scholarly journals Information Technology in an Audit Context: Have the Big 4 Lost Their Advantage?

2017 ◽  
Vol 32 (1) ◽  
pp. 87-107 ◽  
Author(s):  
D. Jordan Lowe ◽  
James L. Bierstaker ◽  
Diane J. Janvrin ◽  
J. Gregory Jenkins
Keyword(s):  
Information Technology ◽  
Audit Quality ◽  
Data Availability ◽  
It Adoption ◽  
The Past ◽  
Big 4 ◽  
Adoption And Implementation ◽  
Audit Firms ◽  
Perceived Importance ◽  
Communication Modes

ABSTRACT Audit firms use information technology (IT) to improve audit quality, effectiveness, and efficiency. While audit IT has evolved over the past decade, limited guidance is available to assist practitioners in determining how IT can be used. Our research objectives are fourfold. First, we examine to what extent auditors use and assess the perceived importance of IT in their audits. Second, we look at different-sized firms to determine whether IT adoption and implementation decisions differ by firm size. Third, we investigate changes in auditors' use and perceived importance of IT over the past decade. Fourth, we examine whether IT has impacted the communication modes used by auditors when reviewing workpapers and fraud brainstorming. Overall, Big 4 auditors were not significantly more likely to use IT than non-Big 4 auditors, suggesting that the dominance of the Big 4 firms' use of IT has lessened. In fact, there are a few applications where non-Big 4 auditors appear to have taken the lead. In addition, our findings indicate that auditors have increased the use of all the IT applications we examined ten years ago. However, we find evidence that auditors may prefer to use even more IT in their audits than they are currently using. Data Availability: Data used in this study are available for download, see Appendix B.

Do Big 4 Auditors Provide Higher Audit Quality after Controlling for the Endogenous Choice of Auditor?

2014 ◽  
Vol 33 (4) ◽  
pp. 197-219 ◽  
Author(s):  
John Daniel Eshleman ◽  
Peng Guo
Keyword(s):  
Propensity Score ◽  
Propensity Score Matching ◽  
Audit Quality ◽  
Data Availability ◽  
Accounting Restatements ◽  
Big 4 ◽  
Audit Firms ◽  
Weak Evidence ◽  
Matching Procedure ◽  
Jel Classifications

SUMMARY: Recent research suggests that Big 4 auditors do not provide higher audit quality than other auditors, after controlling for the endogenous choice of auditor. We re-examine this issue using the incidence of accounting restatements as a measure of audit quality. Using a propensity-score matching procedure similar to that used by recent research to control for clients' endogenous choice of auditor, we find that clients of Big 4 audit firms are less likely to subsequently issue an accounting restatement than are clients of other auditors. In additional tests, we find weak evidence that clients of Big 4 auditors are less likely to issue accounting restatements than are clients of Mid-tier auditors (Grant Thornton and BDO Seidman). Taken together, the evidence suggests that Big 4 auditors do perform higher quality audits. JEL Classifications: M41, M42 Data Availability: All data are publicly available from sources identified in the text.

Auditor Multinational Expertise and Audit Quality

2017 ◽  
Vol 93 (4) ◽  
pp. 203-224 ◽  
Author(s):  
Joshua L. Gunn ◽  
Paul N. Michas
Keyword(s):  
Audit Quality ◽  
The United States ◽  
Data Availability ◽  
Public Companies ◽  
The Past ◽  
Geographically Dispersed ◽  
Audit Firms ◽  
Foreign Operations ◽  
Market Leadership ◽  
Country Specific

ABSTRACT Over the past several decades, the scope of public companies' operations has become increasingly global. This has led to concern over the ability of audit firms to conduct high-quality audits across geographically dispersed foreign operations. We contribute to the growing body of research in this area by investigating the association between audit quality and local audit offices' expertise in conducting multinational audit engagements. We use two complementary measures to proxy for an audit office's multinational expertise: (1) local multinational market leadership, and (2) country-specific experience. Using a sample of multinational client firms headquartered in the United States, we consistently find that audit quality is stronger when the auditor possesses expertise conducting global group audits, possesses particular expertise in the country where a client has a significant subsidiary, or possesses both types of expertise on an engagement. Several sample partitions reinforce our main results. The results are robust to propensity score matching, as well as a placebo test using clients of the audit office that generate no foreign sales. Our evidence suggests that the challenge of conducting multinational audits is more easily met by auditors with expertise on these types of engagements. JEL Classifications: M40; M42; F23. Data Availability: All data used are publicly available.

Audit Firms as Networks of Offices

2017 ◽  
Vol 37 (3) ◽  
pp. 211-242 ◽  
Author(s):  
Scott E. Seavey ◽  
Michael J Imhof ◽  
Tiffany J. Westfall
Keyword(s):  
Knowledge Management ◽  
Knowledge Sharing ◽  
Network Effects ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Big 4 ◽  
Audit Firms ◽  
Network Connectedness ◽  
Partner Knowledge ◽  
Office Level

SUMMARY Prior audit research suggests that most, if not all, audit quality can be explained at the office level. However, the question remains of whether office-level audit quality is contingent on how individual offices relate to the firm as a whole. Motivated by theories of knowledge management, organizational learning, and networks, we posit that individual offices are connected to their audit network through partner knowledge sharing and oversight, which impact office-level audit quality. We interview Big 4 audit partners and learn that knowledge sharing between partners in different offices is common and intended to aid in the provision of audit services. Using network connectedness to proxy for knowledge sharing and oversight between offices of the same firm, we document that more connected offices are associated with fewer client restatements and lower discretionary accruals. We additionally find that network effects are magnified when accounting treatments are more complex and require greater auditor judgement.

Did the 2005 Deferred Prosecution Agreement Adversely Impact KPMG's Audit Practice?

2018 ◽  
Vol 38 (1) ◽  
pp. 77-102 ◽  
Author(s):  
Matthew Baugh ◽  
Jeff P. Boone ◽  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Service Provider ◽  
Audit Quality ◽  
Spillover Effect ◽  
Audit Fees ◽  
Data Availability ◽  
Department Of Justice ◽  
Big 4 ◽  
Tax Shelters

SUMMARY We examine the consequences of misconduct in a Big 4 firm's nonaudit practice for its audit practice. Specifically, we examine whether KPMG's audit practice suffered a loss of audit fees and clients and/or a decline in factual audit quality following the 2005 deferred prosecution agreement (DPA) with the Department of Justice for marketing questionable tax shelters. We find little evidence that the DPA adversely impacted KPMG's audit practice by way of either audit fees or the likelihood of client gains/losses, suggesting little or no harm to KPMG's audit reputation. We also find that the DPA had no effect on the firm's factual audit quality, even for those audit clients that dropped KPMG as their tax service provider. Collectively, our findings suggest that there was no spillover effect from the DPA to KPMG's audit practice. Data Availability: All data are publicly available.

PCAOB Inspections and Large Accounting Firms

2011 ◽  
Vol 26 (1) ◽  
pp. 43-63 ◽  
Author(s):  
Bryan K. Church ◽  
Lori B. Shefchik
Keyword(s):  
Audit Quality ◽  
Linear Trend ◽  
Dominant Role ◽  
Data Availability ◽  
Financial Statement ◽  
Public Companies ◽  
Accounting Firms ◽  
Big 4 ◽  
Second Tier ◽  
Over Time

SYNOPSIS The purpose of this paper is to analyze the PCAOB's inspection reports of large, annually inspected accounting firms. The inspection reports identify audit deficiencies that have implications for audit quality. By examining the inspection reports in detail, we can identify the nature and severity of audit deficiencies; we can track the total number of deficiencies over time; and we can pinpoint common, recurring audit deficiencies. We focus on large accounting firms because they play a dominant role in the marketplace (i.e., they audit public companies that comprise approximately 99 percent of U.S.-based issuer market capitalization). We document a significant, downward linear trend in the number of deficiencies from 2004 to 2009. We also identify common, recurring audit deficiencies, determine the financial statement accounts most often impacted by audit deficiencies, and isolate the primary emphasis of the financial statement impacted. Our findings generally are consistent comparing Big 4 and second-tier accounting firms, though a few differences emerge. In addition, we make comparisons with findings that have been documented for small, triennially inspected firms. Data Availability: The data are available from public sources.

Hiring Auditors with a Part II Quality Control Report: An Opportunity for Increased Earnings Management or Lower Audit Fees?

2020 ◽  
Vol 5 (1) ◽  
pp. 73-93
Author(s):  
Jared Eutsler ◽  
D. Kip Holderness ◽  
Megan M. Jones
Keyword(s):  
Quality Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Fiscal Year ◽  
The Public ◽  
Audit Firms ◽  
Public Company ◽  
General Demand ◽  
Systemic Quality

ABSTRACT The Public Company Accounting Oversight Board's (PCAOB) Part II inspection reports, which disclose systemic quality control issues that auditors fail to remediate, signal poor audit quality for triennially inspected audit firms. Auditors that receive a Part II inspection report typically experience a decrease in clients, which demonstrates a general demand for audit quality. However, some companies hire auditors that receive Part II inspection reports. We examine potential reasons for hiring these audit firms. We find that relative to companies that switch to auditors without Part II reports, companies that switch to auditors with Part II reports have higher discretionary accruals in the first fiscal year after the switch, which indicates lower audit quality and a heightened risk for future fraud. We find no difference in audit fees. Our results suggest that PCAOB Part II inspection reports may signal low-quality auditors to companies that desire low-quality audits. Data Availability: Data are available from the public sources cited in the text.

Did the 2007 PCAOB Disciplinary Order against Deloitte Impose Actual Costs on the Firm or Improve Its Audit Quality?

2014 ◽  
Vol 90 (2) ◽  
pp. 405-441 ◽  
Author(s):  
Jeff P. Boone ◽  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Growth Rates ◽  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
The Other ◽  
Archival Studies ◽  
Big 4 ◽  
Audit Fee

ABSTRACT We examine whether the December 2007 PCAOB disciplinary order against Deloitte affected Deloitte's switching risk, audit fees, and audit quality relative to the other Big 4 firms over a three-year period following the censure. Our findings suggest that the PCAOB censure was associated with a decrease in Deloitte's ability to retain clients and attract new clients, and a decrease in Deloitte's audit fee growth rates. However, methodologies used in extant archival studies yield little or no evidence to suggest that Deloitte's audit quality was different from that of the other Big 4 firms during a three-year window either before or after the censure. Overall, our results suggest that the PCAOB censure imposed actual costs on Deloitte. Data Availability: All data are publicly available.

The role of audit quality in firm valuation

2016 ◽  
Vol 58 (5) ◽  
pp. 575-598 ◽  
Author(s):  
Mishari M. Alfraih
Keyword(s):  
Audit Quality ◽  
Value Relevance ◽  
Accounting Information ◽  
Institutional Setting ◽  
Content Type ◽  
Book Value ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Team

Purpose The purpose of this paper is to examine the effect of audit quality on the value relevance of earnings and book value. Because joint audit is mandated for all Kuwait Stock Exchange-listed firms, it is hypothesized that the higher the quality of the audit team (as measured by the number of Big 4 audit firms in the joint audit team), the higher the value relevance of earnings and book values for equity valuation. Design/methodology/approach Consistent with prior research, the value relevance of earnings and book value is measured by the adjusted R2 derived from the Ohlson’s 1995 regression model. The number of Big 4 audit firms represented on the firm’s audit team is used as a proxy for audit quality. Three tiers of audit quality exist, namely, two non-Big 4 audit firms, one Big 4 and one non-Big 4 audit firms or two Big 4 audit firms. To address this paper’s objective, the association between audit quality and the value relevance of earnings and book value were examined using four approaches. The final sample consists of 1,836 firm-year observations and covers fiscal years from a 12-year period (2002-2013). Findings Taken together, the four approaches used collectively provide empirical evidence that audit quality positively and significantly affects the value relevance of accounting measures to market participants. Importantly, the results reveal significant variations in the value relevance of earnings and book value jointly across the three possible auditor combinations. Research limitations/implications Although using auditor size as a proxy for audit quality is well established in the auditing literature, a limitation of that proxy is that it measures audit quality dichotomously, which implicitly assumes a homogeneous level of audit quality within each group. Practical implications The findings show the importance of high-quality and rigorous external audits in improving the value relevance of accounting information. Originality/value This study contributes to the extent literature on audit quality by exploring the role of audit quality in a unique institutional setting that imposes mandatory joint audits. Although prior studies have investigated the effect of joint audit pair choice on earnings management and audit fee premium, this study is the first to investigate the effect of joint audit pair choice on the value relevance of accounting information.

The Impact of PCAOB AS5 and the Economic Recession on Client Portfolio Characteristics of the Big 4 Audit Firms

2013 ◽  
Vol 32 (4) ◽  
pp. 95-127 ◽  
Author(s):  
Joseph H. Schroeder ◽  
Chris E. Hogan
Keyword(s):  
Financial Risk ◽  
Economic Recession ◽  
Data Availability ◽  
Publicly Traded ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Risk Characteristics ◽  
The Impact

SUMMARY We examine the impact of PCAOB Auditing Standard No. 5 (AS5) and the economic recession on risk characteristics and degree of auditor/client misalignment in the publicly traded client portfolios of Big 4 firms. AS5 and the economic recession both likely resulted in an increase in audit firm personnel capacity as well as a decline in current and future revenue prospects, leading to concerns that the Big 4 firms may pursue clients that present greater risk to the portfolio. We find that the overall portfolio in 2009 presents greater financial risk, attributable to the impact of the recession on continuing clients. A net decrease in audit and auditor business risks is also attributable to continuing clients over this period, as increases for new clients are offset by reductions due to departing clients. Overall, the results, which should be of interest to regulators, indicate that Big 4 firms continued to balance their portfolio with risk in mind. Data Availability: Data are publicly available from sources identified in the paper.

Does Audit Fee Homogeneity Exist? Premiums and Discounts Attributable to Individual Partners

2011 ◽  
Vol 30 (4) ◽  
pp. 249-272 ◽  
Author(s):  
Stuart D. Taylor
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Market ◽  
Homogeneity Assumption ◽  
Audit Firms ◽  
Audit Fee ◽  
Using Data ◽  
The Individual ◽  
Made In

SUMMARY This paper investigates the implied assumption, made in many audit fee determination studies, that, within a given audit firm, all partners produce a statistically identical level of audit quality and earn a statistically identical level of audit fees. This is referred to as the “homogeneity assumption.” However, this is contradicted by the individual auditor behavioral literature, which shows that different individual auditor characteristics can have an impact on audit quality. Given the fact that audit partners differ in their quality, this paper hypothesizes that different audit partners will be able to earn differing levels of fees. This hypothesis is tested by estimating an audit fee model using data from 822 Australian publicly listed companies for the year 2005. Australia is an ideal audit market for this research, as the disclosure of the name of the audit engagement partner in the audit report is mandatory. The empirical results indicate that individual audit partners earn individual audit fee premiums (or discounts) that are not explainable by the audit firms of which they are members. Data Availability: All data have been extracted from publicly available sources.

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