Do auditors’ early-life socioeconomic opportunities improve audit quality? Evidence from China

Prior research documents significant variation in audit outcomes based on individual auditors' demographic features, working experience, educational background, and social connections. This study examines whether individual auditors' early-life socioeconomic opportunities also affect audit practices. We expect that auditors from big cities have more access to socioeconomic opportunities and accumulate more human capital in early life, thus are more capable of providing high-quality audits after they start careers. Consistent with this hypothesis, we find that auditors from big cities make more audit adjustments to earnings compared with auditors from small towns. Additional tests suggest that this early-life effect on audit quality is moderated when auditors receive higher education or gain more auditing experience and is more pronounced in downward adjustments than in upward adjustments. We also find a fee premium for auditors from big cities. Overall, this paper provides evidence that auditors’ early-life socioeconomic opportunities have a far-reaching influence on audit quality.     

How individual auditor characteristics impact the likelihood of audit failure: Evidence from China

Audit failure imposes a severe loss on investors and damages market participants' confidence in financial reporting quality. This study investigates the impacts of individual auditor characteristics on the likelihood of audit failure. Chinese regulators mandate listed firms to disclose the engagement auditors' identity. Furthermore, the information regarding individual auditor characteristics in China is also publicly available. Utilizing this unique setting, we examine the relationship between individual auditor characteristics and the likelihood of audit failure in China during the period from 2000 to 2009. We document that individual auditors with more auditing experience are less likely associated with audit failure. We also find a weaker negative relationship between auditor education level and audit failure. Our study has important implications for both auditors and regulators by shedding lights on the determinants of audit failure and by providing guidance to the human resource management in audit firms.     

Audit firm's Confucianism and stock price crash risk: Evidence from China

This study examines the association between audit firm's Confucianism and stock price crash risk. We postulate that Confucian moral standards predict a mixed relationship between audit firm's Confucianism and stock price crash risk. Using a large sample of listed firms in China during 2006–2018, we find that audit firm's Confucianism is positively related with client's future stock price crash risk, implying that Confucianism of audit firm aggravates client's bad news hoarding behavior. The effect is more pronounced for client without female auditors and/or with closer personal relationship with auditors. Mechanism analysis shows that audit firm's Confucianism exacerbates crash risk by worsening audit quality and information transparency. Political discipline and external monitoring help to alleviate the negative influence of audit firm's Confucianism on stock price crash risk.     

Seeing is believing? Executives' facial trustworthiness,auditor tenure,and audit fees

Psychology and neuroscience studies document that facial trustworthiness perceptions may affect observers' decision-making process. Our study examines whether auditors' perceptions of client executives' facial trustworthiness are associated with their audit fee decisions. We employ a machine-learning-based face-detection algorithm to measure executives' facial trustworthiness. We find that auditors charge 5.6% less audit fee to firms with trustworthy-looking CFOs than to those with untrustworthy-looking CFOs in initial audit engagements. Auditor tenure weakens the negative association between CFOs' facial trustworthiness and audit fee. Further evidence shows that CFO's facial trustworthiness is associated with neither financial reporting quality nor litigation risk.     

Audit committee diligence around initial audit engagement

Studies focusing on governance mechanisms argue that auditor monitoring is one of several governance mechanisms that exist in the firm, and these mechanisms supplement each other. Extending this argument, I examine whether firms support auditor monitoring with audit committee monitoring when auditor oversight is deemed to be weak. Prior auditing literature argues that audit quality is affected by auditors' lack of familiarity with their clients' activities. Since lack of auditor–client familiarity exists in the first year of auditor–client tenure, I examine whether firms increase their audit committee monitoring during the year of auditor change. For a sample of firms that changed auditors between 2006 and 2012, the findings show that audit committees meet more frequently in the first year of audit engagement. Further tests show that firms' past reporting behavior play a significant role in the demand for more audit committee meetings and the increase in the audit committee meetings in the initial year of auditor engagement positively affects reporting quality.     

The effect of gender and firm identification on auditor pre-negotiation judgments

This paper extends current auditor negotiation research by considering the effects of two dimensions of auditors' identity that are posited to be relevant to auditors' negotiation: gender and audit firm identification. Women earn over half of college degrees in accounting, and hold more than half of accounting and auditing positions in the US, yet the balance of the gender of partners at audit firms is currently not equal (AICPA, 2017). However, as more women advance into partnership positions in firms, it is increasingly important to have an understanding of how gender affects the behaviors, processes and outcomes of negotiation, and thus the quality of financial statements. The auditor-client negotiation context has features, such as ambiguity and representation of others that can “trigger” the salience of auditors' gender and firm identity. Once salient, these two dimensions of auditors' identity shape auditors' motivational orientation towards negotiations, which, in turn, affects the auditors' negotiation behavior and negotiation outcomes.The study finds that male and female auditors approach the negotiation over audit adjustments differently. Although many negotiation studies find that males negotiate more aggressively than do females, auditor-client negotiation offers a unique setting that has been found to reverse this common trend. We hypothesize and find that female auditors recommend higher audit adjustments than males. However, the level of firm identification moderates female's recommended audit adjustments such that at higher levels of firm identification, the larger audit adjustments recommended by females decrease. This finding is consistent with the growing research on gender differences in auditing and the research on gender and risk tolerance, which find females to be more risk averse, but contrary to much of the negotiation research which shows males as more aggressive and achieving higher negotiated outcomes. In supplemental analysis, we find that our results hold in the senior manager subsample but not in the partner subsample. This result is consistent with theory on gender differences which suggests that the differences will disappear with increased occupational socialization (Smith & Rogers, 2000). Practical implications are discussed.     

Being private,Big 4 auditors,and debt raising

This study investigates the role of auditor choice (Big 4/Non-Big 4) in debt financing for private and public firms. We find private firms have less access to debt than public firms, and Big 4 auditors support debt raising in both private and public firms. Consistent with private firms facing greater information asymmetry, Big 4 auditors are more important for debt raising in private firms than in public firms. The benefit of appointing Big 4 auditors for private firms' debt raising is greater in the opaque information environment of the global financial crisis. It is also greater when firms are smaller, younger, or have poorer financial reporting quality. We also find evidence consistent with Big 4 auditors mitigating agency conflicts and enhancing debt raising when ownership concentration is higher in private firms.     

National and Office‐Specific Measures of Auditor Industry Expertise and Effects on Audit Quality

Our paper examines whether audit quality is higher for industry audit specialists at the national and city‐office levels using the framework developed in Ferguson et al. [2003] and Francis et al. [2005] . We find that auditors who are both national and city‐specific industry specialists have clients with the lowest abnormal accruals, suggesting that joint national and city‐specific industry specialists have the highest audit quality. In addition, we find some evidence that abnormal accruals of firms audited by city‐industry specialists alone (without also being national specific industry specialists) are lower than those audited by nonindustry specialists. Using alternative measures of audit quality, we find that when the auditor is both a national and a city‐specific industry specialist, its clients are less likely to meet or beat analysts' earnings forecasts by one penny per share and more likely to be issued a going‐concern audit opinion. Together these results provide consistent evidence that audit quality is higher when the auditor is both a national and city‐specific industry specialist, suggesting that auditors' national positive network synergies and the individual auditors' deep industry knowledge at the office level are jointly important factors in delivering higher audit quality.     

Determinants of going concern opinions and audit fees for development stage enterprises

Startup entities have been the focus of much political and academic interest recently. Development stage enterprises (DSEs), as defined by SFAS 7, are startup entities for which some publicly available information exists. New accounting standards have removed the DSE designation and related extra reporting requirements, and placed more responsibility on owners and managers to assess the ability of entities to continue as a going concern. We examined information from financial statements and audit reports of companies previously reporting as DSEs to investigate what increases the likelihood of receiving a going concern modification in auditors' opinions (GCO) and what affects audit fees. Our overall analyses indicate that the asset size of DSEs, negative working capital, and prior-year going concern modifications consistently influence going concern modifications to auditors' opinions. Managers should clearly consider these conditions when making their assessment of their companies' future going concern status. Our results indicate that the size of the audit firm did not influence the going concern modification decision, but Big4 auditors charge significantly higher fees than other auditors. Thus, managers/owners of DSEs should weigh the benefits of having a Big4 firm audit on their financial statements against the higher fees charged by those firms.     

Geographic diversification and agency costs of debt of multinational firms

This paper examines the agency conflicts between shareholders and bondholders of multinational and non-multinational firms and provides an explanation for the puzzle that multinational firms use less long-term debt, but more short-term debt than domestic firms. Using a sample of 6951 firm–year observations for multinational and domestic firms over the 1988–1994 period, we find that alternative measures of agency costs have statistically significant negative effects on the firm's long-term leverage. The results, however, also show that the negative effects of agency costs of debt on long-term leverage are significantly greater for multinational than non-multinational firms. It is documented that the effect of the agency costs of debt on leverage are increased by the firm's degree of foreign involvement. The evidence shows that firm's increasing foreign involvement exacerbates agency costs of debt leading to lower (greater) use of long-term (short-term) debt financing. This result is also confirmed using alternative measures of foreign involvement. The evidence is consistent with the view that multinational corporations (MNCs) are susceptible to higher agency costs of debt than domestic corporations because geographic diversity renders active monitoring more difficult and expensive in comparison to domestic firms. The results fail to support the view that MNCs' lower long-term debt ratios are due to the advantages of the internal capital markets.     

Does Ethical Culture in Audit Firms Support Auditor Objectivity?

The suggested cause of constrained auditor objectivity has been centred on auditors' financial incentives and long audit tenure. Recent research has challenged those assumptions and questioned the effectiveness of auditor rotation to counteract short-tenure threats to auditor objectivity. Audit firms and regulators need to adopt methods for enhancing auditor objectivity that are effective in various auditor–client relationships. This study examines whether audit firm ethical culture is positively related to auditor objectivity. Based on the responses of 281 practising auditors, the findings indicate that auditors are more likely to make objective judgments in ethical cultures characterized by the rewarding of ethical behaviour and punishment of unethical behaviour, prevalence of ethical norms, visible ethical leadership, and low emphasis on obedience to authority. In conclusion, evidence indicates that auditors in audit firms with a strong ethical culture are more likely to maintain auditor objectivity than are auditors in less supportive cultures. This suggests that audit firms should promote a strong ethical culture to reduce the risk of constrained auditor judgment.     

R&D capitalization and audit fees: Evidence from China

Our study investigates the association between capitalized R&D costs and audit fees and whether this association reflects the effect of earnings management. By exploring Chinese listed firms, we find that capitalized R&D costs are positively associated with audit fees, where such positive association holds for both the discretionary and nondiscretionary portions of capitalized R&D costs. Moreover, the positive association between the discretionary portion of capitalized R&D costs and audit fees is more pronounced for firms with stronger incentives to manipulate earnings. Overall, our findings imply that firms' reporting incentives affect how auditors react to clients' accounting choices. This in turn suggests that auditors believe some firms capitalize R&D to manipulate earnings, and the resulting earnings-management concerns lead them to charge higher fees.     

How Do Various Forms of Auditor Rotation Affect Audit Quality? Evidence from China

The Enron/Arthur Andersen scandal has raised concerns internationally about auditor independence, audit quality, and the need for regulatory action such as mandatory auditor rotation. China's unique institutional features provide a setting in which we can compare comprehensively the various forms of auditor rotation at different levels (partner vs. firm) and in different settings (voluntary vs. mandatory). In addition, institutional conditions vary dramatically across China, which provides us with an opportunity to test whether the development of market and legal institutions affects the impact of rotation on audit quality. We expect that auditors are less (more) constrained by market forces and less (more) self-disciplined to maintain audit quality in regions with less (more) developed market and legal institutions. Therefore, mandatory rotation may play a more (less) important role in less (more) developed regions. Using auditors' propensity to issue a modified audit opinion (MAO) as a proxy for audit quality, we find that firms with mandatory audit partner rotations are associated with a significantly higher likelihood of an MAO than are no-rotation firms. However, this effect is restricted to firms located in less developed regions. We find similar evidence for voluntary audit firm rotation although the significance level is much weaker than for mandatory partner rotation. Other forms of auditor rotations (i.e., mandatory audit firm rotation and voluntary audit partner rotation), have no effect on MAOs.     

Human Information Processing the Consistency of Audit Risk Judgments

This research utilises the human information processing methodology to determine whether audit risk judgments are consistent with those obtained by using the audit risk model advanced by Statements on Auditing Standards (SAS) Nos. 39 and 47. The effects of two audit-risk specific factors (the level of algorithmic audit risk and the combination of components of audit risk) are examined. The results of analysis of variance (ANOVA) procedures and cue-utilisation indices reveal that some of the auditors' judgments are inconsistent with the multiplicative nature of the audit risk model. In addition, evidence suggests that auditors affiliated with regional and local firms may depart from the audit risk model when substandard tests of details procedures are performed. The differences noted in the judgments of Big Eight auditors and regional and local auditors indicate that modified versions of the audit risk model may be employed by auditors in different types of audit engagements.     

媒体负面报道与审计收费：基于事务所组织形式变更的视角

事务所向特殊普通合伙制的转变,为研究审计师法律责任的增强对媒体治理作用的影响提供了现实样本.以公司层面的负面报道和审计收费数据进行研究发现,转制后,负面报道与审计费用和正向异常收费显著正相关,但在转制前均不显著;考虑事务所规模的差异后,发现对大型事务所,转制提高了负面报道与正向异常收费的相关性,但对小型事务所,审计收费和异常收费与负面报道的相关性在转制前后没有显著变化,表明审计师法律责任的强化是媒体发挥治理作用的重要路径.     

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。     

The Effects of Anticipation and Frequency of Errors on Auditors' Selection of Substantive Procedures

The process of audit planning continues throughout an audit engagement. Preliminary audit plans are developed in the early phases of an engagement, and are revised in light of information received in subsequent phases, such as the results of substantive tests. This study examines the effects of (1) auditors' anticipation of finding a particular error-type in substantive tests and (2) the frequency of occurrence of the error-type on auditors' revision of preliminary audit plans. An experiment was conducted with practising auditors as subjects. Three error-types were manipulated as part of eighteen sets of exceptions from accounts receivable confirmations that each auditor reviewed. We found that auditors who do not anticipate finding an error-type in substantive tests are more likely to increase the amount of planned audit work. No effect of frequency of an error-type within a sample was found.     

Can material asset reorganizations affect acquirers’’ debt financing costs?——Evidence from the Chinese Merger and Acquisition Market

In this paper, we investigate whether material asset reorganizations (MARs), a special form of merger and acquisition (M&A) transactions, can affect the acquirers’ cost of debt financing. Further, we examine the effect of acquiring firms’ accounting information quality on the cost of debt and on the association between MARs and debt costs. We predict that compared to conventional M&As, large-scale acquisitions through MARs can generate a much greater influx of assets from target firms. This raises the acquirers’ asset collateral and thus reduces the cost of debt. Because the quality of accounting information is a key factor affecting the cost of debt, we suggest that it has a spillover effect on the debt-cost effect of MARs. Using M&A transactions by listed companies in the Chinese A-share market from 2008 to 2014 as our sample, we find that MARs are associated with a higher asset collateral and lower ex post cost of debt than conventional M&As. Furthermore, we show that the acquiring firms’ accounting information quality has a significant negative effect on debt costs, and the negative association between MARs and the cost of debt is more pronounced when accounting information quality is higher.     

Towards a conceptual model of whistle-blowing intentions among external auditors

Whistle-blowing has received considerable attention in the ethics literature. However, following the collapse of Arthur Andersen in the Enron debacle, whistle-blowing within audit firms has taken on greater importance. Given the profession's requirements to be confidential, independent and to act in the public interest (e.g. Sarbanes–Oxley Act, 2002), there is a need for a model that is specific to the audit profession (e.g. Louwers, Ponemon, & Radtke, 1997), and in particular, that addresses auditors' whistle-blowing intentions. This paper presents a conceptual model on whistle-blowing intentions among external auditors where an auditor's individual factors (attitudes toward whistle-blowing, perceived behavioural control, independence commitment, personal responsibility for reporting and personal cost of reporting) have a direct influence on his or her intentions to whistle-blow, but are moderated by isomorphic factors (perceived organisational support and team norms) and issue-specific factors (perceived moral intensity). Using justice and institutional theories, the proposed model anticipates that whistle-blowing within an audit firm produces both positive and negative consequences to society, the audit firm and the individual whistle-blower. However, where audit firms have adequate formal supporting mechanisms for reporting wrongdoings to internal and external parties, the negative effects and personal costs of reporting will be minimised.     

An Empirical Study of the Audit Expectation-Performance Gap

The critical, litigious environment which characterises auditing today can be traced to the audit expectation-performance gap. Defined as the gap between society's expectations of auditors and auditors perceived performance, it is seen to comprise ‘reasonableness’ and ‘performance’ components, the latter being subdivided into ‘deficient standards’ and ‘deficient performance’. Empirical research was conducted in New Zealand in 1989 to investigate the audit expectation-performance gap. The study enables the duties which constitute the reasonableness, deficient standards and deficient performance components of the gap to be identified. It also provides the means to estimate the relative contribution of the duties to their respective components, and of the components to the overall gap between society's expectations of auditors and auditors' perceived performance. The research provides new insights into the structure, composition and extent of the audit expectation-performance gap but, more importantly, it signals a rational, comprehensive approach towards narrowing the gap. If adopted, this should bring society's expectations of auditors and auditors' performance into closer accord and, as a consequence, reduce the criticism and litigation which auditors face today.