The Relationship between Audit Team Composition, Audit Fees, and Quality

2017 ◽  
Vol 36 (3) ◽  
pp. 115-135 ◽  
Author(s):  
Sarowar Hossain ◽  
Kenichi Yazawa ◽  
Gary S. Monroe
Keyword(s):  
Audit Quality ◽  
Positive Association ◽  
Audit Fees ◽  
Professional Staff ◽  
Data Availability ◽  
Team Composition ◽  
Going Concern ◽  
Going Concern Opinion ◽  
Audit Team ◽  
First Time

SUMMARY Using Japanese data, we investigate whether there is a positive association between audit team composition based on the number of senior auditors, assistant auditors, and other professional staff on the audit team and audit fees and a variety of commonly used measures of audit quality (likelihood of issuing a going concern opinion and a first-time going concern opinion for a sample of financially distressed companies, the absolute value of discretionary and working capital accruals). We find that the number of senior auditors, assistant auditors, and other professional staff on the audit team are positively associated with audit fees. We find that the number of senior auditors on the audit team has a positive association with audit quality. However, the number of assistant auditors and other professional staff on the audit team are not significantly associated with any of our audit quality measures. JEL Classifications: M41; M42. Data Availability: All data are publicly available from the sources indicated in the paper.

There's No Place Like Home: The Influence of Home-State Going-Concern Reporting Rates on Going-Concern Opinion Propensity and Accuracy

2015 ◽  
Vol 35 (2) ◽  
pp. 23-51 ◽  
Author(s):  
Allen D. Blay ◽  
James R. Moon ◽  
Jeffrey S. Paterson
Keyword(s):  
Audit Quality ◽  
Type I Error ◽  
State Level ◽  
Error Rates ◽  
Data Availability ◽  
Type I ◽  
Going Concern ◽  
Going Concern Opinion ◽  
Financial Characteristics ◽  
First Time

SUMMARY Prior research has had success identifying client financial characteristics that influence auditors' going-concern reporting decisions. In contrast, relatively little research has addressed whether auditors' circumstances and surroundings influence their propensities to issue modified opinions. We investigate whether auditors' decisions to issue GC opinions are affected by the rate of GC opinions being given in their proximate area. Controlling for factors that prior research associates with going-concern opinions and state-level economics, we find that non-Big 4 auditors located in states with relatively high first-time going-concern rates in the prior year are up to 6 percent more likely to issue first-time going-concern opinions. The results from our state-based GC measure casts doubt that this increased propensity is explained by economic factors and suggests that psychological factors may explain this behavior among auditors. Interestingly, this higher propensity increases auditors' Type I error rates without decreasing their Type II error rates, further suggesting economics alone do not explain these results. Such evidence challenges the generally accepted notion that a higher propensity to issue a going-concern opinion always reflects higher audit quality. JEL Classifications: M41; M42. Data Availability: All data are available from public sources.

The effect of real activities manipulation on going concern audit opinions for financially distressed companies

2018 ◽  
Vol 17 (4) ◽  
pp. 514-539
Author(s):  
Hongkang Xu ◽  
Mai Dao ◽  
Jia Wu
Keyword(s):  
Audit Quality ◽  
Positive Association ◽  
Content Type ◽  
Going Concern ◽  
Accruals Management ◽  
Reporting Decisions ◽  
Going Concern Opinion ◽  
Distressed Firms ◽  
Real Activities Manipulation ◽  
Auditor Reporting

Purpose This study aims to examine the effect of real activities manipulation (RAM) on auditors’ decision of issuing going concern (GC) opinions for distressed companies. Design/methodology/approach This study estimates and examines three types of RAM: reduction of discretionary expenses, sales manipulation and overproduction. It investigates the effect of RAM on auditor reporting conservatism by including the three measures of RAM methods in logistic regressions that explain the issuance of going concern opinions. The authors perform the analysis specifically on distressed firms for 2004-2013 period. Findings This study finds a significant and positive association between RAM and the likelihood of receiving going concern opinion in the financial distressed firm sample, suggesting that client’s abnormal business activity affects the auditor reporting conservatism. Practical implications This study provides evidence that auditors make going concern reporting decisions in consideration of the client’s abnormal operating decisions and management’s opportunism. Originality/value Recent literature argues that auditors have little recourse other than to resign if a client uses RAM to impact earnings or the financial statements, and hence the enhanced audit quality in the post-SOX period is due to the shift from using accruals management to RAM (Cohen et al., 2008; Chi et al., 2011; Kim and Park, 2014). The evidence provided in this study indicates that auditors report more conservatively (rather than simply resign) in response to the aggressive RAM.

Financial Statement Footnote Readability and Corporate Audit Outcomes

2018 ◽  
Vol 38 (2) ◽  
pp. 1-26 ◽  
Author(s):  
John L. Abernathy ◽  
Feng Guo ◽  
Thomas R. Kubick ◽  
Adi Masli
Keyword(s):  
Annual Report ◽  
Audit Fees ◽  
Data Availability ◽  
Financial Statement ◽  
Incremental Information ◽  
Going Concern Opinion ◽  
Financial Misstatements ◽  
Prior Literature ◽  
First Time ◽  
To Receive

SUMMARY We examine whether the readability of financial statement footnotes in the annual report is informative about audit engagement risk. Using various readability measures, we predict and find that firms with less readable footnotes have longer audit report lag, incur higher audit fees, and are more likely to receive a first time modified going concern opinion. We also show that readability of footnotes is associated with a higher likelihood of financial misstatements and future accounting-related litigation. Our results are robust to several measures of readability used in prior literature, as well as different specifications and design choices, revealing that financial statement footnote readability provides incremental information about audit engagement risk that affects auditor-client contracting. Data Availability: Data are obtained from public sources identified in the paper.

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.

Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective

2016 ◽  
Vol 36 (2) ◽  
pp. 21-43 ◽  
Author(s):  
Lucy Huajing Chen ◽  
Hyeesoo H. (Sally) Chung ◽  
Gary F. Peters ◽  
Jinyoung P. (Jeannie) Wynn
Keyword(s):  
Financial Reporting ◽  
Internal Audit ◽  
Positive Association ◽  
Audit Fees ◽  
Data Availability ◽  
Company Performance ◽  
Potential Threat ◽  
External Audit ◽  
Internal Auditors ◽  
Survey Responses

SUMMARY This paper considers the potential impact of internal audit incentive-based compensation (IBC) linked to company performance on the external auditor's assessment of internal audit objectivity. We posit that external auditors will view IBC as a potential threat to internal audit objectivity, thus reducing the extent of reliance on the work of internal auditors and increasing the assessment of control risk. The increase in risk and external auditor effort should result in higher audit fees. We hypothesize that the form of incentive-based compensation, namely stock-based versus cash bonuses, moderates the association between IBC and external audit fee. Finally, we consider whether underlying financial reporting risk mitigates the external auditor's potential sensitivity to IBC. We find a positive association between external audit fees and internal audit compensation based upon company performance. The association is acute to IBC paid in stock or stock options as opposed to cash bonuses. We also find evidence consistent with the IBC associations being mitigated by the company's financial reporting risks. Data Availability: Individual survey responses are confidential. All other data are derived from publicly available sources.

Consequences of Going-Concern Opinion Inaccuracy at the Audit Office Level

2020 ◽  
Vol 39 (3) ◽  
pp. 185-208
Author(s):  
Qiao Xu ◽  
Rachana Kalelkar
Keyword(s):  
Market Share ◽  
Audit Quality ◽  
Type I ◽  
Type I Errors ◽  
Negatively Associated ◽  
Going Concern ◽  
Big 4 ◽  
Office Market ◽  
Going Concern Opinion ◽  
Office Level

SUMMARY This paper examines whether inaccurate going-concern opinions negatively affect the audit office's reputation. Assuming that clients perceive the incidence of going-concern opinion errors as a systematic audit quality concern within the entire audit office, we expect these inaccuracies to impact the audit office market share and dismissal rate. We find that going-concern opinion inaccuracy is negatively associated with the audit office market share and is positively associated with the audit office dismissal rate. Furthermore, we find that the decline in market share and the increase in dismissal rate are primarily associated with Type I errors. Additional analyses reveal that the negative consequence of going-concern opinion inaccuracy is lower for Big 4 audit offices. Finally, we find that the decrease in the audit office market share is explained by the distressed clients' reactions to Type I errors and audit offices' lack of ability to attract new clients.

The Association between Audit Manager and Auditor-In-Charge Experience, Effort, and Risk Responsiveness

2018 ◽  
Vol 38 (3) ◽  
pp. 121-147 ◽  
Author(s):  
Christine Contessotto ◽  
W. Robert Knechel ◽  
Robyn A. Moroney
Keyword(s):  
Audit Quality ◽  
Data Availability ◽  
The Core ◽  
Specific Experience ◽  
Primary Core ◽  
Using Data ◽  
Audit Team ◽  
Industry Experience ◽  
Jel Classifications ◽  
Core Role

SUMMARY Audit quality is dependent on the experience and effort of the audit team to identify and respond to client risks (risk responsiveness). Central to each team are the core role holders who plan and execute the audit. While many studies treat the partner as the primary core role holder, the manager and auditor-in-charge (AIC) are also important. Using data for engagements from two midtier firms, we analyze the association between the experience and relative effort of the manager and AIC and risk responsiveness. We find a manager's client-specific experience is associated with risk responsiveness for non-listed clients but find no evidence that the general or industry experience of a manager, or the experience of the AIC, is associated with risk responsiveness. The client-specific experience and relative effort of the partner is associated with risk responsiveness. These results suggests that managers can provide an important, albeit limited, contribution to the audit. JEL Classifications: M2. Data Availability: The data were made available to the researchers on the understanding that they will remain confidential.

Did the 2005 Deferred Prosecution Agreement Adversely Impact KPMG's Audit Practice?

2018 ◽  
Vol 38 (1) ◽  
pp. 77-102 ◽  
Author(s):  
Matthew Baugh ◽  
Jeff P. Boone ◽  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Service Provider ◽  
Audit Quality ◽  
Spillover Effect ◽  
Audit Fees ◽  
Data Availability ◽  
Department Of Justice ◽  
Big 4 ◽  
Tax Shelters

SUMMARY We examine the consequences of misconduct in a Big 4 firm's nonaudit practice for its audit practice. Specifically, we examine whether KPMG's audit practice suffered a loss of audit fees and clients and/or a decline in factual audit quality following the 2005 deferred prosecution agreement (DPA) with the Department of Justice for marketing questionable tax shelters. We find little evidence that the DPA adversely impacted KPMG's audit practice by way of either audit fees or the likelihood of client gains/losses, suggesting little or no harm to KPMG's audit reputation. We also find that the DPA had no effect on the firm's factual audit quality, even for those audit clients that dropped KPMG as their tax service provider. Collectively, our findings suggest that there was no spillover effect from the DPA to KPMG's audit practice. Data Availability: All data are publicly available.

The Relation between Managerial Ability and Audit Fees and Going Concern Opinions

2014 ◽  
Vol 34 (3) ◽  
pp. 139-160 ◽  
Author(s):  
Gopal V. Krishnan ◽  
Changjiang Wang
Keyword(s):  
Empirical Evidence ◽  
Audit Fees ◽  
Managerial Ability ◽  
Firm Level ◽  
Going Concern ◽  
Going Concern Opinion ◽  
Corporate Resources ◽  
Ability Measure

SUMMARY While prior research has examined the relation between firm-level attributes and auditors' decisions, there is little empirical evidence on whether managerial attributes are informative to auditors. We examine the relation between managerial ability, i.e., ability in transforming corporate resources to revenues, and audit fees and a going concern opinion. We use the managerial ability measure recently developed by Demerjian, Lev, and McVay (2012). We find that incremental to firm-level attributes, both audit fees and the likelihood of issuing a going concern opinion are decreasing in managerial ability. Collectively, our findings support the notion that managerial ability is relevant to auditors' decisions.

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.

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