Voluntary audit committees, auditor selection and audit quality: evidence from Taiwan

Purpose This study aims to examine the Taiwan setting, where audit partners’ names are presented in the audit report and where audit committee formation is voluntary in the initial stage of audit committee reform. This paper investigates the effects of the formation of voluntary audit committees on the selection of individual audit partners, and, in turn, the audit quality. This contrasts with previous studies investigating the relationship between audit committees and auditor selection at the audit firm level. Design/methodology/approach This paper samples all of Taiwan’s publicly listed firms for the period 2007–2012 and uses Heckman’s (1979) two-stage estimation model to achieve our objectives. Findings Using different characteristics of individual engagement partners as proxies for a higher quality auditor, the main empirical results show that voluntary audit committee formation is positively related to an industry specialist lead partner and a lead partner that has a larger number of clients. In addition, this paper also finds that voluntary audit committee formation has a positive impact on audit quality (proxied by discretionary accruals). The results suggest that the voluntary formation of an audit committee contributes positively to both auditor selection and audit quality. Furthermore, an additional test shows that the main empirical results are robust to a validity threat that firms that have good corporate governance prior to the formation of voluntary audit committees tend to select high-quality audit partners. Originality/value The paper contributes to the audit committee literature in the following ways: this paper takes advantage of Taiwan’s unique setting, where forming an audit committee is not compulsory in the initial stage of audit committee reform, to investigate the voluntary audit committee, auditor selection and audit quality; this paper expands on Abbott and Parker’s (2000) study of audit committee characteristics and auditor selection at the audit firm level by examining this relationship at the individual audit partner level; this paper responds to the call by Church et al. (2008) and DeFond and Francis (2005) who propose more studies on audit quality at the individual engagement partner level.

The relationship between the companies’ political connections and audit fees

Purpose The purpose of this study is to investigate whether the political connections of companies are correlated with auditor selection, audit fees and abnormal audit fees. Design/methodology/approach The research data contains 756 observations of companies listed on the Tehran Stock Exchange during 2011-2019. In this study, the relationship between companies with political relationships and the selection of a qualified auditor, audit fees and abnormal audit fees are reviewed. The regression used for test the hypotheses. Findings The results of hypotheses testing indicate that there is a positive and significant correlation between the political relationships of companies and certified auditor selection, auditing fees and abnormal audit fees. In addition, the political relationships of companies have a significant and inverse effect on the relationship between institutional ownership and auditing fee and abnormal audit fees. It was also found that there is a positive and significant correlation between companies and political relationships and abnormal audit fees. Originality/value So far several studies conducted on audit fees, however, no study conducted on the relationship of political relationship of the companies with audit fees and the results of the current study may bridge the gap in the current field.

Shareholder Dissatisfaction and Subsequent Audit Outcomes

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.

The Effects of Auditor Designation by the Regulator on Auditor Decisions: Evidence from Korea

ABSTRACT The Korean market regulator designates external auditors for certain companies that have strong incentives to manage their earnings or that require strict external audits (the auditor designation system [ADS]). The ADS offers an interesting research setting for examining the effects of transferring the power of auditor selection to the regulator. Based on the results of a quasi-experiment with Korean auditors, we find that the ADS may be effective in reducing aggressive client accounting policy choices and achieve greater consensus in a hypothetical impairment loss recognition case. Although more research is needed on the various types of audit engagement systems, the results imply that the ADS may improve audit quality. Thus, auditor designation by the regulator for certain companies that try to manage their earnings (i.e., the ADS) may be a favorable alternative to the current audit engagement system. Data Availability: Data are available from the authors upon request.