Auditor Quality and Loan Syndicate Structure

2011 ◽  
Vol 30 (4) ◽  
pp. 71-99 ◽  
Author(s):  
Jeong-Bon Kim ◽  
Byron Y. Song
Keyword(s):  
Ownership Structure ◽  
Data Availability ◽  
Syndicated Loans ◽  
Big 5 ◽  
External Auditors ◽  
Big 4 ◽  
Auditor Quality ◽  
Syndicate Structure ◽  
Jel Classifications

SUMMARY This study investigates whether and how the quality of external auditors hired by borrowers has an impact on loan syndicate structure. Our empirical analyses, using a sample of U.S. syndicated loans from 1996 to 2009, show the following findings: First, a larger number of banks participate in syndicated loans to borrowing firms with Big 4 (or previously Big 5 or Big 6) auditors than to those with non-Big 4 auditors. Second, the percentage of a syndicated loan retained by the lead bank(s) is smaller when the borrower is a client of a Big 4 auditor than when the borrower is a client of a non-Big 4 auditor. Third, the effect of auditor quality (Big 4 versus non-Big 4) on loan ownership structure is less pronounced when lenders are able to gather more information about the borrower prior to the loan deal. Overall, our results suggest that auditor quality plays an important role in loan syndication by alleviating information asymmetries between lead banks and non-lead participant banks. JEL Classifications: G21; G32; M42. Data Availability: Data are publicly available from sources identified in the paper.

Determinants and Market Consequences of Auditor Dismissals after Accounting Restatements

2013 ◽  
Vol 89 (3) ◽  
pp. 1051-1082 ◽  
Author(s):  
Karen M. Hennes ◽  
Andrew J. Leone ◽  
Brian P. Miller
Keyword(s):  
Financial Reporting ◽  
Market Reaction ◽  
Data Availability ◽  
Executive Turnover ◽  
Corporate Boards ◽  
External Auditors ◽  
Audit Market ◽  
Big 4 ◽  
Financial Restatements ◽  
Market Consequences

ABSTRACT This study examines the conditions under which financial restatements lead corporate boards to dismiss external auditors and how the market responds to those dismissal announcements. We find that auditors are more likely to be dismissed after more severe restatements but that the severity effect is primarily attributable to the dismissal of non-Big 4 auditors rather than Big 4 auditors. We also document that among corporations with Big 4 auditors, those that are larger and more complex operationally are less likely to dismiss their auditors. Combined, this evidence suggests that firms with higher switching costs and fewer replacement auditor choices are less likely to dismiss their auditors after a restatement, which is informative to the debates about the costs and benefits of mandatory auditor rotation and limited competition in the audit market. Additionally, we examine contemporaneous executive turnover and find evidence that boards view auditor dismissals as complementary rather than substitute responses to restatements. Finally, we investigate the market reaction to auditor dismissals after restatements. The market reaction to the dismissal is significantly more positive following more severe restatements (5.9 percent) relative to less severe restatements (0.6 percent) when the client engages a comparably sized auditor. This positive market reaction is consistent with firms restoring financial reporting credibility by replacing their auditors and highlights the important role that auditors play in the financial markets. Data Availability: Data are available from public sources indicated in the text.

Comparing the Auditor Quality of Arthur Andersen to that of the Big 4

2006 ◽  
Vol 6 (1) ◽  
pp. 135-161 ◽  
Author(s):  
Ross D. Fuerman
Keyword(s):  
Audit Quality ◽  
Public Accounting ◽  
Securities Litigation ◽  
Accounting Firms ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Auditor Quality ◽  
The Individual ◽  
Arthur Andersen

This study compares the audit quality of Arthur Andersen with that of the Big 4 accounting firms. An expanded indicator of audit quality is developed based on the law of business misconduct literature and the legal process literature. A representation of audit quality is derived from an analysis of the legal actions initiated against these five large public accounting firms from 1996 to 2004. The legal action was partitioned into three year periods. In the first period, Arthur Andersen and the Big 4 evidenced no quality differential. In the second and third periods, the Big 4, in aggregate, rated higher on the audit quality indicator than did Andersen. The robustness of these findings is substantiated using multiple logistic regression and sensitivity analysis. When the individual firms are compared with Andersen, all four evidenced higher audit quality; three of the firms are significantly higher. This suggests that Andersen represents an outlier within the audit population. However, the analysis also indicates that overall audit quality declined in the period immediately following the passage of the Private Securities Litigation Reform Act of 1995. This suggests that the Sarbanes-Oxley Act provisions directed toward remedying auditing deficiencies is justified and not an overreaction to a “few bad apples.”

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.

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.

Matching Premiums in the Executive Labor Market

2019 ◽  
Vol 94 (6) ◽  
pp. 109-136 ◽  
Author(s):  
Mary Ellen Carter ◽  
Francesca Franco ◽  
İrem Tuna
Keyword(s):  
Data Availability ◽  
Executive Turnover ◽  
Executive Pay ◽  
Sources Of Uncertainty ◽  
Managerial Talent ◽  
Additional Costs ◽  
New Firm ◽  
Over Time ◽  
Jel Classifications

ABSTRACT We study whether executives receive pay premiums for the uncertainty of their match with a new firm. Using changes in executive-firm matches from Execucomp, we document that executives receive significant attraction premiums when they move to new firms. These premiums vary with proxies that capture potential sources of uncertainty about the quality of the match, and are incremental to pay for managerial talent, generalist ability, industry turnover risk, and potential additional costs incurred by the new employer to attract the executive to the firm, such as payments for forfeited equity and relocation costs. Consistent with compensation for uncertainty of fit, we find that the premiums decrease with the executive's tenure at the new firm, as the uncertainty about the executive-firm match is resolved over time. Our findings raise the possibility that attraction premiums are an additional cost of executive turnover and may contribute to the overall rise in executive pay. JEL Classifications: J24; J33; M12; M52. Data Availability: Data are available from sources cited in the text.

scholarly journals ANALISIS PENGARUH PROPORSI KOMISARIS INDEPENDEN, KEPEMILIKAN MANAJERIAL, DAN KUALITAS AUDITOR EKSTERNAL TERHADAP PENGUNGKAPAN INTELLECTUAL CAPITAL PADA PERUSAHAAN MANUFAKTUR YANG TERDAFTAR DI BURSA EFEK INDONESIA

2017 ◽  
Vol 10 (2) ◽  
Author(s):  
Andhikanandono Hartrianto ◽  
Julianti Sjarief
Keyword(s):  
Intellectual Capital ◽  
Stock Exchange ◽  
Descriptive Analysis ◽  
Linear Regression Analysis ◽  
Multiple Linear Regression Analysis ◽  
Managerial Ownership ◽  
Scoring Method ◽  
External Auditors ◽  
Auditor Quality

This research aims to analyze the influence of proportion of independent commissioners, managerial ownership, and the quality of the external auditors against disclosure of intellectual capital. Testing was done with descriptive analysis and multiple linear regression analysis to examine the relationship between the independent variable to the dependent variable on 35 industrial consumer goods manufacturing company listed on the Indonesia stock exchange from 2012 until 2014. Measurement of intellectual capital disclosure uses the 25 items disclosure scoring method belonging to Gan, et al.             The results in this study showed that the proportion of independent commissioners and external auditor quality has an impact on disclosure of intellectual capital and its influence is positive. Meanwhile, managerial ownership has effect on disclosure of intellectual capital and its influence is negative.

The Effect of External Auditors on Managerial Slack

2018 ◽  
Vol 32 (4) ◽  
pp. 85-115
Author(s):  
Junxiong Fang ◽  
Lerong He ◽  
Tara Shankar Shaw
Keyword(s):  
Audit Fees ◽  
Data Availability ◽  
Firm Resources ◽  
Public Firms ◽  
Auditor Choice ◽  
External Auditors ◽  
Big 4 ◽  
Regulated Industries ◽  
Chinese Public

SYNOPSIS We investigate the role of external auditors in constraining managerial slack. Using panel data on Chinese public firms, we find that firms hiring Big 8 auditors are associated with reduced managerial slack after controlling for the endogenous auditor choice. We also document that Big 8 auditors are more effective in mitigating slack in privately controlled firms and firms located in more developed regions. Moreover, we show that international Big 4 auditors are more effective than the domestic Big 4, and the Big 8 effect is more salient in more competitive and less regulated industries, and in industries with higher litigation risks. Finally, we document a positive relationship between managerial slack and audit fees, particularly in the presence of Big 8 auditors. Overall, our results suggest that high-quality external auditors play an important corporate governance role by serving as both bonding and controlling mechanisms to mitigate managerial exploitation of firm resources. Data Availability: Data are publicly available from sources identified in the article.

SOX 404, Auditor Effort, and the Prevention of Financial Report Misstatements

2017 ◽  
Vol 36 (4) ◽  
pp. 151-177 ◽  
Author(s):  
Yuping Zhao ◽  
Jean C. Bedard ◽  
Rani Hoitash
Keyword(s):  
Internal Control ◽  
Lower Incidence ◽  
Audit Fees ◽  
Data Availability ◽  
Section 404 ◽  
Financial Report ◽  
Auditor Tenure ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Jel Classifications

SUMMARY Prior research shows that the Sarbanes-Oxley Act (SOX) Section 404(b) integrated audit is associated with a lower incidence of misstatements. We predict that under 404(b), the auditor's ability to detect misstatements increases relative to other internal control regimes when greater resources are exerted during the engagement. Supporting this prediction, we find that the benefits of 404(b) versus other regimes (including SOX 404(a)) in reducing misstatements increase with incremental audit effort (proxied by abnormal audit fees). We find no benefit of 404(b) in misstatement reduction when abnormal audit effort is low. This implies that the value of 404(b) testing is not uniform, but rather is greater when sufficient resources are available to thoroughly understand client controls. In contrast, we find no benefit of abnormal audit effort under other regulatory regimes. We further examine the conditions under which knowledge gained from auditor internal control testing is more valuable. We find that the benefits of increased audit effort under 404(b) do not vary across internal control regimes under AS2 versus AS5, and are more pronounced for engagements with shorter auditor tenure, non-Big 4 auditors, and industry-specialist auditors. JEL Classifications: M49. Data Availability: Data used in this study are available from public sources.

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.

Auditors and Disclosure Quality: The Case of Major Customer Disclosures

2017 ◽  
Vol 37 (3) ◽  
pp. 163-189 ◽  
Author(s):  
Joseph Legoria ◽  
Kenneth J. Reichelt ◽  
Jared S. Soileau
Keyword(s):  
Voluntary Disclosure ◽  
National Level ◽  
Data Availability ◽  
Disclosure Quality ◽  
Specialized Knowledge ◽  
Auditor Quality ◽  
Second Tier ◽  
Office Size ◽  
The Relationship ◽  
Jel Classifications

SUMMARY Little is known about the relationship between disclosure quality and auditor quality. We measure disclosure quality as the likelihood of a firm fully disclosing the identity of their major customers in the Form 10-K filing. We also measure voluntary disclosure by exempt smaller reporting companies (SRCs) disclosing, and all firms disclosing the identity in the audited notes, or affirming no major customers. We expect that firms are more likely to disclose when they engage higher-quality auditors who have specialized knowledge of 10-K regulations. We hand-collect a sample of more than 26,000 (34,000) major customer disclosures that we use for our main tests (voluntary disclosure tests). We find that firms are more likely to mandatorily disclose their major customers' identity when audited by either an office- or national-level specialist whose clientele consists largely of firms with major customers. We corroborate these results with other higher-quality auditor measures: Big N, second tier, and office size. We also show that SRCs are more likely to voluntarily disclose when they engage a higher-quality auditor. We provide further evidence of an association between voluntary disclosure and a higher-quality auditor by ranking disclosure quality on audited disclosure, nonaudited disclosure, and no disclosure. JEL Classifications: M42; M41; D23. Data Availability: All data are available from public sources identified in the text.

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