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.

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.

An Analysis of “Little r” Restatements

2015 ◽  
Vol 29 (3) ◽  
pp. 667-693 ◽  
Author(s):  
Christine E. L. Tan ◽  
Susan M. Young
Keyword(s):  
Corporate Governance ◽  
Audit Quality ◽  
Cash Flows ◽  
Internal Controls ◽  
Data Availability ◽  
Policy Implications ◽  
Multivariate Tests ◽  
Material Weaknesses ◽  
Free Cash Flows ◽  
Jel Classifications

SYNOPSIS “Little r” restatements occur when a firm's immaterial errors accumulate to a material error in a given year. Unlike “Big R” restatements that must be reported through an SEC 8-K material event filing, little r restatements do not require an 8-K form or a withdrawal of the auditor opinion. This paper documents this previously unexamined form of restatement and analyzes the characteristics of the firms that have used this method of correcting accounting errors over the period 2009 through 2012. Contrary to concerns voiced by regulators and research agencies we find, in multivariate tests, that little r firms are generally more profitable, less complex, and show some evidence of stronger corporate governance and higher audit quality than Big R firms. Compared to non-revising or restating firms, little r firms have lower free cash flows, higher board expertise, higher CFO tenure, are less likely to use a specialist auditor, and less likely to have material weaknesses in their internal controls. We also find that the majority of little r firms do not include any discussion of why these little r's occurred. We discuss policy implications related to disclosure of little r revisions. JEL Classifications: M41; M48; G38. Data Availability: All data used in this study are publicly available from the sources indicated.

Do Big 4 Auditors Provide Higher Audit Quality after Controlling for the Endogenous Choice of Auditor?

2014 ◽  
Vol 33 (4) ◽  
pp. 197-219 ◽  
Author(s):  
John Daniel Eshleman ◽  
Peng Guo
Keyword(s):  
Propensity Score ◽  
Propensity Score Matching ◽  
Audit Quality ◽  
Data Availability ◽  
Accounting Restatements ◽  
Big 4 ◽  
Audit Firms ◽  
Weak Evidence ◽  
Matching Procedure ◽  
Jel Classifications

SUMMARY: Recent research suggests that Big 4 auditors do not provide higher audit quality than other auditors, after controlling for the endogenous choice of auditor. We re-examine this issue using the incidence of accounting restatements as a measure of audit quality. Using a propensity-score matching procedure similar to that used by recent research to control for clients' endogenous choice of auditor, we find that clients of Big 4 audit firms are less likely to subsequently issue an accounting restatement than are clients of other auditors. In additional tests, we find weak evidence that clients of Big 4 auditors are less likely to issue accounting restatements than are clients of Mid-tier auditors (Grant Thornton and BDO Seidman). Taken together, the evidence suggests that Big 4 auditors do perform higher quality audits. JEL Classifications: M41, M42 Data Availability: All data are publicly available from sources identified in the text.

Audit Quality and Specialist Tenure

2018 ◽  
Vol 94 (3) ◽  
pp. 113-147 ◽  
Author(s):  
Jennifer J. Gaver ◽  
Steven Utke
Keyword(s):  
Propensity Score ◽  
Propensity Score Matching ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Data Availability ◽  
Client Characteristics ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Big 4 ◽  
Jel Classifications

ABSTRACT We argue that the association between auditor industry specialization and audit quality depends on how long the auditor has been a specialist. We measure audit quality using absolute discretionary accruals, income-increasing discretionary accruals, and book-tax differences. Our results, based on a sample of Big 4 audit clients from 2003–2015, indicate that auditors who have only recently gained the specialist designation produce a level of audit quality that does not surpass that produced by non-specialist auditors, and is generally lower than the audit quality produced by seasoned specialists. We estimate that the seasoning process takes two to three years. In contrast to prior research that finds no effect of specialization after propensity score matching, we find that seasoned specialists generally produce higher-quality audits than other auditors even after matching. This suggests that the audit quality effect associated with seasoned industry specialist auditors is not due to differences in client characteristics. JEL Classifications: M42. Data Availability: Data used in this study are available from public sources identified in the text.

Office-Client Balance and Metro Area Audit Market Competition

2020 ◽  
Vol 39 (4) ◽  
pp. 113-141
Author(s):  
Michael L. Ettredge ◽  
Matthew G. Sherwood ◽  
Lili Sun
Keyword(s):  
Relative Abundance ◽  
Audit Quality ◽  
Market Competition ◽  
Data Availability ◽  
Financial Statement ◽  
Audit Market ◽  
Metro Area ◽  
Big 4 ◽  
Jel Classifications

SUMMARY We propose a new audit supplier competition construct, the Office-Client Balance (OCB), which consists of the relative abundance of competing audit offices and audit clients in a metropolitan (metro) area. From this construct, we derive a metro level audit competition proxy reflecting surpluses or shortfalls of total metro audit office numbers relative to the national metro OCB norm: the OCB_TOT. Consistent with the predictions of Porter's Five Forces theory, we find that OCB_TOT is associated with lower fees, more auditor turnover, and more (less) office exits (entrances) in metro audit markets. These findings validate OCB_TOT as a proxy for audit market competition. Our results indicate that greater metro level competition among auditors (more positive OCB_TOT) is associated with higher audit quality, proxied by fewer financial statement misstatements. Several additional analyses suggest that OCB_TOT is useful in explaining clients' choices of local (versus remote) audit offices and Big 4 (versus non-Big 4) offices. Data Availability: Data used in this study are available from public sources. JEL Classifications: G18; L10; M42.

Further Evidence on the Effect of Regulation on the Exit of Small Auditors from the Audit Market and Resulting Audit Quality

2017 ◽  
Vol 37 (4) ◽  
pp. 95-115
Author(s):  
Neil L. Fargher ◽  
Alicia Jiang ◽  
Yangxin Yu
Keyword(s):  
Audit Quality ◽  
Financial Statements ◽  
Discretionary Accruals ◽  
Data Availability ◽  
The Public ◽  
Audit Market ◽  
Audit Firms ◽  
Jel Classifications

SUMMARY Following the introduction of SOX in 2002 and the introduction of PCAOB inspections starting from 2003, DeFond and Lennox (2011) found that a large number of small auditors exited the SEC client audit market during the 2002–2004 period and that these exiting auditors were of lower quality relative to non-exiting auditors. This paper seeks to verify whether SOX and the introduction of PCAOB inspections improved audit quality through incentivizing small auditors providing lower audit quality to exit the market. Using client discretionary accruals and the likelihood of the clients restating financial statements as proxies for audit quality, we do not find that the small auditors that exited the market for SEC client audits were of lower quality than successor small audit firms that did not exit the market. JEL Classifications: G18; L51. Data Availability: Data are available from the public sources cited in the text.

Changes in Audit Quality under Auditing Standard No. 5

2016 ◽  
Vol 16 (1) ◽  
pp. 57-83 ◽  
Author(s):  
Michelle Draeger ◽  
Don Herrmann ◽  
Bradley P. Lawson
Keyword(s):  
Audit Quality ◽  
Financial Statements ◽  
Data Availability ◽  
Financial Restatements ◽  
The Impact ◽  
Reallocation Of Resources ◽  
Jel Classifications

ABSTRACT We examine the impact of Auditing Standard No. 5 (AS5) on audit quality. Prior research suggests a reallocation of resources toward higher-risk clients with no overall change in audit quality associated with the adoption of AS5. However, using financial restatements as our proxy for audit quality, we find the likelihood that financial statements are subsequently restated decreases in the AS5 period. These results are robust to several additional analyses. In addition to testing the occurrence of a restatement event, our results indicate that the duration of the restated period decreases during the AS5 period. Consistent with the objectives of AS5, we also find that the improvements in audit quality associated with AS5 are greater for complex firms than non-complex firms. Overall, using financial restatements as our proxy for audit quality, our results suggest that audit quality improves following the issuance of AS5. JEL Classifications: M41 Data Availability: The data used in this paper are publicly available from the sources indicated in the text.

Non-CPAs and Office Audit Quality

2020 ◽  
Vol 34 (3) ◽  
pp. 169-191 ◽  
Author(s):  
Matthew G. Sherwood ◽  
Albert L. Nagy ◽  
Aleksandra B. Zimmerman
Keyword(s):  
Human Resources ◽  
Growth Regulators ◽  
Audit Quality ◽  
Data Availability ◽  
External Audit ◽  
Accounting Firms ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Jel Classifications

SYNOPSIS During the time surrounding the Sarbanes-Oxley Act of 2002, the Big 4 firms either spun-off or downsized their consulting practices. However, in recent years, consulting service lines of the large accounting firms have seen a dramatic resurgence and growth. Regulators have taken notice of, and expressed concern over, this renewed focus on consulting. The accounting firms claim that such services enhance audit quality, mainly due to the prominent role of non-accounting specialists in today's external audit function. This study examines whether the availability of non-CPAs in U.S. Big 4 firm offices is associated with audit quality. We find that greater access to non-CPAs in the office is associated with higher audit quality and conclude that office audit quality is not just a function of audit-specific human resources but also the availability of non-CPAs to support audit engagement teams. JEL Classifications: M41; M42. Data Availability: All data are publicly available from sources identified in the study.

Business Strategy, Internal Control over Financial Reporting, and Audit Reporting Quality

2017 ◽  
Vol 36 (4) ◽  
pp. 49-69 ◽  
Author(s):  
Kathleen A. Bentley-Goode ◽  
Nathan J. Newton ◽  
Anne M. Thompson
Keyword(s):  
Quality Improvement ◽  
Financial Reporting ◽  
Internal Control ◽  
Business Strategy ◽  
Audit Quality ◽  
Reporting Quality ◽  
Internal Controls ◽  
Data Availability ◽  
Material Weaknesses ◽  
Jel Classifications

SUMMARY This study examines whether a company's business strategy is an underlying determinant of the strength of its internal control over financial reporting (ICFR) and auditors' internal control reporting quality. Organizational theory suggests that companies following an innovative “prospector” strategy are likely to have weaker internal controls than companies following an efficient “defender” strategy. Consistent with theory, we find that firms with greater prospector-like characteristics are more likely to report and less likely to remediate material weaknesses, incremental to known determinants of material weaknesses. We also find that auditors' internal control reporting quality is lower among clients with greater prospector-like characteristics when measured using the timeliness of reported material weaknesses. Our findings indicate that business strategy is a useful summary indicator for evaluating companies' internal control strength and suggest that internal control reporting is an important area for audit quality improvement among prospector-like clients. JEL Classifications: D21; 21; M41. Data Availability: Data are obtained from public sources as indicated in the text.

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.

Sign in / Sign up

Export Citation Format

Share Document