Audit Partner Rotation and Financial Reporting Quality

2014 ◽  
Vol 33 (3) ◽  
pp. 59-86 ◽  
Author(s):  
Barri Litt ◽  
Divesh S. Sharma ◽  
Thuy Simpson ◽  
Paul N. Tanyi
Keyword(s):  
Financial Reporting ◽  
Rotation Period ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Novel Approach ◽  
Partner Change ◽  
Audit Partner Rotation ◽  
The U.S

SUMMARY: Audit partner rotation has received considerable attention globally and in the U.S. since the Sarbanes-Oxley Act of 2002 accelerated the rotation period from seven to five years and expanded the cooling-off period from two to five years. However, research on the effects of audit partner rotation on financial reporting quality in the U.S. is virtually non-existent, largely due to the absence of publicly available information on audit partners. Using a novel approach to determine audit partner rotation, we investigate the effect of rotation on financial reporting quality in the U.S. We find evidence of lower financial reporting quality following an audit partner change. Specifically, we find lower financial reporting quality during the first two years with a new audit partner relative to the final two years with the outgoing partner. We find the lower financial reporting quality to be more prevalent for larger clients. Further analyses suggest the initial year post-rotation presents audit challenges for Big 4 partners, which persist for at least three years for non-Big 4 partners. Audit challenges also appear greater for city-level non-industry specialist auditors and smaller audit offices. We discuss the implications of our results for regulators, policymakers, and the profession at large.

scholarly journals Influence of the Sarbanes-Oxley Act on Financial Reporting Quality: An Overview of EU Firms Cross-Listed in the USA

2021 ◽  
Author(s):  
Ujkan Bajra ◽  
Rrustem Asllanaj
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Publicly Traded ◽  
Publicly Traded Companies ◽  
Sarbanes Oxley ◽  
Novel Approach ◽  
The Us ◽  
The Usa

Abstract This paper investigate whether compliance with the Sarbanes–Oxley Act of 2002 (SOX) Sect. 302 (financial reporting) and 404 (internal controls) enhances financial reporting quality (FRQ). This study focuses on EU publicly traded companies that are cross-listed in the US markets. Using a novel approach with respect to operationalization of the SOX, the empirical research integrated into this paper advances the understanding of financial reporting quality for both practitioners and policymakers. The study argues that financial reporting quality increased after SOX entered into force but, notably, we find that FRQ improves with compliance with SOX302 but not with SOX404. Examination of the latter relationship at the subsection level also reveals that compliance with certain SOX requirements is not satisfactory. We find that three out of six subsections of SOX302 are directly associated with financial reporting, while subsections (1), (5) and (6) of SOX302 are not related with FRQ, indicating that the management team, albeit not entirely, provides a reliable financial reporting systems. We also find that compliance with some SOX404’s subsections has been relatively low (i.e. subsections (1) and (3) of SOX404)), suggesting that corporations have not established and are not maintaining suitable internal control systems over financial reporting.

SOX Doomsday Predictions in Hindsight: Evidence from Delistings

2007 ◽  
Vol 1 (1) ◽  
pp. A21-A27
Author(s):  
Lizabeth A. Austen ◽  
Denise Dickins
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
News Releases ◽  
Sarbanes Oxley ◽  
Big 4

Once the enactment of the Sarbanes-Oxley Act of 2002 (SOX) became imminent, many companies protested that complying with SOX provisions was too onerous and costly and would result in many companies choosing to withdraw from public trading. We investigate whether these doomsday predictions were well-founded based on a review of SEC Form 15 requests to delist and related news releases during the period 2002 to 2004. Our findings suggest that there has not been a significant increase in the number of requests to delist since the enactment of SOX. Furthermore, we find that of companies that delist, relatively few (4.7 percent) attribute their delisting to SOX. Companies that did attribute their delisting to SOX were smaller and less likely to be audited by Big 4 auditors, characteristics that have been previously found to be associated with poorer financial reporting quality.

Did the 1999 NYSE and NASDAQ Listing Standard Changes on Audit Committee Composition Benefit Investors?

2017 ◽  
Vol 92 (6) ◽  
pp. 187-212 ◽  
Author(s):  
Seil Kim ◽  
April Klein
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Research Question ◽  
Reporting Quality ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Difference In Differences ◽  
Listed Firms ◽  
Sarbanes Oxley ◽  
Independent Audit

ABSTRACT In December 1999, the SEC instituted a new listing standard for NYSE and NASDAQ firms. Listed firms were now required to maintain fully independent audit committees with at least three members. In July 2002, the U.S. Congress legislated these standards through the Sarbanes-Oxley Act. Our research question is whether all investors benefited from the 1999 new rule. Using both an event study and a difference-in-differences methodology, we find no evidence of higher market value or better financial reporting quality resulting from this rule.

Managers' Strategic Reporting Judgments in Audit Negotiations

2015 ◽  
Vol 35 (1) ◽  
pp. 47-64 ◽  
Author(s):  
Helen Brown-Liburd ◽  
Arnold M. Wright ◽  
Valentina L. Zamora
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Dyadic Relationship ◽  
The Past ◽  
Sarbanes Oxley ◽  
Negotiation Tactics ◽  
Relative Bargaining Power ◽  
Triadic Relationship

SUMMARY Prior research has largely characterized audit negotiations as a dyadic relationship between auditors and managers. However, the Sarbanes-Oxley Act (SOX) substantially enhances the audit committee's oversight responsibilities for the financial reporting and auditing processes. Thus, negotiations post-SOX may be viewed as a triadic relationship that now involves the audit committee with the authority to scrutinize audit negotiations. Consistent with auditors considering their relative bargaining power and expectations of counterpart behavior, Brown-Liburd and Wright (2011) find that auditors are most contending when the audit committee is strong and the past relationship is contentious. We extend Brown-Liburd and Wright (2011) by examining the joint effects of these factors on managers' pre-negotiation judgments. We posit that rather than mirror auditor behavior, managers make different judgments because they have a different perspective and set of incentives than do auditors. Prior research suggests that managers are more flexible, more accurately determine their counterpart's goals and limits, and are more likely to use certain negotiation tactics than auditors. Further, managers have incentives to maximize the current outcome while maintaining their firm's reporting reputation. As such, managers will be less aggressive in responding to a contentious past auditor relationship, particularly in the presence of a strong audit committee that may ask difficult questions and potentially intervene against their favor. However, managers will act more aggressively to capitalize on a cooperative past auditor relationship, particularly in the presence of a weak audit committee that is passive or persuadable. To examine these two boundary conditions, we conduct an experiment with 137 experienced CFO/controllers. We find strong evidence supporting our expectations that managers act as if both the audit committee and the auditor jointly play important roles in ensuring high financial reporting quality. JEL Classifications: M41; M42.

The Persistence in the Association between Section 404 Material Weaknesses and Financial Reporting Quality

2013 ◽  
Vol 33 (1) ◽  
pp. 93-116 ◽  
Author(s):  
Emma-Riikka Myllymäki
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Control Problems ◽  
Section 404 ◽  
Material Weakness ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
History Of

SUMMARY This study examines whether Sarbanes-Oxley (SOX) Section 404 material weakness (MW404) disclosures are predictive of future financial reporting quality. I find evidence that for companies with a history of MW404s, the likelihood of misstatements in financial information continues to be significantly higher for two years after the last MW404 report compared to companies without a history of reported MW404s. The magnitude of the effect decreases non-linearly with decreasing speed. The findings further imply that the reason for the misstatement incidences is the unacknowledged pervasiveness of control problems. In particular, it appears that in many cases, the future misstatements are unrelated to the MW types disclosed in the last MW404 report, suggesting that some MW types are unacknowledged and, hence, control problems are even more pervasive than what was identified. Overall, the findings of this study highlight the importance of discovering and disclosing material weaknesses in internal control over financial reporting.

CFO/CEO-Board Social Ties, Sarbanes-Oxley, and Earnings Management

2011 ◽  
Vol 25 (3) ◽  
pp. 537-557 ◽  
Author(s):  
Gopal V. Krishnan ◽  
K. K. Raman ◽  
Ke Yang ◽  
Wei Yu
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Social Ties ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Board Independence ◽  
Sarbanes Oxley ◽  
Time Period ◽  
The Board Of Directors

SYNOPSIS Prior research suggests that the efficacy of a formally independent member of the board of directors could be undermined by social ties with the CEO. In this study, we examine the relation between CFO/CEO-board social ties and earnings management over the 2000–2007 time period. Our results suggest that CFOs/CEOs picked more socially connected directors in the post-Sarbanes-Oxley Act (SOX) time period (possibly as a way out of the mandated independence requirements). Our results also suggest a positive relation between CFO/CEO-board social ties and earnings management. Still, the increase in managerial/board risk aversion since SOX appears to have negated the effect of social ties on earnings management in the post-SOX period. Board independence and financial reporting quality remain topics of ongoing interest. The study is important in advancing our understanding of the role of social ties in earnings management.

scholarly journals Impact of auditors and internal control effectiveness on the financial reporting quality in small and medium-sized enterprises in Vietnam

2020 ◽  
Vol 4 (2) ◽  
pp. First
Author(s):  
Pham Quoc Thuan
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Weighted Average ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Measurement Scale ◽  
Survey Method ◽  
Control Effectiveness ◽  
Big 4 ◽  
The Impact

This study aims to determine the impact of auditors (Big 4 and non-big 4) and internal control effectiveness on the financial reporting quality in Small and medium-sized enterprises in Vietnam. The case study reasearch with participants who are in the following positions: Head of finance and accounting department; General manager/director; Internal control manager; Auditors is used to build and complete the measurement scale of financial reporting quality based on viewpoints of FASB and IASB 2018. Weighted average is applied for the elements of information quality in measuring financial reporting quality. By using the survey method with a sample of 183 respondents from small and medium - sized enterprises in Vietnam, the authors have developed a regression model showing the impact of these factors named: Auditors (Big 4 and Non-big 4) and Internal Control Effectiveness to the financial reporting quality. In which, the differences in the influence of Big 4 and Non-Big 4 on the quality of financial statements information is the highlighted contributions of this study. In terms of financial reporting quality, the survey results show that financial reporting quality in small and medium - sized enterprises in Vietnam is considered acceptable with average point being 3.49/5. Among 3 qualitative characteristics of financial reporting quality, the enhancing characteristics are highly evaluated (3.94/5) while the fundamental characteristics (relevance and faithful presentation) are considered as moderate (3.43/5 and 3.31/5).

scholarly journals A discussion of auditor-client co-production of the audit and the effect on production efficiency

2016 ◽  
Vol 90 (9) ◽  
pp. 348-351
Author(s):  
Systse Duiverman ◽  
Christine Nolder
Keyword(s):  
Financial Reporting ◽  
Production Efficiency ◽  
Audit Quality ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Big 4 ◽  
Audit Efficiency ◽  
Efficiency And Effectiveness ◽  
Audit Production ◽  
Audit Effectiveness

This article provides a reflection on the paper and presentation during the FAR Conference of 9 and 10 May 2016 of “Auditor-client co-production of the audit and the effect on production efficiency” by Gaeremynck, Willekens, and Knechel (GWK). The authors examine the effect of auditor-client co-production on the efficiency of an audit, a topic relevant to the whole audit-client financial reporting and assurance supply chain. Using a sample of working papers from a Belgium Big 4 firm, the authors explore the controllable (i.e., managerial) and non-controllable (i.e., environmental) factors that contribute to variations in audit efficiency within the auditor-client coproduction of financial reporting quality. The results suggest that partner tenure positively contributes to the efficiency of the audit engagement, but the audit work prepared by the client, interim-work by the auditor, and the final audit work performed during off-peak season negatively affect audit efficiency. While this may be surprising from an efficiency standpoint, it may be that such measures add to the audit effectiveness to an extent that outweighs any efficiency loss. Audit quality or audit production, after all, is a matter of efficiency and effectiveness. GWK offer a number of important insights for practitioners interested in the delicate balance of managing efficiency and effectiveness. In the paragraphs that follow, we aim to both summarize the GWK research and highlight the importance of the findings to practice.

scholarly journals Does Attestation of the effectiveness of Internal Control over Financial Reporting Discourage Earnings Management? Evidence from China

2018 ◽  
Vol 7 (4) ◽  
pp. 1
Author(s):  
Li Dang ◽  
Qiaoling Fang
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Internal Control ◽  
Reporting Quality ◽  
Financial Statements ◽  
Financial Reporting Quality ◽  
Chinese Government ◽  
Chinese Firms ◽  
Public Firms ◽  
Sarbanes Oxley

To improve financial reporting quality, the Chinese government issued the Basic Standard for Enterprise Internal Control in 2008 and other related guidelines/regulations in the following years (hereafter China SOX). The scope of China SOX is broader but similar to Section 404 of the Sarbanes-Oxley Act (SOX) in the U.S. Formal adoptions of China SOX requires management and external auditor’s report on the effectiveness of internal control over financial reporting (ICFR). A company’s ICFR, if effective, should provide reasonable assurance that the company’s financial statements are reliable and prepared in accordance with the applicable accounting standards. The purpose of this study is to investigate whether China external auditor attestation of ICFR discourage earnings management, an indicator of financial reporting quality. By analyzing a sample of Chinese public firms during 2011 to 2013, we find that: (1) Chinese firms that disclose audited ICFR reports exhibit lower earnings management than firms that do not; (2) Chinese firms that are mandated to disclose audited ICFR reports exhibit lower earnings management than firms that voluntarily disclose audited ICFR reports. Our empirical results seem to suggest that attestation of the effectiveness of ICFR discourages earnings management and therefore improve financial reporting quality. 

Non-Audit Services in Audit Committee Interlocked Firms, Financial Reporting Quality, and Future Performance

2021 ◽  
pp. 0148558X2110155
Author(s):  
Linna Shi ◽  
Siew Hong Teoh ◽  
Jian Zhou
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Board Member ◽  
Detrimental Effect ◽  
Reporting Quality ◽  
Auditor Independence ◽  
Financial Reporting Quality ◽  
Sample Period ◽  
Future Performance ◽  
Sarbanes Oxley

We investigate whether board-interlocked firms via an audit committee (AC) board member exhibit correlated non-audit service (NAS) purchases, and whether financial reporting quality and future firm performance vary with the amount of correlated NAS purchases from the AC interlock. We find that AC interlocked firms have positively correlated total NAS and three NAS subtypes—Tax, Assurance, and Other—in the overall sample period from 2000 to 2016, and in each of the subperiods pre- and post-SOX (Sarbanes–Oxley Act). Firms with a larger NAS component that is explained by the AC interlock tend to exhibit lower financial reporting quality. We also find evidence that firms with higher AC interlocked NAS purchases are associated with lower future performance, although this association exists only in the pre-SOX period. Overall, the evidence suggests that greater NAS purchases among AC interlocked firms can have a detrimental effect on financial reporting quality and auditor independence. While these detrimental effects are concentrated in the pre-SOX period when there were less restrictions on NAS purchases, we find some evidence that the association with lower financial reporting quality persists in the post-SOX period.

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