Business Commons^™

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 …

Audit Quality Implications Of Regulatory Change In South Africa, Harina Ndaba, Michael Harber, Warren Maroun

Business Papers and Journal Articles

Purpose: This paper explores how technical constructions of audit practice are influenced by mandatory audit firm rotation (MAFR) regulations. The paper responds to calls for additional research on how external regulation influences audit quality and supplements the predominately quantitative research dealing specifically with firm rotation and its relevance for audit quality.

Design/methodology/approach: Data are collected from South Africa which is the latest jurisdiction to adopt MAFR (from 2017). Detailed interviews with 49 participants comprising 24 audit partners and 25 non-auditors are conducted to explore how MAFR can impact audit quality. For this purpose, audit quality is defined according …

Auditor Expertise, Jurors' Social Identities And Evaluations Of Auditor Negligence, Reginald Wilson

Faculty Publications

This paper employs Social Identity Theory to investigate the impact of auditor expertise and jurors’ identification with auditors on jurors’ perceptions of auditor negligence. Consistent with expectations, jurors who identified more strongly with auditors (strong identifiers) levied more lenient negligence judgments to auditors than weak identifiers. These findings suggest that lay jurors demonstrate the ability to empathize with auditors. However, the significant interaction between jurors’ social identities and the firm’s level of expertise suggests that the effects of jurors’ identities on negligence verdicts may be constrained by firm characteristics.

Merger And Acquisition Financial Reporting Outcomes: An Examination Of Non-Audit Fees And The Impact On Auditor Independence, Jimmy Carmenate

Doctor of Business Administration Dissertations

For over 40 years, the issue of auditors providing both auditing and non-audit services (NAS) to their audit-clients continues to be at the forefront of concerns to regulators, investors, and academics. The literature primarily provides two competing effects of NAS on financial reporting quality. The first being the compromise on auditor independence and the other on the benefits attained from knowledge spillover. Though these competing effects have been studied in various contexts, there has been little to no research on the association between NAS and the outcomes from mergers and acquisitions (M&A) to infer whether NAS lessens the threat to …

Are Out-Of-Period Adjustments A Type Of Stealth Restatement? An Examination Of Non-Audit Services, Clawback Provisions, And Out-Of-Period Adjustments, Cori Oliver Crews

Doctor of Business Administration Dissertations

Over the last decade, out-of-period adjustments (OOPAs) have risen in popularity in direct contrast to the simultaneous decreasing trend in restatements. This could indicate an improvement in financial reporting quality or could indicate the use of a type of stealth restatement for opportunistic purposes. These less prominent restatements are more likely to go undetected and would be an apt way to perpetuate opportunistic disclosure and to mitigate the likelihood of unfavorable market reactions.

The purpose of this study is to investigate (1) the association between non-audit services (NAS) and OOPAs, (2) the association between clawback provisions and OOPAs, and (3) …

The Impact Of The Sarbanes-Oxley Act On Clients’ Audit Opinion Shopping Behavior, Jong-Hag Choi, Heesun Chung, Catherine Heyjung Sonu, Yoonseok Zang

Research Collection School Of Accountancy

This study investigates whether the tendency for audit clients to engage in opinion shopping becomes weaker after the enforcement of the Sarbanes-Oxley Act (SOX). While Lennox (2000) provides evidence that U.K. firms successfully engage in opinion shopping, there is limited evidence on the mitigating effect of SOX on opinion shopping. Using observations collected from the period before and after the enforcement of SOX (year 2001, 2004 and 2005), we find that, for our sample period, firms are likely to switch (retain) their incumbent auditors when the likelihood of receiving a going concern opinion is lower (higher) from a successor auditor, …

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 …

The Effect Of Audit Committee Compensation On The Procurement Of Non-Audit Services, Caroline Hayek

Doctor of Business Administration Dissertations

Over the last decade, audit committee member compensation has shifted from a cash compensation structure toward a more equity-based compensation structure, with members on the audit committee holding substantially large equity positions. Although contrasting viewpoints exist as to whether more equity-based compensation aligns with shareholders’ interest, empirical evidence suggests that the form of compensation has an impact on financial reporting quality and audit committee members’ objectivity. Despite these results, to date there is no authoritative guideline on the appropriate compensation structure for audit committees. Non-audit services (NAS) have also been at the forefront of regulators’ attention in the last decade …

Do Non-Audit Fees Impair Auditor Independence? Using Goodwill Accounting To Help Reconcile The Debate, Jonathan Edward Shipman

Doctoral Dissertations

Prior literature’s inability to document an empirical relation between non-audit service fees and compromised auditor independence contradicts the significant and long-standing concerns expressed by regulators and the investing community. The purpose of this paper is to reconcile the lack of findings in prior research with regulators’ and investors’ concerns about non-audit services. Using a new measure – goodwill impairments – that alleviates many of the potential limitations that could have prevented prior research from documenting evidence to support the proposed relation between non-audit services and auditor independence, I find that the level of non-audit fees of a client is negatively …

Non-Audit Fees, Institutional Monitoring, And Audit Quality, Chee Yeow Lim, David K. Ding, Charlie Charoenwong

Research Collection School Of Accountancy

We posit that the effect of non-audit fees on audit quality is conditional on the extent of institutional monitoring. We suggest that institutional investors have incentives and the ability to monitor financial reporting quality. Because of the reputation concerns and potential litigation exposure, auditors are likely to provide high audit quality, when they also provide non-audit services to clients, particularly when clients are subject to high institutional monitoring. We find evidence that, as non-audit fees increase, audit quality (measured by performance-adjusted discretionary current accruals and earnings-response coefficients) reduces only for clients with low institutional ownership but not for clients with …

Auditor Independence And Client Economic Power: Qualitative Evidence And Propositions Involving Auditors’ Emotions And Moral Reasoning, Carolyn Windsor, Marie Kavanagh

Carolyn Windsor

This study views auditor independence decision-making as holistic, complex and interpersonal, where human elements including emotions come into play when challenged by a morally intense situation. The idea of emotions affecting auditor independence judgments has had little attention in auditing research. In fact, rationality and emotions cannot be separated because they are part of the human condition, often complimenting each other in decision making. To reflect this view, our interactionist model of auditors’ complex decision making includes Rest’s four-component model, (1) moral sensitivity, (2) moral reasoning, and (3) moral motivation as decision-making processes culminating in moral behavior that denotes (4) …

Tax Aggressiveness And Auditor Resignation, Yoonseok Zang, Beng Wee Goh, Chee Yeow Lim, Terry Shevlin

Research Collection School Of Accountancy

We examine the relation between client tax aggressiveness and auditor‟s resignation decision. Consistent with the agency view of tax avoidance which suggests that client tax aggressiveness can increase litigation and reputational risk to auditors and increase the potential conflict with managers, we find a positive association between our proxies for tax aggressiveness and the likelihood that an auditor resigns from an audit engagement. Further, this association is stronger when external monitoring of the client firm is less effective, when there is greater potential for agency problems in the client firm, and when the economic importance of the fees received from …

Tax Aggressiveness And Auditor Resignation, Yoonseok Zang, Beng Wee Goh, Chee Yeow Lim, Terry Shevlin

Research Collection School Of Accountancy

We examine the relation between client tax aggressiveness and auditor‟s resignation decision. Consistent with the agency view of tax avoidance which suggests that client tax aggressiveness can increase litigation and reputational risk to auditors and increase the potential conflict with managers, we find a positive association between our proxies for tax aggressiveness and the likelihood that an auditor resigns from an audit engagement. Further, this association is stronger when external monitoring of the client firm is less effective, when there is greater potential for agency problems in the client firm, and when the economic importance of the fees received from …

Audit Fees: To Disclose Or Not To Disclose?, Teng Aun Khoo, Soo Chiat Hwang

Research Collection School Of Accountancy

The authors argue that the disclosure of audit fees can provide a more level playing field in Singapore, and would also be consistent with the other major capital markets in the world. Auditors' independence is the cornerstone of the auditing profession, because without auditor's independence investors would not be able to rely on the so-called "audited" financial statements. Currently in Singapore, audit-fee disclosure is not mandatory except for banks as stipulated by the Monetary Authority of Singapore (MAS).

The Rise Of Regulatory Capitalism And The Decline Of Auditor Independence: A Critical And Experimental Examination Of Auditors’ Conflicts Of Interest, Carolyn A. Windsor, Bent Warming-Rasmussen

Carolyn Windsor

This study investigates the decline of auditor independence coinciding with the rise of regulatory capitalism. A critical analysis supported by experimental evidence reveals regulatory capitalism's influence on auditor independence. Regulatory capitalism began in the United States during the 1970s when state enforced neo-liberal free-market doctrines of competition and deregulation commercialized the profession. Since then, regulatory capitalism's economic neo-liberal agenda has transformed the auditing profession and the employer firms into a transnational network of professional services firms that now promote and diffuse regulatory capitalism worldwide. Regulatory capitalism is further facilitated by the Sarbanes-Oxley Act and the PCAOB that provide interconnections of …

A Negotiation-Oriented Model Of Auditor-Client Relationships, Gary Kleinman, Dan Palmon

Department of Accounting and Finance Faculty Scholarship and Creative Works

The increasing frequency and complexity of inter-organizational relationships suggests that inter-organizational negotiations should represent an area of increasing concern to management and academicians. Unfortunately, there is little theorizing about, nor study of, these negotiations. The few extant models are heavily influenced by models of individual negotiating styles that are then raised to the inter-organizational level with minimal change. The model developed here attempts to provide a framework for understanding the context of these interorganizational negotiations by identifying and illuminating factors that influence the outcome of interactions in various long-term supplier relationships. Factors discussed include dynamic and stable environments, organizational cultures, …