New development: Local public audit—the changing landscape

This article considers the implications for local public audit of the abolition of the Audit Commission and its audit practice (District Audit). The audit regime of NHS foundation trusts, where the Audit Commission is not responsible for auditor appointments or their oversight, is investigated to provide insights for the future of local public audit.     

Joint Audits: Does the Allocation of Audit Work Affect Audit Quality and Audit Fees?

Audit quality and cost consequences of joint audits have been continually discussed, especially since the publication of the European Commission’s Green Paper in 2010. We provide new empirical evidence for the French audit market. We show that a more balanced audit work allocation between the engaged audit firms reduces the audit quality and enhances the audit fees as compared to an unbalanced work allocation. We measure the quality effects following the concept of abnormal accruals and the concept of cosmetic earnings management. As unbalanced joint audits have parallels to single audits, our results have interest to those debating the benefits and costs of joint audits as compared to single audits.     

非审计业务对审计市场绩效的影响——基于会计师事务所业务结构的角度

以审计质量和审计收费作为审计市场绩效的衡量指标,从会计师事务所业务结构角度来考察我国注册会计师行业拓展非审计业务对审计市场所带来的影响。实证检验发现,相对于其他事务所而言,非审计业务规模越大和当年非审计业务规模较上年扩大的事务所,其审计质量越好,审计收费也越高。这说明在目前审计服务市场容量有限,竞争过于激烈的环境下,拓展非审计业务有利于增强审计独立性和提高审计收费,是改善行业执业环境的一个重要途径。     

提高我国注册会计师审计独立性的对策探讨

注册会计师只有在审计过程中真正做到客观独立,才能保证审计信息的可信性,从而树立起职业声誉,体现其社会价值.提高我国注册会计师审计独立性应从完善注册会计师的委托聘约机制、明确注册会计师的法律责任、规范会计师事务所的组织形式、提高注册会计师的自身素质、健全注册会计师的外部监管机制、优化执业环境等方面入手.     

The Unintended Consequences of the Frequency of PCAOB Inspection

After more than 50 years of self‐regulation of the US auditing profession, the Sarbanes‐Oxley Act of 2002 (SOX) created the Public Company Accounting Oversight Board (PCAOB) as a quasi‐governmental entity with statutory authority to inspect accounting firms that audit public clients. The frequency of this inspection is annual or triennial, based upon the number of public clients the firm audits. We examine the effects of these two levels of inspection frequency on financial reporting quality and audit fees for clients of small and midsize public accounting firms. Our findings provide evidence of significantly higher audit quality and audit fees for clients of annually inspected firms relative to clients of triennially inspected firms. These findings are robust to auditor‐client alignment analyses, propensity score matching, time‐series analyses, examination of firms that have changed from triennial to annual inspection, and particular examination of firms with inspection deficiencies. Overall, our study suggests that the two‐tier frequency system of PCAOB inspection may have also resulted in two‐tier audit quality and audit fee systems for small and midsize public accounting firms, with more frequent inspection leading to more rigorous and informed auditor decisions. We discuss the implications of our results for the Board and the profession at large.     

The vanishing searches and audit fees: Evidence from Google's withdrawal from China

I investigate the impact of the disruption of free information access via search engines on audit fees using a quasi-natural experiment provided by Google's withdrawal from China. Employing a difference-in-differences design, I document an increase in audit fees for firms with overseas business relative to firms without overseas business after Google's withdrawal. The results are robust to matched samples, placebo tests, alternative specifications, excluding alternative explanations and different event windows. This trend in audit fees suggests that Google's withdrawal hampers firms' foreign information streams and increases audit risk and audit effort. Consistent with this argument, after Google's withdrawal, firms with overseas business conduct more earnings management, pay more abnormal audit fees and experience longer audit report lags. Furthermore, the increase in audit fees is greater for firms with poor information environments, more retail investors or non-Big 4 auditors. My findings suggest a potential auditing cost of restricting the free flow of public foreign information about firms.     

Anomalies in the Oversight of Australian Auditors

This commentary identifies and comments on anomalies in the oversight of Australian auditors and audit firms. Regulatory and professional oversight and inspection of Australian auditors and audit firms arise from a number of sources, highlighting its multi‐faceted nature. This makes it impossible to identify a single body with ultimate responsibility for auditor oversight. Three recent Australian reviews commissioned by the Financial Reporting Council, together with an evaluation of the roles of the various regulatory and professional bodies, are used in this commentary as a platform from which to identify a number of significant anomalies in oversight processes. Major anomalies highlighted arise from the overlapping nature of the duties and functions of the various bodies and the variation in oversight across different categories of audit service providers. Policymakers should closely examine the issues raised in the paper if auditor oversight is to be undertaken in an effective and efficient manner.     

发审委身份公开、会计师事务所声誉与IPO公司盈余质量

本文以我国2000至2007年期间IPO公司财务报告为样本,以2003年我国由证监会遴选执业会计师出任股票发行审核委员会(简称"发审委")委员的身份公开为背景,研究被证监会遴选执业会计师出任股票发审委委员的会计师事务所是否有动机提高审计质量,以维护来自政府认可的信任声誉。实证研究发现,这些会计师事务所审计的IPO公司财务报告的盈余质量,无论横向比较还是纵向比较均有显著提高。据此推论,来自政府认可的会计师事务所声誉与源于市场口碑的会计师事务所声誉一样,对享有这些声誉的会计师事务所提高审计质量有明显激励作用。     

Audit office size,audit quality and audit pricing: evidence from small- and medium-sized enterprises

Using Swedish data, we investigate how audit quality and audit pricing vary with audit firm and office size. In contrast to prior studies, we use disciplinary sanctions issued against auditors not meeting the quality requirement as the measure of audit quality. We find no significant differences in the likelihood of sanctions between Big 4 audit firms and the fifth and sixth largest audit firms in Sweden (Grant Thornton and BDO). We refer to these collectively as ‘Top 6’. However, we find that the probabilities of warnings or exclusions from the profession are much higher for non-Top 6 auditors in Sweden than for Top 6 auditors. Furthermore, we find a strong negative association between the likelihood of sanctions and audit office size for non-Top 6 auditors. This association is insignificant for Top 6 audit firms. Audit fees follow a similar pattern and indicate that larger audit firms and offices put in more effort or have greater expertise. These results suggest that audit quality is differentiated in the private segment market. However, contrary to prior studies, our results suggest that the important dimensions are Top 6 versus non-Top 6 and the office size of non-Top 6 audit firms.     

Does International Accounting Network Membership Affect Audit Fees and Audit Quality? Evidence From China

Regulators suggest that small audit firms join international accounting networks to reduce their resource constraints in serving large clients and providing high-quality service. Bills, Cunningham, and Myers (2016) investigate the issue in the United States and find that both audit fees and quality are higher for members of international accounting networks (i.e., member audit firms). We investigate the effects of network membership on audit fees and quality in China, a relatively weaker institutional environment than the United States. Using data of Chinese listed companies audited by non-Big N audit firms from 2001 to 2010, we find that member audit firms charge 3.9% higher fees than nonmember audit firms, much lower than the 30% fee premiums charged by U.S. member audit firms. We do not find consistent evidence that audit quality is higher for member audit firms. Overall, our results demonstrate that China's weak institutional environment may overwhelm the quality control brought by international accounting networks and that it may weaken or even offset the benefits of audit firms' participation in these networks, resulting in smaller or even no effects of membership on audit fees and quality.     

Audit Pricing of Shared Leadership

This study explores audit implications of shared leadership in client firms. Analyzing data from 2002 to 2013 of Korean listed companies, we find that auditors spend fewer audit hours and charge lower audit fees for clients with multiple CEOs. Additional tests reveal that the lower audit fees for co-CEO clients are likely attributable to reduced audit effort rather than to reduced hourly rates. We also document that firms with co-CEOs exhibit better-reporting quality than do firms with a solitary CEO. In sum, this article presents evidence that mutual monitoring via co-CEO appointments assures high-quality financial reporting of audit clients, and thus leads to reduced audit fees.     

Audit committee quality indices,reporting quality and firm value

We investigate the relation between audit committee (AC) quality indices, financial reporting, internal control quality and firm value using a US dataset for the period 2002–12. The indices are developed by linking firm value with principal component analysis (PCA) factors based on a broad set of 82 AC variables, some of which influence the quality of the AC, but are not addressed in prior literature. Significant AC factors include ‘overlapping directors’, ‘busyness’ and ‘foreign director’, and we use these factors to develop ‘high’ and ‘low’ AC quality indices. We show that low AC quality firms are more likely to manage earnings, be external auditor dependent with respect to non‐audit tax services, and switch to a lower quality auditor. Low AC quality firms are also more likely to have internal control concerns disclosed by predecessor auditors, including accounting issues, financial restatements, audit opinion concerns and deficiencies that undermine internal control effectiveness. Further, they are more likely to receive an audit report containing additional explanatory notes. Conversely, high AC quality firms are significantly less likely to have these concerns. Our findings highlight the value of using AC quality indices in delivering greater oversight of the financial reporting process.     

The Effect of IPO Risks on Auditors’ Decisions: Auditor Designation Case

This study examines the effect of audit risks in the Korean initial public offering (IPO) market on the designated auditors’ decisions. The Korean External Audit Act requires firms to switch from incumbent to new auditors designated by the Securities and Futures Commission after the firm announces a future IPO. This study shows the effects of audit risks by examining if the quality of reported earnings and audit fees significantly differs between IPO‐eligible and IPO‐ineligible firms. Empirical tests first show that discretionary accruals are significantly lower for IPO‐ineligible firms than for IPO‐eligible firms in both the IPO designation period and the following review period. We interpret this result to mean that designated auditors evaluate the IPO‐ineligible (and eventually failed) firms’ listing possibility as low. Second, audit fees are higher for IPO‐ineligible firms in the auditor designation period. This reflects the fact that designated auditors are exposed to future audit risks associated with firms’ post‐IPO financial market troubles if IPO‐ineligible firms attempt to go public. Our study contributes to IPO‐related research by showing the effects of auditors’ risk evaluation on discretionary accruals and audit fees. This study also contributes to accounting policymaking regarding auditor independence.     

Public Audit: A Comment and a Clarification of CIPFA's Views

This article aims to clarify CIPFA's views on the arrangements for 'public audit', as reflected in its submissions to the Nolan Committee and the subsequent Cabinet Office/Treasury Review of external audit in the public services. In particular, it attempts to correct perceived misapprehensions about CIPFA's attitude to the role of the private audit firms in public sector audit.     

The effect of external audits of internal control over financial reporting on financial reporting for clients of Big 4, Second-tier,and small audit firms

The external audit of internal control over financial reporting (ICFR) is a very expensive and contentious aspect of the Sarbanes–Oxley Act (SOX). Larger public firms were first required to file a management report on and have an external audit of ICFR in 2004. Smaller public firms were first required to file a management report on ICFR in 2007 but are exempt from the audit requirement. Whereas most related prior research investigates the combined effect of management and auditor reports on financial reporting, this study examines the distinct effect of auditor reports on reporting quality. For companies audited by small auditors, we find evidence that financial reporting quality improves with an auditor report on ICFR. We find no evidence that auditor ICFR reports improve reporting quality for clients of Big 4 or Second-tier audit firms. Our study adds to the debate on the applicability of SOX Section 404 to smaller firms.     

Responsiveness of Auditors to the Audit Risk Standards: Unique Evidence from Big 4 Audit Firms

We examine the effect of changes in audit risk standards on the conduct of financial statement audits in a European setting. We investigate this by analysing the audit hours and audit fees for clients of Big 4 audit firms in Finland in 1996 and 2010. Our results show that audit firms became more sensitive to clients’ business risk due to the introduction of the new audit risk standards, with more audit hours allocated to owner-managed companies in 2010 than in 1996, and fewer audit hours allocated to low-risk clients in 2010 than in 1996. Also, the labour mix in the audit team changed for owner-managed companies, with a greater work load carried by junior auditors in 2010 than in 1996. Regarding the price of audit, we find an increase in audit fees for clients with high business risk, while audit fees remained at roughly the same level for low-risk clients. These findings should be of interest to the auditing profession and those involved in the development of auditing regulations.     

审计师收取客户债务风险溢价了吗?

已有研究发现,公司债务风险越高,审计师收取的审计费用越高;然而,审计费用提高的原因可能是审计投入的增加,也可能是审计师收取客户公司的债务风险溢价。由于缺少审计投入的数据,已有研究无法回答审计师是否收取客户公司债务风险溢价的问题。本文以我国A股上市公司为研究样本,运用我国独到的审计工时数据,就此展开相关问题研究。研究发现,在控制了审计投入之后,客户债务风险与审计费用显著正相关,表明审计师收取了客户公司的债务风险溢价。进一步研究表明,审计师对财务状况较差和治理较差的公司以及非国有企业收取更高的债务风险溢价,规模较小的会计师事务所收取的债务风险溢价高于规模较大的会计师事务所。     

Perverse Audit Culture and Accountability of the Modern Public University

The audit culture which has developed in public universities has led to counter‐productive outcomes. Managerial oversight of academic work has reached a critical tipping point. Extensive auditing of research output by means of performance management assessment regimes motivated by a New Public Management mentality has damaged individual scholarship and threatened academic freedom. Such assessment regimes are perverse and conducive to the development of psychotic tendencies by universities. It is important to understand the effects of a perverse audit culture when re‐thinking and reforming approaches to university performance management. We suggest ways for public universities to acknowledge the need for accountability while remaining true to core academic purposes.     

The impact of the input level of information system audit on the audit quality: Korean evidence

In response to the increasingly sophisticated corporate information system environment in producing accounting data, audit firms are undertaking information system (IS) audit in addition to conventional auditing. This study focuses on examining the impact of input level of IS audit on audit quality. We collected data on IS audit hours, a unique reporting requirement for Korean listed-firms as disclosed in the External Audit Implementation Details beginning in 2014. Simultaneously, we used the amount of discretionary accruals and measure of conservatism, C_Score as the proxies of the audit quality. By empirically examining a sample set that includes 2,370 corporate-year observations from the Korea Composite Stock Price Index (2014–2018), we found that IS audit hours and IS audit personnel had a statistically significant negative correlation when estimating with amount of discretionary accruals using the model of Kothari et al. (2005) and positive correlation with C_Score. Even when the group was divided into Big 4 and non-BIG 4, these results were apparent in firm samples that were audited by Big 4 audit firms, whereas those audited by non-Big 4 firms did not show these results. Taken together, the following conclusion can be derived. Audit quality has improved through conducting IS audit in response to new types of audit risks that have emerged because of the use of information technology in corporations. Significantly, this study analyzes empirically the effect that the effort of IS auditing has on improving audit quality by using a unique reporting requirement for Korean-listed firms. The study confirms that an appropriate level of IS audit input can improve audit quality. In addition, it is meaningful that IS audit practice is following the risk-based approach of the Clarified International Standards on Auditing (ISA).     

Auditors’ scepticism in response to audit committee oversight behaviour

We use two experiments and a survey to examine how audit committee (hereafter, AC) oversight behaviour, particularly AC sceptical attitude and proactive behaviour, affects auditor scepticism, and whether the influence is driven by the risk aspect of auditors’ assessment of AC oversight behaviour. We find that when ACs exercise insufficient scepticism, auditors (junior auditors, managers, and partners) perceive AC oversight as weak, and increase their scepticism. However, AC proactive behaviour does not significantly influence auditor scepticism. Our findings suggest auditors view weak AC oversight as a risk indicator and respond by exercising greater scepticism.