Shareholder Dissatisfaction and Subsequent Audit Outcomes

2020 ◽  
Vol 34 (4) ◽  
pp. 181-200
Author(s):  
Paul N. Tanyi ◽  
Dasaratha V. Rama ◽  
K. Raghunandan ◽  
Gregory W. Martin
Keyword(s):  
Empirical Evidence ◽  
Audit Quality ◽  
Audit Fees ◽  
Securities And Exchange Commission ◽  
Financial Statement ◽  
Audit Report ◽  
Subsequent Period ◽  
Abnormal Accruals ◽  
Auditor Selection

SYNOPSIS This study examines the association between shareholder dissatisfaction, as proxied using auditor ratification voting, and subsequent auditor effort and audit quality. We document that increases in shareholder dissatisfaction are associated with (1) higher audit fees and longer audit report lags, and (2) lower abnormal accruals and reduced likelihood of financial statement misstatements, in the subsequent period. These findings inform the debate about auditor ratification voting, as governance activists and some regulators argue to increase the role of shareholders in auditor selection despite opposition from some firms and the staff of the Securities and Exchange Commission. We provide empirical evidence that increases in shareholder dissatisfaction with the auditor are associated with increases in subsequent auditor effort and audit quality. This suggests that shareholder action (even nonbinding) may potentially influence subsequent audit outcomes.

Audit Quality Inputs and Financial Statement Conformity to Benford’s Law

2020 ◽  
pp. 0148558X2093046
Author(s):  
Thien Le ◽  
Gerald J. Lobo
Keyword(s):  
Cash Flow ◽  
Audit Quality ◽  
Financial Statements ◽  
Audit Fees ◽  
Financial Statement ◽  
Benford’S Law ◽  
Audit Report ◽  
Audit Firm ◽  
Income Statement ◽  
Benford's Law

We examine whether audit quality inputs are related to the conformity of financial statements to Benford’s law. We find that overall financial statement conformity increases with audit fees, nonaudit fees, and audit report lag, and decreases with audit firm tenure. We also find that these audit quality inputs are more strongly associated with income statement conformity than with cash flow statement conformity. Our findings document the role that auditing plays in enhancing the conformity of financial statements to Benford’s law.

Shareholder Voting on Auditor Selection, Audit Fees, and Audit Quality

2011 ◽  
Vol 87 (1) ◽  
pp. 149-171 ◽  
Author(s):  
Mai Dao ◽  
K Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Advisory Committee ◽  
Audit Quality ◽  
Audit Fees ◽  
Experimental Results ◽  
Shareholder Voting ◽  
Public Companies ◽  
Abnormal Accruals ◽  
Auditor Selection ◽  
Using Data ◽  
The U.S

ABSTRACT The Advisory Committee on the Auditing Profession (ACAP), formed by the U.S. Department of the Treasury, has recommended that all public companies be required to have shareholder ratification of auditor selection. Using data from 1,382 firms for the year ending December 31, 2006, we find that audit fees are higher in firms with shareholder voting on auditor ratification. We also find that firms that started having a shareholder vote pay higher fees than firms that stopped having a shareholder vote. In the second part of our study, we find that in firms with shareholder voting on auditor selection (1) subsequent restatements are less likely and (2) abnormal accruals are lower. Our findings are consistent with the experimental results in Mayhew and Pike (2004), and provide empirical grounding for the debate about mandating shareholder voting on auditor selection.

An Analysis of Cross-Sectional Differences in Big and Non-Big Public Accounting Firms' Audit Programs

2006 ◽  
Vol 25 (1) ◽  
pp. 27-48 ◽  
Author(s):  
Hans Blokdijk ◽  
Fred Drieenhuizen ◽  
Dan A. Simunic ◽  
Michael T. Stein
Keyword(s):  
Risk Assessment ◽  
Empirical Evidence ◽  
Audit Quality ◽  
Audit Fees ◽  
Public Accounting ◽  
Accounting Firms ◽  
Big 5 ◽  
Public Accounting Firms ◽  
Audit Approach ◽  
Control Risk

A significant body of prior research has shown that audits by the Big 5 (now Big 4) public accounting firms are quality differentiated relative to non-Big 5 audits. This result can be derived analytically by assuming that Big 5 and non-Big 5 firms face different loss functions for “audit failures” and is consistent with a variety of empirical evidence from studies of audit fees, auditor changes, and the stock price reaction to audited earnings. However, there is no existing evidence (of which we are aware) concerning the underlying production differences between Big 5 and non-Big 5 audits. As a result, existing empirical evidence cannot distinguish between the possibility that Big 5 audits are simply perceived to be different (e.g., by investors) or actually differ in how they are produced. Our research objective is to identify the production characteristics of audit engagements that may explain the differences in expected audit quality between Big 5 and non-Big 5 firms. In this archival study, we examine the total audit effort and the allocation of effort to four audit phases—planning, (control) risk assessment, substantive testing, and completion—for a cross-section sample of 113 audits of Dutch companies in 1998/99 by 14 public accounting firms. We find that, after controlling for client characteristics: (1) both types of auditors exert about the same amount of total audit effort; (2) Big 5 auditors allocate relatively more effort to planning and (control) risk assessment, and relatively less to substantive testing and completion; and (3) client size, use of the business-risk-based audit approach, and reliance on client internal controls affect audit hours differently for the two auditor types. We conclude that the Big 5 firms actually produce a higher audit quality level, and that this quality difference is related to how audit hours are deployed in a more contextual and less procedural audit approach.

scholarly journals Audit Quality, Joint-Auditors and Game Theory: Empirical Validation in the French Context

2016 ◽  
Vol 11 (7) ◽  
pp. 292
Author(s):  
Abdelhakim Ben Ali
Keyword(s):  
Game Theory ◽  
Business Performance ◽  
Audit Quality ◽  
Audit Fees ◽  
Scientific Discipline ◽  
Debt Ratio ◽  
Complex Relationships ◽  
High Level ◽  
Gains And Losses

<p>The objective of our research is to show the role of “game theory” as a scientific discipline permitting better explanation of the nature of complex relationships between the different stakeholders of the company. Motivated by the current discussions on the choice of the composition of the college auditors, we try to study the combination of auditors to ensure a better audit quality; and to demonstrate the gains and losses of the two players in the game studied during the period 2005-2010.</p>The empirical results reveal that the best audit quality is conditioned by the presence of pair heterogeneous auditors (Big4_Non Big4). Added to that, the audit quality is affected by a high level of audit fees, minimizing the debt ratio, a large reflection of the business performance and financial means to enable it to meet the economic crises that surround it.

scholarly journals Opportunities to improve the measurement of audit quality: a call for collaboration between the profession and academics

2016 ◽  
Vol 90 (9) ◽  
pp. 352-351 ◽  
Author(s):  
Jeroen van Raak ◽  
Ulrike Thürheimer
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Class Action ◽  
Financial Statement ◽  
Accrual Quality ◽  
Wide Range ◽  
External Stakeholders ◽  
Insight Into ◽  
Considerable Doubt

Audit research relies on a wide range of publicly available measures to examine which factors influence the quality of financial statement audits. While research to date has to rely largely on remote proxies due to a lack of access to proprietary data, there is considerable doubt about the validity of these proxies and the inferences drawn based on these proxies. In order to provide insight into the reliability of these measures, Rajgopal, Srinivasan & Zheng (2015) investigate whether commonly used proxies for audit quality (i.e. auditor size, abnormal audit fees, accrual quality, and the propensity to meet and beat analyst targets) are associated with deficiencies reported in SEC investigations and class-action lawsuits. Such alleged deficiencies reflect how external stakeholders assess audit performance. Their study indicates that the use of such proxies is highly problematic and that the performance of these measures, with the exception of auditor size, is poor.

Auditors’ response to readability of financial statement notes

2020 ◽  
Vol 28 (3) ◽  
pp. 463-480
Author(s):  
Mahdi Salehi ◽  
Mahmoud Lari Dasht Bayaz ◽  
Shaban Mohammadi ◽  
Mohammad Seddigh Adibian ◽  
Seyed Hamed Fahimifard
Keyword(s):  
Stock Exchange ◽  
Financial Statements ◽  
Audit Fees ◽  
Financial Statement ◽  
Audit Report ◽  
Financial Reports ◽  
Statistical Population ◽  
Content Type ◽  
Listed Firms ◽  
Going Concern Opinion

PurposeThe main objective of the present study is to assess the potential impact of readability of financial statement notes on the auditor's report lag, audit fees and going concern opinion (GCO).Design/methodology/approachThe statistical population of this study includes all listed firms on the Tehran Stock Exchange (TSE) for the period of 2012–2017. The systematic elimination method is used for sampling and multiple regression and EViews software are used for testing the hypothesis models.FindingsThe obtained results show that there is a significant and positive relationship between audit report lags and readability of financial statements. Moreover, it is also revealed that readability of financial statements is positively associated with audit fees. Furthermore, the findings suggest a negative correlation between readability indexes and issuing GCOs, denoting hard-to-read statements is considered as a risk factor by auditors. Finally, the observations of our robustness tests suggest that the association between audit report lag and readability of financial statements is robust.Originality/valueThis is the first conducted investigation concerning auditor's response to the readability of financial statement notes in TSE. The outcome of current paper may pave the way for revising and developing Iranian accounting standards in order to give a fairer and clearer picture of financial reports.

scholarly journals Corporate Governance Application, Audit Quality and Audit Report Lag: The Moderating Role of Law Compliance

2019 ◽  
Vol 10 (4) ◽  
pp. 164
Author(s):  
Yenny Dwi Handayani ◽  
Ewing Yuvisa Ibrani
Keyword(s):  
Corporate Governance ◽  
Regression Analysis ◽  
Audit Quality ◽  
Manufacturing Companies ◽  
Audit Report ◽  
The Relationship ◽  
Moderating Role

This study aims to examine the effect of corporate governance application and audit quality on audit report lag. Special attention is paid to investigate the moderating role of law compliance in the relationships. 180 manufacturing companies are observed during the three years of observation (2013-2015). Data are analyzed using moderated regression analysis (MRA). The results show that corporate governance application and audit quality have no effect on audit report lag. While law compliance moderates the relationship between corporate governance application and audit report lag.

Financial Restatements and Shareholder Ratifications of the Auditor

2009 ◽  
Vol 28 (1) ◽  
pp. 225-240 ◽  
Author(s):  
Li-Lin Liu ◽  
K. Raghunandan ◽  
Dasaratha Rama
Keyword(s):  
Audit Quality ◽  
Empirical Support ◽  
Securities And Exchange Commission ◽  
Financial Statement ◽  
Shareholder Voting ◽  
Financial Restatements ◽  
Preceding Period ◽  
Significant Attention ◽  
The U.S ◽  
Selection Of

SUMMARY: Regulators and legislators have focused significant attention on financial statement restatements in recent years, and the U.S. Securities and Exchange Commission (SEC) and financial statement users view restatements as audit failures. The SEC (2000, 2003a) suggests that shareholder voting on auditor ratification will be impacted by perceptions of audit quality. In this paper we examine shareholder voting on auditor ratifications in 2005 or 2006 following restatement announcements by SEC registrants. We find that shareholders are more likely to vote against auditor ratification after a restatement when compared with votes at (1) firms without restatements or (2) restating firms in the preceding period. Overall, the results provide empirical support to the SEC's assertion that shareholder voting on auditor ratification will be related to perceptions of audit quality, and also support recent actions by shareholder activists to require all firms to submit the selection of the auditor for a ratification vote by shareholders.

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