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1 – 10 of 181Winifred D. Scott and Willie E. Gist
The purpose of this study is to explore the effect of industry specialization on the absorption and competitive pricing (or lack thereof) of audits of large Andersen clients (S&P…
Abstract
Purpose
The purpose of this study is to explore the effect of industry specialization on the absorption and competitive pricing (or lack thereof) of audits of large Andersen clients (S&P 1500 companies) who switched to the remaining Big 4 international accounting firms in 2002 due to the demise of Arthur Andersen LLP (Andersen). Did the audit clients pay a premium or discount in audit fees to their new auditor who specialized in their industry?
Design/methodology/approach
Ordinary least squares regression is used to test hypothesis of a positive association between industry specialization and audit fees charged to former Andersen's audit clients in 2002 following Andersen's demise. This study provides more control over size effects by design. Test variables are constructed based on national market share of audit fees within an industry. Logistic regression is used to examine the likelihood of choosing new auditor that is an industry specialist.
Findings
Results support hypothesis, consistent with auditor differentiation explanation. Proportion of clients that had engaged an industry specialist in 2001 increased from 38 percent (84 clients) to 48 percent (105 clients) in 2002. No evidence of price‐gouging in 2002 although clients who aligned with industry specialist paid a 23.2 percent premium in audit fees. Large clients lost bargaining power to negotiate lower fees. Findings are robust to the inclusion of additional alternative measures of company size.
Research limitations/implications
Results of logistic regression analysis imply that large audit clients with former auditor of tarnished reputation, long auditor tenure and high leverage are more likely to switch to an industry specialist to possibly signal audit/financial reporting quality. Large sample companies may limit the ability to generalize findings to smaller companies.
Practical implications
Mandatory audit firm rotation (currently being debated in the profession) will have costly effect on the pricing of Big 4 audits for companies wanting to signal audit and financial reporting quality to affect market perception, and large companies would likely lose their ability to bargain for lower audit fees.
Originality/value
The paper focus on the alignment of Andersen clients and impact on audit fees with Big 4 industry specialists resulting from the sudden increase in audit market concentration. Prior to Andersen's collapse, evidence on the association of audit fees premium and industry specialists was mixed, and little attention has been given to the influence of auditor industry specialization on both audit fees and alignment of former Andersen clients with a Big 4 specialist. This paper fills that void.
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Brad J. Reed, Linda M. Lovata, Michael L. Costigan and Alan K. Ortegren
This paper aims to provide evidence on the hypothesis that auditors differ in how they constrain discretionary accruals (DAs) of their clients. The paper seeks to analyze changes…
Abstract
Purpose
This paper aims to provide evidence on the hypothesis that auditors differ in how they constrain discretionary accruals (DAs) of their clients. The paper seeks to analyze changes in DAs for clients of Laventhol and Horwath associated with the appointment of a successor auditor.
Design/methodology/approach
The study uses regression and archival data to separate a firm's accounting accruals into discretionary and non‐DAs. The study then examines changes in a firm's DAs associated with a change in auditors.
Findings
Replacing LH with a new auditor resulted in a statistically significant decrease in DAs. This result is contrary to prior research and could be due to the prior research using voluntary auditor changes where variables such as financial distress and opinion shopping could drive the results.
Originality/value
The study provides results that differ from prior research. This study shows that the auditor change is associated with a systematic decline in the level of a firm's DAs. The results could be due to the forced nature of this auditor change as opposed to voluntary auditor changes used in prior research.
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Angel Arturo Pacheco Paredes and Clark Wheatley
This study aims to extend recent research analyzing the effect of auditor busyness on audit quality. Specifically, this study explores the effect on audit quality of a change of…
Abstract
Purpose
This study aims to extend recent research analyzing the effect of auditor busyness on audit quality. Specifically, this study explores the effect on audit quality of a change of fiscal year-end to or from an audit firm’s busy period.
Design/methodology/approach
Empirical archival.
Findings
When firms change their fiscal year-end to a period when the auditor is less busy, client firms are rewarded with lower audit fees and auditors are rewarded with a reduction in required effort. This study finds no difference in the level of audit quality after a change in fiscal year-end.
Practical implications
There are significant implications for audit firms as they may gain cost advantages by successfully promoting off-season fiscal year-ends, and reduce the negative effect on employees associated with “busy season” stress. Similarly, client firms may find that audit costs are reduced when they adopt a less “busy” fiscal year-end.
Social implications
These results have policy implications for regulators because regulators often dictate the fiscal year-end for certain industries or traded securities. Such dictates may thus introduce inefficiencies into the market for audit services.
Originality/value
These results should guide regulators in their decisions to dictate fiscal year-ends and firms in their choice of reporting periods.
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Hsiao-Tang Hsu and Sarfraz Khan
The purpose of this paper is to investigate the roles of chief accounting officer (CAO) on the efficiency of auditing process and to empirically examine the association between…
Abstract
Purpose
The purpose of this paper is to investigate the roles of chief accounting officer (CAO) on the efficiency of auditing process and to empirically examine the association between separate CAO appointment and audit report lag (ARL).
Design/methodology/approach
This study employs firms listed in the US market from 2004 to 2012. The firm year having a CAO who does not simultaneously take other executive position is specifically identified. Firm years with job titles similar to CAO, such as chief accounting executive, vice president of accounting or corporate accounting executive, are categorized into the CAO group.
Findings
The presence of a separate CAO significantly reduces ARL. With the appointment of a new auditor, the presence of a separate CAO is associated with lower ARL, suggesting the moderating effect of separate CAOs on the relationship between auditor change and audit delay.
Practical implications
This study shows the importance of CAO, an executive who is specifically responsible for carrying out accounting functions. The findings suggesting the positive effects of separate CAO on external audit process and the timeliness of information should be of interest to firms, financial reporting users, auditors and regulators.
Originality/value
While few studies address CAO-related issues, the roles of a CAO are not widely explored and how a separate CAO affects external audit process remains an open question. This study fills this gap and further documents the contribution of separate CAO in external audit work to enrich literature in executive roles and audit efficiency at the same time.
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David Castillo-Merino, Josep Garcia-Blandon and Gonzalo Rodríguez-Pérez
This paper aims to examine the effects of the 2014 European regulatory reform on auditors’ activity, the audit outcome and the audit market, with a focus on the Spanish market.
Abstract
Purpose
This paper aims to examine the effects of the 2014 European regulatory reform on auditors’ activity, the audit outcome and the audit market, with a focus on the Spanish market.
Design/methodology/approach
The research is based on in-depth, semistructured interviews with partners of the main audit firms operating in the Spanish market. This qualitative approach provides a precise identification of the cause-effect relationships of the new measures introduced by the European audit regulation.
Findings
The findings indicate that, based on auditors’ opinions, the costs of the main regulatory changes outweigh the benefits. The European Union (EU) Audit Regulation imposes more demanding provisions, such as an extended auditor’s report, mandatory audit firm rotation, more banned nonaudit services and stricter quality controls, resulting in substantial side effects on audit activity and the audit market. This could undermine the objective of enhancing the quality of audit services.
Originality/value
To the best of the authors’ knowledge, this is the first study to analyze the effect of the 2014 EU regulatory reform on audit activity, audit market and audit outcome based on auditors’ perceptions. The findings may be of interest to academics, professionals and regulators alike, as they offer valuable insights for assessing the effectiveness of the new audit provisions. Additionally, the qualitative methodology used facilitates a causal analysis of the key elements introduced by the regulations, potentially paving the way for future research avenues.
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The purpose of this paper is to further the understanding of the determinants of audit report lag, which is the number of days from a company’s fiscal year-end to the date of its…
Abstract
Purpose
The purpose of this paper is to further the understanding of the determinants of audit report lag, which is the number of days from a company’s fiscal year-end to the date of its auditor’s report, by synthesizing extant literature. Audit report lag has been a variable of interest in many studies due to its use as a proxy for the occurrence of auditor-client management negotiations and audit efficiency and because long audit report lags delay the release of earnings information to the market.
Design/methodology/approach
The author uses meta-analysis to examine commonly identified predictors of audit report lag to determine if the prior research provides a consistent portrayal of audit report lag drivers.
Findings
The author finds that a number of variables relating to client profitability and financial condition, client complexity and audit opinion modifications increase audit report lag. In addition, audit report lag decreases with client size, when clients have positive earnings news to report and when the auditor has long tenure and provides non-audit services. Several variables, such as those relating to corporate governance and various auditor characteristics, have been little explored and would benefit from future research.
Originality/value
These results will be useful to researchers when selecting control variables for future audit report lag studies and provide insights into the key factors that contribute to the delay in audit reporting.
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Peter Öhman, Einar Häckner and Dag Sörbom
The purpose of the paper is to develop, test, and improve a structural equation model (SEM) of client satisfaction with the audit, and of client perception of the usefulness of…
Abstract
Purpose
The purpose of the paper is to develop, test, and improve a structural equation model (SEM) of client satisfaction with the audit, and of client perception of the usefulness of the audit to external stakeholders.
Design/methodology/approach
A questionnaire was mailed to audit clients, i.e. managers of Swedish limited companies with 50 or more employees; 627 useable questionnaires were returned, giving a response rate of 43 percent. Data were processed using the SEM software LISREL.
Findings
The data suggest that auditors face difficulties in handling divided loyalties, as audit clients perceive a strong relationship between client satisfaction and usefulness to external stakeholders. Signing auditor competence is positively and auditor skepticism negatively related to both client satisfaction and usefulness to external stakeholders.
Research limitations/implications
The paper focuses solely on the auditor and audit team levels and uses a limited number of independent variables.
Practical implications
The findings extend previous results, indicating that client relationships with both signing auditors and audit assistants affect client satisfaction positively, but have no significant connection with usefulness to external stakeholders. Consequently, it would be useful to consider organizing audit teams in which the various members have distinct roles.
Originality/value
The study addresses an issue most auditing research has not explicitly considered: the distinction between client satisfaction with the audit and client perceptions of the usefulness of the audit to external stakeholders.
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Hui Liu, Charles Cullinan and Junrui Zhang
Companies may be defendants in lawsuits that are unresolved at year-end. This paper aims to consider whether the financial statements of companies facing litigation claims…
Abstract
Purpose
Companies may be defendants in lawsuits that are unresolved at year-end. This paper aims to consider whether the financial statements of companies facing litigation claims (pending litigation) are more time-consuming to audit due to the complexity and subjectivity of contingent liabilities associated with pending litigation. The authors consider whether auditors tailor their approach to pending litigation based on two distinct factors in the Chinese business environment: the client’s government ownership status and the legal development of the region in which the company is based.
Design/methodology/approach
Data on litigation against companies and their audit report lags were obtained for 18,029 firm-year observations of Chinese companies from 2008 to 2017. The sample was subsequently divided based on whether the company was a state-owned enterprise (SOE) and based on whether the company was based in a region of China with a more-developed and more market-oriented legal system.
Findings
The overall results indicate that audits of companies with pending litigation take 2.9 days longer than those of companies without pending litigation. For companies with multiple pending claims, each additional claim is associated with 1.9 more days of audit report lag. These effects are weaker for SOEs and for companies in regions of China with less developed legal systems. The results are consistent with the idea that auditors tailor their response to pending litigation based on the risk profile of the client, including consideration of SOE status and regional legal development.
Originality/value
This paper is the first to consider the potential effect of pending litigation (including claims not disclosed or recognized in financial statements) on audit report lags and how environmental business factors can influence this relationship.
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The purpose of this paper is to examine the determinants of audit report lag in Sub-Saharan African Central Banks. In this case, the determinants were divided into two categories…
Abstract
Purpose
The purpose of this paper is to examine the determinants of audit report lag in Sub-Saharan African Central Banks. In this case, the determinants were divided into two categories: independent variables and mediating variables. The independent variables, which were generated from board characteristics, included board size, board gender diversity, governor duality, audit committee size and audit committee meetings. The mediating variables were auditing characteristics and they comprised audit mandate, audit approach and audit quality.
Design/methodology/approach
The study used data from 192 observations from African Central Banks' financial reports for the period 2000–2016. The data collected were analyzed using path analysis, whereby four regression models were run and tested simultaneously. From the analysis, the study determined total effects and then decomposed the total effects into direct and indirect effects.
Findings
The study results indicate that in the case of board characteristics, governor duality and audit committee size were found to have a positive influence on audit report lag. In the case of audit quality, only audit mandate was found to have a negative influence on audit quality in the Central Banks. However, the introduction of mediating variables increased the positive effect of governor duality and audit committee size, while also making board size and board gender diversity have a significant negative effect on audit report lag.
Practical implications
The findings of this paper have implications for the practice and policy of the auditing and governance of Central Banks, which includes designing appropriate governance structures as well as proper auditing strategies.
Originality/value
This is the first study which has examined factors influencing audit report lag in Central Banks. Previous studies on Central Banks' governance have examined the independence and autonomy of the Central Banks, as well as their accounting. This paper extends prior studies by examining the effects of those factors. Another contribution is the study's application of auditing characteristics as mediating variables.
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Ahmed Atef Oussii and Neila Boulila Taktak
The purpose of this paper is to investigate whether there is any relationship between the effectiveness of an audit committee and the financial reporting timeliness of Tunisian…
Abstract
Purpose
The purpose of this paper is to investigate whether there is any relationship between the effectiveness of an audit committee and the financial reporting timeliness of Tunisian listed companies as proxied by external audit delay (AD). Analysis focuses on five audit committee characteristics: authority, financial expertise, independence, size and diligence.
Design/methodology/approach
Empirical tests address 162 firm-year observations drawn from Tunisian listed companies during 2011-2013.
Findings
Multivariate analyses indicate that audit committees with members who have financial expertise are significantly associated with shorter AD. Thus, the results suggest that audit committee financial expertise contributes to the improvement of financial statements’ timeliness.
Research limitations/implications
The audit committee attributes examined in this study were based on DeZoort et al. (2002) framework. There could be other aspects of audit committee effectiveness such as audit committee tenure and audit committee chair characteristics, which were not addressed in the present study. Thus, future research may consider and examine these other components of audit committee effectiveness.
Practical implications
Findings have managerial implications. Companies can re-look into how to further improve audit committee composition in order to enhance the timeliness of financial reporting. The issues of audit committee effectiveness and timely reporting also affect regulators and policy makers since they need to play a role in the establishment of effective audit committees and the improvement of financial reporting timeliness.
Originality/value
This study is one of few that have examined the impact of audit committee effectiveness on ADs in an emerging market country. Findings lend credence to the belief that audit committee members’ financial expertise enhances the quality of financial reporting by firms in a North African market criticized for the lack of maturity of its corporate governance system (Klibi, 2015; Fitch Ratings, 2009).
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