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.

Audit Partner Tenure and Audit Planning and Pricing

2010 ◽  
Vol 29 (2) ◽  
pp. 45-70 ◽  
Author(s):  
Jean C. Bedard ◽  
Karla M. Johnstone
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Internal Controls ◽  
First Year ◽  
Public Companies ◽  
Audit Opinion ◽  
Audit Firm ◽  
Audit Planning ◽  
Sarbanes Oxley ◽  
Client Knowledge

SUMMARY: This paper investigates the association between audit engagement partner tenure and audit planning and pricing. Prior archival research from countries requiring partner signature on the audit opinion provides mixed results on the implications of partner tenure for audit quality. While variation in audit quality based on partner tenure implies some difference in the conduct of the engagement, prior research has not yet addressed whether engagement processes differ based on partner tenure. Using proprietary data from a large audit firm, we find that planned engagement effort increases following partner rotation, suggesting that new partners invest effort to gain client knowledge in the first year on the engagement. We also examine planned realization rates, finding them to be lower following partner rotation. This implies that new partners’ investments in client knowledge are not compensated by clients. We also find higher planned realization rates on audits having the same engagement partner for more than five years, a longer tenure than is now allowed for public companies following the Sarbanes-Oxley Act. We obtain these results while controlling for client risks that affect audit planning and pricing, including those related to financial reporting, management integrity, and internal controls.

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.

Female Board Presence and the Likelihood of Financial Restatement

2012 ◽  
Vol 26 (4) ◽  
pp. 607-629 ◽  
Author(s):  
Lawrence J. Abbott ◽  
Susan Parker ◽  
Theresa J. Presley
Keyword(s):  
Financial Reporting ◽  
Matched Pair ◽  
Related Factors ◽  
Board Diversity ◽  
Financial Restatement ◽  
Sarbanes Oxley ◽  
Time Period ◽  
Lower Likelihood ◽  
Female Director ◽  
The Impact

SYNOPSIS: This paper investigates the impact of one form of board diversity on the incidence of financial restatement. More specifically, we hypothesize that there is a negative relation between female board presence (defined as whether or not a board has at least one female director) and the likelihood of a financial restatement. Our hypothesis is consistent with a female board presence contributing to the board's ability to maintain an attitude of mental independence, diminishing the extent of groupthink and enhancing the ability of the board to monitor financial reporting. Utilizing the U.S. General Accounting Office (U.S. GAO 2002) report on restatements, we construct a matched-pair sample of 278 annual (187 quarterly) restatement and 278 annual (187 quarterly) control firms. After controlling for other restatement-related factors, we find a significant association between the presence of at least one woman on the board and a lower likelihood of restatement. Our results continue to hold in annual restatements from the post-Sarbanes-Oxley (SOX) time period.

The Impact of Regulation on the U.S. Nonprofit Sector: Initial Evidence from the Nonprofit Integrity Act of 2004

2011 ◽  
Vol 25 (1) ◽  
pp. 107-125 ◽  
Author(s):  
Daniel G. Neely
Keyword(s):  
Nonprofit Organizations ◽  
Financial Reporting ◽  
Nonprofit Sector ◽  
Reporting Quality ◽  
Charitable Organizations ◽  
Time Period ◽  
Financial Statement Audit ◽  
Before And After ◽  
Financial Scandals ◽  
The Impact

SYNOPSIS: The early 2000s revealed a series of high-profile financial frauds in the corporate and nonprofit sectors. In response to several of these financial scandals, California passed the Nonprofit Integrity Act (NIA) of 2004. This seminal piece of governance regulation sought to increase financial transparency and mitigate fundraising abuses by California charitable organizations. This study examines the characteristics of California charitable organizations before and after the Act to understand the initial impact the Act had on nonprofit organizations. Key findings from the study include limited reported improvement in financial reporting quality and an increase in accounting fees following the implementation of the Act. California nonprofits subject to the Act’s provisions did exhibit an increase in executive compensation following the implementation of the Act; however, the increase was less than that exhibited by the population of nonprofits during the same time period. Overall, the results of this study suggest that the initial impact of regulations similar to the NIA is greatest for organizations that did not previously have a financial statement audit.

Implementing IFRS in Saudi Arabia: evidence from publicly traded companies

2020 ◽  
Vol 28 (2) ◽  
pp. 243-273 ◽  
Author(s):  
Mohammad Nurunnabi ◽  
Eva K. Jermakowicz ◽  
Han Donker
Keyword(s):  
Saudi Arabia ◽  
Financial Reporting ◽  
Critical Role ◽  
Saudi Arabian ◽  
Content Type ◽  
Audit Firm ◽  
Big 4 ◽  
Expected Benefits ◽  
The Impact ◽  
Ifrs Implementation

Purpose The Saudi Organization for Certified Public Accountants (SOCPA) requires that International Financial Reporting Standards (IFRS), as endorsed in Saudi Arabia, be used by all listed and unlisted companies. This study aims to provide insight into IFRS implementation problems, based on a survey sent to Saudi Arabian companies listed on Tadawul, the Saudi stock market (i.e. financial hub in the Middle East). Design/methodology/approach The survey focused on the impact that IFRS conversion has had on companies, their accounting and their finance strategies. The benefits and challenges of the adoption of IFRS are analyzed, including matters pertaining to the level of understanding and experience with IFRS, perceptions about the quality of IFRS and the impact of adoption of IFRS on consolidated equity and net income. Findings The survey had a response rate of 72 per cent. The results indicate a majority of respondents support conversion to IFRS as it results in higher quality financial reporting; the most important expected benefits of adopting IFRS include greater reporting transparency and improved comparability with other businesses; other expected benefits include harmonization of internal and external reporting, and increased cross-border investment opportunities; the IFRS process is costly and ties up resources because of its complexity and training needed and companies expect increased volatility in reported financial results that will impact share option plans and/or other incentive plans tied to profits. However, the authors find strong support among preparers of the financial statements for IFRS, as evidenced by higher agreement among respondents to the survey on the benefits of adopting IFRS, rather than on the costs of its adoption. Furthermore, the analysis shows that the likelihood of Saudi Arabian firms that are in favor of adopting IFRS decreases if the audit firm is one of the Big 4. The reason for this negative relationship could be that the cost of transition toward IFRS will be high. Therefore, Saudi Arabian firms will not favor a transition toward IFRS when their audit firm belongs to the Big 4. Most difficult to implement IFRS, as listed by respondents, include those on financial instruments, revenue, leases and employee benefits. Originality/value The authors show how economic and environmental factors play a critical role in the IFRS implementation process. This study should be important to all countries worldwide that are in the process of adopting IFRS.

‘Big 4’ influence on audit market

2020 ◽  
Vol 7 (54) ◽  
pp. 143-156
Author(s):  
Marta Tache
Keyword(s):  
Financial Reporting ◽  
Stock Exchange ◽  
Business Group ◽  
Anova Analysis ◽  
Group Influence ◽  
Audit Firm ◽  
Financial Reporting Standards ◽  
Audit Market ◽  
Big 4 ◽  
The Impact

AbstractThe main purpose of this paper is to determine the impact that Big 4 companies have had after the adoption of International Financial Reporting Standards (IFRS) became mandatory on the audit market. Thus, after thorough research of the specialised studies, the impact of the financial reporting based on IFRS is analysed, while considering that Big 4 companies have created a strong monopoly that led to several changes on the audit market. All the companies listed on the Bucharest Stock Exchange that traded premium shares from 2011 to 2019 were analysed. With the use of ANOVA analysis, this paper verifies if the profitability, shareholders’ funds, firm size and the size of the business group influence the choice of the audit firm. Our results confirm that the choice of an audit firm is influenced by the shareholders’ funds, number of employees and the size of the business group. Besides, this paper presents an analysis of the changes that have occurred from 2011–2019 on the audit market of Romania.

Office-Level Characteristics of the Big 4 and Audit Report Timeliness

2014 ◽  
Vol 33 (3) ◽  
pp. 129-152 ◽  
Author(s):  
James D. Whitworth ◽  
Tamara A. Lambert
Keyword(s):  
Financial Reporting ◽  
Low Cost ◽  
Fiscal Year ◽  
Audit Report ◽  
Audit Firm ◽  
Big 4 ◽  
Office Size ◽  
Reporting Environment ◽  
The Impact ◽  
Industry Expertise

SUMMARY: Recent changes in the audit and financial reporting environment have resulted in longer audit report lags and have increased the importance of identifying factors associated with a timely audit. We examine timeliness implications of office-specific attributes of the audit firm. Specifically, we examine whether office-specific industry expertise, office size, and the importance of the client to the local office are associated with audit delay (i.e., the time between fiscal year-end and the audit report date). We explore the sensitivity of our results to various measures and consider the impact of earnings quality. We examine two types of industry expertise and whether the aforementioned audit firm attributes are associated with a propensity to issue an early earnings announcement. We find that office-specific industry expertise is negatively associated with audit delay (for all but the largest quartile of firm offices) while office size and client importance are both positively associated with audit delay; however, the most important clients are associated with a more timely audit. Office-specific industry expertise is positively associated with the propensity to announce earnings substantially early and such expertise garnered via a product-specialist strategy is positively associated with audit delay relative to a low-cost specialist strategy. Our study provides further support for the importance of office-specific characteristics on audit and financial reporting outcomes and provides evidence of the benefit of office-specific industry expertise.

Insights into Large Audit Firm Sampling Policies

2015 ◽  
Vol 9 (2) ◽  
pp. P7-P18 ◽  
Author(s):  
Brant E. Christensen ◽  
Randal J. Elder ◽  
Steven M. Glover
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Sampling Methods ◽  
Accounting Firms ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Audit Firms ◽  
Current Sampling ◽  
Audit Sampling

SUMMARY Changes in the audit profession after Sarbanes-Oxley, including mandatory audits of internal control over financial reporting and PCAOB oversight and inspection of audit work, have potentially changed the nature and extent of audit sampling in the largest accounting firms. In our study, “Behind the Numbers: Insights into Large Audit Firm Sampling Policies” (Christensen, Elder, and Glover 2015), we administered an extensive, open-ended survey to the national offices of the Big 4 and two other international accounting firms regarding their firm's audit sampling policies. We find variation among the largest firms' policies in their use of different sampling methods and in inputs used in the sampling applications that could result in different sample sizes. We also provide evidence of some of the sampling topics firms find most problematic, as well as changes to firms' policies regarding revenue testing due to PCAOB inspections. Our evidence provides important insights into current sampling policies, which may be helpful to audit firms in evaluating their sampling inputs and overall sampling approaches.

The Impact of Enterprise Resource Planning (ERP) Systems on the Effectiveness of Internal Controls over Financial Reporting

2011 ◽  
Vol 25 (1) ◽  
pp. 129-157 ◽  
Author(s):  
John J. Morris
Keyword(s):  
Financial Reporting ◽  
Enterprise Resource Planning ◽  
Internal Control ◽  
Control Sample ◽  
Resource Planning ◽  
Internal Controls ◽  
Erp Systems ◽  
Individual Account ◽  
Sarbanes Oxley ◽  
The Impact

ABSTRACT: Software vendors that market enterprise resource planning (ERP) systems have taken advantage of the increased focus on internal controls that grew out of the Sarbanes-Oxley (SOX) legislation by emphasizing that a key feature of ERP systems is the use of “built-in” controls that mirror a firm’s infrastructure. They argue that these built-in controls and other features will help firms improve their internal control over financial reporting as required by SOX. This study tests that assertion by examining SOX Section 404 compliance data for a sample of firms that implemented ERP systems between 1994 and 2003. The results suggest that ERP-implementing firms are less likely to report internal control weaknesses (ICW) than a matched control sample of non-ERP-implementing firms. It also finds that this difference exists for both general (entity-wide), and individual (account-level) controls.

Determinants of the Persistence of Internal Control Weaknesses

2012 ◽  
Vol 26 (2) ◽  
pp. 307-333 ◽  
Author(s):  
Bonnie K. Klamm ◽  
Kevin W. Kobelsky ◽  
Marcia Weidenmier Watson
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Management Training ◽  
Internal Controls ◽  
Senior Management ◽  
Data Availability ◽  
The Public ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Specific Control

SYNOPSIS This paper analyzes the degree to which material weaknesses (MWs) in internal control reported under the Sarbanes-Oxley Act of 2002 (SOX) affect the future reporting of MWs. Particularly, we examine information technology (IT) and non-IT MWs and their breakdown into specific IT-related entity-level, non-IT-related entity-level, and account-level deficiencies. Analysis reveals that most account-level and entity-level deficiencies occur at a significantly higher rate in SOX 404 reports with at least one IT MW than in MW reports with only non-IT MWs. Further, the presence and count of both types of MWs and all three types of deficiencies are associated with increased future MWs, as are lower profitability, non-Big 6 auditor, and firm complexity. Specific control deficiencies related to senior management, training, and IT control environment have the strongest impact on future MWs. These results indicate that effective corporate governance of both the IT and non-IT domains is pivotal in establishing and maintaining strong internal controls over financial reporting. Data Availability:  Data are available from the public sources identified in the paper.

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