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Article
Publication date: 19 March 2021

Syed Numan Chowdhury and Yasser Eliwa

The purpose of this paper is to examine whether audit quality influence real earnings management activities using a sample of UK listed firms that have strong incentives…

Abstract

Purpose

The purpose of this paper is to examine whether audit quality influence real earnings management activities using a sample of UK listed firms that have strong incentives to manage earnings upward through meeting past year’s earnings as a benchmark in the post-adoption period of International Financial Reporting Standards (IFRS).

Design/methodology/approach

The authors use a sample of 4,774 firm-year observations of UK listed firms during the period 2005–2018. Univariate and multivariate analyses have been conducted to test the association after controlling for firm characteristics and institutional variables.

Findings

The study reports that the presence of Big 4 auditors is significantly and positively related with greater levels of sales and discretionary expenses manipulation. Though the authors do not find any conclusive evidence on production costs manipulation, the aggregated measure of real earnings management shows a significant positive association with the presence of Big 4 auditors.

Practical implications

The study implies that managers who have incentives to manage earnings upward around the UK firms take advantage of the accounting flexibility in defining policies while reducing information asymmetry among the investors to signal better future performance. The approach to detect earnings manipulation as described in the auditing standards fails to limit the managerial use of real activities due to limited scope and unclear guidance. Thus, due to the significant impact on public policies, the results should, therefore, be of interest to the regulators and standard setters.

Originality/value

To the best of the authors’ knowledge, this is the first study that examines the association between audit quality and real earnings management for the UK all-purpose operational firms in sampled data that just meet past year’s earnings as a benchmark in the post-IFRS period.

Details

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

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Article
Publication date: 1 December 2020

Camillo Lento and Wing Him Yeung

This study aims to explore the audit quality supplied by the Big 4, large indigenous Chinese (LIC) and five largest second-tier international network (Tier 2) audit firms

Abstract

Purpose

This study aims to explore the audit quality supplied by the Big 4, large indigenous Chinese (LIC) and five largest second-tier international network (Tier 2) audit firms in China during the second phase of their audit market development.

Design/methodology/approach

Ordinary least squares regression is used on an archival sample of firm-year observations. Endogeneity and self-selection bias are addressed by creating a propensity score matched sample and using two-stage regression with the inverse Mills’ ratio.

Findings

Strong evidence is found for higher levels of actual audit quality for the Big 4 relative to both LIC and Tier 2 audit firms. Weak evidence is found regarding the audit quality superiority of Tier 2 relative to LIC audit firms. Furthermore, the actual audit quality differential between the Big 4 relative to the LIC and Tier 2 firms widens after adopting International Financial Reporting Standards, which is contrary to the intention of Chinese regulators.

Originality/value

To the best of the authors’ knowledge, this is the first known empirical study to trisect Big N and non-Big N audit firm proxies into the Big 4, LIC and Tier 2. Currently, only qualitative studies have fully appreciated the unique regulatory roles of these three firm structures in developing China’s audit market, which reflect tensions between reliance on foreign expertise and self-determination. In addition, this study adds to the ongoing global dialogue on Tier 2 as an alternative to the Big 4 and the benefits of international accounting network membership.

Details

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

Keywords

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Article
Publication date: 29 September 2020

Babajide Oyewo, Oluwafunmilayo Ajibola and Mohammed Ajape

This study investigates the characteristics of business and management consulting firms (firm size, international affiliation and scope of operation) affecting the…

Abstract

Purpose

This study investigates the characteristics of business and management consulting firms (firm size, international affiliation and scope of operation) affecting the adoption rate (i.e. recency of adopting big data analytics (BDA) as a new idea) and usage level of BDA. Ten critical areas of BDA application to business and management consulting were investigated, (1) Human Resource Management; (2) Risk Management; (3) Financial Advisory Services; (4) Innovation and Strategy; (5) Brand Building and Product Positioning; (6) Market Research/Diagnostic Studies; (7) Scenario-Based Planning/Business Simulation; (8) Information Technology; (9) Internal Control/Internal Audit; and (10) Taxation and Tax Management.

Design/methodology/approach

Survey data was obtained through a structured questionnaire from one hundred and eighteen (118) consultants in Nigeria from diverse consulting firm settings in terms of size, international affiliation and scope of operation (Big 4/non-Big 4 firms). Data was analyzed using descriptive statistics, cluster analysis, multivariate analysis of variance (MANOVA), multivariate discriminant analysis and multivariable logistic regression.

Findings

Whereas organizational characteristics such as firm size, international affiliation and scope of operation significantly determine the adoption rate of BDA, two attributes (international affiliation and scope of operation) significantly explain BDA usage level. Internationally affiliated consulting firms are more likely to record higher usage level of BDA than local firms. Also, the usage level of BDA by the Big 4 accounting/consulting firms is expected to be higher in comparison to non-Big 4 firms.

Practical implications

Contrary to common knowledge that firm size is positively associated with the adoption of an innovation, the study found no evidence to support this claim in respect of the diffusion of BDA. Overall, it appears that the scope of operation is the strongest organizational factor affecting the diffusion of BDA among consulting firms.

Originality/value

The study contributes to knowledge by exposing the factors promoting the uptake of BDA in a developing country. The originality of the current study stems from the consideration that it is the first, to the researchers' knowledge, to investigate the application of BDA by consulting firms in the Nigerian context. The study adds to literature on management accounting in the digital economy.

Details

Journal of Asian Business and Economic Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2515-964X

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Article
Publication date: 20 August 2020

Mohamed M. El-Dyasty and Ahmed A. Elamer

Although a number of studies suggest that big audit firms provide higher audit quality in strict legal environments, empirical evidence remains inconclusive. As little is…

Abstract

Purpose

Although a number of studies suggest that big audit firms provide higher audit quality in strict legal environments, empirical evidence remains inconclusive. As little is known about the effect of auditor type on audit quality in less strictly legal environments, this study aims to investigate the impact of auditor type on audit quality in the Egyptian market.

Design/methodology/approach

Data of Egyptian-listed companies during the period 2011–2018 are used. To examine the impact of auditor type on audit quality, ordinary least square regression and robust standard errors clustered at year and industry level are used. This study uses discretionary accruals as a proxy for audit quality. Several additional analyzes are conducted to assess the robustness of the main results, including alternative measures of audit quality and auditor type.

Findings

The results show that audit firms tend to provide higher audit quality when they are affiliated with a foreign audit firm. However, Big 4 auditors do not provide higher audit quality compare to their counterparts. Additionally, the governmental agency, accountability state authority, that monopolize audit function in state-owned companies do not appear to be associated with higher audit quality. Finally, local audit firms have a negative association with audit quality. This may be their strategy to secure future clients that seek low-quality audits.

Research limitations/implications

This study suggests that affiliation with foreign audit firms will help the Egyptian firms to develop their abilities by using advanced technology and techniques and transfer rare expertize to the Egyptian auditors. This study also shows that the strategy adopted by many Egyptian audit firms to affiliate with foreign auditors reflects the desire of these firms to be included in one tier alongside Big 4 audit firms to increase their market share under a claim of providing a higher audit quality.

Originality/value

This study adds to the rare but growing body of literature by investigating how auditor type affects audit quality in the context of less strictly legal environments. The results are important, as investors, standards-setters and regulators have growing concerns over audit quality since the Enron scandal. The findings suggest that audit quality depends on auditor type. These findings have important implications for investors, standards-setters and auditors interested in auditor oversight, audit quality and auditor choice.

Details

International Journal of Accounting & Information Management, vol. 29 no. 1
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 21 February 2020

Rong-Ruey Duh, Chunlai Ye and Lin-Hui Yu

The purpose of this study is to examine whether the corruption level of a country is associated with a firm’s decision to choose Big 4 versus non-Big 4 auditors. In…

Abstract

Purpose

The purpose of this study is to examine whether the corruption level of a country is associated with a firm’s decision to choose Big 4 versus non-Big 4 auditors. In addition, the authors examine whether firms that are cross-listed in a country with a corruption level different from that of the home country are more likely to appoint Big 4 auditors.

Design/methodology/approach

Based on a sample of 185,549 firm-year observations from 78 countries over 2003-2012, panel regression analysis is used to investigate the research questions.

Findings

The authors find a negative association between corruption and the propensity to hire Big 4 auditors and that cross-listed firms are more likely to hire Big 4 auditors than their domestic counterparts. Interestingly, the authors find that when firms cross-list in less corrupt countries relative to their home countries, firms are more likely to hire Big 4 auditors. However, this tendency disappears when firms cross-list in more corrupt countries.

Originality/value

The authors contribute to the audit choice literature by providing evidence that the political environment, as manifested in the corruption level of a country, plays a role in the decision to choose Big 4 versus non-Big 4 auditors. The study complements the prior auditor choice literature, which focuses mostly on single countries such as the USA, by expanding the scope to 78 countries. Furthermore, the authors enhance the understanding of how the absolute and relative performance of the political environment affects cross-listed firms’ choice of auditors.

Details

Review of Accounting and Finance, vol. 19 no. 2
Type: Research Article
ISSN: 1475-7702

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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

Keywords

Content available
Article
Publication date: 16 January 2017

Ataur Belal, Crawford Spence, Chris Carter and Jingqi Zhu

The purpose of this paper is to explore the work practices of Big 4 firms in Bangladesh with the aim of exploring the extent to which global professional service firms

Abstract

Purpose

The purpose of this paper is to explore the work practices of Big 4 firms in Bangladesh with the aim of exploring the extent to which global professional service firms (GPSFs) can be thought of as being genuinely “global”.

Design/methodology/approach

Interviews were undertaken with the vast majority of Big 4 partners in Bangladesh. These interviews explored a number of themes related to the professional service work context in Bangladesh and the relationship between local and global firms.

Findings

The central finding of this paper is that although the Big 4 have a long-established presence in Bangladesh, local societal factors heavily influence the realities of work for accountants there. In most cases the Big 4 firms establish correspondent firms (instead of full member firms) in Bangladesh and tend to offer restricted service lines. Additionally, the paper identifies professional, commercial and cultural barriers to greater Big 4 involvement in the local market. Conceptually, the chief contribution of this paper is to explore how the effects of globalizing capitalism and standardised “best practices” in global professional service work are mediated through the societal effects of Bangladeshi society, resulting in the Big 4 having only a tentative presence in the Bangladeshi market.

Research limitations/implications

The findings cast doubt on the extent to which self-styled GPSFs are truly “global” in nature. Future work examining the Big 4, or accounting more generally, in the context of globalization, would do well to pay greater attention to the experience of professionals in emerging markets.

Originality/value

Whilst there has been much work looking at accounting and accountants in the context of globalization, this work has tended to privilege “core” western empirical settings. Very little is known about professional service firms in “peripheral” emerging markets. Furthermore, this study extends the application of the system, society and dominance framework by mapping the interactions and dynamics of these three sources of influence in the setting of PSFs.

Details

Accounting, Auditing & Accountability Journal, vol. 30 no. 1
Type: Research Article
ISSN: 0951-3574

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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.

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

Keywords

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Article
Publication date: 12 October 2010

Khaled Samaha and Mohamed Hegazy

This study aims to examine the International Standards on Auditing (ISA) number 520 relating to analytical procedures (APs) and adapt relevant aspects of prior studies on…

Abstract

Purpose

This study aims to examine the International Standards on Auditing (ISA) number 520 relating to analytical procedures (APs) and adapt relevant aspects of prior studies on APs to the Egyptian audit context. The study investigates the extent of use of APs in Egypt during the three main stages of an audit by size of firms and level of staff. It examines auditors' perceptions of the frequency and effectiveness of different types of APs in achieving a selected set of audit objectives. The study also identifies the types of assurance provided by APs and their influence on detailed testing as well as analyzing the role of auditing standards in the context of the use of APs.

Design/methodology/approach

The design and research method are empirical using a questionnaire survey to collect information on actual uses of APs from 14 audit firms in Egypt which audit the 100 actively traded companies on the Egyptian Stock Exchange (EGX) as measured by the EGX 100 index. The survey was carried out between 2008 and 2009.

Findings

The results of the study showed relatively low use of APs by Egyptian auditors with wide variations in its use by Big 4 and other auditing firms. Auditors from Big 4 firms are found to use APs to a greater extent than auditors from non‐Big 4 firms. Also, the reliance on APs tends to differ by auditors rank and position. The majority of auditors consider APs useful in achieving audit objectives. Audit firms of all size continue to emphasize judgment‐based compared to quantitatively based procedures. The results also indicated a lack of confidence in the use of APs as substantive procedures. Finally, the study confirmed prior research findings in that auditing standards are regarded as most effective in codifying existing large firms practice. It was found that ISA 520 has been least effective in stimulating change in the Egyptian audit practice.

Research limitations/implications

The different economic, political, educational, and culture environment in Egypt may restrict the generalisability of this study results.

Practical implications

In order to increase the use of APs by Egyptian auditors in the various stages of the audit engagement, auditors need to understand the requirements of the Egyptian Auditing Standards regarding their use. Auditors also need to be aware of the application of various APs techniques, especially those associated with statistics and mathematical models. Educational institutions and the Egyptian Association of Accountants and Auditors must play significant role in educating auditors about APs techniques and their use in planning, testing and final review of the financial statements.

Originality/value

This paper contributes to an understanding of the nature and uses of APs within the Egyptian culture and economic context. The study will stimulate further research in understanding the importance of the use of APs in audit engagements in different perspectives.

Details

Managerial Auditing Journal, vol. 25 no. 9
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 3 July 2017

Arnold Schneider

This paper aims to examine whether knowledge about companies switching auditors from Big 4 firms to regional firms affects commercial lending decisions.

Abstract

Purpose

This paper aims to examine whether knowledge about companies switching auditors from Big 4 firms to regional firms affects commercial lending decisions.

Design/methodology/approach

The approach used is an experiment where bank loan officers make judgments about risk and probabilities of granting a line of credit.

Findings

Neither risk assessments nor probabilities of granting credit differed for companies that switch auditors from Big 4 firms to regional firms as compared to companies that did not switch auditors. For companies that did switch auditors, providing a reason for the switch did not influence lending decisions.

Research limitations/implications

Lenders were given questionnaires that do not contain all of the information they may have used in actual loan decision settings. Also, the hypothetical nature of the decisions and incentives may not produce the responses that would be given in actual lending scenarios.

Practical implications

When applying for bank loans, companies need not be concerned about having switched auditors from Big 4 to regional firms. Also, companies that switch from Big 4 firms to regional firms need not worry about whether or not to provide a reason for the audit firm switch.

Originality value

This study adds to the auditor switching literature by investigating the effects of switches from Big 4 firms to regional firms on commercial lending decisions.

Details

Accounting Research Journal, vol. 30 no. 2
Type: Research Article
ISSN: 1030-9616

Keywords

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