Understanding the Relation between Financial Reporting Quality and Audit Quality

2016 ◽  
Vol 35 (4) ◽  
pp. 1-22 ◽  
Author(s):  
Lisa Milici Gaynor ◽  
Andrea Seaton Kelton ◽  
Molly Mercer ◽  
Teri Lombardi Yohn
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Recursive Relation ◽  
Financial Reporting Quality ◽  
Task Environment ◽  
Future Research

SUMMARY A primary goal of both financial reporting research and audit research is to understand the determinants of quality, and researchers in both areas have identified a wide set of variables that enhance or impair quality. In this paper, we define financial reporting quality and audit quality and use a person/task/environment framework to summarize prior findings on the determinants of each. We use this framework to discuss the links between the financial reporting and audit academic literatures and highlight the recursive relation between financial reporting quality and audit quality. Our discussion provides insights and suggestions on how financial reporting and audit researchers can learn from each other to improve our collective understanding of financial reporting and audit quality. Using this framework, we also identify opportunities for future research.

scholarly journals Disclosure Quality and its Impact on Financial Reporting Quality, Audit Quality, and Investors’ Perceptions of the Quality of Financial Reporting: A Literature Review

2019 ◽  
Vol 8 (3) ◽  
pp. 201
Author(s):  
Yousef Alwardat
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Empirical Studies ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Future Research ◽  
Disclosure Quality ◽  
Quality Audit ◽  
Sarbanes Oxley

The purpose of this paper is to review the most recent empirical studies on corporate disclosures, in the aim of examining the link between disclosure quality (DQ) and financial reporting quality, audit quality, and investors’ perceptions of the quality of financial reporting and providing recommendations for future research on this topic. Seventy-eight empirical studies, published in several relevant journals from 2003 onwards (i.e. one year after the commencement of the SOX 2002), have been categorized and analyzed in order to identify the link between the aforementioned variables. The analysis has revealed that the Sarbanes Oxley Act (2002) has significantly increased management awareness of the importance of accounting disclosures. In general, the majority of the studies which have been reviewed have identified the presence of a positive correlation between four aforementioned variables. These findings lend credence to the belief that these variables may well be classified as dependent since they are complementary. Finally, the review presents a discussion of the limitations of the studies and provides useful recommendations for future research on this topic.  

Auditor and FASB Responsibilities for Representing Underlying Economics—What U.S. Standards Actually Say

2018 ◽  
Vol 32 (3) ◽  
pp. 83-90 ◽  
Author(s):  
Zoe-Vonna Palmrose ◽  
William R. Kinney
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Financial Statements ◽  
Financial Reporting Quality ◽  
Or Practice

SYNOPSIS Does the auditor's responsibility under U.S. authoritative guidance extend to providing assurance of financial reporting quality—specifically whether financial statements “faithfully reflect the firm's underlying economics”—after the auditor has concluded that financial statements are fairly presented in conformity with GAAP, in all material respects? The question arises because DeFond and Zhang (2014) state such a view and cite U.S. authoritative guidance as support. We review SEC, PCAOB, and FASB guidance and other sources and find no authoritative support for DeFond and Zhang's (2014) view. We also find that the PCAOB explicitly recognizes the lack of objective criteria that would be necessary to evaluate financial reporting quality beyond application of GAAP to events and transactions. Further, we find no evidence that practicing auditors do (separately) assess or assure that financial statements faithfully reflect the entire firm's underlying economics. Overall, these findings suggest DeFond and Zhang (2014) express a personal (and impracticable) normative view and not the auditor's actual responsibility or practice under extant U.S. standards. More broadly, results reinforce the importance of defining and measuring audit quality based on the auditor's actual responsibilities and the importance of accurately characterizing authoritative guidance and practice for scholarship regarding complex and multifaceted matters, including audit quality.

Auditor Communications with the Audit Committee and the Board of Directors: Policy Recommendations and Opportunities for Future Research

2007 ◽  
Vol 21 (2) ◽  
pp. 165-187 ◽  
Author(s):  
Jeffrey Cohen ◽  
Lisa Milici Gaynor ◽  
Ganesh Krishnamoorthy ◽  
Arnold M. Wright
Keyword(s):  
Financial Reporting ◽  
Boards Of Directors ◽  
Audit Committee ◽  
Academic Research ◽  
Reporting Quality ◽  
Academic Community ◽  
Communication Process ◽  
Audit Committees ◽  
Financial Reporting Quality ◽  
Future Research

To contribute to the Public Company Accounting Oversight Board (PCAOB) project on auditor communications with audit committees and boards of directors, we present in this paper a review of relevant academic literature. We also identify promising future research opportunities for the academic community. We specifically focus on how the communication process may affect overall financial reporting quality, internal controls, control environments, and external auditors' performance, as well as matters that potentially impact financial reporting and should interest the PCAOB (e.g., in the area of management discussion and analysis). We specifically link the findings from academic research to the discussion questions posed by the PCAOB in its 2004 briefing paper. Several potential implications of the findings should also interest standard-setters and regulators addressing issues related to corporate governance and financial reporting quality.

scholarly journals AN INVESTIGATION ON THE EFFECT OF AUDIT COMMITTEE ON FINANCIAL REPORTING QUALITY IN PRE AND POST IFRS ADOPTION: EVIDENCE FROM MALAYSIAN COMPANIES

2020 ◽  
Vol 8 (2) ◽  
pp. 25-35
Author(s):  
Citrawati Jatiningrum ◽  
Fauzi ◽  
Rita Irviani ◽  
Mujiyati ◽  
Shahanif Hasan
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Ifrs Adoption ◽  
Significant Difference ◽  
The Relationship

Purpose of study: This study sought to investigate the effect of the audit committee on Financial Reporting Quality (FRQ), explicitly focuses on the period pre- and post-mandatory IFRS adoption in Malaysia. The Financial Reporting Quality in this study proxied by earnings management. Malaysian. Methodology: The sample study has covered 81 listed companies on Bursa Malaysia, with 567 observations, which examined the time of 2009 to 2015. The relationship was analyzed by statistical multiple regression linear methods and also examined the significance of differences between pre and post IFRS adoption by paired sample t-test. Result: The main finding reveals that the relationship between the audit committee and financial reporting quality after IFRS adoption in Malaysia has more significant. However, empirical evidence showed that the post period of mandatory IFRS evidently no significant difference level of earnings management practice. This result indicates that the IFRS adoption cannot reduce managerial discretion yet and the possibility for EM manipulation for Malaysian companies. Implication/Application: This finding has critical implications for regulators and policymakers, that the consequences of IFRS adoption do not increase the quality of financial reporting when EM practices still continue in the different forms. Novelty/Originality of this study: This study gives empirical evidence that there are differences in relationship level between audit quality and earnings management in the period before and after IFRS mandatory adoption in Malaysia companies.

scholarly journals Analysis of the effects of changes in Spanish auditing regulation on audit quality and its differential effect depending on the type of auditor

2019 ◽  
Vol 22 (2) ◽  
pp. 171-186 ◽  
Author(s):  
Elena Cabal-García ◽  
Javier De-Andrés-Suarez ◽  
Carlos Fernández-Méndez
Keyword(s):  
Financial Reporting ◽  
Public Interest ◽  
Differential Effect ◽  
Audit Quality ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Legal Reforms ◽  
Legal Enforcement ◽  
Per Se

The objective of this paper is to provide evidence on the effect of the reforms of the Spanish auditing legislation, enacted in 2002, 2010 and 2015, on audit quality. More specifically, we study whether the reforms had a differential effect depending on the type of auditor. To this end, the auditors were classified according to their size. We analyzed the specific case of non-financial listed Spanish companies which are considered as Public Interest Entities (PIEs). The main results indicate that none of the reforms caused an improvement in financial reporting quality. This could mean that legal reforms per se are not sufficient to achieve the intended objectives in countries with weak legal enforcement, as is the case of Spain. Because of this, it may be necessary to implement mechanisms to encourage auditors to apply the new rules. El objetivo de este trabajo es aportar evidencia sobre el efecto de las reformas de la legislación auditora española, efectuadas en 2002, 2010 y 2015, sobre la calidad de la auditoría y, más concretamente, sobre si las mismas tuvieron un efecto diferencial en función del tipo de auditor. Para ello, los auditores fueron clasificados en función de su tamaño. Se analizó el caso concreto de las empresas españolas cotizadas no financieras, colectivo que tiene la consideración de Entidades de Interés Público (EIP). Los resultados principales indican que ninguna de las reformas causó mejoras en la calidad de la información financiera. Esto podría significar que las reformas legales per se no son suficientes para lograr los objetivos previstos en países con débil aplicación legal, como es el caso de España. Por ello, podría ser necesario implementar mecanismos para alentar a los auditores a aplicar las nuevas reglas.

Audit committee and financial reporting quality: the moderating effect of audit quality

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sana Mardessi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Reporting Quality ◽  
Moderating Effect ◽  
Real Earnings Management ◽  
Financial Reporting Quality ◽  
Content Type ◽  
The Relationship

Purpose The purpose of this study is to address the impact of audit quality on financial reporting quality proxied by real earnings management. To further clarify the mentioned links, this study empirically assesses the moderating effect of audit quality. Design/methodology/approach The study is based on a sample consisting of 90 non-financial companies that are listed in the Amsterdam stock exchange in AEX all share index over the 2010–2017 period. This study applies a quantitative approach and secondary data as the main source of information for analysis. This paper performs an ordinary least squares regression to examine the moderating effect of audit quality on the relationship between financial reporting quality. Findings Empirical findings demonstrate that corporate governance mechanism, mainly independence members, financial expert and audit committee size has a statistically significant relationship with real earnings management. However, the effect of audit committee meetings on real earnings management is not significant. There is also evidence that audit quality moderates the audit committee – real earnings management links. Originality/value This study extends the existing literature by examining the moderating effect of audit quality on the relationship between financial reporting quality proxied by real earnings management in the Dutch context.

Mandatory Audit Firm Turnover, Financial Reporting Quality, and Client Bargaining Power: The Case of Arthur Andersen

2005 ◽  
Vol 19 (2) ◽  
pp. 51-68 ◽  
Author(s):  
Albert L. Nagy
Keyword(s):  
Financial Reporting ◽  
Bargaining Power ◽  
Audit Quality ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Auditor Change ◽  
Time Basis ◽  
Firm Turnover ◽  
Mandatory Rotation ◽  
Arthur Andersen

This paper examines the effect of mandatory auditor change on audit quality in the unique environment created by the failure of Arthur Andersen (AA). The failure of AA forced a significant number of companies (ex-AA clients) to change auditors and also helped increase the overall skepticism exhibited on external audits. The demise of AA does not truly replicate a mandatory rotation regime, but it does provide a rich setting to examine one aspect of such a regime—the effect that a forced auditor change has on the level of audit quality. Furthermore, because ex-AA clients were forced to change auditors on a one-time basis and will not necessarily have to change auditors in the future, client bargaining power is likely to influence auditor behavior and is considered in this study's empirical analyses. This study provides evidence that, for smaller companies, the level of audit quality improved for companies forced to switch from AA, and that the negative relation between short auditor tenure and audit quality was effectively mitigated over the period of AA's demise. The lack of results for larger companies could reflect higher bargaining power toward their auditor. Further research is needed to determine if a forced auditor change would improve audit quality for larger companies in a true mandatory auditor rotation regime, where the amount of bargaining power possessed by companies would seemingly diminish.

scholarly journals Does Selling Non-Audit Services Impair Auditor Independence? New Research Says, “Yes”

2015 ◽  
Vol 9 (2) ◽  
pp. P1-P6 ◽  
Author(s):  
Monika Causholli ◽  
Dennis J. Chambers ◽  
Jeff L. Payne
Keyword(s):  
Financial Reporting ◽  
Strong Evidence ◽  
Audit Quality ◽  
Reporting Quality ◽  
Auditor Independence ◽  
Financial Reporting Quality ◽  
Fresh Perspective ◽  
New Research ◽  
New Evidence ◽  
Non Audit Services

SUMMARY A recently published academic study by Causholli, Chambers, and Payne (2014) brings new evidence to a long-standing debate about whether the provision of non-audit services (NAS) can impair auditor independence. Prior research on this question has largely found no evidence of lower financial reporting quality when auditors provide high levels of NAS. By considering the potential that future NAS, rather than current NAS levels, could impair auditor independence, Causholli et al. (2014) bring a fresh perspective on the question. They argue that it is the potential for new NAS revenue that would most likely cause auditors to have impaired independence. They find strong evidence that audit quality suffers when clients are willing to purchase future NAS from their auditor.

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