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1 – 10 of 302Tatiana Mazza, Stefano Azzali and Andrey Simonov
This study aims to examine whether national industry expertise in Italy is more dominant than local expertise. Prior studies from Australia, USA and UK show that audit fees for…
Abstract
Purpose
This study aims to examine whether national industry expertise in Italy is more dominant than local expertise. Prior studies from Australia, USA and UK show that audit fees for industry experts are priced at a higher premium at the local level than the national level. These countries have voluntary audit firm rotation, while Italy has mandatory audit firm rotation (MAFR). The authors predict that Italy has a stronger national than local level of industry expertise, to better retain and transfer industry expertise.
Design/methodology/approach
The authors compare audit fee premiums of national industry experts to local levels, using quantitative (multivariate tests) and qualitative (interviews) methodology.
Findings
Using hand-collected audit fees, the authors find that the audit fee premium for industry expertise is greater at the national level than the local level. The authors find corroborating results with audit hours. To provide further support, the authors conduct analysis for a neighboring country that does not have audit firm rotation. Using hand-collected data from Germany, the authors find that audit fee premiums from national industry expertise are no different from local industry expertise.
Originality/value
The present study study has theoretical and practical implications, for European Union countries, which recently adopted MAFR and for countries considering adoption in the future.
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Esraa Esam Alharasis, Manal Alidarous and Fouad Jamaani
This study aims to examine the relationship between auditor industry specialization (IS) and audit fees.
Abstract
Purpose
This study aims to examine the relationship between auditor industry specialization (IS) and audit fees.
Design/methodology/approach
The authors utilize 2,100 firm-year data of Jordanian companies from 2005 to 2018. Two conflicting theoretical approaches of IS were employed: the product differentiation approach, as assessed by market share (MS); and the shared efficiency approach, as evaluated by portfolio share (PS).
Findings
Results of the ordinary least squares (OLS) regression support product differentiation (shared efficiency) and show that employing experts' auditors exerts a very substantial and favorable direct impact on audit fees (negative).
Originality/value
This research contributes new empirical data to the auditing literature by examining if IS does influence Jordanian businesses' audit fees. The findings offer useful data for Jordanian officials to examine the auditing industry's difficulties while refining regulations and revising auditor pricing. Additionally, the results offer advice to Jordan's regulatory bodies who oversee the auditing industry. Arguably, results from Jordan may be extrapolated to other Middle Eastern nations.
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This study examines whether and how a client's business strategy can affect the relationship between auditor characteristics and financial reporting quality.
Abstract
Purpose
This study examines whether and how a client's business strategy can affect the relationship between auditor characteristics and financial reporting quality.
Design/methodology/approach
In this study, auditor industry specialization and tenure were used as proxies for auditor characteristics. The client business strategy was measured using the resource allocation index method. Finally, discretionary accruals are used to assess financial reporting quality. This study includes 1,450 firm-year observations and 145 companies listed on the Tehran Stock Exchange (TSE) over a ten-year period from 2011 to 2020. The research hypotheses were analyzed using a multivariate regression model and panel data.
Findings
The results show that auditor industry specialization increases financial reporting quality. This relationship improves when the client's business strategy deviates from the industry–normal strategy. The research findings state that auditor tenure has a positive association with financial reporting quality, and this relationship is strengthened when the company's business strategy deviates from the normal industry strategy.
Practical implications
The findings of this study provide important evidence for investors, firm management, and auditing firms. Investors must consider the auditor characteristics when selecting companies listed on the TSE. Managers of Iranian companies are advised to consider the auditor's characteristics when choosing an audit firm to increase financial reporting quality. Audit firms should evaluate their business strategies in audit planning to increase the quality of financial reporting.
Originality/value
To the best of the authors’ knowledge, this is the first empirical study to examine the relationship between auditor characteristics and the financial reporting quality in the emerging capital market by considering the clients' business strategy.
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Guy D. Fernando and Alex Thevaranjan
This paper aims to study the impact of audit quality on the components of executive cash compensation. It is predicted that as audit quality improves, greater emphasis will be…
Abstract
Purpose
This paper aims to study the impact of audit quality on the components of executive cash compensation. It is predicted that as audit quality improves, greater emphasis will be placed on the incentive components of cash compensation, and lower emphasis on the salary (fixed) component. Specifically, it is predicted that as audit quality enhances, greater emphasis will be placed on earnings and sales revenues in determining executive cash compensation. Using auditor specialization as a proxy for audit quality, empirical support is provided for all of our predictions.
Design/methodology/approach
This paper provides empirical support with agency theoretic predictions.
Findings
This paper developed the following hypotheses: H1 – in executive cash compensation, more weight is being placed on earnings-based measures as auditor specialization improves; H2 – in executive cash compensation, more weight is also being placed on sales revenues as auditor specialization improves; H3 – in executive cash compensation, salary levels decrease as auditor specialization improves; and H4 – the impact of auditor specialization on the weight on earnings, sales and the salary levels is lower in the post-Sarbanes–Oxley Act (SOX) period compared to pre-SOX period.
Research limitations/implications
First, the article limits itself to cash compensation, while current executive compensation is largely made of equity. Second, the measure of audit quality used, ‘national level auditor specialization’, may not be as effective in the post-SOX era.
Practical implications
Compensation committees should pay attention to audit quality (in whatever way it may be proxied by) in determining executive compensation.
Originality/value
This is the first paper to show that audit quality not only improves the earnings response coefficient in firm valuation but also enhances the weight placed on earnings (and sales revenues) in executive compensation.
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Muhammad Rifqi Abdillah, Agus Widodo Mardijuwono and Habiburrochman Habiburrochman
The purpose of this paper is to examine and analyze the factors that affect an auditor’s efficiency in completing the audit process proxied by audit report lag. The factors used…
Abstract
Purpose
The purpose of this paper is to examine and analyze the factors that affect an auditor’s efficiency in completing the audit process proxied by audit report lag. The factors used in this study are selected by looking at the characteristics of the company and the characteristics of an auditor.
Design/methodology/approach
Company characteristics were proxied by the audit committee effectiveness, financial condition, accounting complexity and profitability, whereas auditor characteristics were proxied with auditor reputation, audit tenure and auditors industry specialization. Populations of this study were all manufacturing companies listed in Indonesian Stock Exchange in 2014–2016. Based on the purposive sampling method, the number of samples obtained from 231 companies was 77. Multiple linear regression method was used to analyze this study. Hypothesis testing was done by statistical t-test (partial).
Findings
The results showed that partially variables of the audit committee effectiveness and profitability had a significant negative effect on audit report lag while the variable financial condition had a significant positive effect on audit report lag. Meanwhile, variables of the accounting complexity, auditor reputation, audit tenure and auditors’ industry specialization did not show significant influence on audit report lag.
Originality/value
This study tests both company’s and auditor’s characteristic on audit report lag that as far as authors know never been tested simultaneously.
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Deepak Verma, Varun Dawar and Pankaj Chaudhary
The present study's goal is to analyze the impact of audit quality (AQ) on earnings quality (EQ) using different audit attributes. The study shows empirical evidence from India…
Abstract
Purpose
The present study's goal is to analyze the impact of audit quality (AQ) on earnings quality (EQ) using different audit attributes. The study shows empirical evidence from India, considered an emerging market.
Design/methodology/approach
The sample selected represents the 376 non-financial firms listed on the Bombay Stock Exchange (BSE). With a 20-year time frame, the authors used the absolute value of discretionary accruals (McNichols, 2002) (DA) as a proxy for EM, which is inversely related to EQ. The authors analyzed data using OLS, fixed effect (FE), 2SLS and Panel-IV estimators.
Findings
The authors found that most audit attributes positively affect EQ. In the Indian context, joint auditor (JA), auditor size (A_SIZE), auditor fee (A_FEE) and auditor tenure (A_TENURE) have a negative association with EM indicating high EQ. In contrast, auditor rotation (A_ROTATON) positively affects EM confirming low EQ.
Research limitations/implications
The present study uses Big-4 and its member firms as a proxy of auditor size (A_SIZE); instead, other bases may be taken for it, like the dominant audit firms in a particular industry in sample data, etc. The authors have started audit tenure from the base year, i.e. 2001, which may ignore the association of auditor and auditee just before 2001.
Practical implications
The study findings would enhance policymakers' willingness to prepare appropriate regulations regarding JAs and auditor rotation, which might improve financial market efficiency and reduce financial fraud among Indian corporates.
Originality/value
To the best of the authors' knowledge, this is the first study to incorporate “Joint Auditor” (JA) as a proxy for audit quality in the Indian context, which might significantly contribute to the literature.
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Olfa Ben Salah and Anis Jarboui
The objective of this paper is to investigate the direction of the causal relationship between dividend policy (DP) and earnings management (EM).
Abstract
Purpose
The objective of this paper is to investigate the direction of the causal relationship between dividend policy (DP) and earnings management (EM).
Design/methodology/approach
This research utilizes the panel data analysis to investigate the causal relationship between EM and DP. It provides empirical insights based on a sample of 280 French nonfinancial companies listed on the CAC All-Tradable index during the period of 2008–2015. The study initiates with a Granger causality examination on the unbalanced panel data and employs a dynamic panel approach with the generalized method of moments (GMM). It further estimates the empirical models simultaneously using the three-stage least squares (3SLS) method and the iterative triple least squares (iterative 3SLS) method.
Findings
The estimation of our various empirical models confirms the presence of a bidirectional causal relationship between DP and EM.
Practical implications
Our study highlights the prevalence of EM in the French context, particularly within DP. It underscores the need for regulatory bodies, the Ministry of Finance, external auditors and stock exchange organizers to prioritize governance mechanisms for improving the quality of financial information disclosed by companies.
Originality/value
This research is, to the best of our knowledge, the first is to extensively investigate the reciprocal causal relationship between DP and EM in France. Previous studies have not placed a significant emphasis on exploring this bidirectional link between these two variables.
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Yuanhui Li, Yezen Kannan, Stephen Rau and Shuning Yang
The aim of this paper is to provide additional insights on the association between real earnings management (REM) and crash risk, particularly from the perspective of an emerging…
Abstract
Purpose
The aim of this paper is to provide additional insights on the association between real earnings management (REM) and crash risk, particularly from the perspective of an emerging market economy. It also examines the moderation role that internal and external corporate governance may play in this area.
Design/methodology/approach
Relying on archival data from the RESSET and CSMAR databases over a timeframe from 2010 to 2018 of China listed company, the authors test the hypotheses by regressing common measures of crash risk on the treatment variable (REM) and crash risk control variables identified in the prior crash risk literature. The authors also introduce monitoring proxies (internal controls as an internal governance and institutional ownership as an external governance) and assess how effective internal and external governance moderate the relation between REM and stock price crash risk.
Findings
The results suggest firms with higher REM have a significantly greater stock price crash risk, and that this association is mitigated by external monitoring. That is, greater institutional ownership, particularly pressure insensitive owners, mitigates the impact of REM on stock price crash risk. However, internal control does not mitigate the association between REM and stock price crash risk.
Originality/value
Following the passage of the Sarbanes–Oxley (SOX) Act, prior research has documented an increase in the use of REM and a positive association between REM and cash risk. The authors demonstrate that they persist in one of the largest emerging markets where institutional regulations, market conditions and corporate behaviors are different from those in developed markets. Also, the assessment of the moderation effect of internal and external governance mechanisms could have meaningful implications for investors and regulators in Chinese and other emerging markets.
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This paper examines the organizational resilience of audit firms during the early stages of COVID-19. The unexpected restrictions placed on travel and on-site working created…
Abstract
Purpose
This paper examines the organizational resilience of audit firms during the early stages of COVID-19. The unexpected restrictions placed on travel and on-site working created unanticipated barriers for auditors in Hong Kong. The authors expect that auditors with greater organizational resilience can respond to unexpected situations and restore expected performance levels relatively quickly.
Design/methodology/approach
The authors utilize a sample of 1,008 companies listed on Hong Kong Stock Exchange (HKEX) with a financial year-end of December 31. The authors identify five proxies contributing to organizational resilience: auditor size, industry specialization, diversity, geographic proximity to the client and auditing a new client. The authors use audit report timeliness as this study's main dependent variable.
Findings
This study's full-sample results suggest that larger auditors, industry specialists and auditors with closer relationships to clients issued more timely audit reports during the pandemic. The analysis of a subsample of companies that initially published unaudited financial statements reveals that industry expertise and longer auditor-client relationships significantly reduced the need for year-end audit adjustments. Finally, the authors find that larger auditors were more likely to offload clients, whereas industry specialists were more likely to retain clients.
Research limitations/implications
The results of the paper suggests that audit firm characteristics associated cognitive abilities, behavioral characteristics and contextual conditions are associated with audit firm organizational resilience and, consequently, helps auditors respond unexpected changes in the audit environment.
Practical implications
The findings of the paper are informative for those involved in audit firm management or auditor hiring and retention decisions.
Originality/value
This study is the first to link organizational resilience to the performance of audit firms in a time of unexpected events. The authors connect three auditor and two auditor-client dimensions to the organizational resilience of the audit firms.
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Kim Ittonen, Emma-Riikka Myllymäki and Per Christen Tronnes
This paper focuses on bank audit committees and examines whether audit committee members who are former auditors are associated with the acquisition of audit and non-audit…
Abstract
Purpose
This paper focuses on bank audit committees and examines whether audit committee members who are former auditors are associated with the acquisition of audit and non-audit services from their former employers.
Design/methodology/approach
The study empirically examines a sample of large banks that are included in the S&P Composite 1500.
Findings
The paper reports significantly lower audit fees and a higher proportion of non-audit fees to total fees when the audit committee chair is an alumnus of the incumbent audit firm. Moreover, additional analysis reveals that these findings are stronger for banks with more earnings management.
Research limitations/implications
Overall, the findings indicate that audit firms might consider banks using their alumni as audit committee chairs to be less risky or easier to audit, thus requiring relatively less effort from the auditors. The reduced effort required to audit clients with audit firm alumni on their audit committees then has the effect of reducing the audit fees charged. Alternatively, their auditing experience and cognitive proximity might influence the assessment of the need for auditing or the ability to negotiate lower audit fees on the part of audit firm alumni.
Originality/value
This paper provides empirical evidence of the association between audit firm alumni in influential positions on an audit committee and fees paid to those audit firms in the banking industry. The findings contribute to the literature by suggesting that banks with affiliated former auditors chairing their audit committees not only have significantly lower audit fees but also a higher proportion is spent on non-audit services.
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