From joint to single audits – audit quality differences and auditor pairings

This study analyses audit quality differences between audits by a single big audit firm and joint audits with either one or two big audit firms. We exploit the unique situation in Denmark beginning on 1 January 2005, at which time a long-standing mandatory joint audit system for listed companies was replaced by a voluntary joint audit system. First, we report the results of a survey of Danish CFOs’ views on and their experiences with the choice of single or joint audits and their perceptions of audit quality. Second, based on data from the mandatory joint audit abolition year and the following two years, we test the audit quality differences using abnormal accruals. Most CFOs perceive that audit quality by a single big four audit firm is the same as it is in joint audits with either one or two big four audit firms. The results of our empirical analysis are in line with the perceptions. We find no evidence of audit quality differences between audits made by a single big four firm and those conducted by either of the two combinations of joint audits.     

Do Joint Audits Improve or Impair Audit Quality?

Conventional wisdom holds that joint audits would improve audit quality by enhancing audit evidence precision because “Two heads are better than one.” Our paper challenges this wisdom. We show that joint audits by one big firm and one small firm may impair audit quality, because, in that situation, joint audits induce a free‐riding problem between audit firms and reduce audit evidence precision. We further derive a set of empirically testable predictions comparing audit evidence precision and audit fees under joint and single audits. This paper, the first theoretical study of joint audits, contributes to a better understanding of the economic consequences of joint audits on audit quality.     

Effect of outsourcing public sector audits on cost‐efficiency

This study compares the cost‐efficiency of ‘in‐house’ and outsourced to private sector audit supplier arrangements to deliver financial audits in the public sector by examining audit cost‐efficiency within the context of the public sector arrangement at one state in Australia (Western Australia). The results for 178 public agencies show that outsourced audits are, in general, more costly than in‐house audits, but this result is conditional on the type and size of public agency. Specifically, outsourced audits are more costly than in‐house audits for small statutory authority audits, whereas for specialist audits (i.e. hospitals) and large and complex statutory authority audits, the in‐house supply is equally efficient as the outsourced service.     

Audit Firm Tenure,Non‐Audit Services,and Internal Assessments of Audit Quality

We use data from internal assessments of audit quality in a Big 4 firm to investigate the impact of audit firm tenure and auditor‐provided non‐audit services (NAS) on audit quality. We find that first‐year audits receive lower assessments of audit quality and that quality improves shortly thereafter and then declines as tenure becomes very long. Partitioning our sample between SEC registrants and private clients, we find that the decline in audit quality in the long tenure range is attributable to audits of private clients. For audits of SEC registrants, the probability of a high quality audit reaches its maximum with very long tenure. We also find that audit fees are discounted for first‐year audits but auditor effort is higher than in subsequent years. We find no association, on average, between total NAS fees and audit quality in the full sample but observe that total NAS fees are positively associated with quality for SEC registrants and negatively associated with quality for privately held clients. Our findings are important for regulatory policies related to audit firm tenure and auditor‐provided NAS.     

Audit Quality in New Zealand – Early Evidence from the Regulator

This study examines the impact of audit regulation in New Zealand, using audit quality reviews undertaken by the Financial Markets Authority (FMA) between 2013 and 2017. Regulation has more than halved the number of registered audit firms indicating that it imposes costs on audit firms. The results show that audit quality is improving, but a high proportion of audits do not meet the FMA's requirements. A key area for improvement is the consistency of quality across audits performed by the same audit firm. The FMA advises audit firms to investigate the underlying cause of audit deficiencies to ensure that internal quality control systems are effective in producing high‐quality audits on a regular basis. A comparison of audit file ratings with the United Kingdom shows that New Zealand's audit quality is much lower. The variation in audit quality across countries concerns the International Forum of Independent Audit Regulators (IFIAR) as it has the potential to undermine stakeholder confidence in the audit industry. Thus monitoring progress in improving audit quality in New Zealand is important. This paper provides insights into audit quality at a country level, whereas most research focuses on the firm level.     

University Audit Departments in the United States

Internal auditors of public and private universities were asked about their selection processes, supervisors, and activities. At public institutions, the governing board selects the internal auditor, the president supervises the work and more audit findings are implemented. Private institutions have more audit committees that are involved with the internal auditors' activities and their auditors perform more program audits. Thus, although public universities are following professional guidelines more closely, suggesting more accountability, private universities have greater access to audit committees and perform more value-added audits.     

Auditing private companies: what do we know?

The purpose of this article is to provide an overview of the literature on what we currently know about the costs and benefits of auditing private company accounts. Our main conclusions are the following. First, there is much heterogeneity in factors driving audit demand in private companies and the value derived from the audit. Second, research provides support for improved financial reporting quality due to, and real economic benefits from, private company audits. Third, the cost–benefit analysis for private company audits is firm-specific and mandating the audit does not seem to be cost-effective and thus economically optimal for all private companies. Alternative services may better meet the needs of especially smaller private companies. Furthermore, mandating the audit is not necessarily an optimal solution since private companies with low demand for a high-quality audit are able to find an auditor that meets their requirements even under a mandatory regime. Hence, having a mandatory audit in place is no guarantee for universally high-quality audits and this seems most salient for private companies where auditors may be more prone to independence issues. We conclude by providing a number of directions for future research.     

Group audits: Are audit quality and price associated with the Lead auditor’s decision to accept responsibility?

Lead auditors frequently rely on work performed by Other auditors, especially when auditing clients with operations in multiple countries. The PCAOB has expressed concern that the quality of such group audits may differ depending on whether the Lead auditor accepts or declines responsibility for work done by Other auditors. The PCAOB also has been concerned with the venue through which Lead auditors and Other auditors disclose their participation in group audits, including disclosure of whether Lead auditors accept or decline responsibility. To investigate these issues, we employ a sample consisting entirely of group audit engagements. We identify Lead auditors taking responsibility from PCAOB Form 2, filed by Other auditors of U.S. registrants for fiscal years 2009 to 2017. We identify Lead auditors not accepting responsibility from audit report disclosures during the same period. The results suggest that Lead auditors accepting responsibility charge higher audit fees but provide audits of no higher quality, and possibly of even lower quality. These results are robust to various additional analyses. Our research contributes to the ongoing debate over how the participation of Other auditors affects audit quality.     

Measuring audit quality of local governments in England and Wales

The purpose of this paper is to model and test the audit quality provided to local governments in England and Wales. A key question is: are there major differences in audit quality provided? The Audit Commission, a national public body under Parliament, regulates the audits. It sets audit standards, appoints the auditors, and (although each auditor and client local government set the specific audit fee for that client) it establishes a formula to determine standard audit fees. The Audit Commission also conducts an annual review of the audit quality provided by the selected auditors, as well as a survey of client satisfaction. The majority of audits are conducted by District Auditors (public sector employees of the Audit Commission). About a quarter of local governments are audited by one of six private sector auditors (including three of the Big 4). Actual results indicate that audit quality differences are associated with the number of governmental audit clients and local government type. Generally, there were modest quality differences by auditor category.     

Busy auditors,financial reporting timeliness and quality

We investigate whether audit partners with multiple clients are able to complete their audits in a timely fashion, an important but largely unexplored area of academic research. One view is that having multiple clients increases the knowledge and experience of the audit partner resulting in a more efficient and therefore, quicker audit. On the other hand, having multiple clients may over-burden an audit partner resulting in a slower audit process and longer completion times. We find that audit partners with multiple clients take longer to complete their annual audit. More importantly, we also find that companies with busy auditors who take longer to complete their audits also have poorer levels of financial reporting quality. Additionally, in terms of consequences for busy auditors, firms with lengthy audit report lag switched their auditors the next year suggesting that busy audit partners may lose clients if their workload is excessive and they are not able to maintain audit quality. Our results are robust to alternative measures for both audit report lag and audit partner busyness and a range of endogeneity tests. We also undertake simultaneous quantile regression to assess changes in audit report lag depending on the number of audit clients per partner where we find preliminary evidence of a knowledge spill-over effect. Consequently, our results have implications for companies, audit firms, regulators and other key stakeholders.     

An Empirical Investigation of Audit Pricing in the Public Sector: The Case of Greek LGOs

This paper investigates the associations between audit pricing and multidimensional characteristics of local governments by using a sample of Greek municipalities. The Greek institutional setting is interesting because it is politically pluralistic. Moreover, independent auditors appointed through a bid process exclusively perform the audits. Our results suggest a considerable variation on audit fees which is mainly driven by politically related factors indicating the importance of relevant theoretical anticipations in audit pricing in the public sector. Agency costs appear strong enough to explain audit pricing. We also confirm prior findings on the significance of audit complexity and size. Results also suggest that audit fees are reduced when an internal team dedicated to accrual accounting is appointed. Therefore, our conclusions offer practical implications for policy setters and regulators in the public sector in relation to audit quality.     

The effect of inspections,rotations and client preferences on staffing decisions

With increased regulatory focus on audits and concerns about whether audit regulation is achieving its stated aims, it is timely to investigate how regulator inspection of audit files and partner rotations may be affecting staffing decisions. This is an important issue, which affects all audits, as the calibre of staff allocated across engagements impacts the quality of audit work delivered. This study reports the results of an experiment where auditor participants allocate staff across two audits, where regulation anticipated (none, inspection, rotation) and a client request for the best staff (absent, present) are manipulated between‐subjects. We find that auditors allocate lower calibre staff when neither an inspection nor rotation is anticipated than when either is anticipated. When an inspection is anticipated, auditors allocate staff with more knowledge and compliance skills. When a rotation is anticipated, auditors allocate staff with more people skills. A client request for the best staff only has an effect when a partner is due to be rotated, where auditors allocate staff with more people skills in response to the client request. Our findings provide greater understanding of staffing decisions, which may affect audit quality if concerns around audit inspections and partner rotations are perceived by auditors as more important than the underlying risk or complexity of an engagement when allocating staff.     

Do PCAOB Inspections Improve the Quality of Internal Control Audits?

We investigate whether Public Company Accounting Oversight Board (PCAOB) inspections affect the quality of internal control audits. Our research design improves on prior studies by exploiting both cross‐sectional and time‐series variation in the content of PCAOB inspection reports, while also controlling for audit firm and year fixed effects, effectively achieving a difference‐in‐differences research design. We find that when PCAOB inspectors report higher rates of deficiencies in internal control audits, auditors respond by increasing the issuance of adverse internal control opinions. We also find that auditors issue more adverse internal control opinions to clients with concurrent misstatements, who thus genuinely warrant adverse opinions. We further find that higher inspection deficiency rates lead to higher audit fees, consistent with PCAOB inspections prompting auditors to undertake costly remediation efforts. Taken together, our results are consistent with the PCAOB inspections improving the quality of internal control audits by prompting auditors to remediate deficiencies in their audits of internal controls.     

国家审计、内部审计与注册会计师审计的协调与贯通

我国审计体系依据审计主体的不同,划分包括国家审计、内部审计和注册会计师审计三种审计力量。三大审计主体之间既有区别也有联系。三者之间的区别即工作目标、工作依据不同。三者之间的联系主要体现在国家审计对内部审计、注册会计师审计具有领导作用;内部审计以及注册会计师审计应接受国家审计机关的监督和指导,以便促进三种审计力量的有效相互配合,更好的服务于国家治理。为推动我国国家治理现代化的实现,进一步加强三大审计主体之间的协调与贯通是很有必要的。     

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.     

Social compliance audits and multinational corporation supply chain: evidence from a study of the rituals of social audits

This study investigates the use of social compliance audits in the supply chain of multinational corporations (MNCs). Particularly, we explore the use of such audits in assessing and managing the working conditions of factory workers in the garment industry in a developing nation. Through a range of interviews with MNCs’ internal auditors, with commissioned external auditors and with representatives of the suppliers in Bangladesh, this study finds that social compliance audits become ritual strategies and are not a primary means of advancing workers’ rights. Drawing on the concept of surrogate accountability, the study suggests that to create real change in workers’ conditions and in order to hold MNCs and their suppliers accountable, some form of surrogate (government, non-governmental organisations or media) intervention is necessary. This is, we argue, preferable to leaving it in the hands of ‘markets’ and simply waiting for another major incident such as Rana Plaza to stir public concern. This study contributes to the literature by investigating how social compliance audits are undertaken by MNCs sourcing products from a developing nation, what motivations drive the adoption of such audits, and what, if anything, are the likely outcomes from the process.     

Performance auditing: Improving the quality of political and democratic processes?

In an attempt to improve the quality of political and democratic processes, governmental organisations could decide to introduce performance auditing. However, earlier studies suggest that performance auditing can actually damage the quality of these processes, especially when it leads to information about the inputs, outputs and efficiency of programmes or activities. This raises the question of whether performance audits that lead to other types of information have similar effects. This paper analyses the effects of two local government audit committees in the Netherlands, both of which conduct performance audits that produce a broad set of information. It concludes that the lack of success of performance auditing, in terms of its contribution to the quality of political and democratic processes, cannot fully be explained by the type of information that is produced. In order to strengthen their role, audit bodies must find a balance between maintaining an independent position and responding to the expectations and requirements of their key stakeholders, which include the elected body, the Executive and the official organisation.     

A Maturity‐level Assessment of Generalised Audit Software: Internal Audit Functions in Australia

The advancement of information technology in today's technologically driven era has had a significant impact on the way corporate organisations are conducting their business, especially in a developed country such as Australia. Consequently, it is now almost impossible to conduct effective and efficient audits without the use of technology‐based tools in control environments that are dominated by big data and increasing volumes of electronic audit evidence. Generalised Audit Software (GAS) is one of the most frequently used technology‐based tools available for the internal audit function for tests of controls purposes. The objective of this article is to explore the maturity of the use of GAS by internal audit functions in Australia. The literature review reveals that the use of GAS by internal audit functions globally is still at a relatively low level of maturity, despite the increased adoption of information technology and the generation of big data within organisations. Similarly, the empirical results also confirm the low level of maturity in the use of GAS by internal audit functions in Australia. Only 17.4% of the respondents displayed a high level of maturity with regard to the use of GAS.     

Commentary: Where You Sit Is What You See: The Seven Deadly Sins of Performance Auditing. Implications for Monitoring Public Audit Institutions

It has to be observed at the outset that performance auditing has been a contentious issue for much of the three decades it has been pursued in Australia. That said, there is clear evidence of its growth and acceptance in that period. Nevertheless, there are still apparent differences in views and perceptions across the main stakeholders, not least related to the performance and results achieved by the Audit Offices involved. In these respects, Stuart Kells highlights deficiencies that need to be addressed to instill greater confidence in such auditing. In my view, many of these deficiencies (Sins) have been addressed, particularly in the last decade or so, and we may be better employed in focusing more on the achievement of identifiable outcomes as a result of such auditing. Do performance audits actually make a ‘difference’? Such a focus does not ignore questions about how performance audits are selected, conducted and reported, nor their quality and relevance. Rather, a major challenge is to put in place a robust review framework that would markedly add to accountability for implementation of agreed audit outcomes.