Earnings Volatility and Auditor Risk Assessments: Evidence from Auditor Resignations

2020 ◽  
Vol 34 (4) ◽  
pp. 33-56 ◽  
Author(s):  
David B. Bryan ◽  
Terry W. Mason
Keyword(s):  
Earnings Management ◽  
Positive Association ◽  
Risk Assessments ◽  
Earnings Volatility ◽  
Big 4 ◽  
Accounting Estimates ◽  
Increase Risk

SYNOPSIS This study proposes that auditors incorporate earnings volatility into their risk assessments such that volatility is associated with auditor resignations. Because volatile earnings are less predictable, they create larger deviations from the auditor's expectation of earnings and could increase auditor risk assessments. Higher earnings volatility could also signal underlying conditions that increase risk because accounting estimates become less reliable. Alternatively, auditors may perceive lower earnings volatility as riskier if auditors view it as an indication of more earnings management. We find a positive association between earnings volatility and auditor resignations, consistent with auditors viewing volatile earnings as riskier. This association is stronger for non-industry-specialists and auditors without long tenure. Finally, after the resignation of a Big 4 auditor, firms in the top quartile of earnings volatility are more likely to switch to a non-Big 4 auditor. Overall, our results show that earnings volatility plays an important role in auditor-client realignments.

Audit Senior Modeling Fallibility: The Effects of Reduced Error Strain and Enhanced Error-Related Self-Efficacy on Audit Juniors' Responses to Self-Discovered Errors

2019 ◽  
Vol 31 (2) ◽  
pp. 17-30 ◽  
Author(s):  
Craig Emby ◽  
Bin Zhao ◽  
Jost Sieweke
Keyword(s):  
Survey Data ◽  
Self Efficacy ◽  
Direct Relationship ◽  
Positive Association ◽  
Accounting Firms ◽  
Big 4 ◽  
The Relationship ◽  
Practical Implications

ABSTRACT This paper examines the relationship between audit seniors discussing their own experiences with committing and correcting errors (modeling fallibility), and audit juniors' thinking about errors and error communication (openly discussing their own self-discovered errors). The paper investigates the direct relationship between senior modeling fallibility and juniors' responses, and whether the relationship is mediated through error strain and error-related self-efficacy. Survey data from 266 audit juniors from two Big 4 Canadian accounting firms showed a direct positive association between audit senior modeling fallibility and audit juniors' thinking about errors, and error communication. This relationship is positively mediated through error-related self-efficacy. We also found that the relationship is mediated by error strain. However, although audit senior modeling fallibility was associated with reduced error strain, error strain was positively related to both thinking about errors and error communication, contrary to our hypothesis. The paper discusses the theoretical and practical implications of these results.

scholarly journals Auditors’ professional and organizational identities and commercialization in audit firms

2018 ◽  
Vol 31 (2) ◽  
pp. 374-399 ◽  
Author(s):  
Pernilla Broberg ◽  
Timurs Umans ◽  
Peter Skog ◽  
Emily Theodorsson
Keyword(s):  
Professional Identity ◽  
Customer Orientation ◽  
Linear Regression Analysis ◽  
Positive Association ◽  
Process Orientation ◽  
Content Type ◽  
Organizational Identities ◽  
Big 4 ◽  
Audit Firms ◽  
New Instrument

Purpose The purpose of this paper is to explain how auditors’ professional and organizational identities are associated with commercialization in audit firms. Unlike previous studies exploring the consequences of commercialization in the firms, the study directs its attention toward the potential driver of commercialization, which the authors argue to be the identities of the auditors. Design/methodology/approach The paper is based on 374 responses to a survey distributed to 3,588 members of FAR, the professional association of accountants, auditors and advisors in Sweden. The study used established measures of organizational and professional identity and introduced market, customer and firm process orientation as aspects of commercialization. The study explored the data through descriptive statistics, principle component analysis and correlation analysis and tested the hypotheses with multiple linear regression analysis. Findings The findings indicated that the organizational identity of auditors has a positive association with three aspects of commercialization: market orientation, customer orientation and firm process orientation. Contrary to the arguments based on prior literature, the study has found that the professional identity of auditors is also a positively associated with commercialization. This indicates a change of the role of professional identity vis-à-vis commercialization of audit firms. The positive association between professional identity and commercial orientation could indicate the development of “organizational professionalism.” The study also found differences between the association between professional identity and commercialization in Big 4 and non-Big 4 firms. While in Big 4 firms, professional identity is positively associated only with the firm’s process orientation, in non-Big 4 firms, professional identity has a positive association with all three aspects of commercialization. Originality/value The paper provides insight into how auditors’ identities have influenced commercialization of audit firms and into the normalizing of commercialization within auditing. The study also developed a new instrument for measuring commercialization, one based on market, customer and firm process orientation concepts. This paper suggests that this instrument is an alternative to the observation through proxies.

scholarly journals Assessing Management Integrity: Insights from Big 4 Auditors in Egypt

2018 ◽  
Vol 12 (1) ◽  
pp. A29-A39
Author(s):  
Rasha Kassem
Keyword(s):  
Best Practices ◽  
Training Programs ◽  
Risk Assessments ◽  
External Auditors ◽  
Corporate Scandals ◽  
Fraud Risk ◽  
Big 4 ◽  
Audit Firms ◽  
Fraud Risk Assessments ◽  
Audit Standards

SUMMARY Recent corporate scandals have raised concerns about the quality and value of the audit profession and have generated demands for improving auditors' evaluation of management integrity. The literature lacks evidence regarding methods of assessing management integrity, while audit standards provide little if any guidance on this matter. This raises questions about how external auditors can comply with the audit standards in this area and what best practices and deficiencies exist in the assessment of management integrity. This study examines methods of assessing management integrity by providing insights from the Big 4 auditors in Egypt. The findings of this study will benefit audit firms in their professional audit training programs, as well as auditors conducting fraud risk assessments.

A-35 Relationship between Suicidality and Discrepancies in Verbal and Nonverbal Intelligence in Adolescents

2021 ◽  
Vol 36 (6) ◽  
pp. 1076-1076
Author(s):  
Dov Gold ◽  
Danya Ravid ◽  
Emily Crain ◽  
Karen Holler
Keyword(s):  
Suicide Attempts ◽  
Positive Association ◽  
Convenience Sample ◽  
Verbal Comprehension ◽  
Increase Risk ◽  
Lifetime Number ◽  
Verbal Comprehension Index ◽  
Linear Regression Modeling ◽  
Perceptual Reasoning ◽  
Iq Discrepancy

Abstract Objective Many have examined the relationship between intellectual functioning (IQ) and suicidality in children and adolescents. However, no study to date has investigated how discrepancies between verbal and nonverbal IQ may influence suicide risk in adolescents. This study used a sample of patients hospitalized on an adolescent psychiatric unit to compare number of lifetime suicide attempts (SA) among those with a ≥ 22-point difference between verbal and nonverbal abilities. Method Data were retroactively collected from a convenience sample. Patients were grouped based on discrepancies between Perceptual Reasoning Index (PRI) and Verbal Comprehension Index (VCI) scores (VCI > PRI & VCI). Results The number of lifetime ACEs or size of IQ discrepancy did not significantly differ between groups; however, those in the VCI < PRI (μ = 1.13 ± 0.98) group had a significant higher number of SAs than those in the VCI > PRI group (μ = 0.50 ± 0.86) (t(32) = 2.01, p = 0.05). Hedges’ g revealed large effect for IQ discrepancy type and number of SAs. Linear regression modeling revealed a positive association between number of ACEs and number of SAs (ß = 0.10, t(33) = 2.71, p = 0.01). Size of IQ discrepancy was not significantly contributory to total SAs. Conclusion VCI being considerably lower than PRI may increase risk of SA in adolescents. This risk may be further exacerbated by lifetime number of ACEs.

Earnings Management and Stock Liquidity

2021 ◽  
pp. 66-84
Author(s):  
Hakan Özkaya
Keyword(s):  
Stock Market ◽  
Earnings Management ◽  
Trading Volume ◽  
Management Practices ◽  
Positive Association ◽  
Discretionary Accruals ◽  
Market Liquidity ◽  
Stock Liquidity ◽  
Turnover Ratio ◽  
Liquidity Measures

This chapter tests whether the earnings management practices in Turkey are considered informative or opportunistic by outside investors by examining its effect on stock liquidity. Earnings management is measured by discretionary accruals calculated by two different competing methods. Stock liquidity is also proxied by two different measures: the illiquidity measure of Amihud and the turnover ratio. Amihud's illiquidity measure indicates firms' daily price responses associated with the trading volume and the turnover ratio indicates how many times a stock changes its owner in a year. Relevant control variables are also included in the models. A positive association between earnings management and stock liquidity implies informative earnings management and vice versa. Earnings management is found to be positively associated with stock market liquidity. Results favor the informative earnings management view for Turkish firms and are robust to alternative specifications of earnings management and stock liquidity measures.

scholarly journals CEO Characteristics and Real Earnings Management in Jordan

2020 ◽  
Vol 11 (4) ◽  
pp. 255
Author(s):  
Mohammad Abedalrahman Alhmood ◽  
Hasnah Shaari ◽  
Redhwan Al-dhamari
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Stock Exchange ◽  
Reporting Quality ◽  
Personal Characteristics ◽  
Positive Association ◽  
Real Earnings Management ◽  
Board Structure ◽  
Political Connection ◽  
Ceo Characteristics

The Chief Executive Officer (CEOs) tends to be the most influential member of a corporation as they exert control over corporate decisions such as financial disclosure, board structure, and company performance in ensuring enhanced corporate performance and earnings. The issue of earnings management (EM) that has captured the attention of researchers may be among the most critical factors that are linked to financial statement manipulation. Therefore, the current study explored the effects of the personal characteristics of CEOs on real earnings management (REM) practices in Jordan. Data of 58 companies listed on the Amman Stock Exchange for six years from 2013 to 2018 were utilised to achieve this study’s objectives. The results of this study revealed that CEOs’ experience had a significantly positive association with REM. Meanwhile, CEOs’ tenure had no impact on REM among Jordanian firms. Also, the results exposed the presence of a significantly negative association between CEO duality and REM. Finally, CEOs’ political connection was found to have a significantly positive association with REM. This study offers empirical evidence on the effect of CEO characteristics on REM and how such characteristics can lead to exploitation, which brings an impact on the financial reporting quality.

Changes in Accounting Estimates: Underlying Economic Reality or Earnings Management

2018 ◽  
Author(s):  
Al (Aloke) Ghosh ◽  
Subprasiri Siriviriyakul
Keyword(s):  
Earnings Management ◽  
Accounting Estimates ◽  
Economic Reality

scholarly journals Examining the Decision to Opt In versus Opt Out of Section 107 of the JOBS Act of 2012: Determinants and Consequences

2019 ◽  
Vol 8 (2) ◽  
pp. 108
Author(s):  
Jason Bergner ◽  
Marcus R. Brooks ◽  
Binod Guragai
Keyword(s):  
Earnings Management ◽  
Transition Period ◽  
Accounting Standards ◽  
Financial Statements ◽  
Least Square ◽  
Ordinary Least Square ◽  
Big 4 ◽  
Opt Out ◽  
Ordinary Least Square Regression ◽  
Jobs Act

The Jumpstart Our Business Startups Act of 2012 (hereafter, JOBS Act) creates a new category of firms, referred to as “Emerging Growth Companies” (hereafter, EGCs). Section 107 of the JOBS Act, titled “Opt-In Right for EGCs,” gives EGCs the choice to take advantage of an extended transition period for complying with new or revised accounting standards. In other words, an EGC can choose to delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. Using a logistic regression approach with hand-collected data, we examine the underlying firm characteristics associated with EGCs’ choice of opting in or out of the accounting standards exemption, as provided by Section 107 of the JOBS Act. Using additional ordinary least square regression analyses, we further examine whether the choice of opting in or out is associated with earnings management and financial statement restatement behavior. Our results suggest that EGC firms designated as “smaller reporting companies” are more likely to choose to delay the adoption of a new or revised accounting standard (i.e., opt in). Our findings also show that EGCs that employ Big 4 auditors are more likely to opt out. We further find that EGCs that choose to opt out are less likely to engage in earnings management behavior, proxied by the absolute value of abnormal accruals, and are less likely to restate their financial statements. Taken together, our findings suggest that EGCs that choose to opt out of Section 107 produce higher quality financial statements.

Board characteristics, external auditing quality and earnings management

2014 ◽  
Vol 4 (1) ◽  
pp. 79-96 ◽  
Author(s):  
Neila Boulila Taktak ◽  
Ibtissem Mbarki
Keyword(s):  
Earnings Management ◽  
Management Practices ◽  
Audit Quality ◽  
Good Practice ◽  
Board Structure ◽  
External Audit ◽  
Content Type ◽  
Board Characteristics ◽  
Big 4 ◽  
The Impact

Purpose – The purpose of this paper is to examine the impact of board characteristics and external audit quality on earnings management among major Tunisian banks over the period 2003-2007. Design/methodology/approach – Multivariate regressions are employed to test the effect of board structure and external audit quality on discretionary provisions as a proxy for earnings management. Findings – Results indicate that among the characteristics of the board, CEO duality is associated with higher levels of discretionary provisions. However, the presence of directors affiliated to the largest shareholder tends to constrain earnings management practices. The results reveal also that a co-audit belonging to the BIG 4 provides incentives to manage earnings while the capacity of the external auditor to disclose reservations impacts negatively the manager's discretion. Practical implications – First, it is not desirable to appoint a co-audit both belonging to the BIG 4. Second, the presence of affiliated directors reduces the discretionary practices except in cases where directors are affiliated to families. In this case, banks should strengthen the presence of independent directors. Finally, the delineation of the leeway left in the Tunisian accounting standards would provide more transparent financial information. Originality/value – This study contributes to the literature on governance and its impact on earnings management among Tunisian banks by introducing two variables that have not been tested before which are affiliated directors and co-audit. The paper will be of value to banks willing to comply with the Governance Good Practice Guide adopted recently in Tunisia.

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