The Settlement Norm in Audit Legal Disputes: Insights from Prominent Attorneys

Prior research indicates that most audit legal disputes settle. There is, however, little evidence of the factors that drive the settlement norm and its exceptions in audit legal disputes. To better understand these factors, we rely on theory related to how professionals manage risks and, as a result, how professions defend jurisdictional claims. We use this theoretical lens to help motivate four research questions that we probe by interviewing 27 prominent attorneys experienced in audit litigation. Consistent with our lens, our interview data indicate that attorneys manage their risks, including the risk of reputational loss, by settling based on their expectations of trial verdicts. Unlike trials, settlements simultaneously enable attorneys on both sides to limit costs and avoid catastrophic jury verdicts and, by doing so, claim “wins” for their clients. Attorneys also stress that they settle many audit disputes without any legal filings. Thus, a large subset of disputes is invisible to the public and researchers. Attorneys characterize trials as exceptions to the settlement norm that emerge due to abnormal conditions sometimes present in disputes. However, trial verdicts in these abnormal conditions help attorneys justify the use of settlements to clients, as attorneys stress that by settling they can avoid the dreaded possibility of extreme unfavorable verdicts. We conclude that as individual attorneys manage their risks, especially the risk of reputational loss, their profession maintains its public image and thereby defends its jurisdictional claims. Among the many questions we pose for future research is whether the settlement norm reduces society's ability to monitor the audit profession and, more generally, whether this norm's benefits outweigh its drawbacks.     

会计师事务所国际化对审计质量的影响

基于中国会计师事务所在美国公众公司会计监督委员会（PCAOB）注册视角,系统探究会计师事务所国际化对审计质量的影响。研究发现,中国会计师事务所国际化促使审计质量提升。进一步结合审计师能力、审计师声誉等机制检验结果说明会计师事务所国际化通过学习效应、声誉效应等渠道提高审计质量。研究表明会计师事务所国际化有助于提高审计质量,对于加强信息披露质量与完善资本市场建设具有积极作用,为会计师事务所国际化实践提供理论参考。     

整合审计、审计质量与审计收费

2012年,我国规定上市公司在进行财务报表审计的基础上,进行内部控制审计并披露相应报告,但未强制要求进行整合审计,即由同一事务所对同一被审计单位既执行财务报表审计又执行内部控制审计。文章选取2012-2013年我国A股上市公司为研究对象,实证检验整合审计的效用。研究发现,相较一致非整合审计,一致整合审计的审计质量更优,但整合审计在提高审计质量的同时未能显著降低审计收费,为我国开展整合审计工作提供经验参考。     

Growing Pains: Audit Quality and Office Growth

This study provides evidence on how local office growth affects audit quality. We predict that significant recent growth will temporarily stress office resources, leading to a negative relation between office‐level growth and audit quality. To test this prediction, we examine a sample of 17,062 firm‐year observations from 2005 to 2010. Results indicate a consistent negative relation between changes in volume of audit work and audit quality. Specifically, clients of offices that experience increases in workload over the prior year have greater absolute discretionary accruals as well as an increased likelihood of restatement. Our tests also indicate that the effect of office growth is transient and vanishes after one year. We find limited evidence that the size of the auditor's national network of offices partially mitigates the negative effects of office growth on audit quality. We further show that proxies for audit quality are negatively related to office‐level growth from new and existing clients. These findings are robust to controls for client and auditor characteristics as well as alternative specifications of growth. Taken together, evidence indicates that while larger offices provide higher audit quality, the benefits of office size are not realized immediately and rapid growth temporarily impairs audit quality. These results are informative to regulators concerned with audit quality and to practitioners charged with adjusting to office growth.     

Auditors’ Joint Engagements and Audit Quality: Evidence from Italian Private Companies

This study examines the effect of auditors’ collaboration in joint audit engagements on knowledge transfer, auditor expertise, and audit outcomes. I employ a unique sample of Italian private companies whose financial statements are jointly audited by three individual auditors and use measures from the network literature to capture the intensity of interactions between these auditors. I find a positive association between several audit quality proxies and auditors’ collaboration in multiple joint engagements. My results suggest that auditors develop knowledge and contacts through collaboration which potentially leads to higher audit quality. Overall, my findings suggest that joint engagements facilitate knowledge transfer and increase auditor expertise.     

Legal Penalties and Audit Quality: An Experimental Investigation*

The purpose of this paper is to investigate the impact of legal penalties on audit quality under different legal regimes. We investigate whether audit quality is affected differentially due to the complexity inherent in legal regimes and the frequency of imposing legal penalties. Economic theory predicts that players adopt equilibrium strategies that reflect the expectation that a penalty will be incurred, but the actual occurrences of penalties, if consistent with this expectation, should not prompt an individual to modify his or her strategy. However, learning theory suggests that players' choices will be repeated in the future based on outcomes. We found that penalties triggered both increases and decreases in effort, and seemed to introduce a “shock” that increased the variability of effort. We also observed a “funnel” effect — that is. greater changes in effort closer to the imposition of penalties, and smaller changes as more periods go by without a penalty.     

审计任期、审计市场集中度与审计质量相关研究评述与展望

随着经济的发展,审计质量日益受到社会各界的广泛关注,尤其是在本世纪初发生几起重大会计舞弊之后。影响审计质量的因素是多方面的,学术界关注得较多的主要有审计市场集中度、审计任期,本文对这两方面的相关研究进行了整理和总结,并对未来的研究提出了建议。     

Are Audit Firms' Compensation Policies Associated with Audit Quality?

We examine how compensation policies of audit firms are associated with audit quality. Specifically, we investigate the effects of the ratio of variable to fixed compensation and the size of the basis for profit sharing (i.e., whether partners share profits in a small or in a large profit pool). For our analyses, we use detailed mandatory disclosure of the compensation policies in German audit firms. We document that compensation policies vary considerably across audit firms. We find that profit sharing in a small profit pool and high variable compensation are two characteristics of auditor compensation associated with lower audit quality. We also find some evidence suggesting that audit quality may be most at risk in cases in which partners rely more heavily on variable compensation to divide a relatively small profit pool. In additional analyses, we find that these associations are more pronounced in medium-sized audit firms. We argue that this finding may result from these firms being too large for audit partners to directly monitor each other effectively, yet simultaneously too small to have sophisticated centralized monitoring systems in place. Finally, we find that integrating partner-specific, nonprofit-related performance metrics into the compensation structure mitigates the adverse effects of small profit pools and high variable compensation.     

Learning by Doing and Audit Quality*

In this study, we present a nonstrategic, dynamic Bayesian model in which auditors' learning on the job and their choice of professional services jointly affect audit quality. While performing audits over time, auditors accumulate client‐specific knowledge so that their posterior beliefs about clients are updated and become more precise (that is, precision is our surrogate for audit quality) — what we call the learning effect. In addition, auditors can enrich their knowledge accumulation by performing nonaudit services (NAS) that, in fact, may influence clients' managerial decisions — what we call the business advisory effect. This advisory effect permits auditors to anticipate and to learn about changes in clients' business models, which in turn improves their advisory capacity. These dual “learning” and “advisory” effects are interdependent and mutually reinforcing. The advisory effect of NAS may increase or reduce auditors' engagement risk. We show that large professional fees can induce auditors to provide NAS that increase engagement risk and diminish audit quality. However, when NAS reduce engagement risk and increase audit quality, auditors may provide NAS without charging clients. The feature that distinguishes our study — the interdependence between the learning and advisory effects — provides new insight into the trade‐off between audit fees and audit quality. Consequently, our analysis helps explain why the scope of the audit has evolved over time and why the boundaries between audit and NAS are constantly shifting. A recent example of such a shift is that the Sarbanes‐Oxley Act adds control attestation to audits for public companies traded in U.S. markets.     

审计质量与盈余公告效应

从行为金融的角度出发,以投资者过度反应和反应不足为理论基础,采用沪市A股2005-2009年间的数据对审计质量和盈余公告效应二者关系进行了检验。结果发现,审计质量能够加剧盈余公告效应幅度,它既能加剧"好消息"公司股价的向上漂移,也能够加剧"坏消息"公司股价的向下漂移。     

Future Nonaudit Service Fees and Audit Quality

Prior to the Sarbanes–Oxley Act of 2002, audit partners experienced economic pressure to grow revenue from the sale of nonaudit services to their audit clients. To an auditor who is highly rewarded for revenue generation and growth, nonaudit services may represent a particularly strengthened economic bond with the client. Prior research shows that, in general, nonaudit service fees received in the current period do not impair audit quality. We examine a different setting. We propose that auditor independence can become impaired, and audit quality compromised, when clients that currently purchase relatively low amounts of nonaudit services, increase their purchases of nonaudit services from the auditor in the subsequent period. We test our prediction in the context of earnings management as a proxy for audit quality, measured by (a) performance‐adjusted discretionary accruals and (b) classification shifting of core expenses. Our results indicate that prior to the Sarbanes‐Oxley Act, rewards to the auditor in the form of future additional nonaudit service fees from current‐year high fee‐growth‐opportunity clients adversely affects audit quality. This effect is particularly strong among companies with powerful incentives to manage earnings. Our findings indicate that regulators should consider the multiperiod nature of the client–auditor relationship when contemplating policies that restrict nonaudit services, as well as the overall environment in which audit partners operate. This might include partner compensation arrangements that put pressure on audit partners to focus on increasing revenue at the expense of audit quality.     

The Effect of Joint Auditor Pair Composition on Audit Quality: Evidence from Impairment Tests

Using a sample of firms from France, where the law requires the use of two auditors, we study the effect of auditor pair composition on audit quality by examining a specific account, goodwill impairment. We document that firms audited by a Big 4–non‐Big 4 auditor pair (BS) are more likely to book an impairment and book a larger impairment than firms audited by a Big 4–Big 4 auditor pair (BB) when low‐performance indicators suggest a greater likelihood of impairment. Moreover, firms audited by a BB pair reduce impairment disclosures when they book impairments, while firms audited by a BS pair do not, suggesting lower transparency for firms audited by a BB pair. Our results inform investors and firms in mandatory joint audit regimes, as well as regulators who are considering requiring joint audits.     

A Note on the Association between Audit Firm Size and Audit Quality*

Abstract. This study proposes that comparison of management earnings forecasts with audited, reported earnings provides an approach to the measurement of audit quality. Assuming that managers have incentives to minimize the difference between forecasted and reported income, higher-quality audit firms will tend to be associated with larger forecast errors. Therefore if, as previous literature suggests, larger auditing firms provide higher-quality audits than do smaller auditing firms, larger auditing firms will tend to be associated with larger forecast errors, all else being equal. Data from the Toronto Stock Exchange are used to examine this proposition. After controlling for client characteristics such as risk, the results indicate that larger auditing firms tend to be associated with larger forecast errors consistent with the proposition that, other things being equal, larger auditing firms provide higher-quality audits than do small auditing firms. Résumé. Les auteurs proposent une technique de mesure de la qualité de la vérification qui consiste à comparer les prévisions de la direction relatives aux bénéfices et les bénéfices déclarés qui ont été vérifiés. Si l'on suppose que les gestionnaires ont intérêt à minimiser l'écart entre les bénéfices prévus et les bénéfices déclarés, les vérificateurs de haut calibre auront tendance à être associés à des erreurs prévisionnelles plus importantes. Par conséquent, si, comme l'ont suggéré les études antérieures, les cabinets d'experts-comptables importants offrent des services de vérification de meilleure qualité que les cabinets d'experts-comptables de taille plus modeste, les cabinets d'experts-comptables importants auront tendance à être associés aux erreurs prévisionnelles plus grandes, toutes choses étant égales. Les auteurs utilisent les données de la Bourse de Toronto pour vérifier cette affirmation. Une fois contrôlées les caractéristiques du client telles que le risque, les résultats indiquent que les cabinets d'experts-comptables de grande taille tendent à être associés aux erreurs prévisionnelles plus importantes, ce qui confirme l'hypothèse voulant que, toutes choses étant égales, les cabinets d'experts-comptables de grande taille offrent des services de vérification de meilleure qualité que les cabinets d'experts-comptables de taille plus petite.     

Audit Hours and Unit Audit Price of Industry Specialist Auditors: Evidence from Korea

Higher audit fees associated with auditor industry specialization could represent higher unit price charged by industry specialist auditors (ISAs) or the provision of a greater quantity of audit services. This study exploits a field setting in Korea, where the disclosure of audit hours is required in company annual reports, and finds that ISAs charge significantly higher total audit fees but also expend significantly greater audit hours than non‐ISAs. When audit fees and hours are considered together, the unit audit price of ISAs is significantly lower than that of non‐ISAs. This indicates that higher total audit fees associated with ISAs are likely to be attributable to greater audit hours associated with ISAs. However, greater audit hours for ISAs may suggest higher audit quality or may simply indicate that the additional audit work performed by ISAs is conducted by relatively cheaper junior auditors. Our work provides an alternative explanation for the higher total audit fees documented in the previous studies.     

审计质量、企业声誉与企业高质量发展

企业高质量发展是实现我国经济高质量发展的重要抓手，企业的高质量发展离不开审计监督。选取2012-2021 年中国A 股上市公司为研究样本，实证研究审计质量对企业高质量发展的影响。研究发现，审计质量能有效促进企业高质量发展，这种促进作用在经过内生性检验和稳健性检验之后依旧成立；机制检验表明，审计质量通过提升企业声誉促进企业的高质量发展；异质性检验发现，审计质量对国有企业、东部地区企业的高质量发展促进作用更明显。     

制度背景、审计师特征与审计质量研究

利用2011-2015年的A股上市公司财务数据,以及中国注册会计师协会网站手工收集的注册会计师的信息,采用固定效应回归模型,考察审计师特征对审计质量的影响。研究发现,女性、高学历、合伙人和接受过会计专业教育的注册会计师主持项目的审计质量高。进一步研究发现,政府监管和媒体监督在审计师特征影响审计质量中发挥着正向调节作用,主要研究结论在一系列稳健性测试后依然成立。研究表明,审计师特征和制度背景是影响审计质量的重要因素,研究对会计师事务所、政府监管部门具有重要启发意义。     

政治关联、事务所规模与审计质量

本文以我国A股上市公司为样本,探讨政治关联、事务所规模与审计质量的关系。研究发现,事务所规模与其审计质量正相关,即规模更大的事务所具有较高的审计质量;政治关联作为我国资本市场上市公司的普遍现象对审计行为具有显著负面影响,有政治关联的上市公司更倾向于选择小规模(非"十大")事务所,无政治关联的上市公司则更倾向于选择大所("十大");具有政治关联的上市公司获得"非标"审计意见的概率低于无政治关联上市公司。