How Increased Regulatory Oversight of Nonaudit Services Affects Investors' Perceptions of Earnings Quality

2012 ◽  
Vol 32 (1) ◽  
pp. 85-112 ◽  
Author(s):  
Aasmund Eilifsen ◽  
Kjell Henry Knivsflå
Keyword(s):  
Audit Quality ◽  
Data Availability ◽  
Negative Effects ◽  
Regulatory Oversight ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Audit Firms ◽  
Earnings Response ◽  
Nonaudit Services ◽  
The Relationship

SUMMARY In 2003, the Financial Supervisory Authority of Norway (FSA) disclosed that audit firms had violated the legal restrictions for providing nonaudit services (NAS). In response, the FSA tightened the NAS regulations. This study examines how regulatory oversight affects the relation between the provision of NAS and earnings response coefficients (ERC). For small, non-industry specialized audit firms, the disclosure of violations in 2003 negatively affected the relationship between NAS and ERC, but the effect was more pronounced in the disclosure year 2003 than in the new regulation period 2004–2008. For Big 5 audit firms, these negative effects are moderated, indicating higher audit quality. Contrary to our expectations, the results of this study suggest that investors perceive audit firm industry specialization as a threat to independence in 2003. Data Availability: Data are publicly available from the listed sources.

Auditor Industry Specialization and Earnings Quality

2003 ◽  
Vol 22 (2) ◽  
pp. 71-97 ◽  
Author(s):  
Steven Balsam ◽  
Jagan Krishnan ◽  
Joon S. Yang
Keyword(s):  
Audit Quality ◽  
Earnings Quality ◽  
Discretionary Accruals ◽  
Prior Work ◽  
Brand Name ◽  
Absolute Level ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Auditor Industry Specialization ◽  
Earnings Response

This study examines the association between measures of earnings quality and auditor industry specialization. Prior work has examined the association between auditor brand name and earnings quality, using auditor brand name to proxy for audit quality. Recent work has hypothesized that auditor industry specialization also contributes to audit quality. Extending this literature, we compare the absolute level of discretionary accruals (DAC) and earnings response coefficients (ERC) of firms audited by industry specialists with those of firms not audited by industry specialists. We restrict our study to clients of Big 6 (and later Big 5) auditors to control for brand name. Because industry specialization is unobservable, we use multiple proxies for it. After controlling for variables established in prior work to be related to DAC and the ERC, we find clients of industry specialist auditors have lower DAC and higher ERC than clients of nonspecialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of nonspecialists.

Who Did the Audit? Audit Quality and Disclosures of Other Audit Participants in PCAOB Filings

2014 ◽  
Vol 90 (5) ◽  
pp. 1939-1967 ◽  
Author(s):  
Carol Callaway Dee ◽  
Ayalew Lulseged ◽  
Tianming Zhang
Keyword(s):  
Audit Quality ◽  
Market Reaction ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Multivariate Model ◽  
Significant Decline ◽  
Earnings Response Coefficients ◽  
Absolute Value ◽  
Earnings Response ◽  
First Time

ABSTRACT We empirically test whether audit quality is affected when part of an SEC issuer's audit is outsourced to auditors other than the principal auditor (“participating auditors”). We find a significantly negative market reaction and a significant decline in earnings response coefficients (ERCs) for experimental issuers disclosed for the first time as having participating auditors involved in their audits. However, we find no market reaction and no decline in ERCs for a matching sample of issuers that are not disclosed as using participating auditors, nor for issuers disclosed for the second or third time as using participating auditors. We also find actual audit quality as measured by absolute value of performance-matched discretionary accruals is lower for the experimental issuers, although we find no difference in audit fees paid by the experimental and matching issuers in a multivariate model. Our findings suggest that the PCAOB's proposed rule requiring disclosure of the use of other auditors in addition to the principal auditor would provide information useful to investors in assessing audit quality for SEC issuers.

How does reciprocal rent-seeking between politicians and auditors influence audit quality? - Evidence from China

2021 ◽  
Author(s):  
Ku He ◽  
Xiaofei Pan ◽  
Gary Gang Tian ◽  
Yanling Wu ◽  
Chun Cai
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Rent Seeking ◽  
Political Connections ◽  
Chinese Market ◽  
Earnings Response Coefficients ◽  
Capital Costs ◽  
Study Results ◽  
Earnings Response ◽  
Audit Opinions

In this study, we propose a reciprocal rent-seeking game between politicians and individual auditors with political connections, and examine how these auditors' political connections influence their audit quality. Using hand-collected data from the Chinese market from 2008 to 2013, we find that politically connected auditors have a significantly lower tendency to issue modified audit opinions (MAOs). In addition, we also find that politicians' career prospects are significantly adversely influenced by MAOs being issued in their jurisdictions, while auditors' political connections enable them to charge higher audit fees, acquire larger market share, and reduce the likelihood of encountering regulatory sanctions. Further evidence suggests that compared with their non-connected counterparts, the politically connected auditors tend to issue less accurate audit opinions, reduce client firms' earnings response coefficients (ERCs), and increase client firms' capital costs. Collectively, our study results suggest that individual auditors' political connections facilitate the reciprocal rent-seeking activities between these auditors and politicians, which ultimately undermines audit quality.

Hiring Auditors with a Part II Quality Control Report: An Opportunity for Increased Earnings Management or Lower Audit Fees?

2020 ◽  
Vol 5 (1) ◽  
pp. 73-93
Author(s):  
Jared Eutsler ◽  
D. Kip Holderness ◽  
Megan M. Jones
Keyword(s):  
Quality Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Fiscal Year ◽  
The Public ◽  
Audit Firms ◽  
Public Company ◽  
General Demand ◽  
Systemic Quality

ABSTRACT The Public Company Accounting Oversight Board's (PCAOB) Part II inspection reports, which disclose systemic quality control issues that auditors fail to remediate, signal poor audit quality for triennially inspected audit firms. Auditors that receive a Part II inspection report typically experience a decrease in clients, which demonstrates a general demand for audit quality. However, some companies hire auditors that receive Part II inspection reports. We examine potential reasons for hiring these audit firms. We find that relative to companies that switch to auditors without Part II reports, companies that switch to auditors with Part II reports have higher discretionary accruals in the first fiscal year after the switch, which indicates lower audit quality and a heightened risk for future fraud. We find no difference in audit fees. Our results suggest that PCAOB Part II inspection reports may signal low-quality auditors to companies that desire low-quality audits. Data Availability: Data are available from the public sources cited in the text.

scholarly journals Legal Systems and Earnings Quality: The Role of Auditor Industry Specialization

2007 ◽  
Vol 26 (2) ◽  
pp. 25-55 ◽  
Author(s):  
Soo Young Kwon ◽  
Chee Yeow Lim ◽  
Patricia Mui-Siang Tan
Keyword(s):  
Earnings Quality ◽  
Legal Environment ◽  
Industry Specialization ◽  
Earnings Response Coefficients ◽  
Auditor Industry Specialization ◽  
Earnings Response ◽  
International Setting ◽  
Using Data ◽  
The Impact ◽  
Industry Specialist

This paper extends prior studies in auditor industry specialization to an international setting and examines if the impact of industry specialist auditors on earnings quality is dependent on the legal environments. Using data for 28 countries over 20 industries from 1993 to 2003, we find that clients of industry specialist auditors have lower discretionary current accruals and higher earnings response coefficients than clients of nonspecialist auditors. In addition, we find that the impact of auditor industry specialization on earnings quality increases as the legal environment weakens. Collectively, the results suggest that the benefits from engaging the services of industry specialist auditors increase as a country's legal environment shifts from a strong to a weak environment. Our results are robust to the inclusion of additional control variables.

Does Audit Fee Homogeneity Exist? Premiums and Discounts Attributable to Individual Partners

2011 ◽  
Vol 30 (4) ◽  
pp. 249-272 ◽  
Author(s):  
Stuart D. Taylor
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Market ◽  
Homogeneity Assumption ◽  
Audit Firms ◽  
Audit Fee ◽  
Using Data ◽  
The Individual ◽  
Made In

SUMMARY This paper investigates the implied assumption, made in many audit fee determination studies, that, within a given audit firm, all partners produce a statistically identical level of audit quality and earn a statistically identical level of audit fees. This is referred to as the “homogeneity assumption.” However, this is contradicted by the individual auditor behavioral literature, which shows that different individual auditor characteristics can have an impact on audit quality. Given the fact that audit partners differ in their quality, this paper hypothesizes that different audit partners will be able to earn differing levels of fees. This hypothesis is tested by estimating an audit fee model using data from 822 Australian publicly listed companies for the year 2005. Australia is an ideal audit market for this research, as the disclosure of the name of the audit engagement partner in the audit report is mandatory. The empirical results indicate that individual audit partners earn individual audit fee premiums (or discounts) that are not explainable by the audit firms of which they are members. Data Availability: All data have been extracted from publicly available sources.

scholarly journals Internal Auditing Outsourcing, Nonaudit Services and Audit Fees

2021 ◽  
Author(s):  
Effiezal Aswadi Abdul Wahab ◽  
Willie E. Gist ◽  
Ferdinand A. Gul ◽  
Mazlina Mat Zain
Keyword(s):  
Audit Quality ◽  
Negative Relationship ◽  
Audit Fees ◽  
Internal Auditing ◽  
External Audit ◽  
Nonaudit Services ◽  
The Relationship

This study examines the relationship between outsourced internal audits, nonaudit services and audit fees. We use Malaysian data to show that client firms that outsource their internal auditing function (IAF) are associated with lower external audit fees than those with in-house IAF. Moreover, this negative relationship is significantly stronger for firms that purchase greater amounts of nonaudit services (NAS) from the auditor. The results suggest that an auditor who provides NAS to a client and thus earns additional overall revenue is willing to accept lower audit fees provided a high audit quality can be achieved through reliance on outsourced IAFs.

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.

Does Auditor Industry Specialization Matter? Evidence from Market Reaction to Auditor Switches

2007 ◽  
Vol 26 (1) ◽  
pp. 19-45 ◽  
Author(s):  
W. Robert Knechel ◽  
Vic Naiker ◽  
Gail Pacheco
Keyword(s):  
Audit Quality ◽  
Market Reaction ◽  
Abnormal Returns ◽  
Brand Name ◽  
Market Reactions ◽  
Industry Specialization ◽  
Big 4 ◽  
Audit Firms ◽  
Auditor Switches ◽  
Differential Costs

Numerous capital market studies have investigated the stock market's reaction to firms switching to and from brand name auditors (Big 8/6/5/4 auditors). However, audit firm brand name is only one possible indication of the quality of an auditor. This study contributes to the existing literature on auditor switching, by examining how the market reacts to auditor switches to or from audit firms that are considered to be industry specialists. Consistent with our hypotheses, we find that firms switching between Big 4 auditors experience significant positive abnormal returns when the successor auditor is an industry specialist, and they experience significant negative abnormal returns when the successor auditor is not a specialist. We also find that these market reactions are more likely to be due to changes in perceived audit quality rather than differential costs of using specialist auditors. In supplemental analysis of switches involving non-Big 4 auditors, we find that firms that switch from a specialist Big 4 auditor to a non-Big 4 auditor suffer the largest negative market reaction. Surprisingly, we also observe that the market reacts most positively when a company switches from a non-Big 4 auditor to a Big 4 auditor who is not a specialist. These results suggest that the market does perceive audit quality differences based on industry specialization to be relevant to the valuation of a company's market value.

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