The Effect of Engagement Auditors on Financial Statement Comparability

2021 ◽  
Author(s):  
Liuchuang Li ◽  
Baolei Qi ◽  
Jieying Zhang
Keyword(s):  
Fixed Effects ◽  
Financial Statement ◽  
Industry Specialization ◽  
Personal Traits ◽  
Audit Firm ◽  
Audit Firms ◽  
Prior Literature ◽  
Client Firm ◽  
Industry Peers ◽  
Over Time

Prior literature finds that audit firm style shapes client firm financial statement comparability (Francis, Pinnuck, and Watanabe 2014). We expect that engagment partners also shape financial statement comparability, and find that two clients audited by the same engagement auditor have more comparable accruals than two clients audited by different auditors. We also find that engagement auditor past comparability style explains new client comparability with industry peers, suggesting that engagement auditor style persists over time. We uncover that auditor personal traits such as gender, experience, qualification, and industry-specialization are associated with higher comparability. Finally, we find that adding the audit-firm, audit-office and engagement-auditor fixed effects sequentially increases the adjusted R2 of our accrual comparability model by 0.6%, 1.9%, and 10%, respectively. Taken together, our findings suggest that the engagement auditors have a distinguishable effect on financial statement comparability that is incremental to the effect of audit firms and offices.

Industry Specialization by Auditors

1999 ◽  
Vol 18 (1) ◽  
pp. 1-17 ◽  
Author(s):  
Chris E. Hogan ◽  
Debra C. Jeter
Keyword(s):  
High Risk ◽  
Market Share ◽  
Scale Economies ◽  
The Other ◽  
Industry Specialization ◽  
Audit Market ◽  
Audit Firms ◽  
Regulated Industries ◽  
Concentration Levels ◽  
Over Time

Dramatic changes in recent years in the audit market suggest the timeliness of an investigation of trends in auditor concentration and an extension of prior research (e.g., Danos and Eichenseher 1982). In recent press, large audit firms have claimed that specialization is a goal of increasing importance. Peat Marwick, for example, has restructured along industry lines, claiming to be recruiting professionals for national teams of multidisciplinary experts organized to “focus on the same industry to serve clients optimally.” On the other hand, litigation concerns might prompt auditors to diversify their risks by diversifying their clientele. In this study, we examine trends in industry specialization from 1976 to 1993 and the industry factors which may affect specialization; whether market share increases are greater for audit firms classified as specialists; and whether the nation's largest audit firms have increased their market share in the industries which they have identified as their focus industries. We find evidence that concentration levels have increased over this period, consistent with the claims of the large audit firms. We find that auditor concentration levels are higher in regulated industries, in more concentrated industries and in industries experiencing rapid growth, but lower in industries with a high risk of litigation. Levels of concentration have increased over time in nonregulated industries providing evidence that scale economies or superior efficiencies of heavy-involvement auditors are not limited to regulated industries but extend to nonregulated industries as well. We also find that for the audit firms classified as market leaders at the beginning of the year, market share has increased over time, whereas market share has declined for firms with a smaller share at the beginning of the year. This suggests that there are returns to investing in specialization.

How a Shared Auditor Affects Firm-Pair Comparability: Implications of Both Firm and Individual Audit Styles

2020 ◽  
Vol 39 (3) ◽  
pp. 133-160
Author(s):  
Lili Jiu ◽  
Bin Liu ◽  
Yuanyuan Liu
Keyword(s):  
Accounting Standards ◽  
Financial Statement ◽  
Professional Judgment ◽  
Audit Process ◽  
Personal Style ◽  
Audit Firm ◽  
Market Participants ◽  
Audit Firms ◽  
Audit Reports ◽  
Practical Implications

SUMMARY In this study, we examine the roles of audit firms and individual auditors in improving financial statement comparability. We conduct the study in the Chinese setting, in which the identities of signing auditors are revealed in audit reports and accounting standards are principle based. After controlling for audit firm style, we find that firm pairs with shared signing auditors have incrementally greater comparability. Our results indicate that individual auditors exhibit their own personal style in implementing accounting standards and exercising professional judgment in the audit process. Overall, our study underscores the association between individual auditors and comparability, with practical implications for market participants and policymakers.

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.

Industry Specialization by Global Audit Firm Networks

2009 ◽  
Vol 84 (2) ◽  
pp. 355-382 ◽  
Author(s):  
Elizabeth Carson
Keyword(s):  
Market Share ◽  
Industry Specialization ◽  
Audit Firm ◽  
Global Industry ◽  
Audit Market ◽  
Audit Firms ◽  
Audit Fee ◽  
Firm Networks ◽  
National Industry

ABSTRACT: This study investigates the role of global audit firm networks in the market for audit services. Underlying theory suggests that there are benefits from the use of network structures, which enable these firms to expand efficiently into the global audit market and to develop global industry specializations. I identify global and national industry specialist auditors via market share metrics based on client assets audited, and use a large sample of 15,583 clients from 62 countries in 2000 and 14,628 clients from 60 countries in 2004. I find in both periods that audit fee premiums are consistently associated with global specialist auditors, irrespective of whether those audit firms are or are not national specialists.

scholarly journals Predicting Impending Bankruptcy From Auditor Qualified Opinions And Audit Firm Changes

2011 ◽  
Vol 22 (1) ◽  
Author(s):  
David L. Senteney ◽  
Yinning Chen ◽  
Ashok Gupta
Keyword(s):  
Empirical Evidence ◽  
Relevant Literature ◽  
Explanatory Power ◽  
Financial Statement ◽  
Compelling Evidence ◽  
Font Size ◽  
Strategic Response ◽  
Audit Firm ◽  
Audit Firms

<p class="MsoBlockText" style="margin: 0in 0.6in 0pt 0.5in;"><span style="font-style: normal; font-size: 10pt; mso-bidi-font-style: italic;"><span style="font-family: Times New Roman;">Unlike prior research, we investigate the incremental explanatory power of both auditor qualified opinions and auditor changes beyond the information conveyed by traditional financial statement ratios in predicting bankruptcy. We find that qualified auditor opinion and auditor changes are both important in predicting impending bankruptcy and that auditor changes convey important information not reflected in auditor qualified opinions alone.<span style="mso-spacerun: yes;">&nbsp; </span>In fact, we find compelling evidence that auditor changes provide incremental explanatory power in predicting impending firm failure beyond what is conveyed by auditor qualified opinions and traditional financial statement ratios considered jointly.<span style="mso-spacerun: yes;">&nbsp; </span>Although the existing relevant literature provides no empirical evidence in this regard to our knowledge, this result is intuitive as one motivation for clients to change audit firms is to seek less conservative professional auditors as a strategic response to manifestation of the financial statement effects of bankruptcy.</span></span></p>

scholarly journals Auditor Style Dan Komparabilitas Laporan Keuangan

2019 ◽  
Vol 1 (1) ◽  
pp. 109-122
Author(s):  
Riski Wulandari ◽  
Henri Agustin ◽  
Mayar Afriyenti
Keyword(s):  
Stock Exchange ◽  
Financial Statements ◽  
Financial Statement ◽  
Accounting Standard ◽  
Audit Firm ◽  
Internal Working ◽  
Big 4 ◽  
Audit Firms ◽  
Reported Earnings ◽  
Working Rules

Auditor style defined as a unique set of internal working rules for the interpretation and enforcement of accounting standard within the auditor’s clienteles belongs to particular audit firm, especially Big 4 audit firms. As a consequence, financial statements of two companies audited by the same Big 4 auditor, subjected to the same audit style, tend to have comparable earnings which have a more similar accrual, than two companies audited by two different Big 4 auditors with different styles. This research attempts to examine the effect of this auditor style issue on manufacturing financial statement comparability listed in Indonesian Stock Exchange. For five years’ observations, through 2012-2016 this research demonstrated a result with auditor style affects the comparability of reported earnings within a Big 4 auditor’s clientele and found no effect of auditor style on financial statement comparability within a non-Big 4 auditor’s clientele

Does Increased Audit Partner Tenure Reduce Audit Quality?

2008 ◽  
Vol 23 (4) ◽  
pp. 553-572 ◽  
Author(s):  
David L. Manry ◽  
Theodore J. Mock ◽  
Jerry L. Turner
Keyword(s):  
Audit Quality ◽  
Discretionary Accruals ◽  
Financial Statement ◽  
Risk Level ◽  
Negatively Associated ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Using Data ◽  
International Audit

The Sarbanes-Oxley Act of 2002 requires the lead audit or coordinating partner and the reviewing partner to rotate off the audit every five years so the engagement can be viewed “with fresh and skeptical eyes.” Using data obtained from actual audits by multiple U.S. offices of three large international audit firms, we examine whether there is a relationship between evidence of reduced audit quality, measured by estimated discretionary accruals, and audit partner tenure with a specific client. We find that estimated discretionary accruals are significantly and negatively associated with the lead audit partner's tenure with a specific client. Thus, audit quality appears to increase with increased partner tenure. After controlling for client size and engagement risk, we find audit partner tenure significantly and negatively associated with estimated discretionary accruals only for small clients with partner tenure of greater than seven years, regardless of risk level. We also find that tenure is not significantly associated with estimated discretionary accruals for large clients. This suggests that as partner tenure increases, auditors of small client firms become less willing to accept more aggressive financial statement assertions by managers, and that partner tenure does not affect audit quality for large clients or for shorter-tenure smaller clients. Our results relating to audit partner tenure are consistent with the conclusions about audit firm tenure by Geiger and Raghunandan (2002); Johnson, Khurana, and Reynolds (2002);Myers, Myers, and Omer (2003); and Nagy (2005) and extend their findings by focusing on individual audit partners rather than on audit firms.

Quasi Rents to Audit Firms from Longer Tenure

2018 ◽  
Vol 32 (2) ◽  
pp. 81-102 ◽  
Author(s):  
Aloke (Al) Ghosh ◽  
Subprasiri (Jackie) Siriviriyakul
Keyword(s):  
Sample Selection ◽  
Auditor Independence ◽  
Audit Report ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Over Time ◽  
Jel Classifications

SYNOPSIS We offer an economic explanation for why audit firms oppose mandatory firm rotation. Using an innovative sample that overcomes sample selection biases, we find that fees for Big 4 audit firms increase noticeably over the audit firm's tenure. In contrast, fees for non-Big 4 audit firms decline as tenure lengthens. Using audit report lag as a proxy for audit cost, we find that audit cost declines over the audit firm's tenure, and this decline is even larger for Big 4 auditors. Our results indicate that Big 4 engagements become more profitable or earn “quasi rents” over time, which may explain why Big 4 audit firms are so opposed to firm- but not partner-rotation. Whether non-Big 4 auditors earn any quasi rents remains doubtful. Our findings suggest a need to better monitor auditor independence and audit judgments when tenure is long, especially for Big 4 auditors, because economic bonding between the audit firm and client tends to increase over time. JEL Classifications: M40; M42.

Evidence of Organizational Learning and Organizational Forgetting from Financial Statement Audits

2015 ◽  
Vol 35 (2) ◽  
pp. 53-72 ◽  
Author(s):  
Monika Causholli
Keyword(s):  
Production Efficiency ◽  
Financial Statement ◽  
Accounting Firm ◽  
Audit Firm ◽  
Productivity Losses ◽  
Learning Rates ◽  
Organizational Forgetting ◽  
Audit Production ◽  
Productivity Gains ◽  
Over Time

SUMMARY This paper examines the association between audit firm tenure and audit production efficiency. The analyses are based on proprietary audit production data provided by a large international accounting firm. The results document evidence of learning over time. Specifically, repeatedly servicing a client increases production efficiency by reducing the total audit hours expended in an audit engagement. Learning rates vary across different ranks of labor and learning is more pronounced among higher personnel ranks, with lower ranks experiencing little learning. Further, learning rates are not constant over time; there is little incremental learning beyond the initial productivity gains consistent with the concept of the learning curve. Finally, the results show some evidence of productivity losses as audit hours increase for very long tenures consistent with the notion of organizational forgetting. JEL Classifications: M41; M42

Auditor Industry Specialization, Auditor Changes, and Accounting Restatements

2008 ◽  
Vol 22 (4) ◽  
pp. 389-413 ◽  
Author(s):  
Robin N. Romanus ◽  
John J. Maher ◽  
Damon M. Fleming
Keyword(s):  
Financial Reporting ◽  
Error Detection ◽  
Financial Statement ◽  
Corporate Boards ◽  
Accounting Restatements ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Audit Firms ◽  
The Impact

SYNOPSIS: The increasing occurrence of accounting restatements has drawn considerable attention from regulators, audit firms, and corporate boards concerning audit and financial statement quality. Research suggests that auditor industry specialization is associated with improved error detection and greater financial statement quality. We examine the impact of auditor industry specialization on a sample of restatement and nonrestatement firms and find that auditor industry specialization is negatively associated with the likelihood of accounting restatement. In addition, focusing on the subset of restatement firms, we find that auditor industry specialization reduces the likelihood of issuing restatements affecting core operating accounts, suggesting that industry specialization adds value in auditing a particularly critical area of the firms’ continuing operations. Finally, we find changing from a nonspecialist to a specialist auditor increases the likelihood of restatement, and changing from a specialist to a nonspecialist reduces the likelihood of restatement. Our findings are consistent with industry specialization enhancing auditors’ role in improving the quality of the financial reporting process, particularly related to the core operations of their clients.

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