Auditor Conservatism after Enron

2010 ◽  
Vol 29 (1) ◽  
pp. 267-278 ◽  
Author(s):  
Dorothy A. Feldmann ◽  
William J. Read
Keyword(s):  
Financial Statement ◽  
Going Concern ◽  
Corporate Scandals ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
The Media ◽  
Time Periods ◽  
Audit Opinions ◽  
Auditor Conservatism

SUMMARY: Corporate scandals and the resulting passage of the Sarbanes-Oxley Act (SOX) in 2002 significantly affected the auditing profession. The quality of financial statement audits was called into questioned and the media and regulators held audit firms responsible. Several studies found evidence of an increase in the issuance of going-concern opinions after the passage of SOX relative to earlier time periods (Geiger et al. 2005; Nogler 2008; Myers et al. 2008). Auditors, it appears, behave more conservatively when the profession is in the headlines. We replicate and extend this research to determine whether the heightened conservatism continues or whether it fades as time passes. We examine audit opinions issued 12 months or less prior to a bankruptcy filing for 565 companies from 2000–2008. Our findings indicate that while the proportion of going-concern modifications increases sharply in 2002–2003 compared to 2000–2001, it declines in the periods that follow, ultimately returning to its pre-Enron level.

Enriching AIS Courses With SOX Compliance Activities

2010 ◽  
Vol 5 (1) ◽  
pp. 1-24 ◽  
Author(s):  
Joann Segovia ◽  
Carol M. Jessup ◽  
Marsha Weber ◽  
Sheri Erickson
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Controls ◽  
Accounting Profession ◽  
Investor Confidence ◽  
Reporting Requirements ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Significant Change

A very significant change to the accounting profession occurred in 2002 when the Sarbanes-Oxley Act of 2002 (SOX) was enacted. This legislation had a significant impact on corporations and their audit firms. The objective was to improve corporate governance and its quality of financial reporting to improve investor confidence. This paper provides instructors with a background on SOX and suggests readings and activities that reflect the requirements of SOX as it relates to the AIS environment and the analysis of internal controls. These activities can strengthen students' understandings of how corporations respond to the various reporting requirements of this Act.

The Global Financial Crisis: U.S. Bankruptcies and Going-Concern Audit Opinions

2013 ◽  
Vol 28 (1) ◽  
pp. 59-75 ◽  
Author(s):  
Marshall A. Geiger ◽  
K. Raghunandan ◽  
William Riccardi
Keyword(s):  
Financial Crisis ◽  
Global Financial Crisis ◽  
Going Concern ◽  
Business Press ◽  
Big 4 ◽  
Audit Firms ◽  
Auditing Standards ◽  
Audit Opinions ◽  
The Global Financial Crisis

SYNOPSIS This study investigates whether auditors' going-concern modified opinion (GCO) decisions were less likely after the start of the recent “Global Financial Crisis” (GFC). Auditing regulators and the business press had complained that auditors did not provide adequate warning in their reports prior to many companies filing for bankruptcy during the GFC. Accordingly, we examine auditors' GCO opinions for financially stressed clients that subsequently entered into bankruptcy during the period from 2004 to 2010. We find that, after controlling for other factors related to GCOs, the propensity of auditors to issue a GCO prior to bankruptcy significantly increased after the onset of the GFC. Additional tests reveal similar results when we separately examine clients of the Big 4 and non-Big 4 firms, suggesting both sized firms significantly increased the likelihood of issuing a GCO to a subsequently bankrupt client after the start of the GFC. Our results should be of interest to regulators, investors, audit firms, academics, and standard setters as they evaluate U.S. auditor performance during the GFC, and in contemplation of changes to auditing standards as a result of the GFC.

Did SOX Influence the Association between Fee Dependence and Auditors' Propensity to Issue Going-Concern Opinions?

2013 ◽  
Vol 33 (2) ◽  
pp. 165-185 ◽  
Author(s):  
Jennifer L. Kao ◽  
Yan Li ◽  
Wenjun Zhang
Keyword(s):  
Government Regulations ◽  
Going Concern ◽  
Sarbanes Oxley ◽  
Short Run ◽  
Public Scrutiny ◽  
Jel Classifications ◽  
Auditor Conservatism

SUMMARY: Li (2009) found that the association between fee dependence (FEEDEP) and the incidence of going-concern opinions (GCO) changed from insignificant in 2001 to positive in 2003. This finding has been interpreted as evidence that auditors became more conservative after the Sarbanes-Oxley Act (SOX). However, Feldmann and Read (2010) suggested that the year following SOX was not typical due to the intense spotlight directed at the audit profession. We revisit Li (2009) by extending the post-SOX period to 2011, and find robust results of little FEEDEP-GCO association in the years after 2003. Hence, the rise in auditor conservatism identified by Li (2009) likely represented the audit profession's temporary reaction to public scrutiny surrounding the passage of SOX, rather than a sustained movement toward more conservative going-concern reporting. Our study reinforces the notion that the effect of major events and government regulations cannot be adequately assessed based on what transpires in the short run. JEL Classifications: M420.

Investors’ Expectations of the Improvement in the Credibility of Audit Opinions following PCAOB Inspection Reports with Identified Deficiencies

2010 ◽  
Vol 10 (1) ◽  
pp. 36-56 ◽  
Author(s):  
Jesse C. Robertson ◽  
Richard W. Houston
Keyword(s):  
Public Confidence ◽  
Audit Opinion ◽  
Outreach Programs ◽  
High Profile ◽  
Perceived Credibility ◽  
Sarbanes Oxley ◽  
Accounting Scandals ◽  
Audit Firms ◽  
Public Company ◽  
Audit Opinions

ABSTRACT: Following high-profile accounting scandals (e.g., Enron), Congress passed the Sarbanes-Oxley Act, which established the Public Company Accounting Oversight Board (PCAOB). The PCAOB conducts regular inspections of audit firms and issues inspection reports that describe audit deficiencies identified during the inspections. One purpose of these reports is to improve public confidence in auditor credibility. We conduct a between-subjects experiment to provide initial evidence concerning investors’ perceptions of audit opinion credibility following PCAOB inspections. While we find an overall increase in perceptions of the credibility of future audit opinions, the degree to which perceptions increase is a function of three salient characteristics of PCAOB reports. Specifically, we find that investors anticipate more (less) improvement in the credibility of future opinions when: (1) inspections contain high (low) severity deficiencies; (2) firms respond to the reports with concessions (denials); and (3) for small (large) firms. Further, investors’ assessment of the credibility of the firm’s response to the PCAOB report is higher for concessions than denials; response credibility fully mediates the effect of response type (concession or denial) on the perceived improvement in the credibility of future opinions. Therefore, the inspections may be a useful tool for improving the perceived credibility of audit opinions under certain conditions. Implications include the possibility that firms should consider carefully the nature of their responses and the PCAOB should consider establishing outreach programs to investors to educate them about its regulatory role.

Does Increased Audit Partner Tenure Reduce Audit Quality?

2008 ◽  
Vol 23 (4) ◽  
pp. 553-572 ◽  
Author(s):  
David L. Manry ◽  
Theodore J. Mock ◽  
Jerry L. Turner
Keyword(s):  
Audit Quality ◽  
Discretionary Accruals ◽  
Financial Statement ◽  
Risk Level ◽  
Negatively Associated ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Using Data ◽  
International Audit

The Sarbanes-Oxley Act of 2002 requires the lead audit or coordinating partner and the reviewing partner to rotate off the audit every five years so the engagement can be viewed “with fresh and skeptical eyes.” Using data obtained from actual audits by multiple U.S. offices of three large international audit firms, we examine whether there is a relationship between evidence of reduced audit quality, measured by estimated discretionary accruals, and audit partner tenure with a specific client. We find that estimated discretionary accruals are significantly and negatively associated with the lead audit partner's tenure with a specific client. Thus, audit quality appears to increase with increased partner tenure. After controlling for client size and engagement risk, we find audit partner tenure significantly and negatively associated with estimated discretionary accruals only for small clients with partner tenure of greater than seven years, regardless of risk level. We also find that tenure is not significantly associated with estimated discretionary accruals for large clients. This suggests that as partner tenure increases, auditors of small client firms become less willing to accept more aggressive financial statement assertions by managers, and that partner tenure does not affect audit quality for large clients or for shorter-tenure smaller clients. Our results relating to audit partner tenure are consistent with the conclusions about audit firm tenure by Geiger and Raghunandan (2002); Johnson, Khurana, and Reynolds (2002);Myers, Myers, and Omer (2003); and Nagy (2005) and extend their findings by focusing on individual audit partners rather than on audit firms.

Recent Changes in the Association between Bankruptcies and Prior Audit Opinions

2005 ◽  
Vol 24 (1) ◽  
pp. 21-35 ◽  
Author(s):  
Marshall A. Geiger ◽  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Paradigm Shift ◽  
Recovery Period ◽  
Client Characteristics ◽  
Going Concern ◽  
High Profile ◽  
Sarbanes Oxley ◽  
Reporting Decisions ◽  
Audit Opinions ◽  
Auditor Reporting ◽  
The U.S

The intense legislative and media scrutiny after a series of high-profile corporate failures, coupled with the paradigm shift in the regulation of the auditing profession brought forth by the Sarbanes-Oxley Act, suggests that auditors' decisions would be more conservative in the period after December 2001. Based on analyses of 226 financially stressed companies that entered bankruptcy during the period from 2000 to 2003, we find that auditors are more likely to issue going-concern modified audit opinions in the period after December 2001. Since the post-December 2001 period coincides with recovery from a recession in the U.S., we also examine prior audit opinions for 93 companies entering bankruptcy in 1991 and 1992. We find that auditors were also more likely to issue prior going-concern modified audit opinions in 2002–03 than in the earlier recession recovery period. Following the technique used in Francis and Krishnan (2002), we document that the increase in going-concern modification rates for bankrupt companies after December 2001 is due to changes in auditor reporting decisions and not solely due to differences in client characteristics between the time periods studied.

scholarly journals The Influence of Institutional Regulatory Pressure on Nonprofit Hospital Audit Quality

2018 ◽  
Vol 7 (1) ◽  
pp. 1-23
Author(s):  
Michele M. McGowan ◽  
Siew H. Chan ◽  
Yuliya V. Yurova ◽  
Chunhui Liu ◽  
Raymond M. K. Wong
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Data Availability ◽  
Nonprofit Hospitals ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Public Interest Groups ◽  
Two Measures ◽  
Nonprofit Hospital

ABSTRACT This paper investigates whether the influence of institutional regulatory pressures emanating from the enactment of the Sarbanes-Oxley Act and subsequent nonprofit legislation and disclosure requirements improves nonprofit hospital audit quality. Drawing on institutional theory, we argue that increased regulatory attention can shift the audit firm's judgment regarding the choice and inference of previously acceptable audit procedures and heighten the importance of reputational capital as an incentive for audit firms to improve audit quality. We examine two measures of audit quality: internal control deficiencies and discretionary accruals. The results reveal that the audit quality of nonprofit hospitals improves, suggesting that audit firms have responded to regulatory pressures and enhanced their audit and engagement practices for the benefit of nonprofit hospitals and stakeholders. The findings provide regulators and public interest groups with evidence that desired nonprofit oversight and accountability may have already been attained via improved audit quality. Data Availability: Data are available from public sources cited in the text.

Auditor Independence and Auditor-Provided Tax Service: Evidence from Going-Concern Audit Opinions Prior to Bankruptcy Filings

2008 ◽  
Vol 27 (2) ◽  
pp. 31-54 ◽  
Author(s):  
Dahlia Robinson
Keyword(s):  
Audit Quality ◽  
Auditor Independence ◽  
The Public ◽  
Going Concern ◽  
Sarbanes Oxley ◽  
Public Company ◽  
Reporting Decisions ◽  
Going Concern Opinion ◽  
Information Spillover

SUMMARY: This study examines whether auditors’ provision of tax services impairs auditor independence by focusing on auditors’ going-concern opinions among a sample of bankruptcy filing firms. The evidence from the bankruptcy setting is particularly salient given that the bankruptcy of corporations such as Enron motivated several provisions of the Sarbanes-Oxley Act (SOX) of 2002. More recently, auditors’ provision of tax service to their audit clients has been the focus of new rules by the Public Company Accounting Oversight Board (PCAOB). Consistent with improved audit quality from information spillover, the study documents a significant positive correlation between the level of tax services fees and the likelihood of correctly issuing a going-concern opinion prior to the bankruptcy filing. One implication of this result is that restricting tax services by auditors of poorly performing firms may diminish the quality of auditors’ reporting decisions without leading to an improvement in auditor independence.

Auditor Industry Specialization, Auditor Changes, and Accounting Restatements

2008 ◽  
Vol 22 (4) ◽  
pp. 389-413 ◽  
Author(s):  
Robin N. Romanus ◽  
John J. Maher ◽  
Damon M. Fleming
Keyword(s):  
Financial Reporting ◽  
Error Detection ◽  
Financial Statement ◽  
Corporate Boards ◽  
Accounting Restatements ◽  
Industry Specialization ◽  
Auditor Industry Specialization ◽  
Audit Firms ◽  
The Impact

SYNOPSIS: The increasing occurrence of accounting restatements has drawn considerable attention from regulators, audit firms, and corporate boards concerning audit and financial statement quality. Research suggests that auditor industry specialization is associated with improved error detection and greater financial statement quality. We examine the impact of auditor industry specialization on a sample of restatement and nonrestatement firms and find that auditor industry specialization is negatively associated with the likelihood of accounting restatement. In addition, focusing on the subset of restatement firms, we find that auditor industry specialization reduces the likelihood of issuing restatements affecting core operating accounts, suggesting that industry specialization adds value in auditing a particularly critical area of the firms’ continuing operations. Finally, we find changing from a nonspecialist to a specialist auditor increases the likelihood of restatement, and changing from a specialist to a nonspecialist reduces the likelihood of restatement. Our findings are consistent with industry specialization enhancing auditors’ role in improving the quality of the financial reporting process, particularly related to the core operations of their clients.

scholarly journals Independence: The Fall Of Andersen And The Rise Of Sarbanes Oxley

2011 ◽  
Vol 3 (7) ◽  
Author(s):  
H. Francis Bush
Keyword(s):  
Lower Percentage ◽  
Font Size ◽  
Related Services ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Audit Opinions ◽  
Arthur Andersen ◽  
Non Audit Services

<p class="MsoBodyText2" style="text-align: justify; margin: 0in 0.6in 0pt 0.5in;"><span style="font-style: normal; font-size: 10pt;"><span style="font-family: Times New Roman;">In this study, the author examines the audit firms&rsquo; fees associated with audit services and audit-related services as a percentage of total fees charged to individual firms as reported to the SEC.<span style="mso-spacerun: yes;">&nbsp; </span>This study was motivated by discussion of the impacts on audit opinions of the amount of work beyond an audit for which an auditing firm contracts.<span style="mso-spacerun: yes;">&nbsp; </span>The results indicate that the fees that Arthur Andersen charged its individual clients indeed had a lower percentage of total fees associated with audit work.<span style="mso-spacerun: yes;">&nbsp; </span>Further, for the year 2002, on average, firms reported a higher percentage of fees from auditors were associated with audit work.<span style="mso-spacerun: yes;">&nbsp; </span>Firms that previously contracted with Arthur Andersen contracted significantly less non-audit services than their counterparts.</span></span></p>

Sign in / Sign up

Export Citation Format

Share Document