Lead independent directors and accruals quality

We investigate the association between firms having a lead independent director (LID) who serves on the audit committee and accruals quality using a sample of 32,346 observations during 2001–2018 period. Our results suggest that firms with an LID who serves on the audit committee are associated with higher accruals quality. The results suggest that these firms are associated with an increase in accruals quality equal to 6.60% of the accruals quality metric's median value. We also find that as board size increases, the positive influence of an LID on accruals quality weakens—but only for firms with an LID who does not serve on the audit committee. Supplemental analyses indicate that our inferences still hold when using a changes model, when examining a firm's initial adoption or elimination of the LID position, and when using an entropy balancing approach.     

Audit quality indicators: Perspectives from Non-Big Four audit firms and small company audit committees

Through a combined study, we explore the professional perspectives of two distinct PCAOB constituent groups related to the PCAOB's proposed regulatory approach for audit quality indicators. First, we examine the comment letters of Non-Big Four audit firms and find that this specific constituent group views most of the PCAOB's proposed audit quality indicators as infeasible and redundant. Further, Non-Big Four audit firms contend that the indicators require greater clarification from the regulator as well as substantial accompanying qualitative context to avoid misinterpretation that may lead to unintended consequences. Second, we survey a collection of audit committee members from small, publicly-traded companies regarding the current evaluation and perceived effectiveness of eleven specific PCAOB audit quality indicators, each of which is well-established in the extant audit quality literature. We find indicators related to auditor personnel with specialized skill and knowledge, experience of audit personnel, and the timely reporting of internal control issues are perceived to possess the highest level of effectiveness in the evaluation of audit quality.     

Mandatory audit partner rotation,audit market concentration,and audit quality: Evidence from China

This research examines the audit quality consequences of China's mandatory audit partner rotation (MPR) regulation, which became effective in 2004. The rule requires firms to rotate signing audit partners of audit reports every five years. We find that audit quality improves in the three years immediately following a client firm's MPR during the 2004–2011 period for a sample of 273 Chinese publicly listed firms. Specifically, we find that the improvement is most pronounced in those Chinese provinces with both low levels of audit market concentration and low levels of legal development. However, MPR does not improve audit quality in jurisdictions where legal conventions are more developed and/or where audit markets are highly concentrated with a handful of large audit firms dominating the market.     

The vanishing searches and audit fees: Evidence from Google's withdrawal from China

I investigate the impact of the disruption of free information access via search engines on audit fees using a quasi-natural experiment provided by Google's withdrawal from China. Employing a difference-in-differences design, I document an increase in audit fees for firms with overseas business relative to firms without overseas business after Google's withdrawal. The results are robust to matched samples, placebo tests, alternative specifications, excluding alternative explanations and different event windows. This trend in audit fees suggests that Google's withdrawal hampers firms' foreign information streams and increases audit risk and audit effort. Consistent with this argument, after Google's withdrawal, firms with overseas business conduct more earnings management, pay more abnormal audit fees and experience longer audit report lags. Furthermore, the increase in audit fees is greater for firms with poor information environments, more retail investors or non-Big 4 auditors. My findings suggest a potential auditing cost of restricting the free flow of public foreign information about firms.     

The Differential Impact of the Force of Law Australian Auditing Standards

This qualitative study explores whether the impact of the introduction of the legally enforceable Australian Auditing Standards (ASAs) differs between audit firms based on their size. It complements and extends the Australian Government's pre‐implementation April 2006 Regulation Impact Statement ( AUASB 2006 ) and Hecimovic et al.'s (2009) study exploring the perceptions of key stakeholders. The results of the current study, based on data from extensive interviews with auditors from small, medium and large audit firms, suggest that compliance with the legally enforceable ASAs does not appear to increase perceived audit quality or public confidence. The study also finds that the costs/benefits to small audit firms and their clients differ to those of medium and large firms, raising questions about the viability of smaller firms remaining in the audit market.     

Audit committee financial expertise,corporate governance,and the voluntary switch from auditor-provided to non-auditor-provided tax services

A prime objective of the SOX is to safeguard auditor independence. We investigate the relation between audit committee quality, corporate governance, and audit committees' decision to switch from permissible auditor-provided tax services. We find that firms with more independent boards, audit committees with greater accounting financial expertise, higher stock ownership by directors and institutions, that separate the CEO and Chairman of the board positions, and with higher tax to audit fee ratios are more likely to switch to a non-auditor provider. Further, we document that firms are more likely to switch prior to issuing equity. We find no evidence that broad financial expertise on audit committees is related to the switch decision, suggesting that the SEC's initial narrow definition of expertise is more consistent with the objective of the SOX. Overall, our results suggest that accounting financial expertise and strong corporate governance contribute to enhanced audit committee monitoring of auditor independence.     

Board Characteristics,Firm Profitability and Earnings Management: Evidence from India

The present paper explores the association between earnings management and specific board characteristics and the firm's profitability in the Indian context. In India, the corporate ownership model is the promoter dominated shareholders model. This is the first study based on a panel data framework that employs a fixed effect model to control for time‐invariant endogeneity. It also contributes to the literature by exploring the role of the firm's profitability in transmitting the impact of audit committee independence on earnings management. The study finds that profitability is an important variable, as it moderates the association between audit committee independence and earnings management. Managers of a profit‐making company would have little need to modify their earnings. This signifies that independent audit committees are more effective monitors of earnings management in profitable firms than in non‐profitable firms. Independent directors with multiple directorships are also found to be ineffective monitors. The findings are of material significance to policymakers in analysing board effectiveness and earnings management and improving policymaking for corporate governance by using profitability and related variables.     

Signing auditors' cultural background and debt financing costs

This study explores the effect of signing auditors' cultural background on debt financing costs. Using a sample of Chinese listed firms from 2007 to 2019, we find a negative association between signing auditors of Confucian origin and the cost of debt, indicating that signing auditors who grow up in strong Confucian atmospheres increase perceptions of audit quality. Furthermore, empirical results show that signing auditors of Confucian origin enhance accounting information quality. Meanwhile, these signing auditors can obtain high audit fees, attract more clients, and are more likely to be selected by client firms when changing auditors. Additional tests document that signing auditors' gender, education level, and working experience attenuate the negative relationships between signing auditors' Confucian background and debt financing costs. The negative effect of signing auditors' cultural background on debt financing costs is more pronounced in non-state-owned firms and firms with less analyst coverage. This paper extends the literature about the influencing factors of financing costs and provides insights into the economic consequence of culture.     

The Contribution of Internal Audit as a Determinant of External Audit Fees and Factors Influencing This Contribution

Despite extensive research on the determinants of external audit fees, there is little empirical evidence on the effect of internal audit contribution on the external audit fee. Using a cross-sectional regression model based on prior audit fee research, this study provides evidence that internal audit contribution is a significant determinant of the external audit fee. Further, a second model that provides evidence on the determinants of internal audit contribution is developed and tested. This second model indicates that internal audit contribution is influenced by internal audit quality and, conditional on the level of inherent risk, the availability of internal audit and the extent of coordination between internal and external auditors. These results are based on a unique data-set comprised of publicly available data matched with survey responses from internal and external auditors affiliated with 70 non-financial services Fortune 1000 firms. The sample includes all of the former "Big 6" international accounting firms and clients from twenty-nine different industries.     

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.     

Audit Firm Attributes and Auditor Litigation Risk

This study examines the association between auditors' litigation risk and audit firm attributes. Using professional liability insurance premiums as a proxy for auditors' litigation risk, we present evidence that the risk is lower in audit firms having: (1) separate non-audit and audit divisions; (2) a higher proportion of partners; and (3) a higher annual growth in number of CPAs employed. Additionally, we find that the risk is higher in audit firms having: (1) operating losses; and (2) high revenue growth. Our results are consistent with the idea that audit firms' financial condition and organizational structure affect their independence/ expertise, and, in turn, their litigation risk. Our results are broadly supportive of the PCAOB's (2015) and US Department of Treasury's (2008) views that investors, audit committees, management, and other regulators could benefit from having access to financial and organizational information about 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.     

中国本土会计师事务所的市场地位与经济回报

区域规模化和行业专长化是会计师事务所通常采取的两种发展战略。本文分析和比较了具有区域市场领先地位以及具有行业市场领先地位的中国本土会计师事务所伴随的经济回报(以审计定价度量)。基于全样本的证据显示:本土会计师事务所仅仅通过在各省际市场取得领先地位并不足以获取明显的经济回报;具备行业市场领先地位则伴随着显著更高的经济回报;同时具备行业市场领先地位和区域市场领先地位则伴随着更大的经济回报。进一步的分析显示,不同本土会计师事务所可能需要考虑在发展战略及其实现途径上的差异化。本文的发现对本土会计师事务所制定符合自身特征的发展战略具有启示意义。     

Social Relations and the Differential Local Impact of Global Standards: The Case of International Standards on Auditing

This article contributes to the literature exploring the contextual conditions that lead international standards to produce a differential impact with regard to inducing convergence in local practice. The article documents three types of responses by local audit firms to the implementation of International Standards on Auditing (ISAs) in Russia, namely: (1) those that claim to follow the national auditing standards modelled on ISAs and mandated by audit law; (2) those that voluntarily provide ISA audits in accordance with original ISAs; and (3) those that provide pseudo audits (‘black audits’) and ignore auditing standards. The study investigates a link between these different responses and the degree of the indigenous firms' social embeddedness in relation to the international audit firms that first introduced ISAs to Russia. The article argues that the higher the embeddedness levels the more likely the audit firms will genuinely commit to following the standards. It also shows that social embeddedness is influenced by a number of conditions, including geographical proximity between the indigenous and international audit firms, as well as commonalities in their professional characteristics, such as aspiration to intraprofessional status and target clientele. The study's findings demonstrate that the local impact of international standards is dependent not just on the characteristics of the local institutional environments in which the adopters operate but also on the social structures and relationships within which they are embedded.     

Audit Quality in New Zealand – Early Evidence from the Regulator

This study examines the impact of audit regulation in New Zealand, using audit quality reviews undertaken by the Financial Markets Authority (FMA) between 2013 and 2017. Regulation has more than halved the number of registered audit firms indicating that it imposes costs on audit firms. The results show that audit quality is improving, but a high proportion of audits do not meet the FMA's requirements. A key area for improvement is the consistency of quality across audits performed by the same audit firm. The FMA advises audit firms to investigate the underlying cause of audit deficiencies to ensure that internal quality control systems are effective in producing high‐quality audits on a regular basis. A comparison of audit file ratings with the United Kingdom shows that New Zealand's audit quality is much lower. The variation in audit quality across countries concerns the International Forum of Independent Audit Regulators (IFIAR) as it has the potential to undermine stakeholder confidence in the audit industry. Thus monitoring progress in improving audit quality in New Zealand is important. This paper provides insights into audit quality at a country level, whereas most research focuses on the firm level.     

AUDITOR PREFERENCES FOR LIABILITY LIMITATION

Debate over statutorily limiting auditor civil liability has implicitly assumed auditors are homogeneous in their preferences for capping liability. This study examines the preferences of auditors for limiting auditor liability and investigates reasons for the preferences. The study uses an Australian setting in which there has been a persistent debate for a decade or more over regulatory intervention in this area. The study provides a background to the debate over this issue and addresses the effects of two factors suggested by the extant literature, namely auditor size and the business risk of an auditor's client portfolio. These factors are argued to affect the expected costs of litigation facing auditors and therefore their preferences on capping liability. Using the submissions by audit firms on an Australian Companies and Securities Law Review Committee Discussion Paper on limiting auditor liability, the study finds larger audit firms that have greater capacities to lobby and greater expected costs of litigation from unlimited liability than smaller firms, dominate the respondents on the Paper and tend to be more supportive of liability limitation than smaller audit firms. Within the array of possible methods of capping liability canvassed by the Discussion Paper, the study documents evidence of diversity in preferences among audit firms. Larger audit firm size is associated with a preference for a group of methods that provides such firms with opportunities to benefit from the capping at the expense of the smaller audit firms. The method most preferred by the larger audit firms is the multiple of fee with a prescribed minimum. Perhaps not surprisingly, this is also the preferred method of the professional accounting bodies in Australia. As to the effect of the riskiness of the client portfolio on preferences for methods of limiting liability, the study finds that higher business risk in an auditor's portfolio is associated with a preference for methods that give greater control over their liability exposure. The study has implications for the impact of regulation of capping liability on competition in the audit services market.     

Internal control reporting differences among public and governmental auditors: The case of city and county Circular A-133 audits

We investigate potential differences in audit reporting outcomes between Circular A-133 audits performed by governmental auditors vs. those performed by certified public accounting (CPA) firms. Specifically, we investigate the association between auditor type and the likelihood of auditor-disclosed internal control concerns. We employ a cross-sectional sample of 13,386 single audit reports of US cities and counties during 2004–2006. In contrast to prior literature, the results indicate that in the post-Sarbanes–Oxley environment, CPA firms appear more likely to issue audit reports that identify internal control concerns than are governmental auditors in the context of Circular A-133 audits. The differences are more pronounced for larger CPA firms.     

How does the executive pay gap influence audit fees? The roles of R&D investment and institutional ownership

Using a sample of US firms from 2003–2014, this study examines how the executive pay gap affects audit fees for firms with different levels of R&D investment and institutional ownership. Consistent with managerial power theory, we find that the executive pay gap is positively associated with audit fees, and that the positive association is attenuated by intense R&D investment and higher institutional ownership. We also find that the executive pay gap more strongly affects audit fees after the passage of the 2010 Dodd–Frank Act and the PCAOB's 2012 call to identify the audit risk related to executive incentive compensation. Additional analyses show that the moderating effects of R&D investment and institutional ownership on the pay gap–audit fees association are not conditional on auditor tenure, but the moderating effect of institutional ownership is stronger for firms hiring specialist auditors. Collectively, our findings suggest that auditors consider the business context, such as innovation initiative and external monitoring, when assessing audit risk related to the executive pay gap.     

The Impact of Audit Quality Indicators on the Timeliness of Goodwill Impairments: Evidence from the German Setting

This study investigates whether goodwill impairments are perceived as timely and whether specific auditor characteristics affect the perceived timeliness. It therefore contributes to central questions in accounting research: is managerial discretion over accounting numbers (accounting choice) good or bad for stakeholders and does audit quality have an impact on this relationship? It is motivated by the IASB's post-implementation review on business combinations and the Goodwill and Impairment project based on it, the ongoing debate on the decision usefulness of impairment testing, and the question whether auditors have an impact on firms’ reporting of impairment losses. Based on a sample of German listed firms for the period 2006 to 2013, the results indicate that goodwill impairments are not recognized in a timely manner and delayed by at least one to two years. Moreover, the findings suggest that the recognition of impairment losses is influenced by auditor characteristics. In particular, firms seem to report goodwill impairments in a more timely fashion when they are audited by a Big 4 auditor, whereas the timeliness seems to decrease with a higher non-audit fee ratio and a longer auditor tenure. Moreover, additional analyses indicate that higher audit fees lead to more timely impairments.     

Effects of auditor-provided tax services on book-tax differences and on investors' mispricing of book-tax differences

Over the last decade, the joint provision of audit and non-audit services has been criticized for compromising auditor independence and affecting audit quality. Since 2005, the SEC has enacted rules restricting the types of non-audit services audit firms can provide clients. While most non-audit services are prohibited, a range of tax services are still allowed. Therefore, if compromises can emerge from allowing non-audit services, permitting tax services could be problematic. This study investigates the effect of auditor-provided tax services (ATS) on firms' levels of book-tax differences and on investors' mispricing of book-tax differences. Using a propensity-score matched sample from 2000 to 2013, I find strong evidence that firms acquiring ATS exhibit a low level of temporary book-tax differences, which in turn mitigate investors' levels of firms' mispricing. These results do not support regulators' claim that the provision of ATS compromises auditor independence. Instead, it suggests that purchasing ATS can improve overall accounting quality through knowledge spillover and thus help investors better price the value of firms.