Effect of audit report disclosure on auditor litigation risk

Internationally, the escalating number of cases levelled against auditors and the costs of defending such actions has led to the auditing profession calling for measures to reduce their liability burden. Relatively few measures have been taken by the auditing profession by way of adapting the disclosure contained in the audit report to mitigate their litigation risk. This study examines whether the issuance of an audit opinion with a going concern related ‘emphasis of matter’ paragraph or work practices disclosure has any effect on potential litigants' likelihood of pursuing litigation against the auditor. An analysis of 69 responses from advanced law students and 18 practitioners working in corporate liquidation demonstrate that a modified (but not qualified) audit report effectively acts as a ‘red flag’ and reduces potential litigants' propensity to initiate litigation. However, work practices disclosure did not significantly alter potential litigants' inclination to recommend litigation. Despite this finding, respondents (particularly liquidators) indicated that work practices disclosure was an important factor in their litigation decision. These results suggest that further investigation into how to effectively disclose the work done on audit and assurance engagements is needed. This has implications for standard setters and the auditing profession, especially considering recent changes in the disclosure contained in audit and assurance reports.     

The association between characteristics of audit committee accounting experts,audit committee chairs,and financial reporting timeliness

We investigate the association between audit committee (AC) members' financial expertise and financial reporting timeliness, and extend the discussion by investigating how the source of accounting expertise (e.g., public accounting or CFO) differentially influences financial reporting timeliness. We predict and find that AC accounting financial expertise is associated with timelier accounting information. Further, we find that accounting expertise gained from public accounting experience is associated with timelier financial reporting; however, accounting expertise gained from CFO experience is not. We also find that AC chairs (ACCs) with accounting expertise from public accounting experience are significantly associated with timelier financial reporting while ACCs with CFO-sourced accounting expertise are not. Our results are important for two reasons. First, our results suggest that AC accounting financial expertise contributes to AC effectiveness by improving the timeliness of financial information. Second, our findings highlight how personal characteristics of accounting financial experts influence contributions toward AC effectiveness.     

The relevance of quantifiable audit qualifications in the valuation of IPOs

How useful are audit qualifications to financial statement users? We analyze a sample of 204 firms that went public at the Athens Stock Exchange over the period 1987–2002. For 149 of these firms, auditors report quantitative estimates of the amount by which assets are overstated and/or liabilities are understated in reported financial statements. We find that underwriters and their affiliated analysts do not incorporate the negative information provided by these qualifications into offer prices and earnings forecasts. Investors, however, appear to efficiently impound the negative implications of the audit qualifications into stock market prices within the first day of trading. The results suggest that underwriters tend to align their interests with the interests of their clients, the old stockholders, at the expense of the new stockholders. They also suggest that the practice of reporting quantifiable qualifications in audit reports is valuable to investors given that they are disclosed by an expert.     

不利意见、审计费用与意见购买

本文进一步区分上年度不利审计意见的具体类型、审计费用的升降以及审计意见的改善与恶化。研究证实:(1)上年度被出具不利审计意见虽然可能增加本年度收到不利审计意见的可能性,但是亦可能提高审计意见改善的可能性,并和审计意见出现恶化的可能性显著负相关。(2)如果上年度被出具不利审计意见,则异常审计费用与审计意见改善的可能性显著正相关。(3)审计费用的增加能显著降低被出具不利审计意见的可能性,并可有效防止年报审计意见出现恶化。可见,公司管理层可以通过提高审计费用成功地实现审计意见购买动机,在一定程度上规避不利审计意见。     

Board Monitoring and Earnings Management Pre- and Post-IFRS

In this paper, we address the question of whether the board of directors is more effective in constraining earnings management after the mandatory application of IFRS. Specifically, we explore how two board characteristics — board independence and (2) the existence of an audit committee impact earnings management. Our empirical results suggest that board independence and audit committees play an important and effective role in reducing earnings management after the introduction of IFRS and that the accounting regulatory framework significantly contributes to the effectiveness of the two corporate governance mechanisms. Our findings also confirm that a company's corporate governance characteristics remain an important determinant of earnings quality; therefore, an analysis of the effects of new regulations must consider firm-level determinants.     

The association between audit committee effectiveness and audit risk

Audit committees (ACs) are expected to play a key role in improving financial statement integrity and as a consequence reduce audit risk. Companies reporting conformity with regulations can have an AC that appears effective but is not actually effective in substance. We surveyed audit partners and managers to identify their indicators of actual AC effectiveness (auditor‐chosen list). We hypothesize a negative association between AC effectiveness and audit risk, only when an auditor‐chosen list, rather than extent of conformity with regulations, is used to measure effectiveness. Results support our expectations.     

Relation between external audit fees, audit committee characteristics and internal audit

This study examines whether the existence of an audit committee, audit committee characteristics and the use of internal audit are associated with higher external audit fees. Higher audit fees imply increased audit testing and higher audit quality. We find that the existence of an audit committee, more frequent committee meetings and increased use of internal audit are related to higher audit fees. The expertise of audit committee members is associated with higher audit fees when meeting frequency and independence are low. These findings are consistent with an increased demand for higher quality auditing by audit committees, and by firms that make greater use of internal audit.     

Non-audit services, auditor quality and the value relevance of earnings

This paper tests the hypothesis that there is an inverse relation between non‐audit services (NAS) provided by a firm auditor and the value relevance of earnings (measured as the earnings response coefficient) and that this relation is weaker for firms with Big 6 auditors. The hypothesis is based on anecdotal evidence and previous research that suggests that the provision of NAS by the external auditor is likely to adversely affect investors’ perceptions of the credibility of financial reports, and that Big 6 auditors, because of reputational capital and litigation costs, are likely to mitigate the adverse effects of NAS. Results using 840 firm‐year observations of Australian companies document a statistically significant inverse relationship between NAS and the value relevance of earnings, and this inverse relationship is weaker for Big 6 auditors, therefore supporting the hypothesis.     

The association between audit committees,compensation incentives,and corporate audit fees

This study uses audit fee data from the 2001–2003 reporting periods to examine the relationship between measures of audit committee effectiveness and compensation incentives with corporate audit fees. Our results suggest that audit committee size, committee member expertise, and committee member independence are positively associated to audit fee levels, consistent with the notion that audit committees serve as a complement to external auditors in monitoring management. In contrast, CEO long-term pay and insider ownership are inversely related to audit fee levels, substituting for external audit effort in motivating management. Notwithstanding results on the full sample of firm-years, we uncover significant differences in the determinants of audit fees between the years examined. An important implication of these results is that explaining the intra-firm variation in audit fees over time is clearly necessary in order to understand the antecedents and consequences of audit fees.

Impact of family dominance on monitoring of earnings management by audit committees: Evidence from Hong Kong

This study examines whether the establishment of audit committees by Hong Kong firms would constrain earnings management, especially in firms with family-dominated corporate boards, a condition unique to Hong Kong. The study uses the methodology of three-stage (3SLS) regression analyses to control for endogeneity among earnings management, voluntarily established audit committee, and corporate board size. The results of regression analyses based on 523 observations for the period of 1999-2000 when the audit committees were first established by Hong Kong firms show that overall audit committees play a significant role in constraining earnings management even in the business environment of higher ownership concentration. The effectiveness of audit committees is, however, significantly reduced when family members are present on corporate boards, especially when family members dominate the corporate board.     

Independent audit committee members’ board tenure and audit fees

An independent audit committee is an audit committee on which all members are independent directors. This study examines whether independent audit committee members’ board tenure affects audit fees. On the basis of the prior literature, we formulate an unsigned hypothesis. This is because on the one hand, long board tenure audit committee members (defined as members with board tenure of 10 or more years) have greater incentives to protect their reputational capitals by purchasing increased audit effort, which positively affects audit fees. On the other hand, audit pricing reflects audit committee quality. Long board tenure audit committee members may have less need for increased audit effort because they can effectively oversee the financial reporting process themselves, which negatively affects audit fees. We find that audit fees are negatively associated with the proportion of long board tenure directors on the independent audit committee, consistent with the notion that audit committee members’ long board tenure results in lower audit effort.     

The effects of audit firm rotation on perceived auditor independence and audit quality

Our study explores loan officers’ perceptions of auditors’ independence and audit quality under three experimental audit firm rotation scenarios. We use a case experiment with a between-subjects design to determine whether rotation of the audit firm impacts financial statement users’ perceptions of auditor’s independence and quality. Findings based on 212 useable responses indicate that loan officers do perceive an increase in independence when the company follows an audit firm rotation policy. However, the length of auditor tenure within rotation fails to significantly change loan officers’ perceptions of independence. Findings also indicate that neither the presence of a rotation policy nor the length of the auditor tenure within rotation significantly influences the loan officers’ perceptions of audit quality.     

Female audit committee members and their influence on audit fees

We test the relationship between female representation on the audit committee and audit fees for 624 Australian companies in the year 2011. A positive relationship is found, leading to the conclusion that female presence on audit committees influences the quality of the external audit. Further, we find that gender is the significant audit committee characteristic in predicting audit quality and that women on the audit committee strengthen the positive relationship between firm size and audit fees, and between risk and audit fees. Conversely, we find that female representation dampens the positive relationship between complexity and audit fees.     

The effect of political visibility on audit effort and audit pricing

This study examines whether auditors adjust their effort and pricing decisions for political visibility. We argue, from the behavioural literature, that political visibility will create the need for more justification by auditors. Using data on actual audit fees, hours and billing rates for a sample of New Zealand public sector companies, we find that total audit fees are positively related to the number of press mentions (our proxy for political visibility). Consistent with our expectations we find that audit fees are monotonically related to audit fees. We also find that auditors increase the hours spent on the audit but not billing rates, which further suggests defensive bolstering by auditors.     

An examination of the relation between market structure and the profitability of audit engagements

Due to increasing supplier concentration, there is growing concern regarding the lack of competition in the audit market. Theory based on Cournot oligopoly predicts that increasing concentration will facilitate monopolistic behaviour. Conversely, if the market for audit services has more in common with a Bertrand oligopoly, concentration may not lead to higher fees. We evaluate whether increased audit supplier concentration leads to economic rents by investigating audit profitability. Using proprietary data from a (then) Big 6 audit firm, we find that local market structure has a significant and positive association with audit profitability, but not auditor effort for large clients.     

事务所地域与其对盈余管理的抑制能力

与西方发达市场相比,我国会计师事务所产生于政府挂靠体制,政府干预过多;上市公司多由国有企业改制而来,国家持股比例较多,上市公司受到当地政府保护等,使得我国的独立审计具有强烈的地域特色,本地事务所多在当地招揽客户,其审计过程明显受到当地政府的干预。鉴于此,我国政府于1999年开始要求会计师事务所与其挂靠单位脱钩,经过这几年的发展,有必要考察目前本地/异地事务所的审计质量差异是否巳消除。本文使用2002—2004年在沪深两市上市的A股公司数据,考察了会计事务所的地域特征对其盈余这理抑制能力的影响。本文使用可操控性应计的绝对值和非经常性损益的绝对值衡量上市公司的盈余管理程度,使用两步回归控制事务所的自选择偏误,结果发现,异地事务所对盈余管理的抑制能力显著强于本地事务所。     

Large audit firm premium and audit specialisation in the public sector

The outsourcing of public‐sector audits to the private sector is an important issue. This study examines the fee premium in the public sector by comparing audit fees between the government auditor and the Big5. The study (i) statistically adjusts for self‐selection bias, (ii) allows the slope coefficients in the audit fee model to vary between the Big5 and the government audit and (iii) estimates the counterfactual audit fee premium. The Big5 premium is around 23 percent. However, the variation in premium depends on whether the Big5 auditor is an industry or city specialist.     

Response to discussants'' comments: The demand for auditor reputation across international markets for audit services

Previous research has documented a positive relation between variation in audit fees across countries and specific macroeconomic factors such as a country's level of litigiousness and the level of required disclosure. Such studies have focused on the supply of auditor services using single-equation models. This study examines not only the supply of but also the demand for large-firm auditors across 20 different countries using the simultaneous-equations approach. This approach is used to account for the endogeneity between choice of auditor and audit fees. The results indicate an association between greater disclosure requirements and the choice of a large-firm auditor. They also indicate that increased litigation and regulation are associated with higher audit fees.     

Measuring audit quality of local governments in England and Wales

The purpose of this paper is to model and test the audit quality provided to local governments in England and Wales. A key question is: are there major differences in audit quality provided? The Audit Commission, a national public body under Parliament, regulates the audits. It sets audit standards, appoints the auditors, and (although each auditor and client local government set the specific audit fee for that client) it establishes a formula to determine standard audit fees. The Audit Commission also conducts an annual review of the audit quality provided by the selected auditors, as well as a survey of client satisfaction. The majority of audits are conducted by District Auditors (public sector employees of the Audit Commission). About a quarter of local governments are audited by one of six private sector auditors (including three of the Big 4). Actual results indicate that audit quality differences are associated with the number of governmental audit clients and local government type. Generally, there were modest quality differences by auditor category.     

Audit firm merger and the strategic response by large audit firms

We examine the impact of a change in the audit industry structure in China as a result of two recent mergers involving large non-Big 4 audit firms. The ‘New Big’ audit firms, Ruihua and BDO Lixin, became the third and fourth largest audit firms in China following audit firm mergers, outranking both EY and KPMG in terms of total audit revenues in 2013. We find a significant audit fee and audit quality increase for the New Big audit firms relative to the Big 4 audit firms following the mergers. While this finding could be interpreted as an increase in quality as a result of audit firm consolidation, we find that this net effect is due to a decrease in audit fees and audit quality for the Big 4 following the mergers, rather than an increase in audit fees and audit quality by the New Big audit firms. We discuss the implications of our findings for various regulators.