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Article
Publication date: 8 February 2022

Saeed Rabea Baatwah

In response to the users of financial statements’ need for better communication value from audit reports, auditors are required to expand the format and content of their…

Abstract

Purpose

In response to the users of financial statements’ need for better communication value from audit reports, auditors are required to expand the format and content of their reports. This paper aims to investigate the heterogeneity of key audit matters (KAM) for big4 audit firms.

Design/methodology/approach

Using a pool of 273 year-observations from the Omani capital market for the period 2016–2019, a quantile regression approach is adopted to achieve this purpose because it can provide a broader picture of this heterogeneity.

Findings

The results indicate that all types of big4 audit firms are associated with lower numbers of KAM. However, each big4 audit firm reports these KAM differently. Also, the results indicate heterogeneity in the number of KAM among the partners of each firm. Specifically, partners in some big4 audit firms show a significant association with fewer KAM while others are insignificant. Some partners of Ernst and Young show a positive association with a higher number of KAM. Overall, the results confirm the heterogeneity among auditors in styling their KAM disclosure.

Originality/value

There are crucial implications for various policymakers. This paper is the first to analyse KAM aspects at the partner level and use quantile regression to detect the effect of audit firms on KAM.

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: 14 May 2020

Heny Kurniawati, Philippe Van Cauwenberge and Heidi Vander Bauwhede

This paper aims to investigate whether the choice for a Big4-affiliated local audit firm affects the capital structure of listed companies in Indonesia, a fast-growing…

Abstract

Purpose

This paper aims to investigate whether the choice for a Big4-affiliated local audit firm affects the capital structure of listed companies in Indonesia, a fast-growing emerging country that is characterized by high information asymmetry and low litigation risk. A unique characteristic of the Indonesian audit environment is that Big4 auditors can only enter the market indirectly through affiliation with a local audit firm.

Design/methodology/approach

A sample of Indonesian listed companies between 2008 and 2015 is used to investigate this relation using ordinary least squares (OLS). To address the concern that the choice for Big4-affiliated auditors might reflect client characteristics, the authors also perform OLS on a matched sample, using both propensity-score and entropy-balance matching.

Findings

Across all three samples, the authors document that companies audited by a Big4-affiliated local audit firm display lower debt ratios. The authors find no such effect for affiliation with second-tier audit firms. Surprisingly, they find that the negative effect of Big4 affiliation is increasing in client size.

Research limitations/implications

This study provides evidence of the consequences of hiring Big4 auditors on the perceived information asymmetry by financial markets under extreme conditions: in an environment characterized by low litigation risk and where Big4 auditors can operate only indirectly through affiliation.

Practical implications

The results of this study are of interest to policymakers, managers and financial stakeholders in emerging countries where external financing is important yet difficult to obtain because of severe information asymmetry. Hiring a Big4 auditor, even only through affiliation, might reduce perceived information asymmetry and increase the access to external equity financing.

Originality/value

To the best of the authors’ knowledge, this study is the first to provide evidence of the effect of Big4 auditors on their clients’ capital structure when they can operate only indirectly through affiliation with a local auditor.

Details

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

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: 5 January 2010

Tom Van Caneghem

The purpose of this paper is to study audit pricing and the Big4 fee premium in Belgium. While a number of studies have already explored these issues, the Belgian audit…

3895

Abstract

Purpose

The purpose of this paper is to study audit pricing and the Big4 fee premium in Belgium. While a number of studies have already explored these issues, the Belgian audit market provides an interesting setting to gain an additional insight into the pricing of audit services for many reasons (e.g. audit market concentration in Belgium is much lower than in other countries, the Belgian audit market mainly consists of non‐listed firms, etc.).

Design/methodology/approach

Besides the traditional audit fee model, based on seminal work by Simunic, the paper also estimates regression models in which the author allows coefficients to vary across Big4 and non‐Big4 auditors and control for self‐selection (based on a two‐stage procedure).

Findings

Using the traditional audit fee model, results suggest that Big4 auditors receive (or are able to charge) a fee premium compared to non‐Big4 auditors. Nevertheless, when the author allows regression coefficients to vary across Big4 and non‐Big4 auditors and control for self‐selection, the aforementioned finding does no longer hold. The results reveal differences in fee structures between Big4 and non‐Big4 auditors and suggest that Big4 auditors consider a richer set of variables when setting their fees.

Research limitations/implications

Since Belgian firms are only required to disclose audit fees as from 2007 onwards, the analyses are based on data for one year only.

Practical implications

An important implication, at least from an academic point of view, is that the results clearly illustrate and corroborate the need to control for self‐selection when modelling audit fees (while this issue has been ignored by recent audit fee studies). The findings also have implications for the (Belgian) auditing profession. For example, the fact that significant differences are observed in audit pricing between the Big4 and non‐Big4 firms may have an impact on the (Belgian) audit services market (e.g. it might influence the competitive nature of the tendering process).

Originality/value

Using a two‐stage procedure, the results corroborate the need to control for self‐selection in modeling audit fees (an issue that has been largely ignored in the audit fee literature). In addition, the results reveal that Big4 and non‐Big4 auditors have different fee structures and that it is therefore important to allow the regression coefficients (and not only the intercept) to vary across both groups. Finally, the findings add to the very scarce evidence on audit pricing for non‐listed firms.

Details

Managerial Auditing Journal, vol. 25 no. 2
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 1 November 2022

Asif Saeed, Zahid Munir and Muhammad Wasif Zafar

The purpose of this study is to examine whether companies with high audit quality (AQ) are expected to use trade credit (TC) as a financing source. Traditionally, vendors…

Abstract

Purpose

The purpose of this study is to examine whether companies with high audit quality (AQ) are expected to use trade credit (TC) as a financing source. Traditionally, vendors are most likely to extend TC to creditworthy customers.

Design/methodology/approach

The author uses the data from 134,099 firm-year observations of nine Asian emerging markets from 2001 to 2017. Further, to check the impact of AQ on trade credit, the authors employ ordinary least square (OLS) with fixed effects, cluster effect regression and random effect.

Findings

The findings indicate that vendors extend more TC to the companies audited by the BIG4 auditors as, these independent practitioners have greater competencies, expert intellectual capital, global networking connections, and high investment in information technology. The authors, therefore, conjecture that the company's use of TC increases with their improved AQ, especially audited by BIG4. The results are found consistent with this prediction and robust to the alternative measures of trade credit. Similarly, this positive association is more pronounced with the BIG4 partner's unqualified audit opinion.

Research limitations/implications

This study uses the sample of Asian Emerging countries but the researchers cannot generalize the results to developed countries or other regions.

Practical implications

This paper's findings have significant implications for the management, board of directors, shareholders and suppliers. Further, results are in favor of appointing BIG4 auditors to gain the trust of suppliers.

Originality/value

Despite the wide-ranging literature that discusses the importance of quality audits in enhancing the firms' financial disclosures that leads to better access to finance through investors and lenders. But the TC as a financing source is ignored in relation to AQ. The study’s results extend the literature associating companies' AQ with financial decisions.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 12 April 2022

Ogan Yigitbasioglu, Peter Green and May-Yin Decca Cheung

The purpose of this study is to explore the role of accountants as advisors in professional services firms (PSFs), and it examines the impact of digital transformation on…

Abstract

Purpose

The purpose of this study is to explore the role of accountants as advisors in professional services firms (PSFs), and it examines the impact of digital transformation on the work, knowledge and skills of accountants in their role as advisors in PSFs.

Design/methodology/approach

Data were collected using semi-structured interviews predominantly with partners in Australian PSFs, including the Big4 and directors of professional accounting bodies.

Findings

The findings show that accountants as advisors fill a critical role in PSFs as they represent substantial human capital for such firms. Accountants as advisors are a valuable strategic resource because of their unique capabilities in combining generic human capital with digital human capital and social capital resources. Some differences between the Big4 and non-Big4 were found in terms of services offered that were attributable to the respective industry foci and resource availability.

Practical implications

The findings have broader implications for both the accounting profession and the education sector in terms of providing a better, and more overt, understanding of what the future holds for the accounting profession and the relevant knowledge and skills required. Also, recruiters and managers at PSFs are likely to benefit from the findings.

Originality/value

Evidence from PSFs provides insights into an evolutionary path for the accounting profession, and the knowledge and skills accountants need to work in that increasingly competitive domain, due to digital transformation.

Details

Accounting, Auditing & Accountability Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0951-3574

Keywords

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: 5 June 2017

Adriana Rossi and Lara Tarquinio

This paper aims to achieve the following objectives. First, through a longitudinal study, the authors explore the trend of voluntary external assurance of sustainability…

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Abstract

Purpose

This paper aims to achieve the following objectives. First, through a longitudinal study, the authors explore the trend of voluntary external assurance of sustainability reports among Italian listed companies from 2008 to 2012. Thus, the authors aim to analyse the content level of the assurance statements and to test whether it is affected by certain corporate variables and by the type of practitioner chosen.

Design/methodology/approach

A legitimacy theory framework is adopted to investigate the phenomenon of sustainability report assurance services in Italy. The authors developed an assurance statement disclosure index (ASDI) constructed on the basis of the standards ISAE 3000 and AA1000AS. Thus, the authors tested whether the ASDI is affected by certain corporate variables using an ordinary least square (OLS) regression model. To test how each specific item is related to the assurance provider, a contingency table was developed.

Findings

The results of this paper show many differences in the assurance statements content in particular with reference to the criteria used, conclusive comments and recommendations. The presence of a corporate social responsibility committee and an expert who serves on it is positively related to a higher rank on the ASDI. In contrast, Big4 firms seem to be associated with a lower disclosure rank. Finally, Big4 are positively associated with the indications of the provider’s characteristics and negatively with their conclusive comments and recommendations.

Originality/value

This paper presents some findings in an area where little evidence exists, that is, the effects of some variables on the quantity of information disclosed in the assurance statements.

Details

Managerial Auditing Journal, vol. 32 no. 6
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 3 April 2018

Md. Borhan Uddin Bhuiyan and Jamal Roudaki

This paper aims to examine the existence of related party transactions (RPTs) in failed financial companies in New Zealand when firms have interlocking directors on the…

Abstract

Purpose

This paper aims to examine the existence of related party transactions (RPTs) in failed financial companies in New Zealand when firms have interlocking directors on the board. We also examine the role of auditors in the review of RPTs. We anticipate that inter-company director relationships promote RPTs, while reputable large auditors (i.e. Big4) restrict the practice.

Design/methodology/approach

This study uses multivariate analysis to examine the determinants of RPTs. We use an unique, hand-collected database of New Zealand finance companies all of which collapsed during the years 2006-2011.

Findings

Using a sample of 65 firms (including 38 failed finance firms) and 219 firm-year observations, we found that almost half of the failed finance firms were engaged in RPTs. For the failed firms, those that were engaged in RPTs were mostly represented by interlocking directors and were audited by non-Big4 auditors, implying lower monitoring quality may facilitate RPTs. Using a sub-sample, we also found evidence that firms engaged in RPTs were later convicted of questionable accounting and disclosure practices.

Practical implications

This research is beneficial to regulators and audit professionals in understanding the potential for adverse outcomes associated with interlocking directors and undisclosed RPTs. While interlocking directors could enrich the external connections of a firm which might facilitate capital resourcing, this study suggests regulators might encourage firms to disclose RPTs when the firm has higher interlocked directors.

Originality/value

This study is the first to examine the association between RPTs and interlocking directors using a sample of failed finance companies. RPTs and lack of disclosure were widely attributed with being the determinants of corporate failure in the finance sector. However, failed finance firms remain widely under-researched because of a lack of available data. This study circumvent this limitation by using print media and business news portals to collate information on RPTs and interlocking directors. While prior research indicates that weak corporate governance leads to poor accounting practice, using the interlocking board as a proxy for weak corporate governance, this study is the first to substantiate the adverse effect of interlocking boards and undisclosed RPTs with corporate failure.

Details

Pacific Accounting Review, vol. 30 no. 2
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 6 November 2019

Angel Arturo Pacheco Paredes and Clark Wheatley

This study aims to extend recent research analyzing the effect of auditor busyness on audit quality. Specifically, this study explores the effect on audit quality of a…

Abstract

Purpose

This study aims to extend recent research analyzing the effect of auditor busyness on audit quality. Specifically, this study explores the effect on audit quality of a change of fiscal year-end to or from an audit firm’s busy period.

Design/methodology/approach

Empirical archival.

Findings

When firms change their fiscal year-end to a period when the auditor is less busy, client firms are rewarded with lower audit fees and auditors are rewarded with a reduction in required effort. This study finds no difference in the level of audit quality after a change in fiscal year-end.

Practical implications

There are significant implications for audit firms as they may gain cost advantages by successfully promoting off-season fiscal year-ends, and reduce the negative effect on employees associated with “busy season” stress. Similarly, client firms may find that audit costs are reduced when they adopt a less “busy” fiscal year-end.

Social implications

These results have policy implications for regulators because regulators often dictate the fiscal year-end for certain industries or traded securities. Such dictates may thus introduce inefficiencies into the market for audit services.

Originality/value

These results should guide regulators in their decisions to dictate fiscal year-ends and firms in their choice of reporting periods.

Details

Journal of Financial Economic Policy, vol. 12 no. 3
Type: Research Article
ISSN: 1757-6385

Keywords

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