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.

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.

Risk Shifts in the Market for Audits: An Examination of Changes in Risk for “Second Tier” Audit Firms

2009 ◽  
Vol 28 (2) ◽  
pp. 93-118 ◽  
Author(s):  
Chris E. Hogan ◽  
Roger D. Martin
Keyword(s):  
Business Risk ◽  
Switching Activity ◽  
Publicly Traded ◽  
Audit Market ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Audit Firms ◽  
Risk Characteristics ◽  
Changes In Risk ◽  
Second Tier

SUMMARY: The market for audit services has been affected in recent years by significant changes like the demise of Andersen and the implementation of the Sarbanes-Oxley Act of 2002. One impact of these market changes has been an increase in the frequency of auditor switches, and in particular, the frequency of clients switching from Big 4 auditors to smaller audit firms. We examine whether this switching activity has resulted in changes in the risk characteristics of publicly traded clients of Second Tier audit firms. This analysis is important as regulators are concerned about audit market concentration and would like to see the Second Tier audit firms expand their share of the publicly traded client market. Results indicate that Second Tier firms are accepting clients with potentially increased audit and client business risk characteristics relative to their existing client base, but they also appear to be “shedding” clients that have increased audit and client business risk characteristics relative to their existing client base. Some of the differences in risk characteristics for those departing clients are more pronounced in the period after 2000, when we expect the most significant changes in the audit market occurred. Second Tier auditors are increasingly exposed to more business risk as they accept larger clients coming from Big 4 predecessor auditors, which may increase their exposure to litigation.

scholarly journals Auditors’ perceptions of their roles and responsibilities: The impact of exposure to litigation risk

Accounting ◽  
2021 ◽  
Vol 7 (6) ◽  
pp. 1435-1444 ◽  
Author(s):  
Ahmed Abdullah Saad Al-Dhubaibi
Keyword(s):  
Financial Statements ◽  
Third Parties ◽  
Litigation Risk ◽  
Certified Public Accountants ◽  
Audit Firm ◽  
Roles And Responsibilities ◽  
Big 4 ◽  
Audit Firms ◽  
Public Accountants ◽  
The Impact

The purpose of this study is to investigate the perception of auditors regarding their responsibilities and potential liabilities to third parties in the case of failure to detect fraud/material misstatements and report the findings to the appropriate party. The study proposes that auditors’ perception of their own responsibilities will depend on the level of litigation threat expected by the auditor based on his or her position in the audit firm. The questionnaire was sent to the big 4 audit firms, the global audit firms other than the big 4, and to 189 different sized local audit firms registered with the Saudi Organization of Certified Public Accountants (SOCPA). The findings of this study revealed significant variations among auditors with regards to their perceptions of their own responsibilities and liabilities to financial statements’ users affected by their expected level of exposure to litigation risk.

The impact of non-timely 10-Q filings and audit firm size on audit fees

2018 ◽  
Vol 33 (5) ◽  
pp. 503-516 ◽  
Author(s):  
Tiffany Chiu ◽  
Feiqi Huang ◽  
Yue Liu ◽  
Miklos A. Vasarhelyi
Keyword(s):  
Regression Model ◽  
Firm Size ◽  
Audit Fees ◽  
Audit Risk ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact

Purpose Prior studies suggest that non-timely 10-Q filings indicate higher potential risks than non-timely 10-K filings. Furthermore, larger audit firms tend to be more risk-averse and conservative about reporting. Inspired by these research streams, this paper aims to investigate the influence of non-timely 10-Q filings on audit fees and the impact of audit firm size on this association. Design/methodology/approach The cross-sectional audit fee regression model used in this study is similar to that used in prior audit fee research (Simunic, 1980; Francis et al., 2005; Hay et al., 2006; Wang et al., 2013). The model includes the following five major characteristics that would influence auditors’ fee decisions: auditee size (LNAT), complexity (REIVAT, FOREIGN, SEG), financial condition (LOSS, ROA, GROWTH, ZSCORE), special events (ICW, RESTATE, INITIAL, GC) and auditor type (BIG4). To examine the effect of non-timely 10-Q filings on audit fees, the variable NT10Q is included in the audit fee model. Findings The results indicate that when both non-timely 10-K and non-timely 10-Q filings are included in the regression model, only non-timely 10-Q filings are significantly associated with higher audit fees, suggesting that the presence of non-timely 10-Q filings signals more serious underlying problem than non-timely 10-K filings in the audit fees decision processes. In addition, we find that audit fees for firms audited by Big 4 auditors are 26.4 per cent higher when those firms file non-timely 10-Q reports, whereas there is no significant association between non-timely 10-Q filings and audit fees for firms audited by non-Big 4 auditors. Practical implications As no attention has been paid to the investigation of the impact of non-timely 10-Q filings on audit fees, with the aim of filling the gap of this specific research area, this study examines the association between non-timely 10-Q filings and audit fees and the influence of audit firm size on this association. Originality/value The contribution of this paper is threefold: first, it is the first study to examine the association between non-timely 10-Q filings and audit fees. The results show that non-timely 10-Q filings are a better and earlier indicator of audit risk than non-timely 10-K filings. Second, the results reveal that the relationship between non-timely 10-Q filings and audit fees is affected by audit firm size. Specifically, Big 4 auditors tend to charge higher audit fees in the presence of non-timely 10-Q filings, reflecting that they are more sensitive to audit risk than smaller audit firms are. Third, an examination of the quarterly effect of non-timely 10-Q filings on audit fees indicates a stronger effect from the first quarter’s non-timely 10-Q filings, compared to the second or third quarter.

scholarly journals The Impact of the Prohibition of Non–Audit Services on the Profitability of Big-4-affiliated Audit Firms in Bangladesh

2016 ◽  
Vol 1 (1) ◽  
pp. 1-7
Author(s):  
Md Jahidur Rahman ◽  
Mo Lai Lan Phllis ◽  
Lam Mo
Keyword(s):  
Financial Reporting ◽  
Securities And Exchange Commission ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Depth Study ◽  
Stable Source ◽  
The Impact ◽  
Depth Interviews ◽  
Non Audit Services

The purpose of this paper is to study the impact of the prohibition of certain non-audit services by the Securities and Exchange Commission (SEC) of Bangladesh on the profitability of the audit firms which are affiliated with Big-4 international audit firms. This paper is based on personal in-depth interviews with the Big-4-affiliated audit firms. A qualitative approach, in a way which is descriptive and illustrative, is adopted in this research. This research provides evidence for the fact that audit services are the most significant and stable source of income for an audit firm. Although respondents generally admit that non-audit services might be more profitable, they all agree that audit services are indeed the core operations of an audit firm. Findings in this paper reveal a contemporary picture of the auditing profession in Bangladesh and elucidate the impact that the implementation of Corporate Governance Order 2006 has on an audit firm's profitability. This research is the first in-depth study of the impact of the prohibition of non-audit services on the profitability of the Big-4-affiliated audit firms in Bangladesh. Financial reporting regulatory authorities in Bangladesh or other developing countries may find the findings in this paper useful.

The Impact of Partners' Economic Incentives on Audit Quality in Big 4 Partnerships

2021 ◽  
Author(s):  
Simon Dekeyser ◽  
Ann Gaeremynck ◽  
W. Robert Knechel ◽  
Marleen Willekens
Keyword(s):  
Audit Quality ◽  
Positive Association ◽  
Economic Incentives ◽  
Negative Association ◽  
Client Characteristics ◽  
Financial Situation ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
The Impact

Economic incentives are fundamental for understanding auditor behavior. In this paper, we investigate the association between the extent of partners' fee-based compensation, partners' observable net wealth, and audit quality. Using a sample of Belgian Big 4 audit firms and their predominantly private clients, our results suggest a negative association between audit quality and partner fee-based compensation, and a positive association between audit quality and partner observable net wealth. Moreover, our results show that the latter association is most significant when a partner is carrying a lot of debt, which indicates that a partner's financial situation may affect audit quality. The extent of fee-based incentives also varies among partners of the same audit firm. Furthermore, partner and client characteristics differ based on the extent of fee-based compensation. Our findings should be of interest to regulators and audit firms as they suggest that audit partner's economic incentives significantly affect audit quality.

The Effect of Office Changes within Audit Firms on Clients' Audit Quality and Audit Fees

2020 ◽  
Vol 39 (1) ◽  
pp. 71-99
Author(s):  
Carl W. Hollingsworth ◽  
Terry L. Neal ◽  
Colin D. Reid
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Additional Analysis ◽  
Audit Firm ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact ◽  
Audit Partner Rotation

SUMMARY While prior research has examined audit firm and audit partner rotation, we have little evidence on the impact of within-firm engagement team disruptions on the audit. To examine these disruptions, we identify a unique sample of companies where the audit firm issuing office changed but the audit firm did not change and investigate the effect of these changes on the audit. Our results indicate that companies that have a change in their audit firm's issuing office exhibit a decrease in audit quality and an increase in audit fees. In additional analysis, we partition office changes into two groups—client driven changes and audit firm driven changes. This analysis reveals that client driven changes are more likely to result in a higher audit fee while audit quality is unchanged. Conversely, audit firm driven changes do not result in a higher audit fee but do experience a decrease in audit quality.

Audit firms and industry specialization in an emerging economy

2018 ◽  
Vol 14 (3) ◽  
pp. 338-362
Author(s):  
Karim Hegazy ◽  
Mohamed Hegazy
Keyword(s):  
Financial Services ◽  
Capital Investment ◽  
Emerging Economy ◽  
Annual Reports ◽  
Brand Name ◽  
Industry Specialization ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms

PurposeThis study aims to investigate the implications of audit industry specialization on auditor’s retention and growth within an emerging economy. Factors such as whether the firm is a Big 4, a firm with international affiliation, a local firm and the type of industry were studied to analyse the reasons behind audit firm retention and growth.Design/methodology/approachThis research is based on a field study related to audit firms providing services to listed companies in an emerging economy. The sample includes the top 100 publicly held companies’ in the Egyptian stock market during 2006-2011 for which their annual reports are analysed to determine the audit firms’ retention and growth. An assessment of the continuity of the auditors and the increase in the number of audit clients were also measured.FindingsThe results confirm that industry specialization has an important effect on the auditor’s retention, especially for industries where capital investment is significant such as buildings, construction, financial services, housing and real estate. Big 4 audit firms retained their clients because of their industry specialization and brand name. Evidence was found that good knowledge of accounting and auditing standards resulted in audit firms with international affiliation competing with the Big 4 for clients’ retention and growth.Originality/valueThis study contributes to the existing literature, as it is among the first to provide empirical evidence on auditor retention, growth and auditor’s dominance in an emerging economy such as Egypt.

scholarly journals The adoption of IFRS in publicly listed enterprises of high and medium capitalization and the impact of the size of the audit firm in Greece

2014 ◽  
Vol 11 (4) ◽  
pp. 707-716 ◽  
Author(s):  
Michail Pazarskis ◽  
Andreas Koutoupis ◽  
George Drogalas ◽  
Konstantinos Tsakiris
Keyword(s):  
Stock Exchange ◽  
Accounting Standards ◽  
Financial Statements ◽  
International Accounting Standards ◽  
Audit Firm ◽  
The Past ◽  
Big 4 ◽  
The Difference ◽  
Athens Stock Exchange ◽  
The Impact

In 2002, developments in the global markets during the past decades have highlighted the need for common accounting standards among companies all around the world so as the financial statements to be comparable. From 2005 onwards the Greek Companies listed on the Athens Exchange was an accounting “revolution” of the 21st century, given the difference in philosophy between the Greek GAAP and the International Accounting Standards-IAS (next, IFRS). This study evaluates the implementation of IFRS on the financial statements of Greek publicly listed companies of high and medium capitalization, which are companies that are included in the FTSE 20 and FTSE 40 indexes of the Athens Stock Exchange-ASE, respectively. Also, for those firms we examined the effect of the size of the audit firm. The research was conducted based on the analysis of thirteen ratios. According to our analysis only few of the ratios have changed significantly. Finally, regarding the impact of the size of the audit firm the results reveal controversy with the present bibliography concerning “Big 4” in comparison with “non-Big 4” firms in Greece

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.

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