Accounting Commons^™

Auditor Materiality Threshold And Audit Quality: Evidence From The Revised Isa 700 In The United Kingdom, Beng Wee Goh, Kiat Bee Jimmy Lee, Dan Li, Na Li, Muzhi Wang

Research Collection School Of Accountancy

Using a broad sample of U.K. firms that are required to disclose auditor materiality thresholds under the International Standards on Auditing (U.K. and Ireland) 700, we examine whether the auditor materiality threshold is associated with audit quality. We document that a lower materiality threshold is associated with higher audit quality, as measured by lower absolute discretionary accruals, higher accruals quality, and a lower propensity to just meet or beat analysts’ earnings expectations. We also find some evidence that the negative association between the materiality threshold and audit quality is attenuated when the audit committee is more effective and when the …

Audit Adjustments And The Discontinuity In Earnings Distribution Around Zero, Chu Yeong Lim, Themin Suwardy, Tracey Chunqi Zhang

Research Collection School Of Accountancy

Accounting researchers have documented that a discontinuity exists in earnings distribution around zero. However, there is considerable debate among researchers whether the earnings discontinuity around zero is caused by earnings management. We aim to shed light on the earnings discontinuity debate by examining the impact of audit adjustments on the distribution of earnings using a unique dataset from Singapore containing both recorded and waived adjustments. We find that audit adjustments do not reduce the discontinuity of earnings distribution around zero. This affirms that the results of Lennox et. al (2016) based on pre-tax earnings also apply to post-tax earnings and …

Impact Of Audit Time Pressure On Audit Quality, Janae Monet Mcclam

Doctoral Dissertations and Projects

This quantitative research correlational study aimed to determine the effects of time budget pressure on the auditor and whether those effects impact audit quality. The study population consisted of active external auditors registered with a certified public accounting (CPA) license, employed by CPA firms, who hold a minimum of a bachelor's degree in accounting, and have at least one year of accounting experience auditing financial statements. The population consisted of 1,072. The sample size was 283 participants, and the number of respondents was 287. This study contains two dependent variables, auditor judgment and audit quality, and one independent variable, time …

Information Sharing Between Mutual Funds And Auditors, Ole‐Kristian Hope, Pingui Rao, Yanping Xu, Heng Yue

Research Collection School Of Accountancy

This paper examines whether there is information sharing between mutual funds and their auditors about the auditors’ other listed firm clients. Using data from the Chinese market, we find that mutual funds earn higher profits from trading in firms that share the same auditors. The effects are more pronounced when firms have a more opaque information environment and when the audit partners for the fund and the partners for the listed firm share school ties. The evidence is consistent with information flowing from auditors to mutual funds, providing mutual funds with an information advantage in firms that share the same …

Accounting Reporting Complexity, Audit Engagement Partner Mandatory Rotation, And Audit Quality, Clement Chen, Zhenfeng Liu, Wenye Tang, Ling Tuo

Accounting Faculty Publications

This paper investigates the influence of a firm's accounting reporting complexity (ARC) on financial statement audit quality. We predict and find that there is a non‐linear relationship between a firm's ARC and audit quality. Specifically, a more complex accounting environment—measured by ARC—leads to higher quality audits, but this effect diminishes when ARC continues to increase. Further analyses reveal that the effect is more salient among client firms that do not purchase non‐audit services (NAS). We also examine whether ARC affects audit quality in the circumstance of mandatory audit partner rotation. Empirical results show a moderating effect of ARC on the …

Breaking The Glass Ceiling: Do Female Auditors In Public Accounting Shine?, Katie Dubois

Honors Theses and Capstones

This honors thesis examines the significance that female auditors have in shaping the public accounting profession. The study investigates the impact of female auditors on various aspects of the profession, including quality, profitability, and risk. By conducting a comprehensive literature review and analyzing gathered data, this research explores the factors that contribute to the influence of female auditors and the implications for the profession.

The findings highlight that female auditors do in fact impact the public accounting profession positively. Moreover, the data revealed that gender-diverse audit teams enhance audit quality and firm profitability. Client relationships are also positively influenced, as …

Do Big 4 Auditors Provide Higher Audit Service Quality Than Second-Tier Auditors In Small And Mid-Sized Initial Public Offerings?, Stefan K. Slavov

Doctoral Dissertations

Big 4 auditors perform most audits of companies that issue initial public offerings (IPOs). Regulators have expressed interest in increasing IPO audit market competition and a growing body of evidence suggests that Second-Tier auditors could provide IPO audit service quality comparable to that of Big 4 auditors. However, there exists limited empirical evidence on whether IPO audit service quality varies with auditor type. I investigate whether IPO audit service quality differs between Big 4 and Second-Tier auditors for a sample of small and mid-sized IPOs from 2005 through 2019. I find that Big 4 clients are associated with lower pre-IPO …

Audit Firm Culture: An Evolution Of The Audit Profession In Response To External Forces, Christina T. Alberti

2022

The COVID-19 pandemic is disrupting business operations throughout the world, including the working procedures of audit professionals. Yet, to date, research on COVID-19’s impact on auditing is limited. This is despite its potential long-term implications. Thus, my dissertation uses a mix of research methods to examine auditors’ response to, and regulators’ evaluation of auditors’ response to, COVID-19.

The first paper (co-authored) synthesizes research on audit firm culture (AFC) over the past decade, reviewing recent developments in research on AFC and its influence on audit quality and auditors’ work attitudes. Using a three-phase model based on prior research and professional guidance, …

Financial Capacity And The Demand For Audit Quality, Chee Yeow Lim, Gerald J. Lobo, Pingui Rao, Heng Yue

Research Collection School Of Accountancy

Prior research documents that financial capacity could be positively or negatively associated with the demand for audit quality. We re-examine this relation using changes in local real estate prices as exogenous shocks to corporate financial capacity. Using auditor size, auditor industry specialisation, and auditor fees as measures of audit quality, we find robust evidence that an increase (decrease) in financial capacity significantly reduces (increases) the demand for audit quality, and that this relation is more pronounced when firms are more financially constrained, when external monitoring by institutional investors and financial analysts is weaker, and when there is more negative news …

Data Analytics And Audit Quality, Ru Gao, Sterling Huang, Rencheng Wang

Research Collection School Of Accountancy

We examine the impact of data analytics on audit quality. Using hand-collected information on data analytics skills of employees of audit firms, we find that human capital investment in data analytics improves audit quality. The analytics capability of both frontline and back-office employees contributes to audit quality. The effect is more pronounced for audit clients with complex business operations, for clients with complicated accounting estimates, and for clients that are more digitalized. Taken together, our findings suggest that an audit office’s analytics capability represents an important office attribute that can affect audit quality.

The Impact Of Ceo/Cfo Outside Directorships On Auditor Selection And Audit Quality, Jaeyoon Yu, Byungjin Kwak, Myung Seok Park, Yoonseok Zang

Research Collection School Of Accountancy

We examine whether outside directorships of chief executive officer/chief financial officer (CEO/CFO) and resulting network ties to auditors affect auditor selection decisions and subsequent audit quality. The network ties arise when the CEO/CFO of a firm (home firm) serves as an outside director of another firm that hires an auditor (connected auditor). Using a sample of firms that switch auditors in the post-Sarbanes-Oxley Act period, we find that home firms are more likely to appoint connected auditors. We also find that home firms hiring connected auditors experience a significant decline in subsequent audit quality, compared to those hiring …

Dynamic Auditor Competition And Audit Quality In The United States, Arum Choi, Jeong-Bon Kim, Yoonseok Zang

Research Collection School Of Accountancy

Regulators and audit market participants have concerned that less competitive audit market makes auditors to reduce the incentives to conduct high-quality audits. While a few studies examine the effect of competition in the U.S. local audit markets, they report conflicting evidence using the static Herfindahl index which is arguably noisy in capturing the intensity of competition. The purpose of this paper is to provide evidence on the effect of dynamic auditor competition in local audit markets on audit quality. For this purpose, we employ a measure to capture the dynamic nature of audit market competition: the proportion of clients switching …

Do Accounting Firm Consulting Revenues Affect Audit Quality? Evidence From The Pre- And Post-Sox Eras, Ling Lei Lisic, Linda A. Myers, Robert Pawlewicz, Timothy A. Seidel

Accountancy Faculty Publications

In recent years, public accounting firms have experienced a steady increase in the proportion of their revenues generated from consulting services. Although growth in consulting revenue following the Sarbanes‐Oxley Act (SOX) has been generated primarily from services provided to nonaudit clients, regulators have expressed concerns about the potential implications of this increase for audit quality. In contrast, accounting firms assert that the expertise developed by their consulting professionals helps them to provide better quality audits. We examine the relation between the proportion of accounting firm consulting revenue to total revenue and audit quality and investor perceptions of audit quality. Because …

Opinion Shopping To Avoid Going Concern Audit Opinion And Subsequent Audit Quality, Heesun Chung, Catherine Heyjung Sonu, Yoonseok Zang, Jong-Hag Choi

Research Collection School Of Accountancy

Despite regulatory concerns over opinion shopping (OS) behavior, there exists little systematic evidence on the prevalence and consequences of OS to avoid a going concern opinion (GCO). Using Lennox's (2000) framework to identify OS, we find that distressed firms successfully engage in OS to avoid a GCO. Moreover, clients engaging in OS exhibit a higher ex post Type II error rate in audit opinions than clients that do not, and the higher Type II error rate is salient for clients switching auditors for OS but not for clients retaining auditors for OS. We continue to find this asymmetric effect of …

The Effect Of An Auditor Identity Disclosure Requirement On Audit Quality: An Experimental Examination Incorporating The Incremental Effect Of A Signature Requirement, Allen D. Blay, Eric S. Gooden, Mark J. Mellon, Douglas E. Stevens

Accountancy Faculty Publications and Presentations

After considering a proposal to require the engagement partner’s signature on the audit report (PCAOB 2009), the Public Company Accounting Oversight Board chose instead to only require the disclosure of the engagement partner’s name (PCAOB 2015). This choice was made, however, with little supporting theory or empirical evidence. We make predictions regarding the behavioral effects of the two proposed requirements using insights from social norm activation theory, and test those predictions using an experimental audit market setting found in the literature. We find that both requirements reduce misreporting in the audit report compared to a control setting with neither requirement …

Is A Pension Fund's Mix Of Fair Value Investments, Audit Type, And Audit Quality Associated With The Firm's Credit Rating?, Trevor England

Doctor of Business Administration Dissertations

There has been a proliferation of alternative investment holdings by defined benefit pension plans during the 21^st century. While holdings of alternative investments may advantage pension plans and their sponsoring firms through diversification and/or less volatile returns, they may also present valuation problems because underlying investments in opaquely valued (or marked-to-model) securities contain larger estimation error and uncertainty. Such valuation problems may concern credit reporting agencies because the sponsoring firm’s pension plan liability is uncertain. This problem is exacerbated through agency relationships within pension plans that enable executives and investment managers to engage in opportunistic financial reporting of fair …

Examining The Sleeper Effect In Auditors' Evaluations Of Audit Evidence, Jennifer B. Mccallen

Doctoral Dissertations

Current auditing standards require auditors to consider qualifications of the source (e.g., credibility and competence of management) in assessing the quality (e.g., reliability) of audit evidence, especially in subjective audit areas. However, while auditing standards stress the importance of the evaluation of management, they do not prescribe how auditors should effectively identify and incorporate relevant information about the source into evidence evaluation. Psychology research highlights that credibility is multi-dimensional and, more importantly, competence is context-specific. That is, an expert in one area may lack the necessary knowledge and background in other areas. Recent research in psychology has identified a phenomenon …

Data Analytics In An Audit: Examining Fraud Risk And Audit Quality, Sondra Smith

Doctor of Business Administration Dissertations

ABSTRACT

DATA ANALYTICS IN AN AUDIT: EXAMINING FRAUD RISK AND

AUDIT QUALITY

by

Sondra Smith

This study is comprised of two papers which examine, through interviews and an experiment, the current practices of data analytics of CPA firms, whether and how fraud risk impacts the usage of data analytics in an audit, and the effect data analytics has on the efficiency and effectiveness of an audit. The implementation of data analytics in an audit is relatively new, and there is not a good understanding of how it is currently being used in practice. Although historically the auditing profession has been …

The Relationship Between Audit Quality And Competition At The Intersection Of The Large And Small Audit Firm Markets, Jeanne-Claire Alyse White

LSU Doctoral Dissertations

This paper examines the relationship between audit quality and several measures of spatial competition. Spatial competition is measured as the smallest absolute difference in audit fee market shares from an audit firm and its closest competitor. In this paper, spatial competition measures are referred to as competitive distances, and they are calculated within the large audit market (Big 4 only), within the small audit market (non-Big 4 only), and between the large and small audit markets. Audit market competition and its effect on audit quality has been an ongoing debate. On one side of the argument, competition may negatively impact …

Disproportionate Insider Control And The Demand For Audit Quality, Arno Forst, Barry Hettler

School of Accountancy Faculty Publications and Presentations

We examine the relationship between disproportionate insider control, enabled through dual-class share structures, and the demand for audit quality. Using a comprehensive hand-collected sample of U.S. dual-class firms, we find that, consistent with outside shareholders’ increased demand for external monitoring, as well as self-bonding by entrenched insiders, disproportionate insider control is positively associated with the propensity to hire a Big 4 or industry specialist auditor, auditor independence, and audit fees. Corroborating a self-bonding explanation, additional analyses show that audit quality mitigates the negative association of disproportionate insider control and firm value. In expanded analyses, we also investigate the separate effects …

The Price Contagion Effects Of Financial Reporting Fraud And Reputational Losses: Evidence From The Individual Audit Partner Level, Ferdinand A. Gul, Chee Yeow Lim, Kun Wang, Yanping Xu

Research Collection School Of Accountancy

This study investigates the existence of price contagion effects for the low-quality audits of individual audit partners and the associated reputational losses in China. Low-quality partners are identified as those whose clients have been sanctioned by regulators for financial reporting fraud. Our evidence shows that sanctions induce a significant stock price decline among the contagion firms that share common low-quality partners and common low-quality audit firms; however, the decline is greater for the former. We also find that the price contagion effects of low-quality partners are more pronounced for firms located in regions with weak institutional development and less pronounced …

Audit-Related Services And Audit Quality: Evidence From Benefit Plan Audits, Jaclyn Prentice

Graduate Theses and Dissertations

The following study examines a material but less understood component of the public audit marketplace, namely the provision of “audit-related” services to financial statement audit clients. I use the benefit plan audit service setting to examine the company and benefit plan characteristics associated with auditor selection and the impact of audit-related services on financial statement audit quality. I provide market evidence of distinct shifts in the use of the same audit firm for the financial statement audit and other audit-related services over time as well as characteristics of the choice of auditors. I then test whether having the same audit …

Demand For And Assessment Of Audit Quality In The Market For Private Capital: A Field Study, Shyam Sunder

Shyam Sunder

The Downside Of The Network Ties Between Ceo/Cfos And Auditors Through External Directorships: Evidence From Auditor Selection And Subsequent Audit Quality, Jaeyoon Yu, Byungjin Kwak, Myung Seok Park, Yoonseok Zang

Research Collection School Of Accountancy

This study examines whether the professional ties of Chief Executive Officers/Chief Financial Officers (CEO/CFOs) to auditors through external directorships affect auditor selection and subsequent audit quality. Professional ties to auditors arise when the CEO/CFO of a firm (referred to as the home firm) serves as an outside director of another firm that hires an auditor (a connected auditor). Using a sample of firms with auditor switches over the period 2003-2012, we find that home firms are more likely to appoint connected auditors. Furthermore, utilizing a difference-in-differences approach, we find that home firms appointing connected auditors experience a significant decline in …

Audit Quality Indicators: Perceptions Of Junior-Level Auditors, Veena L. Brown, Jodi L. Gissel, Daniel Neely

Accounting Faculty Research and Publications

Purpose

In an effort to develop an audit quality (AQ) framework specific to the US audit market, the Public Company Accounting Oversight Board (PCAOB) recently issued a concept release proposing 28 audit quality indicators (AQIs) along three dimensions: audit professionals, audit process and audit results. Using AQIs initially proposed by the PCAOB, as well as AQIs suggested by prior literature, the authors solicit perceptions from junior-level (senior and staff) auditors to investigate the current state of practice along many of the AQIs relating to audit professionals and audit process.

Design/methodology/approach

In the study, 78 junior-level auditors responded to the survey. …

The Controversy Of Mandatory Audit Firm Rotation: Has Quantitative Accounting Research Misinformed Us About The Relationship Between Audit Tenure And Audit Quality?, Courtney Stern

Accounting

There is controversy between regulators and audit firms over the policy of mandatory audit firm rotation. Many regulators favor mandatory audit firm rotation whereas audit firms are against such a policy. Regulators argue that mandatory firm rotation would improve audit quality while audit firms claim that audit quality increases with audit tenure. Typically, regulators and audit firms refer to academic research that supports their position. One early paper on mandatory audit firm rotation that is commonly cited by academics and opponents of mandatory rotation is Carcello and Nagy (2004), which finds that longer audit tenure does not reduce audit quality. …

Market Pricing Of Banks’ Fair Value Assets Reported Under Sfas 157 Since The 2008 Financial Crisis, Beng Wee Goh, Dan Li, Jeffrey Ng, Keng Kevin Ow Yong

Research Collection School Of Accountancy

We investigate how investors price the fair value estimates of assets as required by Statement of Financial Accounting Standards No. 157 (SFAS 157) since the financial crisis in 2008. We observe that Level 3 fair value estimates are typically priced lower than Level 1 and Level 2 fair value estimates between 2008 and 2011. However, the difference between the pricing of the different estimates reduces over time, suggesting that as market conditions stabilize in the aftermath of the 2008 financial crisis, reliability concerns about Level 3 estimates dissipated to some extent. Next, we examine whether Level 3 gains affect the …

Bringing Darkness To Light: The Influence Of Auditor Quality And Audit Committee Expertise On The Timeliness Of Financial Statement Restatement Disclosures, Jaime Schmidt, Michael Wilkins

Michael S Wilkins

This study investigates whether auditor quality and audit committee expertise are associated with improved financial reporting timeliness as measured by the duration of a financial statement restatement’s ‘‘dark period.’’ The restatement dark period represents the length of time between a company’s discovery that it will need to restate financial data and the subsequent disclosure of the restatement’s effect on earnings. For a sample of dark restatements disclosed between 2004 and 2009, we find that companies that engage Big 4 auditors have shorter dark periods than companies that do not engage Big 4 auditors. We also find that companies with more …

Does A Lack Of Choice Lead To Lower Quality?: Evidence From Auditor Competition And Client Restatements, Nathan Newton, Dechun Wang, Michael Wilkins

Michael S Wilkins

We examine the relationship between auditor competition and the likelihood of financial restatements that occur as a result of failures in the application of GAAP. Policy makers and audit market participants have expressed concern that the current level of auditor competition is low, resulting in a negative impact on audit quality. However, we find that restatements are more likely to occur in metropolitan statistical areas (MSAs) that have higher auditor competition. The association between audit market competition and restatements is statistically and economically significant. Our finding that audit quality is higher when auditor competition is lower suggests that at least …

Auditor Switching For Opinion Shopping, And Subsequnt Audit Quality And Audit Fee: Evidence From Post-Sox Period, Jong-Hag Choi, Heesun Chung, Catherine Heyjung Sonu, Yoonseok Zang

Research Collection School Of Accountancy

Theory suggests that firms engage in opinion shopping to obtain better audit opinions. However, there is scarce evidence on the economic consequences of the opinion shopping behaviors. In this paper, we examine the effect of auditor switches for opinion shopping on audit quality and audit fees. Using 30,333 firm-year observations over the 2004-2012 period in the U.S., we first document evidence that firms switch their auditors in search for better audit opinions. Next, we find that the audit quality of clients that switch auditors for opinion shopping is significantly lower than that of clients that did not switch auditors or …