Audit Committee Director-Auditor Interlocking and Perceptions of Earnings Quality

2014 ◽  
Vol 33 (4) ◽  
pp. 41-70 ◽  
Author(s):  
Jeng-Fang Chen ◽  
Yan-Yu Chou ◽  
Rong-Ruey Duh ◽  
Yu-Chen Lin
Keyword(s):  
Audit Committee ◽  
Positive Relationship ◽  
Earnings Quality ◽  
Earnings Response Coefficients ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Financial Expertise ◽  
Earnings Response ◽  
Reported Earnings ◽  
Positive Effect

SUMMARY: Using earnings response coefficients (ERCs) from returns-earnings regressions as a proxy for investor perceptions of earnings quality, we analyze how investors perceive reported earnings when companies with interlocking audit committee directors are audited by the same audit firm (hereafter, AC director-auditor interlocking). Our empirical results show that the extent of AC director-auditor interlocking is significantly and positively associated with ERCs. By dividing the sample period into pre-Sarbanes-Oxley Act (pre-SOX, 1998 through 2001) and post-SOX (2002 through 2010) periods, we find that the significantly positive effect of AC director-auditor interlocking on ERCs only exists in the post-SOX period, indicating that investors have reacted more positively to AC director-auditor interlocking after the implementation of SOX, which requires that audit committee members be independent. Finally, using financial expertise data for the period 2003 to 2010, we find that the positive relationship between the extent of AC director-auditor interlocking and ERCs is more pronounced when interlocking audit committee directors are financial experts than when they are not financial experts.

Auditor Tenure and Perceptions of Audit Quality

2005 ◽  
Vol 80 (2) ◽  
pp. 585-612 ◽  
Author(s):  
Aloke Ghosh ◽  
Doocheol Moon
Keyword(s):  
Audit Quality ◽  
Earnings Quality ◽  
Earnings Forecasts ◽  
Positive Association ◽  
Earnings Response Coefficients ◽  
Information Intermediaries ◽  
Auditor Tenure ◽  
Earnings Response ◽  
One Year ◽  
Reported Earnings

We analyze how investors and information intermediaries perceive auditor tenure. Using earnings response coefficients from returns-earnings regressions as a proxy for investor perceptions of earnings quality, we document a positive association between investor perceptions of earnings quality and tenure. Further, we find that the influence of reported earnings on stock rankings becomes larger with extended tenure, although the association between debt ratings and reported earnings does not vary with tenure. Finally, we find that the influence of past earnings on one-year-ahead earnings forecasts becomes greater as tenure increases. In general, our results are consistent with the hypothesis that investors and information intermediaries perceive auditor tenure as improving audit quality. One implication of our study is that imposing mandatory limits on the duration of the auditor-client relationship might impose unintended costs on capital market participants.

scholarly journals Does audit committee independence improve information content of earnings under the Sarbanes-Oxley act?

2008 ◽  
Vol 5 (2) ◽  
pp. 168-178
Author(s):  
Loretta Baryeh ◽  
Jui-Chin Chang ◽  
Huey-Lian Sun
Keyword(s):  
New York ◽  
Information Content ◽  
Audit Committee ◽  
Stock Exchange ◽  
New York Stock Exchange ◽  
Earnings Response Coefficients ◽  
Sarbanes Oxley ◽  
York Stock Exchange ◽  
Earnings Response ◽  
The Difference

We examine the relationship between information content of earnings and the disclosure of audit committee independence under the Sarbanes-Oxley Act (SOX) and the Securities Exchange Commission (SEC) rulings. Specifically, we are interested in the difference in information content of earnings measured by earnings response coefficients between non-U.S. and U.S. firms in 2002 due to the fact that non-U.S. firms were not required to comply with the audit committee independence requirements while most U.S. firms were already in compliance with the rulings. Using 82 non-U.S. firms and 82 matched U.S. firms from the New York Stock Exchange (NYSE), we find evidence that the U.S. firms have higher information content of earnings than the non-U.S firms in 2002. The information content of earnings is found to be positively related to board and audit committee independence. For non-U.S. firms, we also find that early compliance with audit committee independence requirements is favorably recognized by the market. Our findings provide evidence that disclosures of fully independent audit committee and other corporate governance information under the SOX regulations as well as the SEC rulings actually improve information content of earnings.

Cross-quarter differential market reactions

2016 ◽  
Vol 28 (2) ◽  
pp. 219-235
Author(s):  
Andrew Lee ◽  
Chu Yeong Lim ◽  
Tracey Chunqi Zhang
Keyword(s):  
Audit Committee ◽  
Design Methodology ◽  
Earnings Quality ◽  
Earnings Announcements ◽  
Listed Companies ◽  
Market Reactions ◽  
Content Type ◽  
Earnings Response Coefficients ◽  
Earnings Response ◽  
Effect Hypothesis

Purpose The purpose of this paper is to investigate the audit effect hypothesis for the cross-quarter differential market reactions to earnings announcements. Design/methodology/approach Earnings response coefficients are focused upon as indicators of perceived earnings quality. Findings The evidence suggests that investors of Singapore listed companies respond more strongly to earnings announcements in the fourth quarter than other interim quarters. The findings support the notion that investors attach different degrees of reliability to interim quarter earnings relative to final quarter earnings. Originality/value Findings in this paper shed new light on the audit effect hypothesis and are relevant to accounting regulators and audit committee members seeking to enhance the credibility of earnings announcements.

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.

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.

scholarly journals Faktor – Faktor Yang Mempengaruhi Real Earnings Management Pada Perusahaan Manufaktur di BEI

2020 ◽  
Vol 25 (2) ◽  
pp. 163
Author(s):  
Linda Santioso, Emily Janice, Andreas Bambang Daryatno
Keyword(s):  
Earnings Management ◽  
Firm Size ◽  
Audit Committee ◽  
Audit Quality ◽  
T Test ◽  
Real Earnings Management ◽  
External Audit ◽  
Audit Firm ◽  
Financial Expertise ◽  
The Impact

This research aims to find out and analyze the impact of audit committee financial expertise, audit quality that is proxied by external audit firm size, and profitability on real earnings management. The method used in this research was purposive sampling with a total sample of 59 manufacturing companies listed in Indonesian Stock Exchange (IDX). The type of data used was secondary data acquired through financial statements extracted from www.idx.co.id. Data analysis methods used in this research were classical assumption analysis, descriptive statistical test, f test, t test, and the test of determination coefficient. T test was used to test this study’s hypothesis. Final result of the study showed that audit committee financial expertise and audit quality proxied by external audit firm size do not have any significant effect on real earnings management, while profitability has been shown to have a positive effect on real earnings management.

Do Former Audit Firm Partners on Audit Committees Procure Greater Nonaudit Services from the Auditor?

2012 ◽  
Vol 88 (1) ◽  
pp. 297-326 ◽  
Author(s):  
Vic Naiker ◽  
Divesh S. Sharma ◽  
Vineeta D. Sharma
Keyword(s):  
Audit Committee ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Audit Committees ◽  
Future Research ◽  
Corporate Boards ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Nonaudit Services

ABSTRACT: To address potential threats to auditor independence, the Sarbanes-Oxley Act of 2002 (SOX) requires the audit committee to pre-approve nonaudit services (NAS) procured from the auditor. However, the presence of a former audit firm partner (FAP) affiliated with the current auditor on the audit committee could undermine the audit committee's due diligence over the NAS pre-approval process. To alleviate such concerns, the Securities and Exchange Commission approved a three-year “cooling-off” period for appointing audit firm alumni as independent directors. Our analyses show that the presence of both affiliated and unaffiliated FAPs on audit committees does not lead to greater NAS procured from the auditor; rather, FAPs reduce NAS procured from the auditor. Moreover, NAS decline significantly following the appointment of FAPs to the audit committee. Further tests suggest the three-year cooling-off period may not be warranted and deserves further investigation. Our study raises important implications for regulators, policy makers, corporate boards, and future research. Data Availability: Data are publicly available from sources identified in the text.

Corporate Governance and Internal Control over Financial Reporting: A Comparison of Regulatory Regimes

2009 ◽  
Vol 84 (3) ◽  
pp. 839-867 ◽  
Author(s):  
Udi Hoitash ◽  
Rani Hoitash ◽  
Jean C. Bedard
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Section 404 ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Financial Expertise ◽  
Financial Expert ◽  
Section 302

ABSTRACT: This study examines the association between corporate governance and disclosures of material weaknesses (MW) in internal control over financial reporting. We study this association using MW reported under Sarbanes-Oxley Sections 302 and 404, deriving data on audit committee financial expertise from automated parsing of member qualifications from their biographies. We find that a lower likelihood of disclosing Section 404 MW is associated with relatively more audit committee members having accounting and supervisory experience, as well as board strength. Further, the nature of MW varies with the type of experience. However, these associations are not detectable using Section 302 reports. We also find that MW disclosure is associated with designating a financial expert without accounting experience, or designating multiple financial experts. We conclude that board and audit committee characteristics are associated with internal control quality. However, this association is only observable under the more stringent requirements of Section 404.

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