Auditor liability and excess cash holdings: Evidence from audit fees of foreign incorporated firms

Auditors of foreign cross-listed firms face liability arising from the nature of the institutional monitoring framework of legal claims that can potentially be brought against the auditor in both the home country and the US. This paper is the first to document the relationship between auditor liability and auditor pricing of excess cash holdings for foreign firms cross-listed in the US. Our findings indicate that auditors demand a fee premium for foreign incorporated clients with greater excess cash holdings, consistent with auditors recognizing the potential for legal exposure to agency conflict arising from foreign listed US traded clients. Furthermore, we examine aspects of foreign capital market protections, such as disclosure requirements, the strength of legal enforcement, and the strength of shareholder rights to better understand auditor perception of the liability they incur due to the agency costs associated with excess cash holdings. We find that there is a significant positive association between audit fees and excess cash holdings for firms where the country of incorporation permits greater liability of auditors in criminal and civil litigation. In addition, auditors assign higher audit fees to firms holding greater excess cash incorporated in countries with greater required accounting disclosure, stronger legal enforcement and stronger shareholder rights.     

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.     

Audit Standards and Auditor Liability: A Theoretical Model

The business of auditing is heavily regulated. Auditor regulation exists through licensing, professional standards and liability. The auditor's liability for losses to financial statement users from audit failure is subject to a test of negligence. What constitutes due audit care is, however, not generally well-specified. Furthermore, reviews of litigation against auditors conclude that compliance with professional audit standards does not always act as a complete defence to allegations of negligence. The current situation can be described as one where (ex ante)—from the point of view of the auditor—uncertainty exists about the ‘legal’ standard of due audit quality (as seen by the courts in the event of litigation). This uncertainty about legal standards fundamentally affects audit behaviour in ways that are not immediately intuitive. This paper draws on insights from the economics and law literature (e.g., Kolstad et al., 1990; Shavell, 1984a, 1984b and 1987; Calfee and Craswell, 1984 and 1986) and provides an analysis of the effects of uncertainty about auditor negligence on the produced level of audit quality and on audit fees. The auditor subject to a negligence rule will produce too low or too high an audit quality level, as compared to the socially optimal level. It is shown that uncertainty about the legal standard of ‘due audit quality’ is fundamental to understanding audit quality supplied. This uncertainty is the explicator of an insurance component in audit fees. A surprising insight is that a large uncertainty about the legal standard of care can reduce rather than increase the quality of audit work supplied and increase the insurance component. Relying on insurance premiums can be more effective than direct expenditure in reducing risk. The effect of the imposition of ex ante precise audit quality standards, in combination with an uncertain negligence rule, is discussed. Since the influence of ex ante standards is indirect through its effect on ex post liability, auditing standards cannot be analysed independently of ‘legal’ standards. If the legal standard of care were clear, there would be no role for audit standards. Audit standards only affect audit behaviour if legal standards of care are unclear, and they help to clarify the legal standard. An effective combination is for ex ante standards to be set below the ex post standards of care so that they provide a lower bound on acceptable work. Under a lowest common denominator approach set too far below legal standards, audit standards would be irrelevant as far as operational decisions were concerned. As the level of standards are raised, so costs are first imposed on the lowest quality providers.     

审计师变更与审计质量:一个理论分析

本文通过建立股东、管理层和审计师三方参与的两委托人-单代理人博弈模型,研究了固定审计费用下不同审计师变更方式对审计质量的影响。研究结果表明,审计师强制性单期变更与审计师强制性定期变更下,审计师与管理层之间的合谋将导致严重的财务舞弊;而在审计师自愿性变更下,股东可以利用解聘现任审计师这一威胁来阻止审计师和管理层之间的合谋,使得审计师和管理层的最优策略均为真实披露公司的盈余信息,并发表标准无保留审计意见。     

代理成本与审计师选择行为研究综述

根据代理理论,独立审计的产生源自于降低代理成本的需求.代理冲突的程度将导致不同的审计质量需求,因此产生对异质审计师的需求.西方大量关于审计师选择和审计师变更的经验研究证实了这一点.但是,这一结论建立在有效的价格保护机制前提之下,对于市场发展和公司代理关系均与英美有较大差异的转型经济(包括我国)未必成立.     

审计师规模与审计质量:声誉视角

本文基于2010年至2013年的四个公司舞弊事件,考察了声誉受损后的审计师变更情况,发现:市场并没有用"及时离开"来惩罚声誉受损的审计师,使其失去准租,审计师的执业资格直接决定了其能否继续获取准租。我们的讨论,是对De Angelo(1981b)审计师规模与审计质量的补充与修正,将有助于更好地理解审计师规模与审计质量之间的传导机制,丰富规模与质量的理论体系。     

职业会计师行为准则之解读

独立性是注册会计师职业的灵魂,丧失了独立性也就丧失了社会公众对注册会计师的信任.     

审计师变更与审计质量：一个经验研究综述

本文对国内外有关审计师变更与审计质量的经验文献做了较为全面、系统的回顾。总的看来,已有的文献主要从审计师变更与审计意见购买、审计任期与盈余质量以及审计师变更与盈余质量三个方面来考察审计师变更对审计质量的影响,但并未取得一致性的研究结论。本文在对相关文献综述的基础上从多维度计量盈余质量和结合中国特殊的制度背景两个方面提出未来的研究方向。     

Some Implications of Auditor and Client Lobbying Activities: A Comparative Analysis

This paper examines the degree to which auditor and client lobbying is related in a UK context. This may help to identify any linkage between the wealth of clients and auditors that is affected by accounting standards, as propounded in the ‘economic consequences’ literature. It also might have some implications for the independence question. Three tests are conducted to see if auditors tend to support the lobbying position of the majority, or the most financially influential, of their clients. The third test is also used to identify any evidence that the comments of smaller clients tend to follow the lead of their audit firms/professional advisors. Auditor and corporate client written submissions on 22 proposed accounting standards are included in the study. The analyses are conducted both at an aggregated and also at a disaggregated level. The results do not indicate that auditor and client collusion took place. In particular, the results are consistent with the view that auditors are independent of their clients. Some suggestions are made for further research.     

A Formal Model of Auditor Independence Risk

Although the literature on auditor independence is extensive, an accepted comprehensive theory, framework or model of auditor independence risk does not exist. This paper develops a formal model of auditor independence risk that may be used to begin a more rigorous investigation of auditor independence and various factors that are thought to affect this risk. Overall, our analytical results show that integrity is the key variable in minimising independence risk. In addition, in cases where integrity could be questioned, independence risk is positively affected by professional standards that are perceived to be effective and potentially negatively affected by certain client characteristics and auditor incentives.     

事务所规模、审计行业专长与知情交易概率

外部审计的作用在于提高公司的信息披露透明度,减少信息不对称,以保护投资者利益。本文从知情交易概率视角出发,研究了外部审计在减少信息不对称方面所发挥的作用。研究结果发现,国内"十大"审计的公司,以及由具有审计行业专长的事务所审计的公司,知情交易概率更低,而且行业专长的国内十大(非十大)审计的公司的知情交易概率也低于不具有行业专长的国内十大(非十大)。进一步检验还表明,在机构投资者持股的公司中,事务所规模和审计行业专长能够更有效减少知情交易概率。     

审计师声誉研究:述评与展望

审计师声誉是审计师保持独立性的动机,对审计师声誉的研究在2001年安然事件后逐渐增多并引发了广泛关注。现有文献主要从审计师声誉的形成、作用、毁损与修复机制等方面展开。具体而言,监管、行业专门化、审计质量、媒体及法律等是审计师声誉形成的重要影响因素,审计师声誉的建立有助于审计师保持独立、提高审计质量和收费等,而审计师声誉的毁损将会导致市场反应和溢出效应,同时也催生了相应的声誉修复问题。本文的综述有助于全面了解审计师声誉的现状并可能对其未来发展方向提供建议。     

Auditor Size,Market Segmentation and Litigation Patterns: A Theoretical Analysis

We provide a theoretical rationale for the observed audit industry structure where well-capitalized auditors hold an extremely large market share. Our analysis focuses on the economics of trading in an adverse selection market where audit quality is unobservable. We show that concentration of market share can arise even if well-capitalized auditors have no relative advantage with regard to supplying high-quality audits, and that the strategy of attracting a narrow base of high-margin clients is typically unsustainable in rational expectations equilibrium. Other results derived from our analysis of strategic competition for clients also conform (qualitatively) with empirical findings regarding audit fee structures and litigation rates. In particular, we show that better-capitalized auditors get a dominant market share, produce more accurate reports and are more profitable. In addition, we show that the imposition of high minimum standards increases the market power of wealthy auditors, even though smaller auditors can potentially provide the same level of audit quality at lower fees. All these results are demonstrated within a framework that endogenizes both a securities trading market and profit-maximizing auditors who strategically compete for clients.JEL Classification: C72, D43, D82, K23, K41, L15     

注册会计师独立性的再审视

本文通过系统考察非标准无保留审计意见与“保壳”和配股资格等因素之间的关系对我国注册会计师的独立性进行了再审视。我们的实证检验结果表明,尽管我国注册会计师已能够发现上市公司的一些会计问题,并开始对上市公司的某些会计信息失真问题说“不”,但这种独立性十分有限。当事关配股、利润分配等上市公司切身利益的事项时,注册会计师更多的是选择沉默。     

Trends in Auditor Reporting in Australia: A Synthesis and Opportunities for Research

The purpose of this review is to synthesise the existing research literature regarding audit reporting and, in particular, the going concern decision. We consider the findings of research conducted in Australia and New Zealand on these issues. We then analyse trends in audit reporting from 2005 to 2013. We identify an increase in auditors’ reports highlighting going concern issues well beyond the global financial crisis period confirming that this period represents a period of prolonged economic uncertainty. We identify trends by audit firm type, by industry and company size. We analyse the subsequent year outcomes for firms receiving going concern opinions. We also identify opportunities for future research.     

Correction to: Auditor benchmarking of client disclosures

Review of Accounting Studies - The original version of this article unfortunately contained mistakes.     

Non-audit Services and Auditor Independence: New Zealand Evidence

Abstract:  This paper examines evidence in New Zealand about whether auditors providing more non-audit services are less independent. Three sets of tests are used to address the issue. The first examines whether there is a relation between non-audit fees and audit fees, the second examines whether there is a relation between non-audit fees and audit report qualification or modification, and the third examines whether there is a relation between non-audit fees and stability of audit tenure. The results suggest a potential for the impairment of auditor independence in appearance when auditors provide non-audit services but no evidence of any impact on independence of mind.     

Auditor reporting and earnings management: some additional evidence

This paper investigates the reasons that lead to modification of auditors’ opinions. We revisit the conclusions of prior US‐based research on whether a modification highlights likely earnings management activities. Extending this research, we consider an alternate explanation that managers adjust accruals to report earnings that better predict future firm performance, which has the side‐effect of placing them in conflict with their auditors. Our study sample comprises all firms listed on the Australian Stock Exchange over the period 1999–2003. Consistent with prior research, there is no evidence of earnings management leading to an audit opinion modification. However, we do show that firms receiving inherent uncertainty modifications (other than going concern) have greater persistence of earnings (accruals) relative to other firms. This is consistent with the proposition that managers have made policy choices in reporting current earnings, with which their auditors disagree, that will likely result in a greater ability to forecast the firm's future earnings.     

From Member of the Company to Registered Auditor: The Role of the External Auditor in Corporate Governance

Corporate governance has often been defined in a narrow way as comprising 'the range of control mechanisms that protect and enhance the interests of shareholders of business enterprises' ( Fama and Jensen 1983 ). In the corporate governance literature there has also been a general focus on the structure and functioning of boards of directors and the responsibilities of audit committees in relation to external auditing ( Rosenstein and Wyatt 1990 ; Shleifer and Vishny 1997 ). This article looks at the evolution of the role of external auditing in corporate governance. The role of the external auditor has changed through time, and consequently it should not be assumed that the role of external auditing is fixed or that it cannot be changed to meet societal needs and expectations. This observation leads to the primary argument of our article, which is that the role of the external auditor in corporate governance ought to be expanded in order to enhance the effectiveness of corporate governance for the benefit of a wider spectrum of stakeholders and society generally.