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1 – 10 of 157Zhuoan Feng, Lina Zixuan Li, Hau Yan Wong and Jilnaught Wong
This paper aims to examine how auditors respond through audit fees and audit quality following disciplinary actions imposed by audit regulators in an emerging market setting.
Abstract
Purpose
This paper aims to examine how auditors respond through audit fees and audit quality following disciplinary actions imposed by audit regulators in an emerging market setting.
Design/methodology/approach
This paper uses the disciplinary actions in 2017 against two major audit firms in China as an exogenous shock to examine the effect of tougher enforcement actions on auditor behavior as reflected in their emended audit fees and audit quality. This paper sampled from publicly listed firms in China with requisite data for the period 2015 through 2018. Using a difference-in-differences model, this paper examines whether the enforcement action (i.e. the suspension of audit firms) significantly impacted the audit fees and audit quality for clients of the disciplined audit firms (hereafter, suspended audit firms) in the two-year period postsuspension relative to audit firms that were not disciplined (hereafter, nonsuspended audit firms).
Findings
This paper finds evidence of increased audit fees and improved audit quality by the suspended audit firms relative to the nonsuspended audit firms in the two-year period postsuspension. These findings suggest that in contrast to symbolic disciplinary actions such as public censures documented in prior literature (Boone et al.,2015), tougher punitive disciplinary actions are followed by an increase in audit fees and an improvement in audit quality by the suspended audit firms. This paper also finds that the deterrent effect from the audit firm suspension is exclusive to the penalized audit firms and had no positive spillover effects on their peers.
Research limitations/implications
A limitation of this study is the focus on the effect of audit firm suspension against two large local audit firms in China. Given the unique characteristics of the Chinese audit market and the Chinese regulatory environment, our findings may not be generalizable to audit firms in other countries and jurisdictions, especially where the audit market is dominated by the international Big 4 auditors that possess greater brand name capital than second-tier local audit firms.
Originality/value
This paper provides novel evidence on the impact of strengthened enforcement on auditor behavior in an emerging market setting. This paper contributes to the existing literature examining the impact of regulatory interventions on financial reporting outcomes and audit quality. While there is evidence on how regulations affect financial statement preparers’ demand for high audit quality, there is limited research on how regulatory interventions affect auditor’s incentive to supply higher audit quality. This paper also contributes to the scant existing evidence on the effect of disciplinary actions against audit firms in emerging economies.
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Md Khokan Bepari, Shamsun Nahar, Abu Taher Mollik and Mohammad Istiaq Azim
In this study the authors examine the nature and contents of key audit matters (KAMs), and the consequences of KAMs reporting on audit quality in the context of a developing…
Abstract
Purpose
In this study the authors examine the nature and contents of key audit matters (KAMs), and the consequences of KAMs reporting on audit quality in the context of a developing country, Bangladesh. The authors’ proxies of audit qualities are discretionary accruals, small positive earnings surprise, audit report lag, earnings management via below the line items and audit fees.
Design/methodology/approach
The authors use content analysis of the KAMs for the period 2018–2021 to understand the nature and extent of KAMs reported by auditors in Bangladesh. The authors then use multivariate regression analysis to examine the effect of the number and content characteristics of KAMs on audit quality by using multivariate regression analysis.
Findings
Auditors in Bangladesh disclose a higher number of KAMs compared to other countries, disclose short descriptions of KAMs and industry generic KAMs. The authors document significant cross-sectional variations in the number and content characteristics of KAMs reported by auditors in Bangladesh. The authors’ pre-post analysis suggest that audit quality has improved after the adoption of KAMs. Cross-sectional analysis suggests that KAMs number and content characteristics are related to audit quality.
Practical implications
The authors’ findings imply that the KAMs reporting has the potential to play significant monitoring role in reducing the opportunistic behavior of managers. Hence, KAMs reporting can play a significant role in reducing the agency problem. For regulators, shareholders and corporate managers, the authors’ findings imply that if the audit quality is to be increased, the audit effort should be supported by an appropriate amount of audit fee.
Social implications
The content characteristics of KAMs significantly influence managerial reporting behavior and affect the level of audit efforts.
Originality/value
Unlike developed countries (Gutierrez et al., 2018; Lennox et al. 2022), this study supports that KAMs reporting improves audit quality and control opportunistic behavior of managers in developing countries. The authors show that even though the KAMs disclosure quality is poor, it has the potential to improve financial reporting quality.
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Nafisah Yami, Jannine Poletti-Hughes and Khaled Hussainey
The authors motivate this research on the gender diversity of the board because of the recent increases in the number of women in top executive teams (Francis et al., 2015), which…
Abstract
Purpose
The authors motivate this research on the gender diversity of the board because of the recent increases in the number of women in top executive teams (Francis et al., 2015), which has probably been the result of the adoption of legislation for gender quotas as well as the establishment of corporate governance recommendations for gender diverse boards in several countries. The purpose of this study is to consider the quality of board directors when examining the effect of female directors on earnings management.
Design/methodology/approach
The analyses follow the system generalized method of moment to address endogeneity concerns (e.g. a board with higher quality is more likely to have female directors on board and vice versa). Besides the lags of the endogenous variables, the authors use the female industry ratio as an additional instrument (Liu et al., 2014), as female directors might be inspired by other female directors according to industrial sectors (measured by the two-digit industry codes), where competitors are likely to follow gender diversity practices of other firms within the same industrial sector.
Findings
The authors’ findings show a negative and significant association between board gender diversity and earnings management (EM), suggesting that independent female directors are the drivers of such effect. High-quality boards decrease the incidence of EM but hinder the potential involvement from female directors towards reducing EM. The incumbent effect of high-quality boards on female director’s contribution on EM reverses with less powerful CEOs.
Originality/value
The authors contribute to the extant literature by recognizing that the effectiveness of a female director on decreasing EM is a function of the environment in which decision-making takes place (i.e. board quality/powerful CEOs).
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Shilin Liu, Noor Adwa Sulaiman and Suhaily Shahimi
Using attribution theory, this study examined the effects of situational factors [time budget pressure (TBP), organisational ethical culture (OEC) and quality control procedures…
Abstract
Purpose
Using attribution theory, this study examined the effects of situational factors [time budget pressure (TBP), organisational ethical culture (OEC) and quality control procedures (QCPs)] and dispositional factors [auditor professional commitment (APC) and internal locus of control (ILOC)] on audit quality threatening behaviour (AQTB). In addition, it observed the moderating role of religiosity in the relationship between situational and dispositional factors and AQTB.
Design/methodology/approach
A total of 189 external auditors responded to the survey questionnaire. This study employed structural equation modelling via SmartPLS to analyse the proposed model.
Findings
The results documented that the OEC and QCPs situational factors were negatively related to the incidence of AQTB, whilst TBP was positively linked to the incidence of AQTB. Dispositional factors APC and ILOC were negatively connected to AQTB. Furthermore, the findings recorded the moderating effect of religiosity on most of the situational and dispositional factors related to AQTB.
Practical implications
Regulators and accounting firms' efforts to promote high audit quality (AQ) may consider the theological/religious lens and reinforce ethical culture and quality control to reduce AQTB.
Originality/value
The findings provide further insights into situational and dispositional factors that may cause or impede the incidence of AQTB in auditing practices, as well as the moderating role of religiosity in curbing AQTB.
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Md Jahidur Rahman, Hongtao Zhu, Yiling Zhang and Md Moazzem Hossain
This study aims to investigate whether gender diversity in audit committees affects the purchase of nonaudit services in China. Results from family and nonfamily firms are…
Abstract
Purpose
This study aims to investigate whether gender diversity in audit committees affects the purchase of nonaudit services in China. Results from family and nonfamily firms are compared and the critical mass participation of females are further examined.
Design/methodology/approach
The sample comprises 1,834 Chinese listed companies from 2012 to 2021, among which 910 are family firms. The Heckman (1979) two-stage model is used to mitigate the potential endogeneity issue in the selection of gender diversity. Propensity score matching is also used to further alleviate the endogeneity problem in relation to family firms.
Findings
Results show a significant and negative correlation between the gender diversity in audit committees and nonaudit service fees. This association is more apparent in nonfamily than in family firms. Findings are consistent and robust to endogeneity tests and sensitivity analyses. The analysis of critical mass and symbolic participation shows that three female directors can more significantly restrain nonaudit fees than one to two females on the board.
Practical implications
This study contributes to literature on resource dependence theory, which posits that audit committees help enterprises establish contact with auditors, improve the company legitimacy, assist in communication and provide relevant expertise. This study also relates to agency theory, which holds that differences in the severity of types I and II agency problems between family and nonfamily firms lead to differences in auditor selection and related costs.
Originality/value
Extending from previous research on the relation between the gender diversity in audit committees and nonaudit fees, the present study delves into this connection within the context of China, an emerging economy. As a result, this investigation offers novel insights and expands upon current knowledge. In addition, the correlation between the gender diversity of audit committees and nonaudit fees is explored for family and nonfamily firms.
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The purpose of this study is to shed light on the relationships between the different types of ownership structure and tax avoidance activities and examine the moderating effect…
Abstract
Purpose
The purpose of this study is to shed light on the relationships between the different types of ownership structure and tax avoidance activities and examine the moderating effect of audit quality.
Design/methodology/approach
This study used secondary data from the listed companies in Amman Stock Exchange (2009–2020). To obtain additional robust findings, this study used various proxies for measuring tax avoidance (effective tax rate [ETR] and cash flow effective tax rate [CFETR]).
Findings
Relying on various proxies for tax avoidance, the results reveal that family and managerial ownership lead to exacerbating tax avoidance activities. Although institutional and board ownership have a positive impact on ETR and CFETR, which indicate that these type of ownership have a negative impact on tax avoidance. Audit quality also has a significant role in moderating the ownership structure–tax avoidance relationships. Besides, the results reveal that audit firm size is not merely symbolic words, but it contributes to reducing and restricting tax aggressiveness.
Research limitations/implications
This study has policy implications related to the policymakers in creating future tax policies to minimize and avoid tax avoidance activities. Results of this study can be used to improve awareness among the various owners and to reduce the tax avoidance practices in the developing countries. It also determines a good agenda for research in the relationships between ownership identities, audit quality and tax avoidance, which also can be used to encourage and guide future studies.
Originality/value
This research extends the existing literature by examining both the direct and indirect influence of ownership structure on tax avoidance in Jordanian firms by including audit quality as a moderating variable. This is a pioneering and unique study examining the joint influence of the different forms of ownership on tax avoidance. To the best of the author’s knowledge, this study is the first of its kind that examines the interaction influences between the various identities of ownership and audit quality on the tax avoidance activities in the Jordanian context.
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Marwa Elnahass, Muhammad Tahir, Noora Abdul Rahman Ahmed and Aly Salama
This study examines the association between internal corporate governance mechanisms (i.e. board of directors and audit committee) and the information value of bank earnings. The…
Abstract
Purpose
This study examines the association between internal corporate governance mechanisms (i.e. board of directors and audit committee) and the information value of bank earnings. The authors comparatively assess this association across different bank types, Islamic versus conventional banks. The authors also investigate the mediating effect of Shariah governance.
Design/methodology/approach
The authors utilize a unique and an international sample of 723 bank-year observations representing 100 listed banks from 16 countries during the period 2007–2015. The authors investigate the characteristics of the board of directors and audit committee (i.e. size and independence) and employ three core analyses for earnings informativeness (i.e. earnings persistence, cash flow predictability and reliability of loan loss provisions). Additional analyses address Shariah supervisory boards’ (SSBs’) size, financial expertise and multiple outside directorships. The authors use the random-effect Generalised Least Squares (GLS) estimation technique and provide several robustness checks and sensitivities.
Findings
The authors find that, on average, having large and independent boards (and audit committees) increases the informativeness of reported earnings for banks. Conditional on bank type, our results report strong evidence for differential effects across the two alternative banking systems. In Islamic banks, large and independent board of directors (and audit committees) is positively associated with all measures of information value. There is insignificant evidence for conventional banks. However, SSBs show no significant effect on the reported earnings’ informativeness.
Originality/value
This is the first study, to the best of our knowledge, that empirically and comparatively assesses the information value of reported earnings in association with effective internal governance while recognizing the institutional characteristics of different bank types. The authors offer new insights to policymakers, investors and other stakeholders located within countries operating on a dual banking system. The results could help regulators to improve their rules/guidance related to double-layer governance and financial reporting quality.
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Georgia Kontogeorga and Anna Papapanagiotou
The purpose of this paper is to examine how Supreme audit institutions (SAIs) address the issue of auditing ethical cases and, more specifically, to research whether the…
Abstract
Purpose
The purpose of this paper is to examine how Supreme audit institutions (SAIs) address the issue of auditing ethical cases and, more specifically, to research whether the organizational structure of an SAI affects the variables of “corruption” and “trust in government.”
Design/methodology/approach
The authors categorized SAIs into two groups depending on their organizational structure according to two divergent philosophies: the court (French) and Anglo-Saxon models. These reflect the presidential and parliamentary systems, respectively. Given the lack of a common definition for these concepts, the authors tested their results using several indexes for corruption by examining OECD (The Organisation for Economic Co-operation and Development) Member countries between 2015 and 2019.
Findings
The authors’ research showed that SAIs organized according to the Anglo-Saxon philosophy achieved better scores than judicial SAIs for all indexes, and the difference was statistically significant. This result confirms the results of previous studies; however, one single common SAI model worldwide is not necessarily the optimal solution for fighting corruption.
Originality/value
The topic of this paper is a challenging and promising one for scholars and practitioners alike, as it combines a review of SAIs' community practices with academic research by expanding the scant literature in this field.
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Amel Kouaib, Isabelle Lacombe and Anis Jarboui
The study of the relationship between external auditing services and investment deviation in a French setting has received relatively little research attention thus far. There are…
Abstract
Purpose
The study of the relationship between external auditing services and investment deviation in a French setting has received relatively little research attention thus far. There are insufficient indicators to measure audit quality and then have a measurable link to investment efficiency. This study is motivated by such a research gap as well as the important role of auditing services in assuring investment efficiency. The purpose of this study is to test whether a good audit quality service improves corporate investment awareness in French-listed companies and contributes to establishing a comprehensive analysis framework for inefficient investment and how audit services have become an important tool to reduce the investment deviation of listed companies in France.
Design/methodology/approach
Based on a sample of 89 non-financial French firms listed on the Stoxx 600 Index from 2015 to 2021, this study uses feasible generalised least squares (FGLS) regressions to study the relationship between investment deviation and auditing service quality.
Findings
After running an FGLS regression model for two firm groups (overinvestment and overinvestment groups) and testing for a set of control variables, especially COVID-19, the findings show a non-linear correlation between audit service and corporate investment deviation. Both underinvestment and overinvestment decisions are negatively and statistically significantly impacted by audit indicators. Furthermore, involving a high-quality specialised auditor may enhance overall monitoring and lead to a lower investment deviation level. Overall, the empirical results show that a high-quality audit service enhances the investment efficiency of French-indexed companies.
Practical implications
This study offers crucial information that audit regulators can use to better appreciate the advantages of high audit quality and to take seriously the policy issues that affect it. Board members are urged to provide excellent audit quality that improves investment efficiency with careful consideration.
Originality/value
This study contributes to the existing audit literature by illuminating the effect of audit quality services on investment deviation to show a deeper understanding of the factors that contribute to the differences in prior studies’ findings in the field of audit quality impacts.
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Domenico Campa, Alberto Quagli and Paola Ramassa
This study reviews and discusses the accounting literature that analyzes the role of auditors and enforcers in the context of fraud.
Abstract
Purpose
This study reviews and discusses the accounting literature that analyzes the role of auditors and enforcers in the context of fraud.
Design/methodology/approach
This literature review includes both qualitative and quantitative studies, based on the idea that the findings from different research paradigms can shed light on the complex interactions between different financial reporting controls. The authors use a mixed-methods research synthesis and select 64 accounting journal articles to analyze the main proxies for fraud, the stages of the fraud process under investigation and the roles played by auditors and enforcers.
Findings
The study highlights heterogeneity with respect to the terms and concepts used to capture the fraud phenomenon, a fragmentation in terms of the measures used in quantitative studies and a low level of detail in the fraud analysis. The review also shows a limited number of case studies and a lack of focus on the interaction and interplay between enforcers and auditors.
Research limitations/implications
This study outlines directions for future accounting research on fraud.
Practical implications
The analysis underscores the need for the academic community, policymakers and practitioners to work together to prevent the destructive economic and social consequences of fraud in an increasingly complex and interconnected environment.
Originality/value
This study differs from previous literature reviews that focus on a single monitoring mechanism or deal with fraud in a broadly manner by discussing how the accounting literature addresses the roles and the complex interplay between enforcers and auditors in the context of accounting fraud.
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