Consulting revenue sharing,auditor effort and independence,and the regulation of auditor compensation

The joint provision of audit and non-audit services by audit firms to their audit clients has posed a threat to auditor independence. To mitigate the independence problem, the US Securities and Exchange Commission (SEC) issued a regulation (SEC, 2003) that prohibits audit partners from receiving compensation for the sale of non-audit services to their audit clients. This study examines the effects of this regulatory change on the effort and reporting decisions of audit partners. We show that partners in an audit firm strategically change the firm’s liability-sharing rule. As a consequence, the regulation restores truthful reporting but has an undesirable negative effect on audit effort. The effect of the regulation on the welfare of the economy (defined as the total payoff to both audit firms and their clients) hinges on the tradeoff between the benefit of the regulation, which is derived from the inducement of truthful reporting, and the cost of the regulation, which results from less diligent audit work. We show that the regulation is more likely to increase the welfare in a strong legal regime (where the legal liability cost of auditor litigation is high) than in a weak legal regime.     

论我国证券市场会计监管问题

如何加强对证券市场的会计监管,是关系到我国证券市场能否稳定、健康有序发展的重大问题,本文根据我国证券市场会计监管的现状,提出了我国证券市场会计监管思路是需要进一步规范与完善会计准则和会计制度,证券市场监管政策需要合理化,此外还必须强化注册会计师审计的独立性.     

The effect of audit firm size on audit prices: A study of the Australian Market

The effect of audit firm size on prizes is a complex function of competition in the market for audit services, product differentiation, and scale economics to large firms. In this study, a competitive market is supported in Australia with product differentiation to Bif Eight accounting firms. Specially, Big Eight accounting firms have significantly higher audit prices than non-Big Eight firms. This results holds for ‘large’ and ‘small’ auditees. A test is also made of price cutting in the Australian market. Price cutting is defined as lower initial audit fees than continuing engagement fees for a comparable audit. Test results do not evidence price-cutting behavior by accounting firms. There is in fact weak evidence that initial audit fees are higher than continuing engagement fee levels. Higher initial fees suggest that accounting firms may recover at least some of the audit start-up costs immediately.     

提高我国注册会计师审计独立性的对策探讨

注册会计师只有在审计过程中真正做到客观独立,才能保证审计信息的可信性,从而树立起职业声誉,体现其社会价值.提高我国注册会计师审计独立性应从完善注册会计师的委托聘约机制、明确注册会计师的法律责任、规范会计师事务所的组织形式、提高注册会计师的自身素质、健全注册会计师的外部监管机制、优化执业环境等方面入手.     

The effect of small audit firms’ failure to remediate the PCAOB’s quality control criticisms on audit market segmentation

This paper examines the role of the Public Company Accounting Oversight Board (PCAOB) quality control inspection program on market segmentation of small firms’ audit services. Specifically, we investigate how non-remediation of quality control criticisms (QCCs) affects the supply and demand of low-quality audits. We find that remediation of QCCs improves audit quality for small accounting firms. However, some small accounting firms do not remediate QCCs (NR firms) and continue to provide low audit quality. We investigate how NR clients react to the disclosure of non-remediation of QCCs. We find that NR clients with low agency costs are more likely to retain NR firms after the disclosure of non-remediation. This finding is consistent with our expectation that voluntary QCC remediation creates a low-quality audit market segment for NR firms. Our findings suggest that the public disclosure of QCCs is not sufficient to remove low-quality auditors. Instead, NR clients use the disclosure of non-remediation of QCCs as a signal to sort themselves into segments based on their demand for audit quality. We are the first to study and find that PCAOB inspections, and specifically the voluntary nature of remediation and public disclosure of lack of remediation, create market segmentation.     

Diversification of External Accountants Serving Small and Medium‐sized Enterprises: Evidence from Belgium

The purpose of this study is: (1) to discover which services are offered by external accountants serving small and medium‐sized enterprises (SMEs); (2) to study the factors that are associated with the degree of diversification of the services offered by these accountants; and (3) to investigate if there are differences between self‐employed accountants and accounting firms on the previous two points. This study has some interesting conclusions: (1) the heterogeneity of internal staff is not significantly associated with the degree of diversification; (2) a homogeneous internal staff with an accounting background is particularly important for accounting firms that diversify their services in the accounting and tax area; (3) collaboration with other service providers is an important factor associated with more diversification of the services; (4) marketing is only important for self‐employed accountants; (5) accounting firms offer fewer non‐accounting‐related services if they serve more micro clients (fewer than 10 employees), whereas self‐employed accountants offer more accounting and tax services if they serve more micro clients (fewer than 10 employees); and (6) accounting firms that diversify in accounting and tax services mainly serve more micro clients (fewer than 10 employees), whereas accounting firms that diversify in non‐accounting areas serve more larger clients (more than 10 employees).     

Auditor's Engagement Risk and Audit Fees: The Role of Audit Firm Alumni

Abstract:  This study explores the effect of the association of audit firm alumni with their alma mater on audit prices. The tests indicate that there is a moderate reduction of up to 21% in the level of audit fee when alumni (i.e., former employees) of the incumbent audit firm sit on the client board of directors which is consistent with the engagement risk theory. This suggests that there is an 'alumni effect' in the market for audit services. The findings hold only in the large company segment of the market. The results are robust to different model specifications and alternative samples. The sample comprises all executive and non-executive directors who run the UK quoted companies and are simultaneously ICAEW qualified chartered accountants. The study's implications for the accounting profession and the regulators are also discussed.     

The effects of advertising and solicitation on audit fees

Leading academic and professional accountants have suggested that the crisis in auditing over the past few years may have had its origin in deregulation which allowed firms to advertise their services and solicit new clients, encouraging accounting firms to become more commercial. In this paper, we look at this issue in New Zealand which has the unique distinction of having separated two key forms of deregulation, namely advertising and solicitation, by 6 years. This allows us to separately examine the effect of each form of market competition on audit fees. We find that advertising is associated with increases in fees, not decreases, which suggests that quality-based advertising took place, and not price-based advertising. In contrast, solicitation corresponded with a general decrease in average fees for clients of the Big 8. We interpret this result as indicating an increase in competition among accounting firms. Our results suggest that there may be a much more complex relationship among market competition, advertising and solicitation, and fees than the arguments used to originally justify deregulation.     

The market for public accounting services: Demand,supply and regulation

An analysis of the market for public accounting services is derived from agency theory. The theory shows that owners and their agents (employees) benefit from monitoring. Furthermore, the owners and managers of enterprises bear the cost when potential investors and users of financial statements (outsiders) fear that those in control operate the enterprise contrary to the interests of the outsiders. The demand for public accounting services is derived from these concerns. The public accountants' comparative advantages in providing this service, the structure of the market supplying the service, and the nature of the demand for its regulation follow from the initial analysis. In the last part of the paper the staff reports of the 1972 U.S. House of Representative (Moss) and Senate (Metcalf) committees are examined and compared with the available evidence.     

Occupational reality shock and organizational commitment: Evidence from the accounting profession

A longitudinal field survey was undertaken to investigate the effects of occupational reality shock on the organizational commitment attitudes, intentions, and behavior of professional accountants. Comparative data was collected over a one year period from a sample of accountants employed in the controller's division of a large (Fortune 100) industrial firm and from a sample of accountants employed by a “Big Eight” public accounting firm. The results portray reality shock as having a significant, asymmetrical impact on the work-related attitudes, intentions, and to a lesser extent behavior of accountants employed in both organizational settings.     

我国注册会计师行业发展状况的分析与研究:成就与意义、问题与挑战、启示与建议

本文利用我国注册会计师行业的历史数据,系统研究了我国注册会计师行业发展问题.研究发现,我国注册会计师行业在促进我国社会经济发展过程中发挥了积极作用,做出了显著贡献.与此同时,也存在因不当审计行为招致的行政处罚、诉讼仲裁案件趋于增长和近年来屡屡遭遇声誉危机事件等问题,未来发展也面临行业过度竞争、薪酬竞争力不足、事务所分所...     

Size effects and audit pricing: Evidence from Germany

Previous research into audit pricing has focused on the US and Australasian markets. This study aims to elaborate on the role played by various size effects on audit pricing using data from the German market.As previous research has shown, audit firms that provide additional non-audit services are able to charge higher fees for auditing. By contrast, our results show that only Big 4 auditors can earn an audit fee premium by providing non-audit services.Our findings also show that the Big 4 premium shown by previous German research is strongly affected by the premium for overall market leadership. Furthermore, we find that the influence of risk variables such as leverage or past losses is significant only for small auditees, while for large auditees size is the determining factor.Finally, this study proposes that using the logarithm of the number of employees is a better proxy for company size than is the more commonly used logarithm of total assets because it is more constant over time and does not bear the risk of interdependencies with other financial statement-based variables. Therefore, its further use in audit pricing research is strongly recommended.     

Does Auditor Reputation Matter? The Case of KPMG Germany and ComROAD AG

We study the stock and audit market effects associated with a widely publicized accounting scandal involving a public company (ComROAD AG) and a large, reputable audit firm (KPMG) in a country (Germany) that has long provided auditors with substantial protection from shareholder legal liability. We use this event to study whether an auditor's reputation helps to ensure audit quality, a rationale for which recent literature and events provide scant support. Given the absence of a strong insurance rationale for audit quality, Germany permits a relatively clean test of whether auditor reputation matters. We find that KPMG's clients sustain negative abnormal returns of 3% at events pertaining to ComROAD, and that these returns are more negative for companies that are likely to have higher demands for audit quality. We also find an increase in the number of clients that drop KPMG in the year of the ComROAD scandal (mostly smaller, recently public companies that are similar to ComROAD). Overall, our results provide support for the reputation rationale for audit quality.     

Australian Rural Accountants’ Views on How Locally Provided CPD Compares with City-based Provision

Abstract

This paper analyses Australian rural accountants’ attitudes and levels of satisfaction with continuing professional development (CPD), based on whether the CPD was delivered by a professional accounting body in a rural or metropolitan area. The paper responds to prior research that finds rural accountants are dissatisfied with professional accounting bodies [Rural and regional Australian public accounting firm services: Service provision, concerns and tensions. Australian Accounting Review, 23(23), 163–176]. Findings of a survey to which 156 rural accountants responded were that when CPD is delivered into the rural areas, there are greater levels of CPD satisfaction. The study also found that cost was significantly better for rural-delivered CPD and that when more rural-based CPD was attended differences became more significant across a number of satisfaction measures. The findings have important implications for both rural accountants and professional accounting bodies.     

UK Auditor Concentration: A Descriptive Note

This note describes supplier concentration in the UK market for audit services. It extends previous research, which has focused on listed markets, by examining auditor concentration ratios across all corporate (quoted, unquoted plc and private) sub-markets. Individual and combined Big Six supplier concentration (CR6) ratios are calculated with reference to the number of clients audited, corporate size and disclosed audit fees. Compared with previous studies, the analysis is based on a larger number (171,799) of corporate audits, and indicates that, inter alia, corporate size (across different sub-markets) is a key determinant of supplier concentration. However, variations are reported in relation to individual auditors, auditee size and corporate sub-sectors. Other key findings are that the CR6 ratio in the quoted market has continued to rise in recent years, from 72.3% in 1991 (Beattie and Fearnley, 1994) to 78.4% in 1994/95, and that the Big Six currently audit a substantial proportion (58.2%) of companies in the UK middle market, which they appear to be targeting, as the large auditee sub-sector becomes saturated, to increase market share.     

Public-Interest Arguments in Privatising Government Audit

The privatisation of the state audit office of Victoria in 1996-97 engendered a widespread debate that was joined by the two main accounting bodies in Australia. Although the accounting bodies adopted divergent positions, both rationalised their arguments in terms of public interest. An analysis of this paradox shows that the accountants pursued their commercial interests through intra-professional conflict and cooperation behind the cloak of public-interest arguments, showing little concern for the public accountability function of public-sector audits and reporting requirements.     

Auditor Independence: A Nonparametric Test of Differences Across the Big‐5 Public Accounting Firms

This small sample study provides additional evidence on the unsettled question of auditor independence: Does the provision of non‐audit services by an auditor compromise independence resulting in a poor quality audit? We also examine whether these findings vary across the “Big‐5” public accounting firms. Most prior studies addressing this question, using parametric approaches and various measures of audit quality, have reported conflicting results. Contrary to these studies, we use a non‐parametric approach and the probability of GAAP violation as a new measure of audit quality to address this question. Using data from a sample of Fortune 500 companies for the year 2000, we find that firms whose auditors provide substantial non‐audit services tend to have a higher propensity to violate GAAP. At the firm‐level analysis, we find that these results are more likely driven by few of the Big‐5 public accounting firms. For the remaining firms, the association between non‐audit services and quality of audit could not be established, primarily because of small sample size and lack of power in the test. Our main finding is consistent with other recent studies that provide evidence that the rendering of significant non‐audit services by auditors creates conflict of interest resulting in poor quality audits. Furthermore, our result of differences in these levels of association among the Big‐5 accounting firms represents a new finding, and suggests that there is a need for controlling them separately in research studies examining auditor independence.     

Public-Interest Arguments in Privatising Government Audit

The privatisation of the state audit office of Victoria in 1996–97 engendered a widespread debate that was joined by the two main accounting bodies in Australia. Although the accounting bodies adopted divergent positions, both rationalised their arguments in terms of public interest. An analysis of this paradox shows that the accountants pursued their commercial interests through intra-professional conflict and cooperation behind the cloak of public-interest arguments, showing little concern for the public accountability function of public-sector audits and reporting requirements.     

Attitudes Towards the Term ‘Generally Accepted Accounting Principles’

The above term has existed in the United States accounting literature since the 1930s, and in general attempts to convey the accounting practices that are accepted as satisfactory by a significant number of recognised accountants. However, the term has been frequently criticised as nebulous and inadequate. Accordingly, this research attempted to determine if parties sophisticated in accounting matters would prefer an alternative term. Financial analysts, certified public accountants (public and private) and accounting academicians were polled as to their preferences. The questionnaire listed twenty potential phrases. The respondent was asked to list his or her agreement as to the appropriateness of each term as a potential alternative to the phrase ‘generally accepted accounting principles’. The results indicated a clear preference for the retention of the term.     

The Unintended Consequences of the Frequency of PCAOB Inspection

After more than 50 years of self‐regulation of the US auditing profession, the Sarbanes‐Oxley Act of 2002 (SOX) created the Public Company Accounting Oversight Board (PCAOB) as a quasi‐governmental entity with statutory authority to inspect accounting firms that audit public clients. The frequency of this inspection is annual or triennial, based upon the number of public clients the firm audits. We examine the effects of these two levels of inspection frequency on financial reporting quality and audit fees for clients of small and midsize public accounting firms. Our findings provide evidence of significantly higher audit quality and audit fees for clients of annually inspected firms relative to clients of triennially inspected firms. These findings are robust to auditor‐client alignment analyses, propensity score matching, time‐series analyses, examination of firms that have changed from triennial to annual inspection, and particular examination of firms with inspection deficiencies. Overall, our study suggests that the two‐tier frequency system of PCAOB inspection may have also resulted in two‐tier audit quality and audit fee systems for small and midsize public accounting firms, with more frequent inspection leading to more rigorous and informed auditor decisions. We discuss the implications of our results for the Board and the profession at large.