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.

PCAOB Inspections and Large Accounting Firms

2011 ◽  
Vol 26 (1) ◽  
pp. 43-63 ◽  
Author(s):  
Bryan K. Church ◽  
Lori B. Shefchik
Keyword(s):  
Audit Quality ◽  
Linear Trend ◽  
Dominant Role ◽  
Data Availability ◽  
Financial Statement ◽  
Public Companies ◽  
Accounting Firms ◽  
Big 4 ◽  
Second Tier ◽  
Over Time

SYNOPSIS The purpose of this paper is to analyze the PCAOB's inspection reports of large, annually inspected accounting firms. The inspection reports identify audit deficiencies that have implications for audit quality. By examining the inspection reports in detail, we can identify the nature and severity of audit deficiencies; we can track the total number of deficiencies over time; and we can pinpoint common, recurring audit deficiencies. We focus on large accounting firms because they play a dominant role in the marketplace (i.e., they audit public companies that comprise approximately 99 percent of U.S.-based issuer market capitalization). We document a significant, downward linear trend in the number of deficiencies from 2004 to 2009. We also identify common, recurring audit deficiencies, determine the financial statement accounts most often impacted by audit deficiencies, and isolate the primary emphasis of the financial statement impacted. Our findings generally are consistent comparing Big 4 and second-tier accounting firms, though a few differences emerge. In addition, we make comparisons with findings that have been documented for small, triennially inspected firms. Data Availability: The data are available from public sources.

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.

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.

Spatial Competition in Local Audit Markets and the Fallout on Deloitte from the 2007 PCAOB Censure

2016 ◽  
Vol 36 (2) ◽  
pp. 1-19 ◽  
Author(s):  
Jeff P. Boone ◽  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Market Power ◽  
Audit Quality ◽  
Spatial Competition ◽  
Spatial Location ◽  
Audit Fees ◽  
Audit Market ◽  
Big 4 ◽  
Audit Fee ◽  
The Face ◽  
Market Leader

SUMMARY We examine whether Deloitte's spatial location in local audit markets affected the firm's adverse fallout—in terms of decreased ability to retain new clients and maintain audit fees—from the 2007 PCAOB censure. We motivate our inquiry by the notion that auditor-client alignment and auditor-closest-competitor distance can help differentiate the incumbent Big 4 auditor from other Big 4 auditors and thus provide market power, i.e., inhibit clients from shopping for another supplier because of the lack of a similar Big 4 provider in the local audit market. Consequently, it seems reasonable that the increase in switching risk and loss of fee growth suffered by Deloitte following the 2007 PCAOB censure will be lower in local markets where Deloitte was the market leader and its market share distance from its closest competitor was greater. Our findings suggest that the decline in Deloitte's audit fee growth rate following the 2007 PCAOB censure was concentrated in the pharmaceutical industry, although the client loss rate appears to have occurred more broadly (across all cities and industries). Collectively, our findings suggest that audit quality issues override auditor market power, i.e., differentiation does not provide Big 4 firms market power in the face of adverse regulatory action. JEL Classifications: G18; L51; M42; M49.

The Association between Audit Manager and Auditor-In-Charge Experience, Effort, and Risk Responsiveness

2018 ◽  
Vol 38 (3) ◽  
pp. 121-147 ◽  
Author(s):  
Christine Contessotto ◽  
W. Robert Knechel ◽  
Robyn A. Moroney
Keyword(s):  
Audit Quality ◽  
Data Availability ◽  
The Core ◽  
Specific Experience ◽  
Primary Core ◽  
Using Data ◽  
Audit Team ◽  
Industry Experience ◽  
Jel Classifications ◽  
Core Role

SUMMARY Audit quality is dependent on the experience and effort of the audit team to identify and respond to client risks (risk responsiveness). Central to each team are the core role holders who plan and execute the audit. While many studies treat the partner as the primary core role holder, the manager and auditor-in-charge (AIC) are also important. Using data for engagements from two midtier firms, we analyze the association between the experience and relative effort of the manager and AIC and risk responsiveness. We find a manager's client-specific experience is associated with risk responsiveness for non-listed clients but find no evidence that the general or industry experience of a manager, or the experience of the AIC, is associated with risk responsiveness. The client-specific experience and relative effort of the partner is associated with risk responsiveness. These results suggests that managers can provide an important, albeit limited, contribution to the audit. JEL Classifications: M2. Data Availability: The data were made available to the researchers on the understanding that they will remain confidential.

Did the 2005 Deferred Prosecution Agreement Adversely Impact KPMG's Audit Practice?

2018 ◽  
Vol 38 (1) ◽  
pp. 77-102 ◽  
Author(s):  
Matthew Baugh ◽  
Jeff P. Boone ◽  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Service Provider ◽  
Audit Quality ◽  
Spillover Effect ◽  
Audit Fees ◽  
Data Availability ◽  
Department Of Justice ◽  
Big 4 ◽  
Tax Shelters

SUMMARY We examine the consequences of misconduct in a Big 4 firm's nonaudit practice for its audit practice. Specifically, we examine whether KPMG's audit practice suffered a loss of audit fees and clients and/or a decline in factual audit quality following the 2005 deferred prosecution agreement (DPA) with the Department of Justice for marketing questionable tax shelters. We find little evidence that the DPA adversely impacted KPMG's audit practice by way of either audit fees or the likelihood of client gains/losses, suggesting little or no harm to KPMG's audit reputation. We also find that the DPA had no effect on the firm's factual audit quality, even for those audit clients that dropped KPMG as their tax service provider. Collectively, our findings suggest that there was no spillover effect from the DPA to KPMG's audit practice. Data Availability: All data are publicly available.

Workplace Mindfulness and its Effect on Staff Auditors' Audit Quality-Threatening Behavior

2018 ◽  
Vol 31 (1) ◽  
pp. 55-64 ◽  
Author(s):  
David N. Herda ◽  
Nathan H. Cannon ◽  
Randall F. Young
Keyword(s):  
Indirect Effect ◽  
Audit Quality ◽  
Review Process ◽  
Effective Means ◽  
Data Availability ◽  
Financial Statement ◽  
Work Setting ◽  
Effective Technique ◽  
Staff Level

ABSTRACT This study investigates the effect of staff auditors' workplace mindfulness on premature sign-off—a serious audit quality-threatening behavior that can go undetected through the review process. We also examine whether supervisor coaching is an effective means to engender workplace mindfulness. Using a sample of 115 auditors, we predict and find that (1) auditors who are coached by supervisors to appreciate the importance of their work to external financial statement users are more likely to be mindful in their work setting, and (2) greater workplace mindfulness about financial statement user considerations is associated with a reduced likelihood of auditor sign-off on an audit procedure not completed. We also find that supervisor coaching has an indirect effect on premature sign-off through workplace mindfulness. The results underscore the importance of workplace mindfulness in reducing audit quality-threatening behavior and indicate that supervisor coaching may be an effective technique in eliciting mindfulness among staff-level auditors. Data Availability: Contact the authors.

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