Do regulations limiting management influence over auditors improve audit quality? Evidence from China

We use data from China to examine whether regulations that limit management influence over auditors improve audit quality. China’s State-owned Assets Supervision and Administration Commission of the State Council (SASAC) issued two rules in 2004 aimed at improving audit quality for state-owned enterprises ultimately controlled by the central government (CSOEs). These rules limit management influence over auditors by mandating that SASAC assign auditors for CSOEs and by requiring management to retain auditors for at least 2 years and at most 5 years. Since these rules apply only to CSOEs, we use a difference-in-difference design to study the impact of these regulations on audit quality. We find that audit quality for CSOEs relative to other companies improves after the enactment of these rules. Our results are robust to a battery of sensitivity analyses. Our findings suggest that limiting management influence over auditors helps improve audit quality.     

Accounting conservatism in a setting of Information Asymmetry between majority and minority shareholders

Following LaFond and Watts (2008), we examine the relation between information asymmetry (as measured by PIN, probability of information-based trading) and accounting conservatism but focus on a country – Taiwan – whose institutional background is different from that of the United States. Due to the disparate degree of conservatism across the world, the conclusions of LaFond & Watts (2008) might not be universally applicable. Our findings support, in general, the applicability of their conclusion to a Taiwan data set. We find, however, that the effect of PIN appears weaker when auditor tenure is taken into account, thus supplementing their conclusions.     

What affects accounting conservatism: A corporate governance perspective

This study explores the relationship between accounting conservatism and corporate governance. There are two competing perspectives about the possible relationship. One is that the demand for conservatism is greater in situations with more agency problems. Therefore, a weaker governance structure will lead to a more conservative accounting. An alternative perspective is that adequate governance results in better monitoring of management and hence will favor the implementation of conservative accounting. Using the firm-year specific C-Score developed by Khan and Watts [Khan, M., Watts, R.L., 2007. Estimation and validation of a firm-year measure of conservatism. Working Paper, Sloan School of Management, MIT, Cambridge], our empirical results indicate that firms with weaker governance structures tend to be more conservative. These findings are consistent with the view that conservatism is a substitute for other corporate governance mechanisms.     

Client importance and audit partner independence

We use data from Taiwan where audit partners are required to sign audit reports to examine whether audit partners compromise their independence for economically important clients. Uniquely, we include both listed and unlisted clients in audit partners’ client portfolios and separately study these clients for Big N and non-Big N auditors. We employ multiple proxies for auditor independence, including various abnormal accruals measures, the propensity of audit partners to issue modified audit opinions, and the probability that clients meet or just beat earnings targets. We fail to find evidence that Big N audit partners compromise their independence for economically important clients; however, we find such evidence for non-Big N auditors. Our results are robust to a battery of sensitivity analyses. While our inferences are limited to the Taiwanese capital market, our study may be of interest to market participants and regulators in other well developed capital markets.     

Voluntary Reporting Incentives and Reporting Quality: Evidence from A Reporting Regime Change for Private Firms in Taiwan

This paper examines the effect of voluntary financial reporting on firms' reporting quality using a reporting regime change in Taiwan. Before 2001, Taiwan's Company Act imposed a mandatory public reporting requirement of filing audited financial statements on private firms with contributed capital exceeding a certain threshold. This requirement was rescinded in 2001 and private firms since have had discretion over public financial reporting. We divide private firms retroactively into two groups: voluntary reporting firms, those continuing the practice of filing financial statements after the regime change; and nonvoluntary reporting firms, those discontinuing the reporting practice after the regime change. We find that financial reporting quality is higher for voluntary reporting firms than for nonvoluntary reporting firms and that this quality difference translates into a lower cost of debt for voluntary reporting firms. Our results support the view that reporting incentives play an important role in determining reporting quality.     

The effects of audit partner pre-client and client-specific experience on audit quality and on perceptions of audit quality

We examine the associations between audit partner pre-client and client-specific experience and audit quality using data from Taiwan, where signing audit partner names are disclosed. Using discretionary accruals and interest rate spreads to proxy for audit quality and perceptions of audit quality, respectively, we find that both pre-client and client-specific experience improve audit quality and creditor perceptions of audit quality. We also find that audit partner pre-client experience is positively associated with audit quality early in the engagement, but not when the partner has been with the client for at least five years. Our findings provide evidence consistent with the assumption underlying the Public Company Accounting Oversight Board’s decision to require the disclosure of engagement partner names. They also suggest that pre-client experience cannot completely mitigate the loss of client-specific knowledge when partner or audit firm turnover occurs.     

How do auditors respond to accounting restatements? Evidence on audit staff allocation

Review of Quantitative Finance and Accounting - We examine how auditors respond to accounting restatements using audit input data from Japan. We find that audit fees, the number of Certified Public...