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Article
Publication date: 3 September 2018

Akihiro Noda

This study aims to examine how firms choose an auditor in the presence of bilateral information asymmetry between insiders and outsiders regarding firms’ economic performance.

Abstract

Purpose

This study aims to examine how firms choose an auditor in the presence of bilateral information asymmetry between insiders and outsiders regarding firms’ economic performance.

Design/methodology/approach

This study presents a one-period reporting bias game with a firm’s risk-neutral manager and investors in the capital market, in which a manager with private information chooses an auditor and reports earnings to investors who acquire their own information. The analysis focuses on the possibility that the manager engages an auditor to constrain earnings management as a commitment device to minimize reporting error cost.

Findings

The results show that the manager’s optimal auditor choice is determined based on investor sensitivity to the earnings report, and managerial incentives for earnings management, discounted by the uncertainty of reporting errors. The results for optimal auditor choice are counterintuitive: engaging a higher-quality auditor could seemingly be associated with aggressive earnings management.

Originality/value

This study advances the understanding of the theoretical basis of firms’ auditor choice in the context of market investors’ information acquisition when auditors exercise their discretion in reporting. This issue has received limited attention in the extant literature.

Details

Journal of Financial Reporting and Accounting, vol. 16 no. 3
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 4 April 2016

Gaetano Matonti, Jon Tucker and Aurelio Tommasetti

This paper aims to investigate auditor choice in those Italian non-listed firms adopting the “traditional” model of corporate governance. In Italy, non-listed firms can…

Abstract

Purpose

This paper aims to investigate auditor choice in those Italian non-listed firms adopting the “traditional” model of corporate governance. In Italy, non-listed firms can choose between two types of auditor: the Board of Statutory Auditors (BSA), that is the statutory auditors, or an “external” auditor. At the same time, a BSA conducts the administrative auditing for all companies with equity exceeding €120,000.

Design/methodology/approach

The paper estimates a logistic regression model of firm auditor choice between an external auditor and the BSA, which incorporates variables proxying for both agency conflict and organizational complexity effects.

Findings

The results show that of the potential agency factors, only board independence drives auditor choice, whereas organizational complexity and risk factors including firm size, investment in inventories, subsidiary status and complexity drive auditor choice. These results may be explained in the administrative audit role of the BSA, which monitors both day-by-day firm operations and the financial statements preparation “project”. Stakeholders as a result are reassured that, in general, their interests are protected. Finally, it was found that legal form and voluntary International Financial Reporting Standards compliance exert an impact on auditor choice.

Originality/value

The paper provides support for an internal yet independent auditing body such as the Italian BSA as a wider model for corporate governance in European non-listed firms (OECD, 2004 and 2015). The BSA as an administrative and financial auditing body made up solely of independent highly qualified professionals can work within the firm on an operational basis, and in so doing can increase stakeholder protection.

Details

Managerial Auditing Journal, vol. 31 no. 4/5
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 26 July 2013

AKM Waresul Karim and Tony van Zijl

The purpose of this paper is to test the relative strengths of efficiency and opportunistic considerations in making client auditor choice decisions in an emerging audit…

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Abstract

Purpose

The purpose of this paper is to test the relative strengths of efficiency and opportunistic considerations in making client auditor choice decisions in an emerging audit services market. The authors examine whether the degrees of foreign and institutional shareholdings, audit complexity, industry orientation (i.e. whether the firm belongs to the banking sector), ownership concentration in the hands of domestic sponsor shareholders, state ownership, power concentration in the hands of a CEO who is also the chairperson of the board, and audit risk affect the demand for superior monitoring by Big‐4 auditors.

Design/methodology/approach

The authors carry out a multivariate analysis using binary logit regression technique. They test whether efficiency or opportunism rules auditor choice of firms in their sample. Efficiency‐based variables used in the authors' models include foreign shareholding by a multinational parent, institutional shareholding, audit complexity and whether the firm belongs to the banking sector. Opportunism‐based variables include ownership concentration in the hands of domestic sponsor shareholders other than government, government shareholding, power concentration in the hands of a CEO who holds the position of chair as well, and audit risk.

Findings

The authors find that opportunistic considerations outweigh efficiency considerations in shaping auditor choice decisions in their sample. Two out of four efficiency arguments (foreign shareholdings in the hands of a multinational parent and institutional shareholding) support efficiency as the main driver of auditor choice while one (client belonging to the banking sector) indicates otherwise. On the other hand, three out of four opportunism arguments (government shareholding, CEO‐chair duality and audit risk) document opportunistic considerations to be the main forces behind auditor choice. The influence of foreign shareholding becomes apparent only when the foreign shareholder is the controlling shareholder.

Originality/value

This paper is the first of its kind to address auditor choice in an emerging market context. No other paper looked at auditor choice using efficiency‐opportunism incentives. The paper contributes to our understanding of auditor choice dynamics in emerging markets. The finding that institutional shareholding is associated with choice of high quality auditors is encouraging. Individual small investors can use institutional investors as a shield to protect their investment through the higher quality auditing linked to the presence of institutional investors.

Details

International Journal of Accounting & Information Management, vol. 21 no. 3
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 3 May 2013

A.K.M. Waresul Karim, Tony van Zijl and Sabur Mollah

The purpose of this paper is to examine the impact of corporate governance on auditor quality choice by IPO companies in an emerging market setting. It seeks to identify…

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1554

Abstract

Purpose

The purpose of this paper is to examine the impact of corporate governance on auditor quality choice by IPO companies in an emerging market setting. It seeks to identify whether efficiency or opportunism is the driving force behind the choice of auditors in Bangladeshi firms going public. We try to see whether ownership concentration in the hands of a owner‐CEO wins over foreign shareholders in the contest of ensuring financial reporting quality.

Design/methodology/approach

Multivariate analysis has been carried out on all IPOs made during 1990 to 2005 whose financial statements were available. Logistic regression tool has been used to identify client's corporate governance attributes affect their choice of auditors. In total, three corporate governance attributes – CEO‐Chair duality, retained ownership, and foreign equity participation – were used to test the impact of ownership structure on auditor choice.

Findings

Our findings from logistic regression suggest that CEO‐Chair duality and the degree of foreign equity participation are significant determinants of auditor choice while proportion of board ownership is not. In addition, issuer size and whether the issuer is a green field operation also influence auditor choice while the length of a firm's operating history does not seem to matter. The findings support agency theory prediction that (at least one category of) principals (foreign shareholders in this case), are likely to trade‐off higher monitoring costs (of hiring a higher quality auditor) with agency costs arising from asymmetric information, primarily borne by absentee owners.

Originality/value

The work is based on empirical data directly from company financial statements. It uses audited financial statements and makes objective analysis of auditor choice dynamics in a frontier market that demonstrated significant growth of IPO activity in recent years.

Details

International Journal of Accounting & Information Management, vol. 21 no. 2
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 1 March 2015

Anne-Mie Reheul, Tom Van Caneghem and Sandra Verbruggen

From 2006 onwards very large Belgian nonprofit organizations (NPOs) are legally required to appoint an external auditor. In this context we investigate whether auditor

Abstract

From 2006 onwards very large Belgian nonprofit organizations (NPOs) are legally required to appoint an external auditor. In this context we investigate whether auditor choice in favor of a sector expert, being a higher quality auditor, is associated with NPOs’ expectations regarding several auditor attributes. We find that NPOs are more likely to choose a sector expert if they attach higher importance to an auditor’s client focus and relationship with management. NPOs are less likely to choose a sector expert if they care more about the practical execution of the audit. We provide recommendations for increasing the appeal of sector expertise as valuable auditor attribute. The resulting quality increase of NPOs’ financial statements and audit reports could benefit various stakeholders.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 27 no. 2
Type: Research Article
ISSN: 1096-3367

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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

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Article
Publication date: 8 May 2017

Mishari M. Alfraih

This paper aims to investigate the association between the composition of boards of directors and the choice of external auditor among companies listed on the Kuwait Stock…

Abstract

Purpose

This paper aims to investigate the association between the composition of boards of directors and the choice of external auditor among companies listed on the Kuwait Stock Exchange (KSE) in 2013.

Design/methodology/approach

Consistent with prior research, audit quality is represented by two proxies, namely, a Big 4 and Non-Big 4 audit firm. Independence, diversity, interlocks, size and role duality are used as proxies for board composition. To accommodate the dichotomous dependent variable (auditor choice), a logistic regression model is used to test the hypothesized associations between board composition and auditor choice.

Findings

After controlling for firm-specific characteristics, results show that independence, diversity and size are statistically significant and increase the likelihood that a KSE-listed company selects a high-quality (Big 4) audit firm. Role duality is also statistically significantly but decreases the likelihood of choosing a Big 4 audit firm.

Practical/implications

This research has implications for regulators, shareholders, boards and academics. The paper underlines the importance of the composition of the board in increasing the likelihood of hiring a high-quality audit firm. Regulators can draw upon these results when assessing the effectiveness of corporate governance mechanisms.

Originality/value

This paper is among the first to study the association between auditor choice and board composition using data from the frontier market of Kuwait, thus responding to the call for empirical research into the issue in less-developed markets. Overall, it sheds light on the effectiveness of board composition and provides empirical evidence that it is an important element in the choice of auditors. The findings indicate that board composition may be a mechanism that can promote demand for high audit quality.

Details

International Journal of Law and Management, vol. 59 no. 3
Type: Research Article
ISSN: 1754-243X

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Article
Publication date: 6 May 2020

Iman Harymawan

One of the strongest connections in politics in developing countries is through military links. This study aims to examine the auditor choice preference of the…

Abstract

Purpose

One of the strongest connections in politics in developing countries is through military links. This study aims to examine the auditor choice preference of the militarily-connected firms in Indonesia, an emerging country where there is a strong influence from the military on political decision-making.

Design/methodology/approach

The analysis used 3,473 firms-year observations listed on the Indonesian Stock Exchange spanning from 2003 to 2017 using regression and other statistical tests.

Findings

The results reveal that firms with a militarily-connected director are less likely to appoint one of the Big 4 auditors. Using the military reform as a natural experiment, the finding shows that militarily-connected firms did not change their auditor choice preference even after the military reform. Interestingly, I find that connected firms are associated with high earnings management. In addition, the different retirement position level and military affiliations of the connected directors generate different outcomes related to the auditor choice decision. Overall, the results indicate that militarily-connected firms were less likely to appoint one of the Big 4 auditors both before and after the military reforms. These results are robust, even after the author controlled for political connections, year fixed effects and industry fixed effects.

Research limitations/implications

Because of the limitations of the prior literature on military connections, this study is developed based on the assumption that the militarily-connected directors have identical behavior whether they serve in either public or private companies. However, this assumption could be invalid which potentially affects the interpretation of some of the results in this study.

Originality/value

This paper provides direct evidence of the auditor choice preference of firms with a military connection. The evidence builds on the existing literature on the difference in auditor choice preference between politically and militarily-connected firms.

Details

Managerial Auditing Journal, vol. 35 no. 6
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 14 September 2012

Sharifah Nazatul Faiza Syed Mustapha Nazri, Malcolm Smith and Zubaidah Ismail

The purpose of this paper is to examine the impact of ethnicity on auditor choice for Malaysian listed companies.

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2473

Abstract

Purpose

The purpose of this paper is to examine the impact of ethnicity on auditor choice for Malaysian listed companies.

Design/methodology/approach

This study evaluates the effects of various independent variables on auditor choice behaviour, particularly ethnicity of auditor and ethnicity of management, using a logistic regression analysis approach for 300 companies listed on the Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange‐KLSE) over an 18 year period.

Findings

Auditor choice is shown to be significantly influenced by client firm's characteristics, notably changes in management, complexity, and financial risk, lending support to the findings of previous survey studies. Ethnicity was found to be a significant factor influencing auditor choice only for auditor switches between non‐Big 4 and Big 4 firms.

Research limitations/implications

A number of important variables such as corporate governance characteristics, audit fees, client size, and growth that might enhance an understanding of auditor choice behaviour in Malaysia were not incorporated in the regression models, and might be considered in future studies.

Originality/value

The results presented in the paper have important implications for both the auditing profession and regulators in Malaysia.

Details

Asian Review of Accounting, vol. 20 no. 3
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 1 October 2019

Arnab Bhattacharya and Pradip Banerjee

This paper aims to examine various factors affecting the pricing of audit services and the selection of auditors in the Indian audit market. This paper also aims to…

Abstract

Purpose

This paper aims to examine various factors affecting the pricing of audit services and the selection of auditors in the Indian audit market. This paper also aims to investigate the impact of financial distress conditions on the audit pricing and auditor choice decisions of a firm, particularly in the context of a developing economy.

Design/methodology/approach

The sample comprises 22,644 firm-years for 1,366 Indian firms from 1990 to 2015. The authors adopt ordinary least squares regression technique to model audit fee, and logistic regression technique to model auditor choice as a function of various factors relating to firm attributes and auditor characteristics.

Findings

This paper finds that auditors tend to charge an audit fee premium when they are affiliated to a Big 4 auditor, have industry specialization or jointly provide auditing and non-auditing services. Additionally, firms with larger boards, higher proportion of independent board of directors and CEO–Chairman separation are more likely to choose a Big 4-affiliated auditor. The results also suggest that financially distressed firms tend to pay significantly lower audit fees and are more likely to choose non-Big 4 auditors.

Originality/value

This paper is among the few studies which investigate how financial distress impacts the audit pricing and auditor choice decisions of a firm in the context of emerging economies. The findings of this paper raises serious concerns about the credibility of the audited financial statements and corporate governance mechanisms of firms undergoing financial distress. The empirical results of this paper have strong implications for practitioners, regulators and investors.

Details

Managerial Auditing Journal, vol. 35 no. 1
Type: Research Article
ISSN: 0268-6902

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