Big Six auditors and audit quality: The Korean evidence

This study investigates the association between discretionary accruals and Big Six and non-Big Six auditors, and the direction of auditor change. We hypothesize that there is no significant difference in discretionary accruals between Big Six and non-Big Six clients when there is low incentive for auditors to provide high-quality audits, as in Korea.Upon examination of the discretionary accruals of firms listed on the Korean Stock Exchange from 1994 to 1998, we find there is no significant difference between the discretionary accruals of firms with Big Six and non-Big Six auditors. This holds true for firms that switch from non-Big Six to Big Six auditors and vice versa. These resources imply that there may be no difference in audit quality between Big Six and non-Big Six auditors in Korea. This is consistent with other studies in Korea, while inconsistent with the findings of previous studies on audit quality in other countries.     

Audit firm size, public ownership, and firms' discretionary accruals management

In this study, we developed and tested three hypotheses concerning earnings management in Belgium (i.e., a continental European environment). The three hypotheses are about: (1) income smoothing, (2) Bix Six auditors, and (3) public ownership. The study is motivated by the finding by Becker, DeFond, Jiambalvo, & Subramanyam [Contemp. Account. Res. 15 (1998) 1] and Francis, Maydew, & Sparks [Audit. J. Pract. Theory 18 (1999) 17] that Big Six audit firms act as a constraint on both income-increasing and income-decreasing earnings management. The finding raises questions as to the determinants of earnings management in other institutional settings such as that of Belgium. Accordingly, we study publicly available financial statements of a matched sample of publicly and privately held Belgian firms. Following Francis et al. [Audit. J. Pract. Theory 18 (1999) 17], DeFond and Subramanyam [J. Account. Econ. 25 (1998) 35], and Becker et al. [Contemp. Account. Res. 15 (1998) 1], we use discretionary accruals as a measure of earnings management. We find that Belgian companies—both private and public—engage in income smoothing and manage earnings opportunistically to meet the benchmark target of prior-year earnings. The evidence is also supportive of the other two hypotheses, but only when companies have earnings that are above target and have incentives to smooth earnings downwards. The fact that our results on the impact of Big Six auditors and ownership type are different for above and below target firms in Belgium, and differ with findings on U.S. samples, can be explained by the Belgian institutional environment.     

The joint determination of audit fees, non-audit fees, and abnormal accruals

Prior research has estimated piece-meal the determinants of audit fees, non-audit fees and abnormal accruals. Intuition, informal analysis, and a variety of theories suggest that audit fees, non-audit fees, and abnormal accruals are jointly determined. We address this endogeneity issue by modeling the confluence of audit fees, fees for non-audit services and abnormal accruals in a system of simultaneous equations. Our joint estimation provides a starting point to look simultaneously at several competing theories. Using audit and non-audit fee data from the UK for 1994–2000, we find evidence consistent with knowledge spillovers (or economies of scope) from auditing to non-audit services and from non-audit services to auditing. While knowledge spillovers from non-audit services to auditing have been found in prior research [e.g. see Simunic, 1984], the presence of knowledge spillovers from auditing to non-audit services is a new result. Contrary to recent results in Ferguson et al. (2000) and Frankel et al. (2002), we do not find support for the assertion that fees for non-audit services increase abnormal accruals. In fact, contrary to the results in Ashbaugh et al. (2003) and Chung and Kallapur (2003), we find that non-audit fees decrease abnormal accruals, which we attribute to the productive effects of non-audit services. We also find evidence that audit fees increase abnormal accruals, consistent with behavioral theories of unconscious influence or bias in the auditor-client relation. The findings are robust to tests with US data. JEL Classification C30 · M40 · M41 · M49     

Pricing of innate and discretionary accruals in Australian debt

This paper addresses the conflicting evidence on the role of accruals in debt pricing. We show that the two subcomponents of accruals quality, innate and discretionary accruals, both impact the debt pricing. Higher innate accruals increases cost of debt, consistent with the prior evidence ( Francis et al., 2005 ; Gray et al., 2009 ). However, we also find that higher discretionary accruals reduce the cost of debt. This contrasts with the prior evidence of a positive association between discretionary accruals and cost and debt ( Francis et al., 2005 ), and no association ( Gray et al., 2009 ). We show that noisy measurement of cost of debt reconciles these results.     

异常审计收费与审计质量的损害——来自中国审计市场的证据

中国上市公司是否成功地通过许以更高的审计收费购买审计意见呢？本文以2001--2002年上市公司作为研究样本,考察了这些上市公司随后年度审计意见的改善情况与异常审计收费的关联关系,结果发现：异常审计收费与上市公司不利审计意见的改善显著正相关,不过,与预期相反,在上市公司提高审计收费的情况下,内资会计师事务所相比外资会计师事务所更少的允许上市公司改善审计意见。同时,异常审计收费的存在显著损害了会计盈余的价值相关性,上述证据意味着中国上市公司成功的通过审计收费的提升购买了审计意见。     

Asset Revaluations in the Accounts of UK National Health Service Trusts

This paper reports the results of an investigation into the impact of the revaluation of fixed assets on the reported results of NHS ambulance services. It recalculates the accounting rate of return of individual trusts after removing revaluation adjustments and examines the published responses of trusts. The numerical analysis demonstrates that, in general, revaluation has depressed the stated rate of return in an inconsistent manner. Failure to meet the required rate of return may cause a trust to be subjected to additional monitoring and management reorganisation while the trusts respond by explaining deviations in the accounting return measure by referring to revaluations and other technical adjustments. Management decisions made in response to these accounting measures may be sub-optimal in delivering health care but appropriate in achieving the desired accounting outcome.     

State ownership and abnormal accruals in highly-valued firms: Evidence from China

We examine how state ownership affects Chinese firms’ abnormal accruals during a period of high valuation. We find the magnitude of abnormal accruals first increases for up to three years of high valuation, and then reduces after the fourth year. We also find that managers turn to using abnormal real transactions after four consecutive years of high valuation. Next, we examine whether the degree of abnormal accruals in highly-valued firms differs between state-owned enterprises (SOEs) and non-NSOEs. Supporting the view that SOE managers have less incentive to sustain high stock prices, we find evidence that highly-valued SOEs have significantly lower levels of abnormal accruals than highly-valued NSOEs during the period of high valuation. Our findings contribute to the literature on the cross-sectional variation in the relation between managers’ pressure to sustain high stock prices and their accounting choices in firms with different ownership structures.     

Ownership structure and the pricing of discretionary accruals in Japan

This paper examines the valuation effect of discretionary accruals for Japanese firms, taking into account the book value of equity. Consistent with US evidence, the Japanese market prices discretionary accruals, indicating that discretionary accruals enhance the value relevance of reported earnings. This value relevance is lower for cross-held firms, consistent with the view that cross-business shareholding aggravates tunneling or managerial opportunism through discretionary accounting choices. On the other hand, foreign shareholding and bond financing provide effective monitoring on managerial discretion of profit firms to enhance the valuation of discretionary accruals.     

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.     

Delivering patient choice in English acute hospital trusts

The role of the patient within the NHS has changed from supplicant to consumer to active participant. A demand-side patient-led approach is combining quasi-consumerism and participative democracy to inform and facilitate patient choice. On the supply-side funding and incentives coupled to reform and performance will deliver additional hospital capacity and patient choice. This paper argues from both a demand and supply-side perspective that there is a large gap between the rhetoric and reality of delivering patient choice in acute hospitals.     

Using contractual incentives in district nursing in the English NHS: results from a qualitative study

Since 2008, health policy in England has been focusing increasingly on improving quality in healthcare services. To ensure quality improvements in community nursing, providers are required to meet several quality targets, including an incentive scheme known as Commissioning for Quality and Innovation (CQUIN). This paper reports on a study of how financial incentives are used in district nursing, an area of care which is particularly difficult to measure and monitor.     

The Market for External Audit Services in the Public Sector: An Empirical Analysis of NHS Trusts

This study investigates the market for audit services in the UK National Health Service (NHS). The market has a number of interesting features, including the presence of the Audit Commission as a regulator, appointer and provider of audit services. Following a theoretical overview of audit pricing in the NHS, evidence is provided on the behaviour of private sector auditors in an environment where audit risk characteristics differ from the private sector. The research also investigates, for the first time in the public sector, the relationship between audit fees and non–audit (consultancy) fees. Comparisons are also drawn between audit fees in the public and private sectors in an analysis of audit fees by industry. Despite some key similarities, the study shows that a number of differences exist between private and public sector audit fee models. In particular, we find no evidence of Big 6 (or mid–tier) auditor premiums, but we do find a significant negative relationship between audit and consultancy fees providing support for the 'knowledge spill–over' hypothesis. In addition, the fees charged to trusts appear significantly lower than their private sector counterparts, despite trust auditors having additional duties to perform. Possible explanations for this finding are offered in the paper.     

Pricing in the English NHS quasi market: a national study of the allocation of financial risk through contracts

The authors investigated how the formal national provisions for pricing in the National Health Service (which are a form of prospective payment, known as ‘Payment by Results’) are operationalized at local level. Transactions costs theory and existing evidence predict that actual practice often does not comply with contractual rules. A national study of pricing between 2011 and 2015 confirms this and indicates that such payment systems may not be appropriate to address the current financial and organizational challenges facing the NHS. As the NHS struggles radically to reconfigure services, it is necessary to reconsider the appropriateness of a wider range of pricing mechanisms to facilitate moving care out of hospitals.     

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.     

The NHS Plan: Accounting for investment and reform in twenty acute hospital trusts in England (1998–2003)

The National Health Service (NHS) Plan published in 2000 summarised Labour's commitment to modernising the NHS in England. The NHS would receive substantial additional funding bringing expenditure on health, as a share in national income, to levels comparable with a European average. The promise of secure financing from government promised to reduce uncertainty and facilitate medium term resource planning in the NHS. Extra funding, as outlined in the NHS Plan, would also be tied into capital and labour process reform(s) to ensure that investment translated into the much needed additional capacity to treat patients. During the period 1998–2003 funding for an average acute hospital has increased 50% in cash terms satisfying expectations set out in the NHS Plan. It is now an appropriate time to review progress. Using information collected for 20 acute hospitals, selected on the basis that they had started and completed PFI projects in the period 1998–2003. This paper constructs a physical and financial audit which is then used to reveal the degree to which acute hospital finances are now secure and the extent to which physical capacity to treat patients has been robustly transformed.     

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.     

Auditor specialization, perceived audit quality, and audit fees in the local government audit market

Prior governmental research implies a positive relation between auditor specialization and audit quality, but the effect of specialization on audit fees is mixed. However, no single governmental study investigates the effect of auditor specialization on both audit quality and audit fees. Also, prior studies focus on either large- or small audit firms and often employ indirect proxies for audit quality. We study the effects of auditor specialization on perceived audit quality and audit fees. Our data represent both Big 5 and smaller audit firms and include three market-based measures of specialization. We survey 241 Florida local government finance directors and find that specialization is positively associated with perceived audit quality but not with audit fees. We also find that Big 5 auditors, often used as a proxy for higher audit quality in prior research, are not uniformly associated with increased perceived audit quality but consistently charge higher audit fees. Our results confirm a relation between measures of audit firm specialization and audit quality and raise questions regarding audit firm size and audit quality in the municipal sector. Our findings suggest that engaging specialized auditors may be good policy for many local governments.