Audit Firms as Networks of Offices

2017 ◽  
Vol 37 (3) ◽  
pp. 211-242 ◽  
Author(s):  
Scott E. Seavey ◽  
Michael J Imhof ◽  
Tiffany J. Westfall
Keyword(s):  
Knowledge Management ◽  
Knowledge Sharing ◽  
Network Effects ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Big 4 ◽  
Audit Firms ◽  
Network Connectedness ◽  
Partner Knowledge ◽  
Office Level

SUMMARY Prior audit research suggests that most, if not all, audit quality can be explained at the office level. However, the question remains of whether office-level audit quality is contingent on how individual offices relate to the firm as a whole. Motivated by theories of knowledge management, organizational learning, and networks, we posit that individual offices are connected to their audit network through partner knowledge sharing and oversight, which impact office-level audit quality. We interview Big 4 audit partners and learn that knowledge sharing between partners in different offices is common and intended to aid in the provision of audit services. Using network connectedness to proxy for knowledge sharing and oversight between offices of the same firm, we document that more connected offices are associated with fewer client restatements and lower discretionary accruals. We additionally find that network effects are magnified when accounting treatments are more complex and require greater auditor judgement.

Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees

2015 ◽  
Vol 91 (3) ◽  
pp. 767-792 ◽  
Author(s):  
Kenneth L. Bills ◽  
Lauren M. Cunningham ◽  
Linda A. Myers
Keyword(s):  
Audit Quality ◽  
Matched Control ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Audit Firm ◽  
Association Member ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
Control Samples

ABSTRACT In this study, we examine the benefits of membership in an accounting firm association, network, or alliance (collectively referred to as “an association”). Associations provide member accounting firms with numerous benefits, including access to the expertise of professionals from other independent member firms, joint conferences and technical trainings, assistance in dealing with staffing and geographic limitations, and the ability to use the association name in marketing materials. We expect these benefits to result in higher-quality audits and higher audit fees (or audit fee premiums). Using hand-collected data on association membership, we find that association member firms conduct higher-quality audits than nonmember firms, where audit quality is proxied for by fewer Public Company Accounting Oversight Board (PCAOB) inspection deficiencies and fewer financial statement misstatements, as well as less extreme absolute discretionary accruals and lower positive discretionary accruals. We also find that audit fees are higher for clients of member firms than for clients of nonmember firms, suggesting that clients are willing to pay an audit fee premium to engage association member audit firms. Finally, we find that member firm audits are of similar quality to a size-matched sample of Big 4 audits, but member firm clients pay lower fee premiums than do Big 4 clients. Our inferences are robust to the use of company size-matched control samples, audit firm size-matched control samples, propensity score matching, two-stage least squares regression, and to analyses that consider changes in association membership. Our findings should be of interest to regulators because they suggest that association membership assists small audit firms in overcoming barriers to auditing larger audit clients. In addition, our findings should be informative to audit committees when making auditor selection decisions, and to investors and accounting researchers interested in the relation between audit firm type and audit quality.

The Effects of Audit Firms' Knowledge Sharing on Audit Quality and Efficiency

2019 ◽  
Vol 39 (2) ◽  
pp. 51-79 ◽  
Author(s):  
Rong-Ruey Duh ◽  
W. Robert Knechel ◽  
Ching-Chieh Lin
Keyword(s):  
Knowledge Sharing ◽  
Survey Data ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Data Availability ◽  
Audit Firm ◽  
Regulatory Changes ◽  
Audit Firms ◽  
Audit Efficiency ◽  
Analyze Data

SUMMARY This paper examines the effect of knowledge sharing in audit firms on audit quality and efficiency. We analyze data from a survey of audit professionals from 22 audit firms in Taiwan matched to publicly available data on individual audits conducted by those firms. The results indicate that knowledge sharing within an audit firm is positively associated with audit quality as manifested in lower absolute discretionary accruals and the issuance of more unfavorable audit opinions. We also find that knowledge sharing within audit firms is associated with higher audit efficiency as represented by shorter audit lags. More importantly, we find that both higher audit quality and audit efficiency are simultaneously associated with higher levels of knowledge sharing, suggesting that effective knowledge sharing may help to improve both audit quality and audit efficiency. Given the regulatory changes to enhance both audit quality and audit timeliness, these findings have implications for audit firms. Data Availability: Data used in this study are available from public sources. Survey data are available upon request.

How Small Audit Firm Membership in Associations, Networks, and Alliances Can Impact Audit Quality and Audit Fees

2015 ◽  
Vol 9 (2) ◽  
pp. P29-P35 ◽  
Author(s):  
Kenneth L. Bills ◽  
Lauren M. Cunningham
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Audit Committees ◽  
Association Network ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Public Company ◽  
Auditor Selection

SUMMARY This article summarizes “Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees” (Bills, Cunningham, Myers 2015), which examines the association between small audit firm membership in an association, network, or alliance (collectively referred to as an “association”), audit quality, and audit fees. We find that small audit firm association members provide higher-quality audits and charge higher fees than small audit firms that are not members of an association. When compared to similarly sized clients audited by the Big 4, we find that member firms provide audit quality similar to the Big 4 firms, but member firms charge lower fees than their Big 4 counterparts. We caution that these results may not be generalizable to the largest Big 4 clients for which there is not a similarly sized client audited by our sample of small audit firms. We infer audit quality from Public Company Accounting Oversight Board inspections, restatement announcements, and discretionary accruals. Our findings should be of interest to audit committees in charge of auditor selection and to small audit firms interested in the benefits of association membership.

Audit Office Labor Market Proximity and Audit Quality

2021 ◽  
Author(s):  
Gladys Lee ◽  
Vic Naiker ◽  
Christopher R Stewart
Keyword(s):  
Labor Market ◽  
Audit Quality ◽  
Financial Accounting ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Sensitivity Tests ◽  
Alternative Measures ◽  
Office Level

This study examines whether the audit quality of Big 4 audit firms is affected by an audit office's proximity to more target universities for appointing staff auditors. We identify these target universities using a recruitment map of a Big 4 audit firm and unique office-level hiring data hand collected from LinkedIn. Our findings suggest that audit offices closer to more of their key feeder schools and universities with accredited business schools are associated with higher audit quality, as observed by a lower likelihood of financial accounting misstatements. Our results are robust across alternative measures of labor market proximity and audit quality, and to a battery of sensitivity tests, including controlling for client firm's proximity to universities. Overall, our results suggest that audit offices benefit from being proximate to more key suppliers of staff auditors.

scholarly journals The Moderating Effect of Audit Quality on the Links Between Stock Market Segmentations, Surplus Free Cash Flow, and Income-increasing Discretionary Accruals

2021 ◽  
Vol 15 (4) ◽  
pp. 153-174
Author(s):  
Ahmad A. Toumeh ◽  
Sofri Yahya ◽  
Mohammed M. Yassin ◽  
Maha D. Ayoush
Keyword(s):  
Stock Market ◽  
Cash Flow ◽  
Audit Quality ◽  
Institutional Environment ◽  
Stock Exchange ◽  
Discretionary Accruals ◽  
Free Cash Flow ◽  
Financial Firms ◽  
Big 4 ◽  
Audit Firms

The objective of this paper is to examine the impacts of stock market segmentations (SMS) and surplus free cash flow (SFCF) on income-increasing discretionary accruals. The study also provides the initial evidence regarding the influence of audit quality (AQ) as a moderating variable on those relationships. A sample of non-financial firms was taken from the list of Amman Stock Exchange over the period 2013-2019. Using Huber-White’s sandwich estimator for pooled OLS regression, the current research presents empirical evidence harmonious with the prediction in all hypotheses. Further, the findings document that a Big 4 auditor weakens the SMS-DAC and SFCF-DAC associations, which suggests that the role of Big 4 audit firms is effective in mitigating management’s opportunistic behaviour. However, the reported results provide beneficial information to investors, regulators, external auditors, policymakers, shareholders, and other countries with similar institutional environment.

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 impact of audit quality on earnings management and cost of equity capital: evidence from a developing market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ben Le ◽  
Paula Hearn Moore
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
Big 4 ◽  
The Government ◽  
The Impact

Purpose This study aims to examine the effects of audit quality on earnings management and cost of equity capital (COE) considering the impact of two owner types: government ownership and foreign ownership. Design/methodology/approach The study uses a panel data set of 236 Vietnamese firms covering the period 2007 to 2017. Because the two main dependent variables of the COE capital and the absolute value of discretionary accruals receive fractional values between zero and one, the paper uses the generalised linear model (GLM) with a logit link and the binomial family in regression analyses. The paper uses numerous audit quality measures, including hiring Big 4 auditors or the industry-leading Big 4 auditor, changing from non-Big 4 auditors to Big 4 auditors or the industry-leading Big 4 auditor, and the length of Big 4 auditor tenure. Big 4 companies include KPMG, Deloitte, EY and PwC, whereas the non-big 4 are the other audit companies. Findings The study finds a negative relationship between audit quality and both the COE capital and income-increasing discretionary accruals. The effects of audit quality on discretionary accruals and the COE capital depend on the ownership levels of two important shareholders: the government and foreign investors. Foreign ownership is negatively associated with discretionary accruals; however, the effect is more pronounced in the sub-sample of state-owned enterprises (SOEs), the firms where the government owns 50% or more equity, than in the sub-sample of Non-SOEs. Originality/value To the best of the knowledge, no prior similar study exists that used the GLM with a logit link and the binomial family regression. Global investors may be interested in understanding how unique institutional settings and capital markets of each country impact the financial reporting quality and cost of capital. Further, policymakers of developing markets may have incentives to improve the quality of financial reporting and reduce the cost of capital which should result in attracting more foreign investments.

Audit quality following the Public Company Accounting Oversight Board’s operation

2017 ◽  
Vol 17 (5) ◽  
pp. 927-946
Author(s):  
She-Chih Chiu ◽  
Chin-Chen Chien ◽  
Hsuan-Chu Lin
Keyword(s):  
Audit Quality ◽  
Univariate Analysis ◽  
Self Regulation ◽  
Discretionary Accruals ◽  
Content Type ◽  
Positive Effects ◽  
Audit Firms ◽  
Public Company ◽  
The Usa ◽  
Big Four

Purpose The purpose of this paper is to investigate the extent to which the transition from self-regulation to heteronomy has changed the gap in audit quality between Big Four and non-Big Four auditors. Design/methodology/approach This study analyzes publicly held companies in the USA between 1999 and 2012 using univariate analysis, multivariate analysis and quantile regression analysis. Audit quality is measured with discretionary accruals. Findings This study shows an insignificant difference in audit quality between the clients of Big Four and non-Big Four auditors after Public Company Accounting Oversight Board (hereafter, PCAOB) began its operations. In the analysis of the effects of PCAOB inspections on the audit quality of audit firms that are inspected annually and triennially, the findings show that the inspections have more positive effects when carried out annually. This suggests that the frequency of inspection is positively associated with audit quality. Overall, these results provide evidence that recent improvements in audit quality have been caused by changes in regulatory standards. Originality/value The paper provides three major original contributions. First, the authors add to the literature on audit quality by further demonstrating a reduced gap in audit quality between Big Four and non-Big Four audit firms due to heteronomy. Secondly, this study contributes to the debate as to whether independent inspections on audit firms are beneficial or not and suggests that the PCAOB inspections help increase audit quality. Finally, the results of this work contribute to the growing literature examining discretionary accruals.

The role of audit quality in firm valuation

2016 ◽  
Vol 58 (5) ◽  
pp. 575-598 ◽  
Author(s):  
Mishari M. Alfraih
Keyword(s):  
Audit Quality ◽  
Value Relevance ◽  
Accounting Information ◽  
Institutional Setting ◽  
Content Type ◽  
Book Value ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Team

Purpose The purpose of this paper is to examine the effect of audit quality on the value relevance of earnings and book value. Because joint audit is mandated for all Kuwait Stock Exchange-listed firms, it is hypothesized that the higher the quality of the audit team (as measured by the number of Big 4 audit firms in the joint audit team), the higher the value relevance of earnings and book values for equity valuation. Design/methodology/approach Consistent with prior research, the value relevance of earnings and book value is measured by the adjusted R2 derived from the Ohlson’s 1995 regression model. The number of Big 4 audit firms represented on the firm’s audit team is used as a proxy for audit quality. Three tiers of audit quality exist, namely, two non-Big 4 audit firms, one Big 4 and one non-Big 4 audit firms or two Big 4 audit firms. To address this paper’s objective, the association between audit quality and the value relevance of earnings and book value were examined using four approaches. The final sample consists of 1,836 firm-year observations and covers fiscal years from a 12-year period (2002-2013). Findings Taken together, the four approaches used collectively provide empirical evidence that audit quality positively and significantly affects the value relevance of accounting measures to market participants. Importantly, the results reveal significant variations in the value relevance of earnings and book value jointly across the three possible auditor combinations. Research limitations/implications Although using auditor size as a proxy for audit quality is well established in the auditing literature, a limitation of that proxy is that it measures audit quality dichotomously, which implicitly assumes a homogeneous level of audit quality within each group. Practical implications The findings show the importance of high-quality and rigorous external audits in improving the value relevance of accounting information. Originality/value This study contributes to the extent literature on audit quality by exploring the role of audit quality in a unique institutional setting that imposes mandatory joint audits. Although prior studies have investigated the effect of joint audit pair choice on earnings management and audit fee premium, this study is the first to investigate the effect of joint audit pair choice on the value relevance of accounting information.

scholarly journals Should the 4 big replace the big 4? An examination of audit quality using internal audit

2012 ◽  
Vol 9 (2) ◽  
pp. 41-55
Author(s):  
Harjinder Singh ◽  
Rick Newby ◽  
Inderpal Singh
Keyword(s):  
Audit Quality ◽  
Internal Audit ◽  
Important Research ◽  
Dummy Variable ◽  
Big 4 ◽  
Audit Firms ◽  
Dichotomous Variable ◽  
Audit Fee

Prior research has linked audit quality with large audit firms. Consequently, a dichotomous variable, Big N/non-Big N has traditionally proxied for audit quality. Applying a different measure of audit quality than audit fee, this study investigates whether a single dummy variable for Big N is an appropriate proxy for audit quality in explaining differences in the existence of clients’ internal audit (IA) function. Results indicate that the existence of clients’ IA function is not consistent among Big 4 firms. This has important research implications for the universal use of a Big N dummy variable as a measure for audit quality.

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