The Effect of Form AP on Auditor Liability when Engagement Partner Disclosure Shows a History of Restatements

2021 ◽  
Author(s):  
Michael J Mowchan ◽  
Philip M.J. Reckers
Keyword(s):  
Audit Quality ◽  
Auditor Liability ◽  
Audit Firm ◽  
Audit Failure ◽  
Partner Disclosure ◽  
History Of ◽  
Catch 22 ◽  
New Form ◽  
A Current

Engagement partner disclosures required by the new Form AP allow litigants to associate audit engagement partners with both current and past restatements. We investigate how knowledge of a partner's history of restatements, along with audit firm interventions following poor audit quality, impact audit firm liability in litigation stemming from a partner's second, unrelated client restatement. Interestingly, we do not find that a partner's association with a current and past restatement, alone, increases audit firm liability. However, we do find that jurors interpret firm interventions intended to restore audit quality as indicators that the partner contributed to the second audit failure and that audit firm oversight was inadequate. Specifically, we find that both requiring a probationary engagement co-partner after an initial restatement and partner dismissal after a second restatement individually increase juror assessments of audit firm liability. Collectively, our findings represent a Catch-22 of Form AP engagement partner disclosure, whereby audit firm interventions to restore audit quality are expected by regulators, but can increase auditor liability in subsequent litigation settings.

The Consequences of Providing Lower-Quality Audits at the Engagement Partner Level

2019 ◽  
Vol 18 (3) ◽  
pp. 63-82 ◽  
Author(s):  
Wuchun Chi ◽  
Ling Lei Lisic ◽  
Linda A. Myers ◽  
Mikhail Pevzner ◽  
Timothy A. Seidel
Keyword(s):  
Audit Quality ◽  
Partner Selection ◽  
Recent History ◽  
Service Experience ◽  
Audit Firm ◽  
Audit Firms ◽  
Increased Risk ◽  
History Of ◽  
Using Data

ABSTRACT Using data from Taiwan, where a long history of engagement partner performance is available, we examine the reputational consequences that engagement partners suffer for having a recent history of past audit failures. We find that when an engagement partner's recent history of poor audit quality is observable to audit clients, they are more likely to lose clients and are less likely to be reassigned to serve other clients of the audit firm over the next five years. We also find that these engagement partners are more likely to stop serving as engagement partners in the next five years, and those who remain in client service experience a reallocation of assignments. Additionally, the clients that these partners continue to serve exhibit increased risk. Overall, our findings suggest that an engagement partner's prior audit quality influences clients' and audit firms' engagement partner selection.

Tax services, consequence severity, and jurors' assessment of auditor liability

2013 ◽  
Vol 29 (1) ◽  
pp. 50-75 ◽  
Author(s):  
John M. Thornton ◽  
Michael K. Shaub
Keyword(s):  
Audit Quality ◽  
Auditor Independence ◽  
Tax Planning ◽  
Court Case ◽  
Content Type ◽  
Auditor Liability ◽  
Audit Failure ◽  
The Impact ◽  
Independence In Appearance

Purpose – The purpose of this research is to determine whether the type of tax services provided by a public accounting firm to its audit client and the consequence severity of an audit failure impact jurors' assessment of audit quality and auditor liability. Design/methodology/approach – The authors administer a court case to 168 jurors manipulating three levels of tax services provided to an audit client (none, tax preparation, and aggressive tax planning services); two levels of consequence severity of the alleged audit failure, observing the impact on jurors' assessment of audit quality, auditor responsibility for audit failure; and damages awarded the plaintiff. Findings – Consistent with recent US regulations, jurors perceive the quality of the audit to be lower when auditors provide aggressive tax planning services, but not for tax preparation services. Damages are greater when auditors provide aggressive tax planning services across both levels of consequence severity. Research limitations/implications – The results indicate that the type of tax services provided may impact jurors' views of audit quality and damage assessments against auditors. The questionnaire uses previously validated measures, but the results may not be generalizable to jurors in all jurisdictions. Practical implications – Though empirical evidence is mixed at best about the impact of auditors providing non-audit services on auditor independence in fact, auditor independence in appearance, and thus audit quality, such impacts may affect the way jurors perceive the situation. Originality/value – The study directly tests the implications for auditor liability of new restrictions on tax services and more accurately measures the impact of consequence severity, using actual jurors.

scholarly journals Determinants Of Enforcement Action By The Financial Supervisory Service Of Korea From The Perspective Of Audit Firms

2015 ◽  
Vol 31 (3) ◽  
pp. 821 ◽  
Author(s):  
Min-Jung Kang ◽  
Ho-Young Lee ◽  
Yong-Sang Woo
Keyword(s):  
Audit Quality ◽  
Financial Statements ◽  
Audit Fees ◽  
Firm Characteristics ◽  
Client Characteristics ◽  
Audit Firm ◽  
Audit Failure ◽  
Enforcement Action ◽  
Audit Firms ◽  
Specific Factors

<p>In this study, we examine the determinants of enforcement action by the Financial Supervisory Service of Korea from the perspective of audit firms. Enforcement action is an indication of audit failure. Both client- and audit firm-specific factors are involved in its occurrence. Most published studies of enforcement after audit failure focus on client characteristics because details about audit firms from financial statements and information about organizational structure are not publicly available. However, examining the issues surrounding enforcement from the perspective of audit firms may also be valuable in elucidating the potential determinants of audit failure resulting in enforcement action. Utilizing publicly available data from audit firms in South Korea, we identify several audit firm characteristics as determinants of enforcement action. The results of our empirical analysis reveal that the likelihood of audit failure is positively associated with the ratio of accounts receivable to total assets, the ratio of audit fees to total revenue, the ratio of partners to the total number of CPAs, CEO ownership, and age of audit firms. In addition, the likelihood of audit failure is negatively associated with ownership concentration and profitability. These associations are more pronounced in non-affiliated audit firms than affiliated audit firms. Several useful implications for regulators are described for improving audit quality by means of enforcement action.</p>

The Impact of Litigation against an Audit Firm on the Market Value of Nonlitigating Clients

1998 ◽  
Vol 13 (2) ◽  
pp. 117-134 ◽  
Author(s):  
Diana R. Franz ◽  
Dean Crawford ◽  
Eric N. Johnson
Keyword(s):  
Audit Quality ◽  
Market Value ◽  
Market Response ◽  
Publicly Traded ◽  
Audit Firm ◽  
Audit Failure ◽  
A Value ◽  
The Impact ◽  
Private Litigation ◽  
Over Time

This study investigates how litigation against an audit firm affects the market value of its publicly traded clients. We examine the impact of private litigation alleging audit failure on the audit firm's clients not involved in the lawsuit. Our results indicate that clients not involved in the litigation experience significant negative returns at the announcement of litigation against their audit firm. These results suggest that the market interprets litigation against an audit firm as a signal of decreased audit quality and that the market places a value on audit quality when pricing a firm's securities. The results are also consistent with an audit insurance explanation, which views the audit firm as a source of potential financial indemnification to investors and predicts that damage to the auditor's underwriting ability will be reflected in reduced securities prices for the firm's clients. When the analysis was restricted to companies in the same industry where the alleged audit failure occurred, the market response is significantly more negative when the audit firm is considered a specialist in that industry than when the audit firm is not a specialist. Finally, the market response is weaker later in the sample period, consistent with the findings of prior research that the frequency of nonmeritorious suits has increased over time.

scholarly journals Impact of auditor and audit firm rotation on accounting and audit quality: A critical analysis of the EC regulation draft

2012 ◽  
Vol 1 (3) ◽  
pp. 7-13 ◽  
Author(s):  
Patrick Velte ◽  
Markus Stiglbauer
Keyword(s):  
Audit Quality ◽  
Rotation Period ◽  
Auditor Independence ◽  
Financial Accounting ◽  
Audit Firm ◽  
Positive Effects ◽  
Auditor Rotation ◽  
Mandatory Rotation ◽  
Mandatory Audit Firm Rotation ◽  
A Current

In a current regulation draft of 2011, the European Commission (EC) plans the mandatory audit firm rotation principally after six years and with regard to a cooling off period of four years to increase auditor independence. This could complement the internal mandatory rotation (auditor rotation) by the 8th EC directive. The present paper gives a state of the art analysis of the empirical research results with regard to auditor and audit firm rotation. In contrast to the perception of the EC, the majority of the empirical results doesn’t find evidence for increased financial accounting and audit quality by audit firm rotation. Furthermore, the positive effects of the internal rotation period of seven years and the cooling off period of two years by the 8th EC directive are not empirically proved yet.

What Went Wrong in the Audit of Tri-Pack Films Limited?

2020 ◽  
Vol 17 (1) ◽  
pp. 36-51
Author(s):  
Omair Haroon ◽  
Waqar Ali ◽  
Atifa A. Dar
Keyword(s):  
Audit Quality ◽  
Listed Company ◽  
Financial Statements ◽  
Securities And Exchange Commission ◽  
Audit Firm ◽  
Audit Failure ◽  
Chartered Accountants ◽  
Year 2013

This case looks into an instance of an audit failure in the context of a Pakistani listed company, Tri-Pack, whose financial statements for the year 2014 showed a material misstatement (which reduced 2013 profits after tax by around 88%). This led to an investigation by the regulator (Securities and Exchange Commission of Pakistan) into the audits across 2012–2013, culminating into a stern warning being issued to the engagement leader (partner) for having failed to exercise an attitude of professional scepticism, failed to perform the audit to obtain reasonable assurance around Tri-Pack’s financial statements being free from material misstatement either due to errors or fraud and failed to bring out material facts about the affairs of the company and make a report to the shareholders thereof1. The case hones in on the audit dynamics and defence presented by the audit firm (A.F. Ferguson & Co. Chartered Accountants) for the year 2013, to assess the shortcomings in the conduct of the audit of Tri-Pack’s financial statements for that year’s end. It stimulates the work of an audit quality head who reviewed Tri-Pack’s audit file in order to ascertain whether the objectives of the audit were met and what lessons can be drawn to leverage towards future audit engagements.

Post-Soviet economy development: From the past to the future

2017 ◽  
pp. 5-21 ◽  
Author(s):  
E. Yasin
Keyword(s):  
Present Situation ◽  
Soviet Economy ◽  
Market Reforms ◽  
Democratic Development ◽  
The Past ◽  
Current Period ◽  
The Future ◽  
History Of ◽  
Working Out ◽  
A Current

The article is devoted to major events in the history of the post-Soviet economy, their influence on forming and development of modern Russia. The author considers stages of restructuring, market reforms, transformational crisis, and recovery growth (1999-2011), as well as a current period which started in2011 and is experiencing serious problems. The present situation is analyzed, four possible scenarios are put forward for Russia: “inertia”, “mobilization”, “decisive leap”, “gradual democratic development”. More than 30 experts were questioned in the process of working out the scenarios.

Fee Discounting and Audit Quality Following Audit Firm and Audit Partner Changes: Chinese Evidence

2014 ◽  
Vol 90 (4) ◽  
pp. 1517-1546 ◽  
Author(s):  
Hua-Wei Huang ◽  
K Raghunandan ◽  
Ting-Chiao Huang ◽  
Jeng-Ren Chiou
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Audit Fees ◽  
Audit Firm ◽  
Audit Fee ◽  
Significant Attention

ABSTRACT Issues related to low-balling of initial year audit fees and the resultant impact on audit quality have received significant attention from regulators in many countries. Using 9,684 observations from China during the years 2002–2011, we find that there is a significant initial year audit fee discount following an audit firm change when both of the signing audit partners are different from the prior year. The evidence is mixed if one or both of the signing partners from the prior year also moves with the client to the new audit firm. We find evidence of audit fee discounting in our analysis of fee levels, but not in our analysis of changes in audit fees from the prior year. Sanctions for problem audits and greater earnings management are more likely when there is an audit firm change that involves two new signing partners together with initial year audit fee discounting.

An Empirical Investigation of IPO Underpricing and the Change to the LLP Organization of Audit Firms

2004 ◽  
Vol 23 (1) ◽  
pp. 53-67 ◽  
Author(s):  
Steven R. Muzatko ◽  
Karla M. Johnstone ◽  
Brian W. Mayhew ◽  
Larry E. Rittenberg
Keyword(s):  
Initial Public Offering ◽  
Audit Quality ◽  
Limited Liability ◽  
Litigation Risk ◽  
Ipo Underpricing ◽  
Audit Firm ◽  
Legal Structure ◽  
Audit Firms ◽  
Public Offering

This paper examines the relationship between the 1994 change in audit firm legal structure from general partnerships to limited liability partnerships (LLPs) on underpricing in the initial public offering (IPO) market. The change in legal structure of audit firms reduces an audit firm's wealth at risk from litigation damages and reduces the incentives for intrafirm monitoring by partners within an audit firm. Prior research suggests that underpricing protects underwriters from litigation damages, and that the level of underpricing varies inversely with both the amount of implicit insurance provided by the audit firm and the quality of the audit services provided. We hypothesize the change in audit firm legal structure reduced the assets available from audit firms in IPO-related litigation and indirectly reduced audit quality by lowering intrafirm monitoring. As a result, underwriters have incentives as a joint and several defendant with the audit firms to increase IPO underpricing, particularly for high-litigation-risk IPOs, following audit firms' shifts to LLP status. Our findings are consistent with this hypothesis.

The Effect of Office Changes within Audit Firms on Clients' Audit Quality and Audit Fees

2020 ◽  
Vol 39 (1) ◽  
pp. 71-99
Author(s):  
Carl W. Hollingsworth ◽  
Terry L. Neal ◽  
Colin D. Reid
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Additional Analysis ◽  
Audit Firm ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact ◽  
Audit Partner Rotation

SUMMARY While prior research has examined audit firm and audit partner rotation, we have little evidence on the impact of within-firm engagement team disruptions on the audit. To examine these disruptions, we identify a unique sample of companies where the audit firm issuing office changed but the audit firm did not change and investigate the effect of these changes on the audit. Our results indicate that companies that have a change in their audit firm's issuing office exhibit a decrease in audit quality and an increase in audit fees. In additional analysis, we partition office changes into two groups—client driven changes and audit firm driven changes. This analysis reveals that client driven changes are more likely to result in a higher audit fee while audit quality is unchanged. Conversely, audit firm driven changes do not result in a higher audit fee but do experience a decrease in audit quality.

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