracy in Private Firms

2018 ◽  
Vol 32 (4) ◽  
pp. 117-132 ◽  
Author(s):  
Kris Hardies ◽  
Marie-Laure Vandenhaute ◽  
Diane Breesch
Keyword(s):  
Large Scale ◽  
Audit Quality ◽  
Private Firms ◽  
Reporting Accuracy ◽  
Public Firms ◽  
Going Concern ◽  
Big 4 ◽  
Cast Doubt ◽  
One Year ◽  
Audit Reports

SYNOPSIS The accuracy of audit reports is often viewed as a signal for audit quality. Prior research shows that in the context of going-concern reporting in audit markets dominated by public firms, some auditors are more accurate than others (e.g., Big N firms). This study is the first large-scale study that investigates going-concern reporting accuracy in an audit market dominated by private firms. The threat of reputation and litigation costs incentivizes auditors to report accurately in markets dominated by public firms, but such incentives are largely absent in markets dominated by private firms. Hence, reporting accuracy in such markets might not vary across auditors. Our main analysis is based on a sample of 1,375 Belgian firms that ceased to exist within one year from the financial statement date. Our results show that the frequency of Type II misclassification does not vary across auditor types (Big 4 versus non-Big 4, audit firm and partner industry specialists versus non-specialists, more experienced versus less experienced, and female versus male auditors). Overall, these results cast doubt on the existence of quality differences among auditors in audit markets dominated by private firms.

To be or not to be – auditors’ ability to signal going concern problems

2015 ◽  
Vol 11 (2) ◽  
pp. 175-192 ◽  
Author(s):  
Torbjörn Tagesson ◽  
Peter Öhman
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Annual Reports ◽  
Content Type ◽  
Going Concern ◽  
Big 4 ◽  
Audit Firms ◽  
Research Opportunity ◽  
Audit Reports ◽  
The Impact

Purpose – This paper aims to chart Swedish auditors’ likelihood of issuing going concern warnings (GCWs), and to investigate the relationship between formal auditor competence, audit fees and audit firm, respectively, and the likelihood of issuing GCWs. Design/methodology/approach – The empirical data are based on annual reports and audit reports for 2,547 limited companies that went bankrupt in 2010 in the wake of the financial crisis and had filed a financial statement in the year before the bankruptcy. Findings – The findings indicate that Swedish auditors seldom issue GCWs. Moreover, there is a positive relationship between audit fee level and the likelihood of issuing GCWs, and Big 4 auditors being more likely to issue such warnings than other auditors. However, the analyses identify differences between audit firms (within the group of Big 4 firms and within the group of other audit firms) in terms of their predictions of client bankruptcies. This suggests a need for further investigation of firm-specific differences. Contrary to what was predicted, authorized auditors are not more likely to issue GCWs than approved auditors. Research limitations/implications – This paper did not investigate the impact of audit experience and tenure or the possibility that auditors may signal survival problems by resigning. Practical implications – Levying appropriate audit fees creates opportunities for thorough audits, but auditors’ formal competence based on training and qualification is not a factor that enforces audit quality. Based on the findings, the authors also suggest some clarifications of existing standards to reduce ambiguity regarding the reporting of survival problems. Originality/value – The Swedish setting is a context in which most companies are small, creditor interest in accounting and auditing is strong and auditors must issue a modified audit opinion if half of the shareholders’ equity is spent. This setting offers a unique research opportunity because the formal competence differs between Sweden’s two categories of certified auditors, and it allows exploration beyond the dichotomy of Big 4 versus other audit firms.

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.

Board characteristics, external auditing quality and earnings management

2014 ◽  
Vol 4 (1) ◽  
pp. 79-96 ◽  
Author(s):  
Neila Boulila Taktak ◽  
Ibtissem Mbarki
Keyword(s):  
Earnings Management ◽  
Management Practices ◽  
Audit Quality ◽  
Good Practice ◽  
Board Structure ◽  
External Audit ◽  
Content Type ◽  
Board Characteristics ◽  
Big 4 ◽  
The Impact

Purpose – The purpose of this paper is to examine the impact of board characteristics and external audit quality on earnings management among major Tunisian banks over the period 2003-2007. Design/methodology/approach – Multivariate regressions are employed to test the effect of board structure and external audit quality on discretionary provisions as a proxy for earnings management. Findings – Results indicate that among the characteristics of the board, CEO duality is associated with higher levels of discretionary provisions. However, the presence of directors affiliated to the largest shareholder tends to constrain earnings management practices. The results reveal also that a co-audit belonging to the BIG 4 provides incentives to manage earnings while the capacity of the external auditor to disclose reservations impacts negatively the manager's discretion. Practical implications – First, it is not desirable to appoint a co-audit both belonging to the BIG 4. Second, the presence of affiliated directors reduces the discretionary practices except in cases where directors are affiliated to families. In this case, banks should strengthen the presence of independent directors. Finally, the delineation of the leeway left in the Tunisian accounting standards would provide more transparent financial information. Originality/value – This study contributes to the literature on governance and its impact on earnings management among Tunisian banks by introducing two variables that have not been tested before which are affiliated directors and co-audit. The paper will be of value to banks willing to comply with the Governance Good Practice Guide adopted recently in Tunisia.

Audit quality and earnings management: evidence from Jordan

2016 ◽  
Vol 17 (2) ◽  
pp. 170-189 ◽  
Author(s):  
Ebraheem Saleem Salem Alzoubi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Least Square ◽  
Cross Sectional ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Jones Model

Purpose – The purpose of this paper is to test the association between audit quality and earnings management (EM). Audit quality studies documented that accruals would reduce when the auditor is independent or the audit firm is large. Design/methodology/approach – This paper uses generalised least square regression to investigate the influence of audit quality on EM. The sample contained 86 companies listed on the Amman Stock Exchange from 2007 to 2010. The cross-sectional modified Jones model was employed to measure discretionary accruals as a proxy for EM. Findings – This paper revealed that there is a significantly negative association between audit quality and EM. The result inferred that EM level is significantly lower among companies using the services of independent auditors. Moreover, this study exposed that the level of EM is significantly less among companies hiring a Big 4 audit firm, as compared to companies utilising the service of a non-Big 4 audit firm. Research limitations/implications – The measurement error, which is a rigorous concern for studies on EM, is one of the limitations in this study. Hence, the current study wholly inherited the limits of the modified Jones model. Practical implications – The findings based on the current study would provide beneficial information for regulators in Jordan and other countries with an institutional environment similar to that of Jordan. Moreover, the results provided valuable information to investors in assessing the influence of audit quality on financial reporting quality (FRQ). Originality/value – The current study contributed to auditing and corporate governance literature and its influence on EM among Jordanian companies. This research will be of value to companies seeking to reduce EM and enhance FRQ.

scholarly journals The Effect of Earnings Management on Company’s Performance with Audit Quality and Company’s Size as Moderating Variables

Telaah Bisnis ◽  
2019 ◽  
Vol 18 (2) ◽  
pp. 2017
Author(s):  
Aprih Susanto ◽  
Rahmatya Widyaswati
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Corporate Performance ◽  
Stock Exchange ◽  
Financial Statements ◽  
Performance Effect ◽  
Accounting Firm ◽  
Big 4 ◽  
Manufacturing Company ◽  
Negative Effect

Abstract The purpose of this study was to see how the effects of earnings management on the perfor­mance of companies with audit quality and size of the company as a moderating variable. High Quality Audit demonstrated with large or small public accounting firm. The size of the company can be seen from how many assets owned by the company itself. The sample in this study is based on purposive sampling, with specific criteria that a manufacturing company listed on the Stock Exchange during the period 2011-2014 which publishes annual financial statements (annual report) in complete accordance with the measurement variables to be studied in this re­search, manufacturing company whose financial statements are audited by KAP Big 4 and non- Big 4. So in the get the 22 companies audited by the Big 4 accounting firm and the 28 companies audited by KAP Non Big 4. The results of this study variable Profit Management significant negative effect on the performance effect Perusahaan. VariabelCompany’s Size significantly strengthen the positive relationship between Profit Management with Corporate performance. Variable Audit Quality significant positive effect strengthens the relationship between the Profit Management with Corporate Performance.  

scholarly journals Does Revenue-Expense Matching Relate To Going-Concern Audit Opinion Conditional On Firm’s Financial Distress?

2016 ◽  
Vol 32 (3) ◽  
pp. 947-966 ◽  
Author(s):  
Hak Woon Kim ◽  
Sooro Lee
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Financial Distress ◽  
Management Behavior ◽  
Audit Opinion ◽  
Going Concern ◽  
Conservative Accounting ◽  
Aggressive Accounting ◽  
And Behavior

This paper investigates how firms manage the revenue-expense relationship in the presence of a going-concern audit opinion (GCO). Using Korean data, we find that firms with GCOs both delay and accelerate recognition of current expenses for current revenues. We also find that firms in severe financial distress that receive GCOs exhibit conservative accounting, whereas GCO firms in relatively less financial trouble adopt aggressive accounting. Overall, our results imply that firms’ matching extent and behavior provide useful information regarding financial reporting and can explain the earnings management behavior of firms with GCOs.

Earnings Management, Audit Committee effectiveness and The Role of Auditor Characteristics

2020 ◽  
Vol 11 (1) ◽  
pp. 9-9
Author(s):  
Rizky Eriandani ◽  
Melly Karina Kurniawan
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Agency Theory ◽  
Capital Markets ◽  
Audit Committee ◽  
Audit Quality ◽  
Theoretical Framework ◽  
Clear Understanding ◽  
External Auditors ◽  
Auditor Characteristics

This research aims to provide empirical evidence regarding the effect of auditor characteristics on the relationship between audit committee effectiveness and earnings management. Mechanisms of good corporate governance can limit and control the opportunistic actions of management. The higher level of effectiveness of the audit committee will reduce the tendency of companies to practice earnings management. In addition to the Audit Committee as an internal party that oversees the credibility of financial statements, it is also necessary to supervise external parties, namely external auditors. So that with an effective audit committee and the function of the external auditor it is expected to reduce earnings management. Agency theory is used as a theoretical framework to provide a robust theoretical framework for investigating manager behavior in various companies. In this perspective, agency theory provides a clear understanding of the effectiveness of audit committees and the characteristics of auditors, and recognizes this as the most crucial oversight mechanism that reduces agency costs, manages conflicts of interest, and mitigates earnings management. The contribution of this research to the existing literature both theoretically and empirically. Theoretically, it will add governance theory about the interaction between the audit committee and external auditors in ensuring the quality of financial reporting. Empirically, the results of research on corporate governance and reporting quality reveal that the majority of them have been conducted in countries with advanced capital markets. In contrast, studies conducted in countries with developing capital markets are still scarce. Keywords: Audit Committee, Earnings Management, Auditor, Audit Quality

Earnings Quality of Foreign versus U.S. Reverse Mergers: Geographical Location or Firm-Level Incentives?

2015 ◽  
Vol 15 (1) ◽  
pp. 49-66 ◽  
Author(s):  
Chu Chen ◽  
Giorgio Gotti ◽  
Don Herrmann ◽  
Kathryn Schumann
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Earnings Quality ◽  
Geographical Location ◽  
Firm Level ◽  
Business Press ◽  
Reverse Mergers ◽  
Big 4 ◽  
Reverse Merger

ABSTRACT We test whether geographical location, audit quality, and equity offering play a role in the earnings quality of reverse merger (RM) firms. We provide evidence that, contrary to the popular focus on foreign reverse mergers by the business press, earnings management is equally likely in both U.S. and foreign RM companies. We find that firm characteristics are more indicative of the likelihood to manage earnings than geographical location. The presence of a Big 4 auditor for RM firms is associated with higher earnings quality and a survival rate almost twice as high in comparison to RM firms audited by a non-Big 4 auditor. Moreover, we find that while earnings management is a common practice at all RM firms, it is especially pervasive for RM firms that are issuing new equity after the reverse merger.

Auditor Fees and Auditor Independence—Evidence from Going Concern Reporting Decisions in Germany

2013 ◽  
Vol 32 (4) ◽  
pp. 129-168 ◽  
Author(s):  
Nicole V. S. Ratzinger-Sakel
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Auditor Independence ◽  
Litigation Risk ◽  
Manufacturing Companies ◽  
Anglo Saxon ◽  
Going Concern ◽  
Big 4 ◽  
Reporting Decisions ◽  
Auditor Fees

SUMMARY This study examines the potential for non-audit services to impair auditor independence using going concern modifications as a proxy for audit quality. While prior research has focused primarily on Anglo-Saxon environments, this study focuses on Germany because of the country's unique reporting attributes and lower litigation risk when compared to Anglo-Saxon settings. Based on a sample of financially stressed manufacturing companies during the period 2005–2009, the results do not suggest that German auditors are less independent when the level of non-audit fees is high. However, there is some evidence that Big 4 audit firms are less likely than their non-Big 4 counterparts to issue a going concern emphasis-of-matter paragraph for engagements characterized by both relatively high levels of non-audit fees and financial stress.

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