Responses by Australian auditors to the global financial crisis

We examine the impact of the global financial crisis (GFC) on auditor behaviour in Australia. Using a sample of listed companies, we examine whether the GFC impacted the propensity of auditors to issue going concern modifications and increased audit effort as reflected in audit fees and audit reporting lag. Controlling for client characteristics, we find an increase in the propensity to issue going concern opinions during the period 2008–2009 compared with the period 2005–2007 and that Big N auditors responded to the GFC earlier than non‐Big N auditors. In relation to audit effort, we find evidence of increased audit fees during the period 2008–2009 compared with the period 2005–2007. There is, however, no evidence of increased audit reporting lags during the GFC.     

Auditor reporting and earnings management: some additional evidence

This paper investigates the reasons that lead to modification of auditors’ opinions. We revisit the conclusions of prior US‐based research on whether a modification highlights likely earnings management activities. Extending this research, we consider an alternate explanation that managers adjust accruals to report earnings that better predict future firm performance, which has the side‐effect of placing them in conflict with their auditors. Our study sample comprises all firms listed on the Australian Stock Exchange over the period 1999–2003. Consistent with prior research, there is no evidence of earnings management leading to an audit opinion modification. However, we do show that firms receiving inherent uncertainty modifications (other than going concern) have greater persistence of earnings (accruals) relative to other firms. This is consistent with the proposition that managers have made policy choices in reporting current earnings, with which their auditors disagree, that will likely result in a greater ability to forecast the firm's future earnings.     

Public Attention and Auditor Behavior: The Case of Hurun Rich List in China

Adverse client publicity can entail regulatory scrutiny over audited financial statements and impose political costs on auditors. We use the changes in client publicity caused by their controlling owners’ presence on the Hurun Rich List (the rich listing) in China to test the hypothesis that auditor conservatism increases with client publicity. Our evidence indicates auditors issue more adverse audit opinions to clients and charge higher fees following the rich listing events. Moreover, we observe that auditors strategically respond to clients with different attributes—for clients whose owners accumulated wealth in a more questionable manner, auditors choose more stringent audit reporting to better defend themselves from regulatory scrutiny; for clients without such attributes, auditors primarily rely on increasing audit fees to cope with any post-listing increase in audit risks. Our analyses also suggest the impacts of rich listings tend to be concentrated among large audit firms with stronger reputation concerns or among engagement auditors with more conservative reporting styles. By showing how auditors manage political risks associated with heightened public scrutiny, we contribute to both the auditing and political cost literature.     

Do the Big 4 and the Second-tier firms provide audits of similar quality?

In this paper, we examine audit quality for Big 4 and Second-tier auditors during 2003–2006. We utilize the auditor’s propensity to issue a going concern audit report for distressed clients as a measure of audit quality. In addition, since the purpose of an audit is to improve financial reporting quality, we utilize abnormal accruals as an observable proxy for audit quality. Further, we utilize the client- and year-specific ex ante equity risk premium as a proxy for audit quality as perceived by investors. We control for auditor self-selection bias using the matched-pairs sample approach discussed by Francis and Lennox (2008). We find weak evidence that the Big 4 have a higher propensity to issue going concern audit opinions for distressed companies. However, the level of performance-adjusted abnormal accruals for Big 4 and Second-tier audit firm clients appears to be similar. With respect to investor perceptions, we find the client-specific ex ante equity risk premium to be lower for Big 4 clients than for Second-tier audit firm clients. Overall, our findings suggest little difference in actual audit quality but a more pronounced difference in perceived audit quality. Collectively, the evidence we provide informs the current discourse on audit quality, auditor choice, and the viability of Second-tier auditors as an alternative to the Big 4.     

Trends in Auditor Reporting in Australia: A Synthesis and Opportunities for Research

The purpose of this review is to synthesise the existing research literature regarding audit reporting and, in particular, the going concern decision. We consider the findings of research conducted in Australia and New Zealand on these issues. We then analyse trends in audit reporting from 2005 to 2013. We identify an increase in auditors’ reports highlighting going concern issues well beyond the global financial crisis period confirming that this period represents a period of prolonged economic uncertainty. We identify trends by audit firm type, by industry and company size. We analyse the subsequent year outcomes for firms receiving going concern opinions. We also identify opportunities for future research.     

Effects of managerial overconfidence and ability on going-concern decisions and auditor turnover

I examine how the appearance of managerial overconfidence and managerial ability affect 1) auditors' decisions to issue a going concern opinion and 2) auditor dismissal rates after issuing a going concern opinion. Managerial attributes are likely to have an influence on auditors' decisions because auditors obtain and evaluate information about client management's remedy plans when there is substantial doubt about the entity's ability to continue as a going concern. While prior literature on managerial overconfidence classifies all managers who demonstrate overconfident behaviors in one group, I argue that the literature needs to take managerial ability into consideration when measuring overconfidence. I find that auditors are more likely to issue a going concern opinion to clients with seemingly overconfident managers only when the management who appears overconfident is also incompetent. I also find that auditors are more likely to be dismissed after issuance of a going concern opinion when the client company has seemingly overconfident management. Finally, I find that the association between managerial overconfidence and auditor dismissal subsequent to issuance of a going concern opinion is stronger when management is relatively more powerful than the company's audit committee.     

An Investigation of Framing and Firm Size on the Auditor's Going Concern Decision

This study investigated the effects of framed information and firm size on the auditor's going concern report modification decision. Framing has been shown to affect individual decision-making in a variety of contexts. Investigations of framing effects in an audit context have reported mixed results. The findings of this study indicate that auditors are susceptible to the effect of framed information. Previous research has reported that auditors from small firms may be less conservative in audit disclosure recommendations than auditors associated with larger firms. This study evaluated the going concern decisions of auditors from three firm sizes: local/regional, a large non-Big Six firm, and a Big Six audit firm. Results indicate that differences in the report issued do exist across firm size. Possible explanations for the reported results are discussed.     

Costs and benefits of auditors' disclosure of critical audit matters: Initial evidence from the United States

In an effort to make audit reports more informative to financial statement users, the Public Company Accounting Oversight Board (PCAOB) requires an expanded audit report in which auditors are required to disclose critical audit matters (CAMs). The new standard (AS 3101) became effective for audits of financial statements of large accelerated filers for fiscal years ending on or after June 30, 2019. Using a sample of annual reports of large accelerated filers with and without CAM disclosures, we examine the costs and benefits of the mandatory disclosure of CAMs in auditors' reports. Our evidence suggests that compared to auditor reports reporting no CAMs, the presence of a single CAM disclosure in the auditor's report provides incremental information to equity investors without a significant increase in audit costs. However, using the benchmark of a single CAM disclosure, multiple CAMs in an auditor's report results in higher audit fees and longer audit delays.     

Is there a relation between audit fee cuts during the global financial crisis and banks’ financial reporting quality?

As a result of the global financial crisis (GFC), several audit clients were able to negotiate lower audit fees for the years 2008 and 2009. However, the PCAOB has expressed concern that lower audit fees might lead to lower audit effort and lower audit quality and financial reporting quality. This study examines the relation between audit fee cuts and banks’ financial reporting quality. Specifically, we focus on earnings management via loan loss provisions (LLP), the relation between current period LLP and future loan charge-offs, i.e., LLP validity, and the timely recognition of loan losses. For banks audited by Big 4 auditors, we find that income-increasing abnormal LLP are decreasing in audit fee cuts and LLP validity is increasing in audit fee cuts. For banks audited by non-Big 4 auditors, LLP validity is higher for banks that received a fee cut of more than 25% relative to other banks audited by non-Big 4 auditors. We do not observe an association between timely loan loss recognition and cuts in audit fees except for banks audited by non-Big 4 auditors and exempt from internal control audits where a fee cut of more than 25% is associated with less timely loan loss recognition. Overall, the findings suggest that Big 4 auditors constrained earnings management via LLP in banks that received cuts in audit fees. Our findings have important implications for regulators, investors, and others.     

Non‐Audit Service Fees and Financial Reporting Quality: A Meta‐Analysis

Auditing as a corporate governance mechanism has attracted considerable research attention. Because of the information asymmetry between corporate managers and outside shareholders, auditors are hired to provide independent assurance that financial statements are prepared following generally accepted accounting principles. The credibility of such assurance depends on the independence, both in fact and in appearance, of the auditor. Over the years, however, the independence of auditors has come under increased scrutiny because of their joint provision of both audit and non‐audit services. A sizable literature on the impact of non‐audit fees on financial reporting quality has developed. The evidence from this literature, however, remains inconclusive. This paper provides a meta‐analysis of the available literature by assessing (a) the net effect of non‐audit fees on financial reporting quality, and (b) whether there is homogeneity in the financial reporting quality proxies used in the extant literature. Findings suggest that the level of client‐specific non‐audit fees is associated with reduced financial reporting quality. However, the underlying studies used to conduct this meta‐analysis are not homogenous.     

Independent and joint effects of audit partner tenure and non-audit fees on audit quality

We examine the individual and joint effects of auditors’ non-audit services (NAS)/abnormal NAS fees and length of audit partner tenure on audit quality. Our results raise questions about the ‘one size fits all’ approach imposed by the current audit partner rotation requirement in Australia as a result of (1) a learning differentiation that we observe between Big 4 and non-Big 4 auditors and (2) higher discretionary accruals associated with non-Big 4 auditors. We find abnormal NAS fees to have a positive association with both absolute and positive (income-increasing) values of discretionary accruals for firms with short audit partner tenure. NAS/abnormal NAS fees are also negatively associated with the issuance of going concern opinions to financially distressed firms when partner tenure is short. In terms of policy implications, regulators are able to gauge the efficacy of the CLERP 9 reforms which currently impose a five year mandatory audit partner rotation requirement.     

An investigation of recent changes in going concern reporting decisions among Big N and non-Big N auditors

Corporate accounting failures and regulatory proceedings that led to the enactment of the Sarbanes–Oxley Act of 2002 increased the scrutiny of auditors. We investigate whether these events resulted in a change in auditor behavior with respect to going concern reporting. Generally speaking, we find that non-Big N auditors became more conservative while Big N auditors became more accurate. Specifically, non-Big N auditors issued more going concern opinions to both failing and non-failing clients post-2001, reducing their Type II misclassifications at the expense of increased Type I misclassifications. However, Big N auditors decreased their Type I misclassifications with no corresponding increase in Type II misclassifications. Thus, our findings suggest that increased auditor scrutiny resulted in performance improvements in the area of going concern reporting primarily for larger auditors. For smaller auditors, improved going concern accuracy for subsequently bankrupt clients came at the cost of more going concern opinions being issued to subsequently non-failing clients.     

Is the objectivity of internal audit compromised when the internal audit function is a management training ground?

We conduct an experiment with 74 internal auditors to examine the effects of using the internal audit function as a training ground for future senior managers. Specifically, we investigate internal auditors' willingness to resist current management's aggressive revenue recognition policies, assuming that internal auditors expect to move into senior management positions in the future. We also examine whether increasing the power of the board of directors can reduce threats to internal auditors' objectivity. This is the first study to empirically examine whether training grounds influence internal auditors objectivity. Results of our study indicate that internal auditors are less objective (i.e. they are more likely to side with management's aggressive revenue recognition policies) when they expect to move into senior management positions, relative to when internal auditing is not used as a training ground. We also find that empowering the audit committee further decreases the objectivity of internal auditors. These results suggest that board power can have unintended consequences on the behaviour of internal auditors and that board empowerment does not guarantee improved governance or improved oversight of financial reporting.     

The effects of problem severity and recovery strategy on managers’ going concern judgments and decisions

Accounting standards now require management (as preparers of the financial statements) to assess and disclose going concern problems to stakeholders. However, important questions exist about managers’ ability and willingness to provide credible going concern assessments given their role as financial statement preparers and incentives to avoid self-reporting problems. The objective of this study is to investigate the effects of problem severity and recovery strategy on managers’ going concern disclosure judgments and decisions. We conduct an experiment with 84 experienced managers involved with financial reporting and find they are most likely to recommend going concern disclosure when financial distress is high and the recovery plan focuses on debt and equity. The results also suggest that managers have higher “substantial doubt” thresholds than auditors, and their perceptions regarding the fairness of the going concern standard also influence their decisions about disclosures of going concern issues.     

The association between municipal disclosure practices and audit quality

This study examines the impact of two proxies for audit quality on a model of public sector disclosure for a sample of municipal governments. I argue that more complete disclosures enhance the reputation of an independent auditing firm and that independent auditors, seeking to maintain a reputation of higher quality, positively influence the level of financial disclosures appearing in their clients' financial statements.Specifically, a variable indicating the presence of a (then) Big Eight auditor and regression residuals from a model of audit fees were used as surrogates of audit quality. These were included in a model designed to explain variation in an index representing financial disclosures required under generally accepted accounting principles for local governments. The results provide evidence in support of the hypothesized relationship between audit quality and disclosure.     

International evidence on economic policy uncertainty and asymmetric adjustment of audit pricing: Big 4 versus non‐big 4 auditors

By investigating the association between economic policy uncertainty and audit fees using data from eight countries, this study examines whether and how Big 4 auditors reinforce their advantages over non‐Big 4 auditors through audit pricing. We find that both Big 4 and non‐Big 4 auditors reduce their audit fees when economic policy uncertainty increases. However, while non‐Big 4 auditors adjust audit pricing asymmetrically as economic policy uncertainty changes, i.e., the magnitude of decline in audit fees when economic policy uncertainty increases exceeds the magnitude of rise when economic policy uncertainty decreases, Big 4 auditors regulate their audit pricing in a symmetric manner. Further analyses reveal that: (1) the asymmetric pricing of non‐Big 4 auditors mainly exists in countries where Big 4 auditors have dominant market share, (2) Big 4 auditors provide higher‐quality audits when economic policy uncertainty increases and (3) many firms in better financial condition turn to Big 4 auditors during uncertain years. Our findings suggest that the symmetric audit pricing helps Big 4 auditors maintain a favorable position in the audit market.     

Auditor Independence,Non‐Audit Services,and Restatements: Was the U.S. Government Right?*

Do fees for non‐audit services compromise auditor's independence and result in reduced quality of financial reporting? The Sarbanes‐Oxley Act of 2002 presumes that some fees do and bans these services for audit clients. Also, some registrants voluntarily restrict their audit firms from providing legally permitted non‐audit services. Assuming that restatements of previously issued financial statements reflect low‐quality financial reporting, we investigate detailed fees for restating registrants for 1995 to 2000 and for similar nonrestating registrants. We do not find a statistically significant positive association between fees for either financial information systems design and implementation or internal audit services and restatements, but we do find some such association for unspecified non‐audit services and restatements. We find a significant negative association between tax services fees and restatements, consistent with net benefits from acquiring tax services from a registrant's audit firm. The significant associations are driven primarily by larger registrants.     

Audit Reporting of Big 4 Versus Non-Big 4 Auditors: The Case of Ex-Andersen Clients

This paper examines audit reporting of Big 4 auditors versus non-Big 4 auditors for ex-Andersen clients and other clients. It suggests that ex-Andersen clients are more risky than other clients and are able to exert more influence than other clients on non-Big 4 auditors because they are larger in size than other non-Big 4 auditees. In addition, Big 4 auditors are more risk-averse and able to withstand clients' pressure than non-Big 4 auditors. The results show that Big 4 auditors are more likely than non-Big 4 auditors to issue going-concern opinions to ex-Andersen clients or restrict the level of discretionary accruals of those clients compared with other clients. Further, ex-Andersen clients of Big 4 auditors would have had a lower likelihood of receiving going-concern opinions or higher levels of discretionary accruals had reporting practices for other clients been applied. Ex-Andersen clients of non-Big 4 auditors would have had a higher likelihood of going-concern opinions or lower levels of discretionary accruals. Hence, the suggestion to reduce the Big 4 concentration in the audit market by allowing non-Big 4 firms a larger market share should be viewed prudently. Overall, these results are consistent with the suggestion that litigation risk and client pressure are important factors in audit reporting.     

Litigation risk,financial reporting and auditing: A survey of the literature

This paper surveys the literature on the determinants and consequences of securities class action lawsuits against firms and auditors from a financial reporting quality perspective. The survey is motivated by the important role that law plays in protecting stakeholders' interests against managerial misdeed. Litigation is, thus, an important topic and numerous studies investigate the determinants and consequences of firm and auditor lawsuits. The underlying premise of these studies is built on the notion that large financial and reputational penalties associated with successful securities class actions can discipline management and deter them from future wrongdoing. The survey documents that poor quality financial reporting as evidenced in earnings restatements has been the primary antecedent for class action lawsuits against the firm and auditors. Lawsuits against auditors affect audit fees, audit planning decisions and client portfolio adjustment decisions. Although significant progress has been made in terms of further understanding the causes and consequences of litigation against auditors, major challenges remain in the area of proper measurement of litigation risk.     

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.