Investor Heterogeneity, Auditor Choice, and Information Signaling

2014 ◽  
Vol 34 (3) ◽  
pp. 113-138 ◽  
Author(s):  
Xu Wei ◽  
Xiao Xiao ◽  
Yi Zhou
Keyword(s):  
Audit Quality ◽  
Firm Heterogeneity ◽  
Audit Fees ◽  
Quality Change ◽  
High Quality ◽  
Auditor Choice ◽  
Audit Market ◽  
Investor Heterogeneity ◽  
Auditor Quality ◽  
Information Signaling

SUMMARY We develop a model of firms' auditor choices when presented with a heterogeneous group of investors. We show that firms' auditor choices in equilibrium depend on the composition of investors in the market. The signaling effect of choosing a high-quality auditor exists only when there is at least a certain proportion of sophisticated investors. If there is a sufficiently high proportion of sophisticated investors, then all firms will choose high-quality auditors. We also show that the overall audit quality in the market increases with an increasing proportion of sophisticated investors. When the audit market is differentiated and investors are heterogeneous, an increase in the penalty for firms that receive a qualified opinion will lead to a decrease in the overall audit quality in the market. Our conclusions remain valid even after taking audit fees, auditor quality change, and firm heterogeneity into consideration.

Dressing for the Occasion? Audit Quality in the Presence of Competition for New Clients

2021 ◽  
Author(s):  
Henrik Moser
Keyword(s):  
Audit Quality ◽  
Market Competition ◽  
New Approach ◽  
Auditor Choice ◽  
Audit Market ◽  
Auditor Quality ◽  
The Impact

This paper investigates the impact of increased audit market competition on audit quality and auditor choice. I develop a model comprising two auditors who compete for a new client by choosing the audit quality for their respective existing clients and using the audited report as a signal. I identify factors that influence auditor quality decisions as well as the behavior of clients, who potentially misstate their reports. Auditors are tempted to alter audit quality because they are eager to appear desirable from a new client's perspective. Interestingly, while recipients of the audited report adjust their conjectures about audit quality, there are conditions under which auditors lower their audit quality to increase the likelihood of being hired. The analysis extends the existing literature by describing a new approach to modeling the auditors' motivation to signal reputation for certain behavior.

Do Social Ties between CEOs and Engagement Audit Partners Affect Audit Quality and Audit Fees?

2018 ◽  
Vol 37 (2) ◽  
pp. 139-161 ◽  
Author(s):  
Soo Young Kwon ◽  
Han S. Yi
Keyword(s):  
Audit Quality ◽  
Social Ties ◽  
Investor Protection ◽  
Chief Executive ◽  
Audit Fees ◽  
Data Availability ◽  
High Quality ◽  
Economic Agents ◽  
South Korean ◽  
Audit Market

SUMMARY Economic agents in the same social networks could either enhance contracting efficiency by reducing information asymmetry or seek rents by promoting collusive behaviors. Recent studies have provided mixed evidence of whether social ties between a chief executive officer (CEO) and an engagement audit partner (EP) improve or impair audit quality (Guan, Su, Wu, and Yang 2016; Jeanjean, Marmousez, and Sirois 2013). By exploiting proprietary data from the South Korean audit market, where low investor protection and strong CEO power might lead to either information sharing or collusion, we add to this literature by exploring how undisclosed CEO-EP social ties affect audit outcomes. We find no evidence that audit effort, audit fees, or audit quality decreases in the presence of CEO-EP social ties. In contrast, we find that CEO-EP school ties are associated with high-quality audits and audit fee premiums. We interpret these findings as evidence that CEO-EP social ties might be important to secure a high-quality audit in a setting with low investor protection. Data Availability: Audit partner and CEO identification data used in this study are proprietary and subject to confidentiality agreements. Other data are publicly available from sources identified in the text.

IFRS adoption and auditing: a review

2016 ◽  
Vol 24 (3) ◽  
pp. 338-361 ◽  
Author(s):  
Hichem Khlif ◽  
Imen Achek
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Research Literature ◽  
Future Research ◽  
Audit Report ◽  
Content Type ◽  
Auditor Choice ◽  
Audit Market ◽  
Ifrs Adoption ◽  
The Future

Purpose The purpose of this paper is to review the empirical research literature dealing with International Financial Reporting Standards (IFRS) and auditing. The authors identify four main topics related to the effect of IFRS adoption on audit fees, audit market and audit report lag and the influence of auditor choice on IFRS compliance. Design/methodology/approach For each reviewed stream of research, the authors present its theoretical underpinning and summarize its main results. Findings Based on 26 empirical studies, the review reveals four main findings. First, IFRS adoption is associated with increased audit fees. Second, IFRS adoption has had an effect on audit market through auditor choice, audit switching and audit market concentration. Third, IFRS adoption has increased audit report lag. Finally, the authors document that audit quality, as proxied by auditor type, may play an important role in enforcing the compliance with IFRS. Practical implications For regulators the review highlights that IFRS adoption is associated with several effects dealing with audit cost (audit fees), audit efficiency (audit report lag) and may benefit audit firms with international affiliation compared to local ones and this may inform regulators in settings that plan to adopt IFRS in the future. Originality/value This literature review represents a historical record and an introduction for researchers who aim to investigate this topic in the future since the authors provide specific guidance for future research avenues for these reviewed strands of research and other unexplored topics related to auditing and IFRS.

Spatial Competition in Local Audit Markets and the Fallout on Deloitte from the 2007 PCAOB Censure

2016 ◽  
Vol 36 (2) ◽  
pp. 1-19 ◽  
Author(s):  
Jeff P. Boone ◽  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Market Power ◽  
Audit Quality ◽  
Spatial Competition ◽  
Spatial Location ◽  
Audit Fees ◽  
Audit Market ◽  
Big 4 ◽  
Audit Fee ◽  
The Face ◽  
Market Leader

SUMMARY We examine whether Deloitte's spatial location in local audit markets affected the firm's adverse fallout—in terms of decreased ability to retain new clients and maintain audit fees—from the 2007 PCAOB censure. We motivate our inquiry by the notion that auditor-client alignment and auditor-closest-competitor distance can help differentiate the incumbent Big 4 auditor from other Big 4 auditors and thus provide market power, i.e., inhibit clients from shopping for another supplier because of the lack of a similar Big 4 provider in the local audit market. Consequently, it seems reasonable that the increase in switching risk and loss of fee growth suffered by Deloitte following the 2007 PCAOB censure will be lower in local markets where Deloitte was the market leader and its market share distance from its closest competitor was greater. Our findings suggest that the decline in Deloitte's audit fee growth rate following the 2007 PCAOB censure was concentrated in the pharmaceutical industry, although the client loss rate appears to have occurred more broadly (across all cities and industries). Collectively, our findings suggest that audit quality issues override auditor market power, i.e., differentiation does not provide Big 4 firms market power in the face of adverse regulatory action. JEL Classifications: G18; L51; M42; M49.

Audit Market Concentration, Audit Fees, and Audit Quality: Evidence from China

2015 ◽  
Vol 35 (2) ◽  
pp. 121-145 ◽  
Author(s):  
Ting-Chiao Huang ◽  
Hsihui Chang ◽  
Jeng-Ren Chiou
Keyword(s):  
Indirect Effect ◽  
Audit Quality ◽  
Earnings Quality ◽  
Audit Fees ◽  
Developed Countries ◽  
Market Concentration ◽  
Legal Environment ◽  
Positive Relation ◽  
Audit Market ◽  
Lower Likelihood

SUMMARY We investigate the effects of audit market concentration on audit fees and audit quality in China, where competition is intense and the legal environment is relatively weak compared with developed countries. Analyzing 12,334 firm-year observations for the period 2001 to 2011, we find a significant positive relation between concentration and audit fees. Path analysis shows that concentration improves client earnings quality and reduces the need for auditors to issue modified audit opinions through increased audit fees. Additional analysis indicates that the increased audit fees and client earnings quality resulting from increased concentration are associated with a lower likelihood of executives and auditors being sanctioned by regulators for audit failures. Together, our results suggest that concentration improves audit quality indirectly through increased audit fees and this positive indirect effect offsets the negative direct effect of concentration on audit quality. By separating the direct and the indirect effect of concentration on audit quality, our study would explain why previous studies that do not have a separation document mixed evidence. Our findings inform regulators that actions taken to eliminate the indirect effect of concentration, for example restricting the upper bound of audit fees, could produce unintended outcomes such as decreased audit quality.

scholarly journals Audit committee compensation, best practices and audit fees

2019 ◽  
Vol 50 (1) ◽  
Author(s):  
Bum-Jin Park
Keyword(s):  
Best Practices ◽  
Financial Reporting ◽  
Regression Models ◽  
Audit Committee ◽  
Best Practice ◽  
Audit Quality ◽  
Positive Association ◽  
Audit Fees ◽  
High Quality ◽  
The Relationship

Background: It is extremely important that an audit committee (AC) monitors a company’s financial reporting process, and that the committee engages a high-quality auditor to carry this out effectively. Prior research on ACs has paid much attention to the relationship between AC best practices and audit fees (AF). Although compensation is a means of aligning interests between ACs and stakeholders, previous studies have neglected the complementary interaction between AC compensation and compliance with best practices on audit quality.Objectives: The purpose of this study is to investigate how compensation for ACs affects AF, and how the association is moderated by compliance with best practices to capture effective monitoring.Method: The regression models are estimated to verify how the relationship between AC compensation and AF is moderated by AC compliance with best practice. Moreover, the logistic regression models are used to investigate how the relationship between AC compensation and the opportunistic achievement of earnings goals is moderated by AC compliance with best practice.Results: The findings show a positive association between the levels of compensation AC members receive and AF, which is reinforced in firms that have ACs that comply with all best practices.Conclusion: The results suggest that highly paid ACs engage high-quality auditors to complement their function of monitoring management and AC compensation and compliance with best practices are complementary to enhance audit quality. This study thus provides the interesting insights that can be applicable to countries with requirements relating to the compensation schemes for ACs or the formation of the AC.

Auditor specialization, perceived audit quality, and audit fees in the local government audit market

2007 ◽  
Vol 26 (6) ◽  
pp. 705-732 ◽  
Author(s):  
Suzanne Lowensohn ◽  
Laurence E. Johnson ◽  
Randal J. Elder ◽  
Stephen P. Davies
Keyword(s):  
Local Government ◽  
Audit Quality ◽  
Audit Fees ◽  
Audit Market ◽  
Auditor Specialization ◽  
Government Audit

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.

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