Do goodwill impairments affect audit opinions? Evidence from China

There has been a steady growth of goodwill impairments in the Chinese stock market since the adoption of the impairment approach in accounting. The influence of goodwill impairments on a firm’s financial position and profitability give reason to doubt its current and future performance. We examine whether auditors, as a crucial external monitor, identify the information risks of goodwill impairments and express their concerns about financial reporting quality in their audit opinions. Using a sample of firms listed on China’s A-share market from 2007 to 2017, we test the association between goodwill impairments and the type of audit opinion received in the same financial period. Our findings are as follows. First, the probability of receiving a modified opinion increases with the amount of goodwill impairments. Second, the positive association between goodwill impairments and modified audit opinions is driven primarily by earnings management risks. Third, this positive association is more salient when auditors are industry experts and there is no auditor–client mismatch. Fourth, auditors are more sensitive to the amount of goodwill impairments than to their mere existence. Overall, we document that auditors perceive goodwill impairments as a signal of information risks and communicate their concerns to investors to avoid litigation.     

Does auditor tenure influence the reporting of conservative earnings?

In this study, we examine the relation between auditor tenure and the reporting of conservative earnings. Using several measures of conservatism, we document a positive association between the conservatism in reported earnings and the length of the auditor–client relationship. We further document an increase in conservatism between short and medium tenure that does not deteriorate over long tenure. Collectively, the results imply lower conservatism for short auditor tenure, which suggests that mandating auditor rotation may have an adverse affect on the conservatism in reported earnings.     

Engagement partner specialization and corporate disclosure transparency

This paper explores the association of audit partners' industry specialization with corporate disclosure transparency and the latter's informativeness. The distinctive institutional designs of partner signature requirement and Information Disclosure and Transparency Ranking System (IDTRS) adopted in Taiwan allow us to empirically address the issue. We posit and find that the rankings from the IDTRS are higher for firms audited by industry specialist engagement partners than for firms audited by non-specialist engagement partners. Additionally, the results show that the probability of informed trade (PIN) proxy for information asymmetry is negatively associated with the rankings for clients of industry specialist engagement partners, but not for clients of industry non-specialist engagement partners. The results are robust with respect to alternative estimation method and alternative measures of industry specialization. Overall, the evidence suggests that industry specialist engagement partners enhance the credibility of corporate disclosure transparency, through which information asymmetry is further declined. The evidence provides policy implications to the partner signature requirement adopted in Taiwan and China.     

Information asymmetry,mutual funds and earnings management: Evidence from China

This paper investigates how information asymmetry and mutual fund ownership affect listed companies’ earnings management. We show that (1) reducing information asymmetry improves firms’ earnings management behavior; (2) relative to short-term mutual funds, long-term mutual funds promote earnings quality by adopting a monitoring role; and (3) by dividing firms into high/low information asymmetry groups, we find that the information environment significantly increases the effect of long-term mutual funds on firms’ earnings management. In this paper, we provide new evidence for the role that institutional investors play in a typical emerging capital market. Our results have clear policy implications: to increase earnings quality, it is essential to improve information transparency and develop long-term institutional investors.     

Audit committees and earnings quality

This research investigates whether audit committees are associated with improved earnings quality for a sample of Australian listed companies prior to the introduction of mandatory audit committee requirements in 2003. Two measures of earnings quality are used based on models first developed by Jones (1991 ) and Dechow and Dichev (2002 ). Our results indicate that formation of an audit committee reduces intentional earnings management but not accrual estimation errors. We also find differences in the associations between audit committee accounting expertise and the two earnings quality measures. Other audit committee characteristics examined are not significantly related to either earnings quality measure.     

The effect of earnings surprises on information asymmetry

We examine the effect of earnings surprises on changes in information asymmetry. We hypothesize and find that asymmetry is lower (higher) in the quarter following positive (negative) earnings surprises compared to firms that meet the consensus analyst earnings forecast. The relations between earnings surprises and information asymmetry are stronger when the surprises are more likely to capture investors’ attention. Examining the source of these changes, we show that decreased information search activities is the most important factor for asymmetry declining after positive surprises; for negative surprises, decreased uninformed trading plays a dominant role increasing asymmetry.     

Do seasoned industry specialists provide higher audit quality? A re-examination

The purpose of this paper is to re-examine the recent findings in Gaver and Utke (2019) (GU) who find that seasoned industry specialist auditors provide higher audit quality. We first illustrate how the magnitude of residuals from the accruals model can vary significantly by industry, thus highlighting the importance of including industry fixed effects when the dependent variable is discretionary accruals. We next replicate GU’s findings. We first attempt to replicate prior literature after including industry fixed effects in the audit quality (discretionary accruals) models. This is an important control, as the relevant benchmark for a firm with an industry specialist auditor is a peer firm in the same industry with a non-specialist auditor. We find that after including industry fixed effects, there is no association between seasoned industry specialist auditors and discretionary accruals. We also find that the association between industry specialization and discretionary accruals is very sensitive to the way in which the researcher calculates specialization. Our findings are informative for shareholders of public companies who vote on auditor ratification.     

Are audit partners’ compensation and audit quality related to their consulting revenues?

Recent accounting scandals have triggered renewed interest in the debate concerning whether audit firms should be banned from providing consulting services. Compared to the voluminous studies on consulting services to audit clients (i.e., non-audit services, hereafter NAS), little has been done to investigate consulting services to non-audit clients (hereafter CS). This study examines whether audit partners' revenues from CS are associated with: i) partners' compensation, and ii) audit quality (AQ), while controlling for revenues from NAS and auditing. We choose the Norwegian setting because of the unique and proprietary data on CS at the audit partner level. Our results provide initial evidence that partners' compensation is positively associated with their revenues generated from CS. Regarding AQ, our findings indicate no relation between AQ and partners' revenues from CS. This study contributes to the recent debate on multidisciplinary audit firms and should be of interest to regulators, audit firms, and users of audited financial statements.     

Strategic timing of annual earnings announcements: evidence from an order-driven market

Using Spanish data, this paper examines, for the first time, the differences in the intraday response of an order-driven market to earnings announcements made during trading and non-trading hours. We show that the speed of reaction depends on timing of the announcement: for overnight (daytime) announcements, the improvement in liquidity is (not) immediate. This finding could explain why Spanish firms prefer to release the bad (good) earnings announcement in trading (non-trading) hours. This strategic timing differs from the traditional disclosure policy in American markets, suggesting that different microstructures may react differently to news releases and, consequently, drive the strategic timing of corporate disclosures.

Independent audit committee members’ board tenure and audit fees

An independent audit committee is an audit committee on which all members are independent directors. This study examines whether independent audit committee members’ board tenure affects audit fees. On the basis of the prior literature, we formulate an unsigned hypothesis. This is because on the one hand, long board tenure audit committee members (defined as members with board tenure of 10 or more years) have greater incentives to protect their reputational capitals by purchasing increased audit effort, which positively affects audit fees. On the other hand, audit pricing reflects audit committee quality. Long board tenure audit committee members may have less need for increased audit effort because they can effectively oversee the financial reporting process themselves, which negatively affects audit fees. We find that audit fees are negatively associated with the proportion of long board tenure directors on the independent audit committee, consistent with the notion that audit committee members’ long board tenure results in lower audit effort.     

The emerging growth company status on IPO: Auditor Effort,Valuation, and underpricing

The Securities Act of 1933 governs the going public process and the accompanying registration statement submissions to the Securities and Exchange Commission (SEC). The Jumpstart Our Business Start-ups (JOBS) Act of 2012 created several accommodations under the SEC securities laws for a new group of companies referred to as “emerging growth companies” (EGCs). We examine the associations between auditor effort, initial public offering (IPO) offer prices, and investors’ perceptions of the registrants’ intrinsic value (underpricing) and EGCs’ registration statements utilizing accommodations to reduce financial statement information disclosure. Our finding that auditor effort is reduced suggests that the potential for increased auditor risk for EGCs future financial statements could be higher because of issues related to financial statements not included in the registration statements. We also find a negative (positive) association between EGC filing and IPO offer prices (underpricing). Our results suggest potential unintended consequences associated with EGCs and that auditor effort might not be sufficient to reduce the possibility of future financial statement failures.     

Auditors’ going‐concern‐modified opinions after 2001: measuring reporting accuracy

An important change in auditors’ reporting behaviour in the period after the high‐profile corporate collapses in 2001 is that auditors were more likely to issue going‐concern (GC)‐modified audit opinions. Comparing company failure rates subsequent to receiving a first‐time going‐concern (FTGC)‐modified audit opinion in the pre‐ and post‐2001 periods, we find a consistent type 1 error (misclassification) rate (the rate of survival among companies issued an FTGC opinion). Results are indicative of auditors maintaining GC reporting accuracy when comparing the 1995–1996 and 2004–2005 periods. This conclusion is supported after considering the impact of mitigating circumstances surrounding companies that received an FTGC‐modified audit report and survived.