Audit Partner Tenure and Audit Planning and Pricing

2010 ◽  
Vol 29 (2) ◽  
pp. 45-70 ◽  
Author(s):  
Jean C. Bedard ◽  
Karla M. Johnstone
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Internal Controls ◽  
First Year ◽  
Public Companies ◽  
Audit Opinion ◽  
Audit Firm ◽  
Audit Planning ◽  
Sarbanes Oxley ◽  
Client Knowledge

SUMMARY: This paper investigates the association between audit engagement partner tenure and audit planning and pricing. Prior archival research from countries requiring partner signature on the audit opinion provides mixed results on the implications of partner tenure for audit quality. While variation in audit quality based on partner tenure implies some difference in the conduct of the engagement, prior research has not yet addressed whether engagement processes differ based on partner tenure. Using proprietary data from a large audit firm, we find that planned engagement effort increases following partner rotation, suggesting that new partners invest effort to gain client knowledge in the first year on the engagement. We also examine planned realization rates, finding them to be lower following partner rotation. This implies that new partners’ investments in client knowledge are not compensated by clients. We also find higher planned realization rates on audits having the same engagement partner for more than five years, a longer tenure than is now allowed for public companies following the Sarbanes-Oxley Act. We obtain these results while controlling for client risks that affect audit planning and pricing, including those related to financial reporting, management integrity, and internal controls.

scholarly journals Model Pengendalian Internal Berbasis Sarbanes-Oxley Act dan Keandalan Pelaporan Keuangan (Studi Internal Audit Pada Perusahaan Publik di Indonesia)

2016 ◽  
Vol 18 (2) ◽  
pp. 81
Author(s):  
Syahril Djaddang ◽  
Shanti Lysandra
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Audit ◽  
Public Companies ◽  
Audit Opinion ◽  
Moderating Variables ◽  
Sarbanes Oxley ◽  
Control Application ◽  
The Impact

<em>This study focus on internal control application based on the Sarbanes-Oxley Act. The research objective is to examine the impact of Sarbanes-Oxley Act implementation and the financial reporting reliability toward audit quality and audit opinion. The research is conducted on public companies implementing Sarbanes- Oxley Act in Indonesia. The internal audit section in the companies are used as respondents. Based on questionnaires distributed, there were 35 samples of public companies used in this research. This study employs WarpPLS to handle the SEM model in testing the hypotheses and multigroup analysis to conduct the sensitivity analysis. The research’s results showed that application of Sarbanes-Oxley Act based internal control and financial reporting reliability are positively affect the audit opinions and directly influence the audit quality. However, the independent auditor's opinion is not a moderating variables between other variables. The research results are expected to be used as considerations by the companies in implementation of Sarbanes-Oxley Act based internal control.</em>

The Impact of Client and Misstatement Characteristics on the Disposition of Proposed Audit Adjustments

2011 ◽  
Vol 30 (2) ◽  
pp. 103-124 ◽  
Author(s):  
Jennifer Joe ◽  
Arnold Wright, and ◽  
Sally Wright
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Data Availability ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Time Period ◽  
Confidentiality Agreement ◽  
Financial Scandals ◽  
The Impact

SUMMARY We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several U.S. financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX). During this period, auditors and their clients faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB), and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments, including the effect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find that 24.2 percent of proposed adjustments were subsequently waived. The results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. Data Availability: Due to a confidentiality agreement with the participating audit firm the data are proprietary.

Audit Firm Tenure and Fraudulent Financial Reporting

2004 ◽  
Vol 23 (2) ◽  
pp. 55-69 ◽  
Author(s):  
Joseph V. Carcello ◽  
Albert L. Nagy
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Auditor Independence ◽  
Fraudulent Financial Reporting ◽  
Audit Firm ◽  
Auditor Tenure ◽  
Sarbanes Oxley ◽  
Client Relationship ◽  
Mandatory Audit Firm Rotation ◽  
The U.S

The Sarbanes-Oxley Act (2002) required the U.S. Comptroller General to study the potential effects of requiring mandatory audit firm rotation. The General Accounting Office (GAO) concludes in its recently released study of mandatory audit firm rotation that “mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence” (GAO 2003, Highlights). However, the GAO also suggests that mandatory audit firm rotation could be necessary if the Sarbanes-Oxley Act's requirements do not lead to improved audit quality (GAO 2003, 5). We examine the relation between audit firm tenure and fraudulent financial reporting. Comparing firms cited for fraudulent reporting from 1990 through 2001 with both a matched set of non-fraud firms and with the available population of non-fraud firms, we find that fraudulent financial reporting is more likely to occur in the first three years of the auditor-client relationship. We fail to find any evidence that fraudulent financial reporting is more likely given long auditor tenure. Our results are consistent with the argument that mandatory audit firm rotation could have adverse effects on audit quality.

The Effect of Audit Duality on Audit Quality

2020 ◽  
Vol 19 (2) ◽  
pp. 65-89
Author(s):  
Lawrence Chui ◽  
Oksana Kim ◽  
Byron J. Pike
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Accounting Standards ◽  
Financial Statement ◽  
Regulatory Environment ◽  
Public Companies ◽  
Potential Reduction ◽  
Audit Firm ◽  
Financial Reporting Standards ◽  
Jel Classifications

ABSTRACT The Russian regulatory environment offers a unique audit duality situation in which public companies receive two separate financial statement audits by the same audit firm: one based on Russian Accounting Standards (RAS) and the other on International Financial Reporting Standards (IFRS). We assess whether audit duality influences audit quality, measured by modifications to the standard audit report. Using a sample of public Russian companies from 2004 to 2016, we find that audit duality significantly reduces auditors' propensity to modify the audit opinions for both the RAS and IFRS audits as compared to companies that engage a different firm for each audit. This potential reduction in audit quality is mitigated when the company is in a loss position. The presence of Big N dual auditors does not diminish the observed findings and, in fact, appears to translate into lower-quality RAS-based audits of financially distressed companies. JEL Classifications: M42; M48.

Assessing Internal Audit with Text Mining

2018 ◽  
Vol 17 (02) ◽  
pp. 1850020 ◽  
Author(s):  
Georgia Boskou ◽  
Efstathios Kirkos ◽  
Charalambos Spathis
Keyword(s):  
Text Mining ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Audit ◽  
Internal Controls ◽  
Annual Reports ◽  
Previous Attempt ◽  
Sarbanes Oxley ◽  
Audit Information

Recently internal controls, corporate governance and risk management have received a great deal of attention. Regarding internal control, several research studies address the issue of internal audit quality. Noteworthy, according to Sarbanes–Oxley (SOX) the internal controls over financial reporting are assessed by the auditors and the management. In the present study, we assess internal controls over financial reporting by employing Text Mining techniques. We analyse the annual reports of 133 publicly traded Greek Companies. The textual parts of the annual reports that refer to internal audit mechanism are extracted. We adopt a Vector Space model and the term-document matrix records the occurrence frequencies of the terms. By applying feature selection, a set of significant keywords, which are used as predictors, is extracted. The Linear Regression model developed explains the variance of the data and highlights significant predictors. The model manages to successfully assess the internal audit function. By performing PCA, major underlying procedures and concepts related to internal audit quality are revealed. Inspite of the undoubted importance of the assessment of internal audit, no previous attempt has been made to assess internal audit and to extract internal audit information from corporate disclosures by using Text Mining techniques. Our results can be useful to internal and external auditors, managers, company decision-makers, regulators and researchers.

scholarly journals Audit tenure and financial reporting in Oman: Does rotation affect the quality?

2016 ◽  
Vol 6 (3) ◽  
pp. 18-29 ◽  
Author(s):  
Saeed Rabea Baatwah
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Financial Reports ◽  
Public Companies ◽  
Audit Opinion ◽  
Audit Firm ◽  
Governance Practices

The purpose of this study is to provide an empirical result concerning the quality of audit under a rotation policy in the Gulf Cooperation Council (GCC). Currently, countries from GCC tend to require the audit firms of public companies to be rotated within four or five consecutive years. This policy received worldwide criticisms which asserted it deteriorates the quality of financial reports – instead of increasing their quality. To achieve this purpose, we use 573 observations from companies listed in the Omani capital market implementing audit firm rotation because Oman is the leading country in GCC. Using discretionary accruals and modified audit opinion to proxy financial reporting quality, we find that audit firm tenure is not significantly associated with low quality financial reports. We also found that audit partner tenure is not positively and significantly associated with high discretionary accruals while it is positively and significantly associated with modified audit opinion. We classify our audit tenure into short and long tenure and find similar findings. Additionally and contrary to previous findings in Oman, we report that audit committee characteristics such as independence, size, financial expertise and number of meetings are not associated with high quality financial reports. Thus, our study contains several contributions to audit tenure debates in general and corporate governance practices in GCC in particular.

scholarly journals Understanding of Client’s Business in Audit Practice

2018 ◽  
pp. 54-63
Author(s):  
N. F. Manko
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Quality Data ◽  
Professional Judgment ◽  
Heuristic Methods ◽  
Audit Opinion ◽  
Audit Planning ◽  
And Performance ◽  
Audit Activity

One of the main requirements to audit tasks according to ISA is an understanding of the business entity’s nature. The process of business scrutiny is a lengthy and labor-consuming process because, apart from obtaining information from various sources, it involves its systematization and further analysis in order to make appropriate decisions. The role of business knowledge during the audit of a business entity is analyzed. A list of the essential issues which solution requires the necessary knowledge of the client’s business is given, the sources of obtaining the necessary information and factors that influence the auditor’s judgments at the phase of the task acceptance are considered. The specific nature of the audit activity requires the use of professional judgment at all audit phases, which necessitates heuristic methods of information analysis. The use of heuristic methods may contain a hidden threat – errors in the auditor’s judgment that can have significant effects for the auditor’s interim conclusions and the final judgment when forming the audit opinion regarding financial reporting. The article shows examples of errors in the auditor’s judgments that may arise at task acceptance and planning phases if the entity’s business is not fully understood. The issues which solutions require understanding of the business entity nature are grouped by phase of auditing on the basis of the author’s scrutiny and the existing audit practice. This study will provide a more thorough auditor’s approach to selecting resources for audit, obtaining high quality data about a business entity and its analysis; it will contribute in solutionsof theoretical and practical problems related with audit planning and performance, assessment of audit evidences, decision making to achieve the goal of audit: audit quality assurance.

Has Sarbanes-Oxley standardized audit quality?

2017 ◽  
Vol 32 (1) ◽  
pp. 2-23 ◽  
Author(s):  
Matthew Hoag ◽  
Mark Myring ◽  
Joe Schroeder
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Earning Forecast ◽  
Content Type ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
The Impact ◽  
Industry Expertise

Purpose The purpose of this paper is to examine whether the institutional changes accompanying the passage of the Sarbanes-Oxley Act of 2002 (SOX) have standardized the audit’s role in the overall financial reporting process, thereby reducing the impact of auditor characteristics on financial reporting quality. Design/methodology/approach To test this hypothesis, the association between audit quality characteristics (auditor size and industry expertise) and measures of financial reporting quality (analyst earning forecast dispersion and accuracy) are estimated using regression analysis. Results of this analysis are compared across the pre- and post-SOX periods. Findings The results of the study document a significant relationship between auditor size (Big N vs non-Big N) and financial reporting quality (as proxied by analyst earnings forecast properties) during the pre-SOX period but not in the post-SOX period. Auditor industry expertise is significantly associated with financial reporting quality throughout the entire sample period. Thus, financial reporting quality continues to be dependent on the degree of specialization of an audit firm in both the pre- and post-SOX periods; however, the impact of auditor size as a surrogate for quality has diminished. Originality/value The SOX Act of 2002 represented one of the most significant changes in the regulation of audits. This paper adds to the literature by examining the Act’s effects on financial professionals’ perception of the impact of audit firm characteristics on their client’s financial reporting quality.

scholarly journals The Goals and Promise of the Sarbanes–Oxley Act

2007 ◽  
Vol 21 (1) ◽  
pp. 91-116 ◽  
Author(s):  
John C Coates
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Public Institution ◽  
Section 404 ◽  
Public Companies ◽  
The Public ◽  
Corporate Scandals ◽  
Sarbanes Oxley ◽  
Public Company

The primary goal of the SarbanesOxley Act was to fix auditing of U.S. public companies, consistent with its full, official name: the Public Company Accounting Reform and Investor Protection Act of 2002. By consensus, auditing had been working poorly, and increasingly so. The most important, and most promising, part of SarbanesOxley was the creation of a unique, quasi-public institution to oversee and regulate auditing, the Public Company Accounting Oversight Board (PCAOB). In controversial section 404, the law also created new disclosure-based incentives for firms to spend money on internal controls, above increases that would have occurred after the corporate scandals of the early 2000s. In exchange for these higher costs, which have already fallen substantially, SarbanesOxley promises a variety of long-term benefits. Investors will face a lower risk of losses from fraud and theft, and benefit from more reliable financial reporting, greater transparency, and accountability. Public companies will pay a lower cost of capital, and the economy will benefit because of a better allocation of resources and faster growth. SarbanesOxley remains a work in progress -- section 404 in particular was implemented too aggressively - but reformers should push for continued improvements in its implementation, by PCAOB, rather than for repeal of the legislation itself.

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.

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