Why Do Canadian Firms Cross‐list? The Flip Side of the Issue

We investigate the relation between managerial incentives and the decision to cross‐list by comparing Canadian firms cross‐listed on US stock exchanges to industry‐ and size‐matched control firms. After controlling for firm and ownership structure characteristics, we find a positive association between substantial holdings of vested options held by CEOs prior to cross‐listing and the decision to cross‐list. Further, firms managed by CEOs with substantial holdings of vested options exhibit positive announcement returns and negative post‐announcement long‐run returns. CEOs of cross‐listed firms seem to take advantage of the aforementioned market behaviour, because they abnormally exercise vested options and sell the proceeds during the year of listing only when their firms underperform during the subsequent year. In addition, there is a positive relation between substantial holdings of vested options and discretionary accruals during the year of listing, consistent with the view that CEOs manage earnings to keep stock prices at high levels. Overall, these results have significant implications for the cross‐listing literature, suggesting an association between cross‐listing and CEO incentives to maximize CEO private benefits.     

Do cross-listers bond to U.S. markets? An examination of earnings quality around SOX

Sarbanes–Oxley [SOX, hereafter] was expected to improve the overall quality of financial reporting. A large amount of research has documented the influence of SOX on companies' reporting behaviors and how those behaviors have impacted the capital market as a whole (Cohen et al., 2008; Engel et al., 2007; Lobo & Zhou, 2006). While the assumption is that the far-reaching regulation impacts all U.S.-listed companies, this paper considers whether SOX has had a differential impact on the earnings quality of foreign filers that cross-list on U.S. exchanges. Despite some minor exceptions, these foreign companies are expected to meet the same reporting standards as domestic U.S. companies. Using a sample of cross-listers around the enactment of SOX, the results suggest that cross-listed companies do not strictly comply with SOX. At the same time, a size-matched sample of domestic U.S. companies shows significant improvement across the same set of earnings quality measures. This differential impact raises concerns about the ability of domestic regulations to impose compliance on foreign filers. While some may believe that cross-listed companies are bonding themselves to U.S. regulations and reporting quality, the evidence in this paper suggests that foreign companies are more interested in the reputational gains associated with a listing in the U.S.     

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.     

The Effect of Previous Working Relationship between Rotating Partners on Mandatory Audit Partner Rotation

This study adds to the literature on mandatory rotation of audit partners in Chinese companies by examining the effect of the pre-rotation relationships between incoming and outgoing partners. We consider the rotating partners to have prior working relationship if they were cosigners of audit reports before the rotation. We find two different outcomes of having prior working relationship: (a) increasing the likelihood that outgoing partners rotate back after the cooling off period, and (b) lower audit quality improvement after rotation. These findings bring into question the extent to which rotating partners with prior working relationships are truly independent.     

Does International Accounting Network Membership Affect Audit Fees and Audit Quality? Evidence From China

Regulators suggest that small audit firms join international accounting networks to reduce their resource constraints in serving large clients and providing high-quality service. Bills, Cunningham, and Myers (2016) investigate the issue in the United States and find that both audit fees and quality are higher for members of international accounting networks (i.e., member audit firms). We investigate the effects of network membership on audit fees and quality in China, a relatively weaker institutional environment than the United States. Using data of Chinese listed companies audited by non-Big N audit firms from 2001 to 2010, we find that member audit firms charge 3.9% higher fees than nonmember audit firms, much lower than the 30% fee premiums charged by U.S. member audit firms. We do not find consistent evidence that audit quality is higher for member audit firms. Overall, our results demonstrate that China's weak institutional environment may overwhelm the quality control brought by international accounting networks and that it may weaken or even offset the benefits of audit firms' participation in these networks, resulting in smaller or even no effects of membership on audit fees and quality.     

How do auditor rotations affect key audit matters? Archival evidence from South African audits

The expansion of the auditor's reporting duties with the introduction of critical or key audit matters (KAMs) has reignited interest in the determinants and consequences of the rules and regulations aimed at improving audit's functionality and quality. This paper expands on a growing body of work which investigates possible determinants of the KAMs being included in audit reports. It provides an original perspective on KAM identification and reporting in three ways. Firstly, the paper deals specifically with audit partner and firm rotations as possible KAM determinants. Secondly, hand-collected details are analysed to test for changes in the absolute number of KAMs as well as for KAMs added to or removed from audit reports to provide a more refined measure of how KAM disclosures are varying. Finally, data are gathered from South Africa to complement the empirical work which, to date, has largely focused on the U.S. and U.K. Our findings reveal a duality of stability and variability in how the requirement to report KAMs is being operationalised. A change in audit partner is not associated with changes in reported KAMs but changing audit firms appears to have a significant impact on the KAMs added to or removed from an audit report. The provisions of ISA 701 promote consistency in how KAMs are identified and disclosed by individual partners. However, ISA 701 cannot define and control every aspect of KAM determination. As a result, there is a degree of agency at the firm-level which allows for differences in how audit firms choose to implement the standard's provisions. Our study makes an important contribution by providing evidence of the complex interaction between standardisation of audit practice and sources of performative variability and may lend weight to the regulatory arguments in favour of mandatory firm rotation.     

The effect of cross‐listing on insider trading returns

Holding privileged positions within firms, insiders can acquire excessive private benefits based on their informational advantage. The bonding hypothesis suggests that this can be prevented when a firm is cross‐listed on an exchange with higher regulatory and legal costs compared with its home exchange. When cross‐listed insiders buy and sell shares, the returns earned are lower than in domestic firms. This difference is attributable to the increased shareholder protection in cross‐listed firms that constrains the extraction of private benefits, such that when cross‐listed insiders trade, they trade for non‐informational reasons.     

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.     

Characteristics of non-audit services and financial restatements in Malaysia

Various types of purchased non-audit services (NAS) and their recurring nature affect the likelihood of financial statement restatements in Malaysia. Based on 953 firm-year observations during the period 2007–2009, evidence of a negative relationship between non-audit fees and financial statement restatements is provided. The purchase of both tax-related and audit-related NAS decreases the likelihood of restatements. Recurring (as opposed to non-recurring) tax-related and audit-related NAS are negatively and significantly related to the likelihood of restatements. These findings support our hypothesis that both types of NAS and their recurrence provide knowledge spillover, which enhances audit and financial reporting quality. When considering institutional settings, we find that politically connected firms are more likely to require financial restatements than non-politically connected firms, while audit committee independence and the purchase of tax-related, recurring tax-related and other NAS decrease this likelihood. The purchase of audit-related and recurring audit-related NAS and non-recurring other NAS decreases the likelihood of restatements for non-politically connected firms.     

Changes in audit effort and changes in auditors’ disclosures of risks of material misstatement

This paper investigates whether auditors' year-to-year modification to risks of material misstatements (RMMs) in extended auditors' reports (EARs) are associated with changes in underlying audit effort, as proxied by changes in audit fees. We examine the dynamics of RMMs over time in terms of adding or dropping specific RMMs. Our main results show that, on average, audit fees increase more from the previous year's fees when more RMMs are added to the current year's EAR. This increase is partially offset by dropping RMMs that were disclosed in the previous year, but changes in audit fees are not significantly affected by dropping RMMs without adding new RMMs. Further analysis suggests the effect of added RMMs is attributable to “new” RMMs originating with the auditor and that added RMMs that were previously known, based on related disclosures in the prior year's audit committee report, do not significantly impact on changes in audit fees. Overall, our results suggest that changes in the choice of RMMs included in EARs reflect changes in underlying audit effort.     

Do practitioner assessments agree with academic proxies for audit quality? Evidence from PCAOB and internal inspections

This study investigates the degree of concordance between fifteen measures of audit quality used in academia and two measures of audit process quality determined either by audit firms’ internal inspections or by Public Company Accounting Oversight Board inspections of individual engagements. Using two confidential datasets of these assessments of audit process quality, I find that three of the measures of audit quality used by academics have significant associations with both measures of audit process deficiencies used by auditors and regulators: (i) the propensity to restate financial statements, (ii) the propensity to meet or beat the zero earnings threshold, and (iii) audit fees. Seven academic proxies are significantly associated with only one audit process quality measure, and five have insignificant associations with both practitioner assessments. Overall, the significant associations indicate that practitioners and academics share common ground in identifying low-quality audits. These findings can provide guidance for future studies in selecting audit-quality proxies suitable for different research questions.     

New development: Local public audit—the changing landscape

This article considers the implications for local public audit of the abolition of the Audit Commission and its audit practice (District Audit). The audit regime of NHS foundation trusts, where the Audit Commission is not responsible for auditor appointments or their oversight, is investigated to provide insights for the future of local public audit.     

国家审计能够促进城市全要素生产率提升吗？——基于空间杜宾模型分析

以全要素生产率度量城市发展水平,考察国家审计对城市高质量发展的影响及其空间溢出效应。研究发现,国家审计功能作用发挥提高了城市全要素生产率,同时,国家审计对城市全要素生产率的影响具有负向的空间溢出效应。进一步分析表明,国家审计可通过提高技术效率、规模效率以及技术创新水平,进而促进本城市全要素生产率提升;国家审计对城市全要素生产率的影响,因地方金融发展水平不同而存在显著差异;此外,国家审计对城市全要素生产率的影响还存在动态效应。