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Article
Publication date: 5 October 2020

Hyoung Joo Lim and Dafydd Mali

Firm management has an incentive to improve credit ratings to enjoy the reputational and financial benefits associated with higher credit ratings. In this study, the…

Abstract

Purpose

Firm management has an incentive to improve credit ratings to enjoy the reputational and financial benefits associated with higher credit ratings. In this study, the authors question whether audit effort in hours can be considered incrementally increasing with credit ratings. Based on legitimacy theory, the authors conjecture that firms with higher credit ratings will demand higher levels of audit effort to signal audit and financial quality compared to firms with higher levels of credit risk.

Design/methodology/approach

The authors conduct empirical tests using a sample of Korean-listed firms using a sample period covering 2001–2015.

Findings

The results show that firms with higher credit ratings demand higher audit effort in hours compared to client firms with lower credit ratings. The authors interpret that firms with higher ratings (lower risk) demand higher levels of audit effort in hours to reduce information asymmetry and to demonstrate that financial reporting systems are robust based on audit effort signaling audit quality. The authors also interpret that firms with lower credit ratings do not have incentives to signal similar audit quality. The authors also capture the “Big4 auditor expertise” effect by demonstrating that client firms audited by nonBig4 auditors demand additional audit effort with increasing credit rating compared to Big4 clients.

Research limitations/implications

Audit effort is considered a signal of firm risk in the literature. This study’s results show evidence that audit effort is inversely related to firm risk.

Practical implications

The results show that audit hour information is informative and likely managed by firm stakeholders. Internationally, it is not possible to capture the audit demand of clients because listing audit hours on financial statements is not a rule. Given that audit hours can be considered informative, the authors believe that legislators could consider implementing a policy to mandate that audit hours be recorded on international annual reports to enhance transparency.

Originality/value

South Korea is one of few countries to list audit effort on annual reports. Therefore, the link between audit effort and credit ratings is unique in South Korea because it is one of few countries in which market participants likely monitor audit effort.

Details

Journal of Applied Accounting Research, vol. 22 no. 1
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 15 November 2021

Ronny Prabowo, Usil Sis Sucahyo, Theresia Woro Damayanti and Supramono Supramono

The research aims to investigate the moderating role of secrecy culture on the effect of tax enforcement on the likelihood that private firms hire external auditors.

Abstract

Purpose

The research aims to investigate the moderating role of secrecy culture on the effect of tax enforcement on the likelihood that private firms hire external auditors.

Design/methodology/approach

The study generates more than 70,000 observations from 83 country-years from the World Bank Enterprise Survey 2018 dataset. Because the study focuses on private firms in emerging countries, data on publicly listed firms and firms from OECD (Organisation for Economic Co-operation and Development) countries are deleted. The secrecy culture data are generated from Hofstede's website. The data are then analyzed with logit analyses because the dependent variable is binary.

Findings

The results demonstrate that tax enforcement increases the likelihood that private firms hire external auditors. Further, secrecy culture weakens the relationship between tax enforcement and audit demand.

Practical implications

Governments in emerging countries need to encourage private firms to hire external auditors by intensifying tax enforcement because private firms often do not appreciate the importance of high-quality financial statements. However, secretive national culture may reduce tax enforcement's effectiveness in motivating private firms to hire external auditors. Hence, governments of highly secretive countries need to address this issue and find alternative ways to promote audited financial statements.

Originality/value

Audit demand of private firms in emerging countries is relatively understudied, especially concerning tax enforcement. Furthermore, the research also focuses on the moderating role of national culture (secrecy) in explaining the relationship between tax enforcement and audit demand.

Details

Journal of Accounting in Emerging Economies, vol. 12 no. 3
Type: Research Article
ISSN: 2042-1168

Keywords

Article
Publication date: 20 July 2022

Tajudeen John Ayoola

This study aims to examine the mediating role of audit seasonality on the association between audit fees and audit quality in Nigerian deposit money banks.

Abstract

Purpose

This study aims to examine the mediating role of audit seasonality on the association between audit fees and audit quality in Nigerian deposit money banks.

Design/methodology/approach

The sample comprises 14 banks with annual financial statements between 2008 and 2020. The modified Baron and Kenny’s (1986) causal mediation model by Iacobucci et al. (2007) through the use of bootstrapped partial least square structural equation modelling and Sobel’s (1986) z-test is adopted to achieve this study’s objective.

Findings

The results of the causal mediation analysis show evidence of a fully mediating role of audit seasonality in the association between audit fees and audit quality in the Nigerian banking industry.

Research limitations/implications

This study extends the body of knowledge by demonstrating how audit fees influence audit quality through audit seasonality as a mediator in line with the job demands-and resources and conservation of resources theories. Regulatory authorities should be wary of policies that will further increase the workload of already burdened personnel of audit firms as the uniform fiscal year-end of 31 December introduced in the Nigerian banking system has unintended consequences on audit fees and audit quality.

Originality/value

To the best of the author’s knowledge, this is one of the first studies to provide evidence on the indirect association between audit fees and audit quality.

Details

Journal of Financial Reporting and Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 27 February 2018

Maarten Corten, Tensie Steijvers and Nadine Lybaert

This paper aims to examine whether a private firm’s demand for a Big4 auditor is influenced by the auditor choice of its main supplier, customer and competitor. The…

Abstract

Purpose

This paper aims to examine whether a private firm’s demand for a Big4 auditor is influenced by the auditor choice of its main supplier, customer and competitor. The authors rely on institutional theory to explain this stakeholders’ influence. The authors also examine whether the extent to which the firm’s board of directors engages in networking moderates this influence.

Design/methodology/approach

Questionnaire data are combined with archival data of 210 Belgian private firms with a statutory audit requirement. Logistic regression analysis is applied to examine to what extent firms follow their main competitor, customer and supplier in hiring a Big4 auditor.

Findings

The results reveal a positive association between the firm’s choice of a Big4 auditor and its main supplier being audited by a Big4 auditor, supporting the conformance effect (isomorphism) toward suppliers as hypothesized by institutional theory. The extent of board networking, however, seems to weaken this effect. Toward competitors, a divergence effect instead of a conformance effect is found, which indicates the existence of competitive differentiation regarding auditor choice.

Research limitations/implications

While prior studies mainly focus on the agency relationships between shareholders, debtholders and managers to explain auditor choice, this study also takes into account the firm’s other main stakeholders by relying on institutional theory. Both the conformance effect toward suppliers as well as the divergence effect toward competitors provide interesting additional perspectives on why auditors are demanded, leading to interesting future research opportunities.

Originality/value

This paper fulfills an identified need to consider additional theories in explaining audit outcomes.

Details

Managerial Auditing Journal, vol. 33 no. 2
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 6 April 2012

Hui Fan

The purpose of this paper, based on the institution change theory, is to analyze the factors which influence the auditees' demand for government performance auditing (GPA).

Abstract

Purpose

The purpose of this paper, based on the institution change theory, is to analyze the factors which influence the auditees' demand for government performance auditing (GPA).

Design/methodology/approach

This study acquired the data by survey. The author investigated the government officials and the state‐owned enterprises and institutions' senior managers from 28 provinces and cities, then used the econometrics model to test the hypotheses.

Findings

By analyzing the survey data, it is found that the respondents who come from the region where the economy is less developed and the legislative level is lower have more demand for the performance auditing; the respondents' knowledge about the GPA has not increased their demand; the auditing penalty effects has negative impact on the demand for performance auditing and the organizational support has positive effects on their demand.

Research limitations/implications

The findings in this study suggest that there is not enough GPA supply in the region where the economy is less developed and the legislative level is lower, and that the auditees have not realized the benefits of GPA, although they know something about the GPA.

Practical implications

The national audit office and its branches should pay more attention to the region where the developmental level of GPA is lower and allocate the auditing resources more efficiently. The government officials should learn more about GPA to realize its benefits and distinguish GPA from the other kinds of government auditing, such as the financial revenues and expenditures auditing. Moreover, the government at all levels should give substantial support to GPA.

Originality/value

The paper empirically analyzes, for the first time, the government auditees' demand for GPA. The paper extends previous studies in this field by surveying auditees who have been neglected but have important impact on the development of GPA.

Details

China Finance Review International, vol. 2 no. 2
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 8 March 2021

Radwan Hussien Alkebsee, Gao-Liang Tian, Muhammad Usman, Muhammad Abubakkar Siddique and Adeeb A. Alhebry

This study aims to investigate whether the presence of female directors on audit committees affects audit fees in Chinese listed companies. This study also investigates…

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Abstract

Purpose

This study aims to investigate whether the presence of female directors on audit committees affects audit fees in Chinese listed companies. This study also investigates whether the audit committee’s gender diversity moderates the relationship between the firm’s inherent situational factors (e.g. audit complexity and firm risk) and audit fees. Finally, this study investigates whether the effect of the audit committee’s gender diversity on audit fees varies with within-country institutional contingencies (e.g. state-owned enterprises [SOEs] vs non-SOEs and firms that are located in more developed regions vs firms that are located in less developed regions)

Design/methodology/approach

This study used the data of all A-share listed companies on the Shanghai and Shenzhen stock exchanges for the period from 2009 to 2015. The authors use ordinary least squares regression as a baseline methodology, along with firm fixed effect, Deference in Deference method, two-stage least squares regression, two-stage Heckman model and generalized method of moments models to control for the possible issue of endogeneity.

Findings

The study’s findings suggest that the presence of female directors on the audit committee improves internal monitoring and communication, which reduce the perceived audit risk and the need for assurances from external auditors. The results also suggest that female directors demand high-quality audits and further assurance from external auditors when the firm is more complex and riskier. In addition, the results suggest that within-country, institutional factors play significant role in shaping the governance role of gender-diverse audit committee.

Practical implications

The study contributes to the agency theory by providing evidence that the interaction between agency theory and corporate governance “board composition” generates an effective monitoring mechanism and contributing to the institutional theory by finding that role of female directors on audit committee varies from context to another. In addition, this study contributes to literature review of gender diversity in the boardroom by finding the economic benefit of having female directors on audit committee. Finally, this study has implications for policy-makers in promoting regulations to legalize women presence on the board, to external auditors in assessing control risk during planning the audit, to those who responsible for appointing audit committee members.

Originality/value

The authors extend earlier studies by providing novel evidence on the relationship between gender-diverse audit committees and audit fees in terms of both the supply- and demand-side perspectives; that female directors moderate the relationship between firm inherent situational factors (e.g. audit complexity and firm risk) and audit fees; and that the effect of audit committees’ gender diversity on audit fees varies with sub-national institutional contingencies.

Details

Managerial Auditing Journal, vol. 36 no. 1
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 1 March 1994

James M. Kurtenbach and Robin W. Roberts

Accounting researchers have performed many studies related to public sector budgeting and financial management. Public sector accounting research seeks to explain the role…

161

Abstract

Accounting researchers have performed many studies related to public sector budgeting and financial management. Public sector accounting research seeks to explain the role of accounting and auditing in the public sector. For example, researchers examine issues such as (1) the use of accounting information by elected officials, (2) the demand for auditing, and (3) the determination of bond ratings. This review of the public sector accounting literature describes some of the theoretical foundations utilized in public sector accounting research and reviews a sample of selected empirical studies.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 6 no. 2
Type: Research Article
ISSN: 1096-3367

Open Access
Article
Publication date: 20 March 2018

Hazem Ramadan Ismael and Clare Roberts

This study aims to identify the factors that lead non-financial companies listed in the UK to use an internal audit function (IAF) as a monitoring mechanism. Although the…

8881

Abstract

Purpose

This study aims to identify the factors that lead non-financial companies listed in the UK to use an internal audit function (IAF) as a monitoring mechanism. Although the use of an IAF in the UK is voluntary, no prior research has examined the drivers for using one.

Design/methodology/approach

Financial and non-financial data were collected from the annual reports of 332 UK non-financial companies listed on the London Stock Exchange (LSE) Main Market. Univariate tests and multivariate logistic regression tests were used to test the research hypotheses. A theoretical framework based on both agency theory and transaction cost economics (TCE) theory was used to explain the economic factors affecting the use of an IAF.

Findings

The study provides evidence that firm size, level of internal risks, agency problem between owners and managers and existence of an effective audit committee are associated with the existence of an IAF. Thus, the need to have strong internal control and risk management systems and to reduce both internal and external agency costs drives companies to have an IAF. These results suggest the importance of IAF as an internal corporate governance tool and the effectiveness of UK governance regulations in monitoring the effectiveness of internal control systems.

Practical implications

Given the importance of the IAF’s corporate governance role, the study provides some policy implications. Regulators should pay more attention to the issue of maintaining an IAF, especially by large companies, the relationship between the IAF and other governance parties, especially the audit committee, and the disclosure of more relevant information about the IAF’s characteristics and practices.

Originality/value

This is the first study to examine the factors affecting the existence of the IAF within the UK’s distinctive regulatory approach of “comply or disclose reasons”. Furthermore, it provides a theoretical framework that explains how both the agency theory and TCE theory can interpret the adoption of internal audit.

Details

Managerial Auditing Journal, vol. 33 no. 3
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 21 November 2017

Hooi Ying Ng, Per Christen Tronnes and Leon Wong

Auditing is seasonal, with the majority of U.S. public companies having a December fiscal year-end. This results in an audit “busy season” and “off-season” with a…

Abstract

Auditing is seasonal, with the majority of U.S. public companies having a December fiscal year-end. This results in an audit “busy season” and “off-season” with a non-trivial seasonal impact on the pricing of audit services. We apply an economic framework that explains how audit seasonality affects both the magnitude and the price elasticity of audit demand and audit supply. We find that the audit busy season is associated with an audit fee premium of approximately 10% based on a meta-analysis of 97 analyses from 18 audit fee studies of U.S public companies. A meta-regression of the contextual differences in research design between studies reveals that examining only Big N attenuates the busy season effect size but does not eliminate it, and that the busy season effect size may be larger post-SOX.

Details

Journal of Accounting Literature, vol. 40 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 14 November 2017

David Hay and Carolyn Cordery

This paper explores the value of financial statement auditing in the public sector. The study applies theory about auditing from the private sector as well as the public…

Abstract

This paper explores the value of financial statement auditing in the public sector. The study applies theory about auditing from the private sector as well as the public sector to explore ways in which public sector auditing can be expected to be valuable. It shows that there are a number of complementary explanations that can be applied to examine the value of public audit, including agency, signaling, insurance, management control, governance and confirmation explanations. The evidence from research and history is generally consistent with the agency and management control explanations. There is some support for the signaling and insurance explanations, while research evidence suggests that governance has differing impact in the public sector compared to the private. The confirmation hypothesis is also potentially relevant. Reviewing the history of the development of public sector auditing functions shows that at least some developments were consistent with explanations such as agency theory and management control. Auditing in the public sector is an area where more research is valuable. The paper concludes with a discussion of issues for further investigation.

Details

Journal of Accounting Literature, vol. 40 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

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