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Article
Publication date: 2 November 2010

Guy D. Fernando, Ahmed M. Abdel‐Meguid and Randal J. Elder

The purpose of this paper is to investigate the impact of certain audit quality attributes, namely auditor size, auditor industry specialization and auditor tenure on a…

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3957

Abstract

Purpose

The purpose of this paper is to investigate the impact of certain audit quality attributes, namely auditor size, auditor industry specialization and auditor tenure on a client firm's cost of equity capital.

Design/methodology/approach

The paper uses empirical data to construct a measure of ex ante cost of equity capital for each firm and year using analyst forecasts. Independent audit quality measures used are auditor size, auditor industry specialization and auditor tenure. Firm cost of equity capital is regressed against the three independent variables and appropriate control variables.

Findings

The paper finds that auditor size (auditor is a member of the BigX), auditor industry specialization and auditor tenure are negatively associated with the client firm's cost of equity capital. However, the paper finds that this effect is limited only to small client firms, potentially reflecting the poor information environment associated with such firms.

Practical implications

The study highlights the importance of audit quality attributes in determining the firm's cost of capital. It also highlights ways in which firms (especially small firms) can reduce the cost of equity capital by improving their information environment through the judicious selection of auditors.

Originality/value

This is believed to be the first paper to examine whether the effects of three audit quality attributes (auditor size, auditor industry specialization and auditor tenure) on a firm's cost of capital are dependent on the client's size. The paper empirically shows that such effects are more pronounced for smaller clients.

Details

Review of Accounting and Finance, vol. 9 no. 4
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 25 July 2008

Meshari O. Al‐Harshani

The main objective of this study is to investigate factors influencing the amount of external audit fees in Kuwait. Of particular interest is the examination of the…

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2638

Abstract

Purpose

The main objective of this study is to investigate factors influencing the amount of external audit fees in Kuwait. Of particular interest is the examination of the potential effect of the client size, client complexity, client risk, and the size of the audit firm on external audit fees.

Design/methodology/approach

An audit fee model is used to examine the effect of audit client size, client complexity, client risk, and the size of the audit firm on the amount of audit fees for a sample of audit engagements performed in the Kuwaiti audit market.

Findings

The study's results indicate that the amount of external audit fees is significantly influenced by the audit client size, liquidity ratio, and profitability ratio. The results, however, do not provide evidence of a significant relation between audit fees and the number of audit locations, or the size of the audit firm.

Originality/value

This study is original since it is the first to empirically investigate factors influencing the pricing of audit services in Kuwait.

Details

Managerial Auditing Journal, vol. 23 no. 7
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 8 April 2019

Mahdi Salehi, Mohamad Reza Fakhri Mahmoudi and Ali Daemi Gah

The purpose of this paper is to demonstrate a deeper understanding about the reasons behind difference in previous studies’ results in the field of audit quality determinants.

Abstract

Purpose

The purpose of this paper is to demonstrate a deeper understanding about the reasons behind difference in previous studies’ results in the field of audit quality determinants.

Design/methodology/approach

A meta-analysis method is employed in which 52 studies including 40 international studies from authentic scientific articles during the year 2000–2015 and 12 national studies out of authentic national scientific articles from 2001 to 2015 are taken to account as sample studies. Audit firm size, auditor tenure and auditor specialization are set as independent variables and audit quality is the only dependent variable in the current paper.

Findings

The results indicate that audit firm size and auditor specialization are positively associated with audit quality. In other words, contracting with larger audit firm and specialized auditor results in delivering higher quality audit services.

Originality/value

The current study is the first study to be conducted in the field of audit quality determinants. The results may be beneficial both for standard setters as well practitioners in a way that it provides evidence that contributes to basis policy and audit-standard makers about domination and determinants of audit quality.

Details

Journal of Accounting in Emerging Economies, vol. 9 no. 2
Type: Research Article
ISSN: 2042-1168

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Article
Publication date: 22 May 2009

Li (Glenda) Chen, Alan Kilgore and Renee Radich

This paper aims to examine the relationship between firm characteristics and incentives for the voluntary formation of audit committees by non‐top 500 firms listed on the…

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1020

Abstract

Purpose

This paper aims to examine the relationship between firm characteristics and incentives for the voluntary formation of audit committees by non‐top 500 firms listed on the Australian Stock Exchange (ASX).

Design/methodology/approach

Data are obtained from a random sample of 224 non‐top 500 firms listed on the ASX for the year 2005. Logistic regression analysis is used to examine the characteristics of non‐top 500 firms who have voluntarily established audit committees.

Findings

The results are consistent with the hypothesis that incentives to voluntarily form audit committees increase with agency costs of debt. The results show a significant and positive association between cost of debt, firm size, number of directors on the board, the proportion of independent directors, independent board chair and the voluntary formation of audit committees.

Research limitations/implications

Results indicate that firm size is not necessarily the primary influence in voluntary formation of audit committees. Board size and the proportion of independent directors and having an independent board chair also have a significant influence on the decision. These results suggest that audit committees will be established in high agency cost of debt situations, where there are economies of scale and are reflective of a desire to reduce information asymmetries and the liability exposure of outside directors.

Originality/value

This study provides useful insights and direction in examining voluntary formation in an Australian context using non‐top 500 firms. The results have implications for regulators in considering making audit committees mandatory for all listed companies.

Details

Managerial Auditing Journal, vol. 24 no. 5
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 October 2005

Nur Barizah Abu Bakar, Abdul Rahim Abdul Rahman and Hafiz Majdi Abdul Rashid

PurposeAuditor independence is fundamental to public confidence in financial reporting and the auditing profession. The study aims to provide further understanding of the…

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10188

Abstract

PurposeAuditor independence is fundamental to public confidence in financial reporting and the auditing profession. The study aims to provide further understanding of the factors influencing auditor independence from the perspective of commercial loan officers. Loan officers formed the sample as they are relatively sophisticated financial statement users who would understand the importance of audit report and the issues related to auditor independence.Design/methodology/approachThe study examines the perceptions of commercial loan officers in Malaysian‐owned commercial banks and a total of 86 officers responded to the self‐administered questionnaire.FindingsResults indicate that smaller audit firms, audit firms operating in a higher level of competitive environments, audit firms serving a given client over a longer duration, larger size of audit fees, audit firms providing managerial advisory services, and, the non‐existence of an audit committee, are perceived as having a higher risk of losing independence. Audit firm size appears to be the most important factor that affects the auditor independence, followed by tenure, competition, audit committee, audit firms providing managerial advisory services and size of audit fee.Originality/valueThe paper provides important insights into the factors affecting auditor independence and contributes towards better understanding on the ways to improve the confidence in financial reporting and credibility of the auditing profession.

Details

Managerial Auditing Journal, vol. 20 no. 8
Type: Research Article
ISSN: 0268-6902

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Book part
Publication date: 20 October 2015

Matthew A. Notbohm, Jeffrey S. Paterson and Adrian Valencia

Prior research finds evidence that audit quality is positively associated with the joint purchase of tax nonaudit services (NAS) and concludes that jointly provided tax…

Abstract

Prior research finds evidence that audit quality is positively associated with the joint purchase of tax nonaudit services (NAS) and concludes that jointly provided tax services result in audit-related knowledge spillovers that lead to improved audit quality. We extend this line of research. We examine the relation between auditor-provided tax services and restatements and determine whether this relation differs when the auditor is a small or large accounting firm. We also examine whether the Securities Exchange Commission’s restrictions on certain tax consulting practices (SEC, 2006) altered this relation. Specifically, we measure whether the probability of financial statement restatements varies with (1) variation in accounting firm size (measured as PCAOB annually inspected firms versus PCAOB triennially inspected firms), and (2) the joint provision of audit and tax services. We find a negative relation between auditor-provided tax services and restatements which is consistent with prior research. We also find that this relation is significantly more negative when the auditor is a small accounting firm. Finally, we find that the lower probability of a restatement associated with the joint provision of audit and tax services persists regardless of auditor size after the SEC-imposed restrictions on certain tax consulting services in 2006. Our study provides evidence that accounting firms, and particularly small accounting firms, benefit from knowledge spillovers when jointly providing audit and tax services and these benefits lead to improved audit quality. Prior research concludes that large auditors provide higher audit quality and that the provision of tax services improves audit quality. Our results provide evidence that audit quality improvements are greater for small auditors and their clients. This improvement narrows that audit quality gap between large and small auditors. We do not find evidence that the SEC’s restrictions on certain tax consulting services altered the relation between audit quality and tax services.

Details

Advances in Taxation
Type: Book
ISBN: 978-1-78560-277-1

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Article
Publication date: 1 July 2020

Ahmad Abdollahi, Yasser Rezaei Pitenoei and Mehdi Safari Gerayli

The present study sets out to examine the effect of auditor's report and audit firm size on the value relevance of accounting information of the companies listed on the…

Abstract

Purpose

The present study sets out to examine the effect of auditor's report and audit firm size on the value relevance of accounting information of the companies listed on the Tehran Stock Exchange during the years 2008–2017.

Design/methodology/approach

The study includes a sample of 1,530 firm-year observations drawn from the listed companies, and the research hypotheses were analyzed using multivariate regression model based on panel data.

Findings

The findings reveal that auditor's report and audit firm size are positively and significantly correlated with two indicators of the value relevance of accounting information including value relevance of earnings and book value per share. Also our results exhibit robustness to the alternative measure of auditor's attributes.

Research limitations/implications

As far as we know, this is the first study to analyze the association between auditor's attributes and value relevance of accounting information in emerging capital markets, thereby generating certain implications for investors, managers, capital market policy makers and audit profession regulators in general and those in emerging markets in particular.

Practical implications

Our findings have implications for policy makers, regulators, managers and investors. Our evidence on the positive association between auditor's size and value relevance of accounting information should help policy makers and regulators which they improve value relevance of accounting information and financial reporting by integrating small audit firms and setting up larger audit firms.

Originality/value

A rise in the value relevance of accounting information deserves further attention while drawing investment, selling the stocks of existing firms and increasing investor's decision-making ability. The way how auditor's attributes can promote the value relevance of accounting information is still open to new research.

Details

Journal of Applied Accounting Research, vol. 21 no. 4
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 5 September 2016

Rindang Widuri, Brendan O’Connell and Prem W.S. Yapa

This paper aims to identify key factors driving auditors’ adoption of Generalized Audit Software (GAS) in a large developing country, Indonesia, through the lens of the…

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1681

Abstract

Purpose

This paper aims to identify key factors driving auditors’ adoption of Generalized Audit Software (GAS) in a large developing country, Indonesia, through the lens of the technology, organization and environment (TOE) framework.

Design/methodology/approach

Results of this study are based on semi-structured in-depth interviews conducted in Indonesia with audit firms of varying sizes.

Findings

Key study findings included the identification of highly influential adoption factors, especially environmental factors, such as availability of information technology-skilled auditors in the local market, client needs and expectations and client size. This study has also identified factors, not identified in previous research, as being influential including the importance of GAS availability in a range of languages and the necessity of a supportive professional and regulatory environment.

Originality/value

This study makes several contributions to the literature including that it identifies new influential factors in the TOE framework. This framework has not been widely applied in auditing research and looks beyond the individual perspective to that of the organization as a whole. Moreover, the present study takes a developing country perspective and examines a range of audit firms. In contrast, most studies to date in the area have taken a Western focus and have concentrated on large audit firms. Additionally, this study provides an in-depth analysis through the use of semi-structured interviews, whereas prior studies have relied on surveys.

Details

Managerial Auditing Journal, vol. 31 no. 8/9
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 22 April 2009

Lisa A. Owens‐Jackson, Diana Robinson and Sandra Waller Shelton

In an effort to restore investor confidence in the wake of recent financial reporting scandals, the Sarbanes‐Oxley Act of 2002 mandates that audit committees be fully…

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1383

Abstract

In an effort to restore investor confidence in the wake of recent financial reporting scandals, the Sarbanes‐Oxley Act of 2002 mandates that audit committees be fully independent and have at least one financial expert. The SEC adopted rules implementing these Sarbanes‐Oxley provisions. This paper contributes to the literature on the association between audit committee characteristics recommended by SOX and the likelihood of fraud in two ways. First, we focus on audit committee composition and the extent of the underlying nature of the firm (e.g., firm size, growth) and the contracting environment (e.g., managerial ownership, leverage) of the firm on the likelihood of fraud. In particular, we find that the likelihood of fraudulent financial reporting is negatively related to audit committee independence, number of audit committee meetings and managerial ownership and positively related to firm size and firm growth opportunities. Second, we separately examine firms with totally independent audit committees and fraudulent financial reporting. This sample is interesting because these are firms that had good corporate governance and yet still had fraudulent financial reporting. By separately examining firms with totally independent audit committees, we find that the likelihood of fraudulent financial reporting given a totally independent audit committee is inversely related to the level of managerial ownership and the number of audit committee meetings.

Details

American Journal of Business, vol. 24 no. 1
Type: Research Article
ISSN: 1935-5181

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Article
Publication date: 1 March 2013

Dennis M. López, Kevin T. Rich and Pamela C. Smith

We investigate whether auditor size is associated with the disclosure of internal control exceptions among Circular A-133 audits of nonprofit healthcare organizations. Our…

Abstract

We investigate whether auditor size is associated with the disclosure of internal control exceptions among Circular A-133 audits of nonprofit healthcare organizations. Our analysis is motivated by recent growth and transparency concerns within the sector. Using a sample of 1,180 audit reports from 2004 to 2008, we find evidence that audits performed by Big 4 firms are less likely to disclose internal control weaknesses than those performed by smaller firms. Additional analyses indicate this relation only remains statistically significant for a subsample of small organizations, possibly due to greater selectivity or lower efforts by the Big 4 auditors. We discuss the implications of these findings from an audit quality, market dominance, and client size perspective. The results are relevant to hospital financial managers seeking high quality audits at low cost.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 25 no. 1
Type: Research Article
ISSN: 1096-3367

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