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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: 1 August 2002

Craig Deegan

This paper serves as an introduction to this special issue of Accounting, Auditing & Accountability Journal; an issue which embraces themes associated with social and…

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Abstract

This paper serves as an introduction to this special issue of Accounting, Auditing & Accountability Journal; an issue which embraces themes associated with social and environmental reporting (SAR) and its role in maintaining or creating organisational legitimacy. In an effort to place this research in context the paper begins by making reference to contemporary trends occurring in social and environmental accounting research generally, and this is then followed by an overview of some of the many research questions which are currently being addressed in the area. Understanding motivations for disclosure is shown to be one of the issues attracting considerable research attention, and the desire to legitimise an organisation’s operations is in turn shown to be one of the many possible motivations. The role of legitimacy theory in explaining managers’ decisions is then discussed and it is emphasised that legitimacy theory, as it is currently used, must still be considered to be a relatively under‐developed theory of managerial behaviour. Nevertheless, it is argued that the theory provides useful insights. Finally, the paper indicates how the other papers in this issue of AAAJ contribute to the ongoing development of legitimacy theory in SAR research.

Details

Accounting, Auditing & Accountability Journal, vol. 15 no. 3
Type: Research Article
ISSN: 0951-3574

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Article
Publication date: 30 September 2022

Mia Mahmudur Rahim, Sanjaya Chinthana Kuruppu and Md Tarikul Islam

This paper aims to examine the role of social auditing in legitimising the relationship between the buyer and supplier firms rather than strengthening corporate…

Abstract

Purpose

This paper aims to examine the role of social auditing in legitimising the relationship between the buyer and supplier firms rather than strengthening corporate accountability in the global supply chain.

Design/methodology/approach

Applying case study methodology and drawing on Suchman’s theory on societal legitimacy, it is argued that social audits are artefacts of legitimacy, and global firms dominate the buyer–supplier relationship across the supply chain. The analysis is based on data collected from different secondary sources, including Walmart’s corporate sustainability reports.

Findings

Using Walmart’s relationship with Tazreen Fashions Limited around the Tazreen factory fire incident as a case study, it explains that the practices which attempt to symbolically demonstrate accountability from social audits need to shift to a more continuous and sincere demonstration of accountability through the social audit process. For this to occur, the cognitive and pragmatic approaches that international buyers have previously used in auditing their supply firms’ social responsibility are no longer sufficient to achieve societal legitimacy. Instead, a moral turn needs to underpin the intentions and actions of these buyers to maintain legitimacy and demonstrate accountability across the supply industry in developing economies.

Originality/value

The findings of the study answer the questions raised in the extant literature about the expectation from social auditing and whether social auditing serves to ensure corporate accountability. The paper contributes to the policymaking discussion of how social auditing can be configured to include a legal provision to ensure that social auditing is not a parroting tool for corporations.

Details

Meditari Accountancy Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2049-372X

Keywords

Article
Publication date: 10 June 2021

Olayinka Erin and Alex Adegboye

This study aims to examine the impact of corporate attributes on integrated reporting quality of top 100 listed firms in South Africa.

Abstract

Purpose

This study aims to examine the impact of corporate attributes on integrated reporting quality of top 100 listed firms in South Africa.

Design/methodology/approach

With a sample of the top 100 listed firms in South Africa, this paper drew insights from the legitimacy and stakeholder theory to examine the impact of corporate attributes on integrated reporting quality. This paper measured integrated reporting quality based on the International Integrated Reporting Council framework of 2013. Corporate attributes were determined taking into consideration three broad perspectives (board committee attributes, firm attributes and audit committee attributes). This paper analyzed the data using content analysis, ordered probit regression and logistic regression method.

Findings

Results indicate that board committee attributes, firm attributes and audit committee attributes have a positive and significant relationship with integrated reporting quality. Additional analysis reveals that external assurance contributes to the quality of integrated reporting. The findings empirically revealed that most South African firms have intensified efforts toward the quality and full disclosure of integrated reporting framework.

Research limitations/implications

The study was limited to a sample size of 100 firms, which is country-specific, however, it sets the tone for future empirical research on the subject matter. This study provides an avenue for future research in the area of corporate attributes and integrated reporting quality in other emerging countries, especially other African countries.

Practical implications

The result of this study provides practical implications in the areas of good corporate governance, corporate reporting and integrated reporting. The empirical approach used in this study emphasizes the need for corporate organizations to introduce integrated reporting practices into their reporting cycle. The finding implies that non-compliance with integrated reporting by corporate organizations may have an adverse effect on corporate growth, corporate sustainability and corporate reputation in the long run.

Originality/value

The work extends prior research on the subject of integrated reporting in South Africa. Also, this study broadens the application of legitimacy and stakeholder theory in influencing corporate organizations to disclose relevant information that could aids stakeholders’ interest.

Details

Journal of Financial Reporting and Accounting, vol. 20 no. 3/4
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 23 November 2010

Christina Chiang and Deryl Northcott

This paper seeks to examine the responses of New Zealand auditors to the promulgation of Audit Guidance Statement (AGS) 1010: The Consideration of Environmental Matters in

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Abstract

Purpose

This paper seeks to examine the responses of New Zealand auditors to the promulgation of Audit Guidance Statement (AGS) 1010: The Consideration of Environmental Matters in the Audit of Financial Statements and the consequent impact on audit practice.

Design/methodology/approach

This study adopts an interpretive methodology. It draws on dual research methods – interviews with 27 senior auditors, and a critical analysis of AGS‐1010. Legitimacy theory informs the interpretation of the findings.

Findings

The findings point to significant gaps in the guidance AGS‐1010 provides and reveal its limited impact on practice, which seems to reflect “business as usual” in regard to the audit of environmental matters. However, AGS‐1010 does appear to serve a ceremonial, legitimating role by supporting practising auditors' efforts to appear responsive to concerns about this emergent accountability issue.

Research limitations/implications

The findings highlight the practical challenges that exist in the audit of environmental matters, and point to the need to scrutinise the role of auditors in providing opinions on the financial reports of firms whose activities give rise to material environmental matters.

Practical implications

The findings suggest points for reflection for a profession that relies on maintaining its societal legitimacy, but which is failing to pursue or achieve best practice in the audit of environmental matters.

Originality/value

This paper presents a novel critique of AGS‐1010 and a first examination of how New Zealand auditors are dealing with environmental matters in light of this professional promulgation. The findings contribute to the international literature by exploring the relatively neglected role of the auditor in advancing the “greening of accounting”.

Details

Pacific Accounting Review, vol. 22 no. 3
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 10 October 2016

Thomas Ahrens, Frank Fabel and Rihab Khalifa

The audit of development funds that flow between development not-for-profit organisations (DNPOs) is virtually free from effective external regulation. When programme…

Abstract

Purpose

The audit of development funds that flow between development not-for-profit organisations (DNPOs) is virtually free from effective external regulation. When programme DNPOs subcontract development work to field DNPOs, they are under current international audit rules free to specify audit frameworks that are limited to the accuracy of the books. Questions of the efficacy of the development work can thus be bracketed off. This paper aims to develop an argument for improving the regulation of cross-national audits of DNPOs.

Design/methodology/approach

Based on a review of the applicable audit regulation and ongoing debates of legitimacy and accountability, this paper articulates a series of problems that should be considered in the regulation of cross-national DNPO audits with reference to their specific legitimacy communities.

Findings

The special consideration that is due to the beneficiaries of development activities suggests that cross-national DNPO audits should be regulated not just with reference to general audit and accounting rules. Consideration should be given as well to some of the key context variables that potentially have a bearing on the likelihood that the audited development programmes meet the claims of the legitimacy community of development. These can include the level and depth of accountability afforded to the beneficiaries, potentially conflicting legitimacy relationships, the nature of admissible records for the audit and the provisions for programme funds to cover the overheads of field DNPOs.

Practical implications

The managerial implications of this paper concern the regulation, commissioning and conduct of cross-national DNPO audits. The authors propose a series of remedies to the scoping of field DNPO audits in a cross-national context.

Originality/value

Focusing on the functioning of cross-border NPO audits, this paper adds an important facet to ongoing discussions about the accountability of current regulation to represent the new interdependencies brought about by the forces of globalisation.

Details

Qualitative Research in Accounting & Management, vol. 13 no. 4
Type: Research Article
ISSN: 1176-6093

Keywords

Article
Publication date: 25 October 2021

Emiliano Ruiz-Barbadillo and Jennifer Martínez-Ferrero

Sustainability assurance services are carried out in a competitive market where a wide range of assurance providers operate without the need for any specific professional…

Abstract

Purpose

Sustainability assurance services are carried out in a competitive market where a wide range of assurance providers operate without the need for any specific professional qualifications, competencies or skills. Assurance providers have heterogeneous professional backgrounds and experiences that lead to substantial diversity in sustainability assurance quality levels. This paper aims to provide an understanding of sustainability assurance quality. From a legitimacy perspective, the authors focus on the choice of assurance providers by exploring why a company voluntarily chooses an incumbent financial auditor to jointly provide audit and sustainability assurance services. The authors argue that to avoid the legitimacy threats undermining stakeholders’ confidence in the sustainability information disclosed, companies should only choose their incumbent financial auditors to provide sustainability assurance services when these auditors possess the professional attributes associated with sustainability assurance quality.

Design/methodology/approach

This study develops regression models for an international sample for 2007–2016, where the authors analyze why a company voluntarily chooses an incumbent auditor to jointly provide audit and sustainability assurance services from a legitimacy theory perspective.

Findings

Evidence confirms that the choice of incumbent auditors as assurance providers is more likely when these providers are more specialized in the industry. The authors also find that independence does not play a significant role in this decision. Therefore, an assurance provider’s industry specialization can be understood as an attribute that is associated with sustainability assurance quality and one which limits the legitimacy threats caused by a lack of sufficient sustainability knowledge.

Practical implications

Given that companies have complete freedom when choosing their assurance providers, the selection of a high-quality incumbent auditor is an indirect measure of social commitment and a mechanism to improve public trust. The results confirm that it is fundamental for firms to understand the situations when choosing an incumbent financial auditor to provide sustainability assurance services is the best way to ensure firm legitimacy while obtaining higher sustainability assurance quality due to the spillover effect. This paper provides useful evidence for firms and managers who can become aware that the legitimacy threat associated with the auditing profession’s questionable competence to conduct efficient sustainability assurance engagements can be reduced if they hire an incumbent financial auditor with greater industry specialization. For assurance providers, the results are especially useful, as they should know that companies will be more likely to choose their incumbent financial auditor when that auditor possesses certain professional attributes, like industry specialization. The ability to assimilate and exploit the knowledge gained through auditing activities can be improved even more by specialization, which enhances sustainability assurance quality.

Social implications

From a social perspective, stakeholders perceive industry specialization as an indicator of the professional skills necessary to increase both the real and perceived quality of sustainability assurance services, thereby limiting the legitimacy threat arising from a lack of sustainability knowledge. The evidence also provides valuable results for regulatory bodies, as it shows that firms are not able to address the legitimacy gap caused by stakeholders’ perceptions that incumbent financial auditors can easily be controlled by companies. Thus, doubts arise as to whether this joint provision undermines auditor independence. Precisely, these doubts about assurance provider independence can erode public confidence in assurance and devalue the quality of the service. The results of this paper highlight the need to strengthen regulation on sustainability reporting and assurance. The advances and relevance of sustainable development in recent years and in future agendas require a firm commitment to sustainability reporting and assurance of quality, reliability, integrity and confidence.

Originality/value

First, this study contributes to recent empirical studies that focus on the role of sustainability assurance services in the legitimation process of corporate sustainability reporting. However, while that research analyzes how the legitimacy theory explains the voluntary adoption of sustainability assurance, this paper adds to the literature by presenting evidence about why certain incumbent auditors are appointed to carry out sustainability assurance services. Second, this paper contributes to the sustainability assurance quality literature. Third, unlike previous studies that have regressed various client-specific and institutional factors that influence firms’ decisions to choose assurance providers, this study contributes to the research by providing knowledge about a set of professional features that may explain the decision model of assurance providers selection from a legitimacy perspective.

Details

Sustainability Accounting, Management and Policy Journal, vol. 13 no. 2
Type: Research Article
ISSN: 2040-8021

Keywords

Article
Publication date: 18 August 2022

Md Mustafizur Rahaman, Md Moazzem Hossain and Md. Borhan Uddin Bhuiyan

The new audit regulation for disclosure of key audit matters (KAMs) in financial reporting has been introduced in both developed and developing countries. This study…

Abstract

Purpose

The new audit regulation for disclosure of key audit matters (KAMs) in financial reporting has been introduced in both developed and developing countries. This study investigates the influence of three distinctive sets of variables, namely industry features, firm characteristics and auditor attributes, on the extent, pattern and level of disclosure of KAMs by companies listed in Bangladesh, an emerging economy.

Design/methodology/approach

The study uses qualitative and quantitative research approaches to investigate the pattern of disclosure of KAMs and their determinants. With a sample of 447 firm-year observations from companies listed on the Dhaka Stock Exchange over 2018–2020, the study reveals industry-level, firm-level and auditor-specific characteristics that affect KAMs' communication in the new audit reporting model.

Findings

The findings suggest that significant differences exist between firms in the number and types of KAMs reported and the extent of their disclosure. The study findings also observed variations both within and across different industry sectors. Highly regulated firms disclose a greater number of KAMs, while environmentally sensitive firms are found to provide a greater detail of the issues presented as KAMs. Further, both firm size and age positively impact the number of KAMs disclosed and the extent of the disclosure provided. Big-4-affiliated auditors do not issue a significantly higher number of KAMs but deliver extensive details to their KAMs description, compared to non-Big-4 auditors. In addition, while auditors, in general, tend to issue boilerplate KAMs, Big-4 associates are found to disclose more new KAMs. However, audit fees and auditor rotation do not influence KAMs disclosure.

Research limitations/implications

This study is based on two years of publicly available data. However, future studies could consider in-depth interviews to explore the motivation behind KAMs' disclosure in Bangladesh and other developing countries with similar cultural and contextual values.

Practical implications

These findings have substantial policy considerations for improving firms' audit quality and, thus, their financial reporting quality, with implications for national and international standard-setters, regulators and other stakeholders.

Originality/value

This study is one of the earliest endeavours to investigate KAMs in a context of an emerging country, such as Bangladesh, which adopted KAMs' disclosure in 2018.

Details

Journal of Accounting in Emerging Economies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2042-1168

Keywords

Article
Publication date: 28 January 2020

Nirmala Nath, Radiah Othman and Fawzi Laswad

This paper aims to provide insights into how the New Zealand Office of the Auditor-General (NZOAG) legitimised the selection of topics for performance audit in the New…

Abstract

Purpose

This paper aims to provide insights into how the New Zealand Office of the Auditor-General (NZOAG) legitimised the selection of topics for performance audit in the New Zealand public health sector over a 10-year period, 2003-2013, by fulfilling the key actors’ “taken for granted beliefs” of the dual roles of the NZOAG: its independence and accountability.

Design/methodology/approach

This paper uses evidence gathered from interviews with representatives of the District Health Boards, the Ministry of Health (including Health Advisory Committee members) and NZOAG staff, along with publically available documentary evidence over a 10-year period. The authors draw on Suchman’s (1995) authority on institutional legitimacy to inform the research findings.

Findings

The New Zealand Auditors-General (NZAGs) get inputs from various sources such as their own audit teams, parliamentary deliberations, the Ministry of Health, the District Health Boards, media and public concerns and complaints. These sources initiate ideas for performance audits. Subsequently, the NZAGs use the recurring themes and risk assessment criteria while simultaneously consulting with the auditees (the MOH and the DHBs) and other actors, such as health advisory groups, to select topics for such audits. This signals to the key actors, such as the MOH and the DHBs, that the NZOAG is addressing the topics and concerns relevant to the former while discharging its public accountability role. Furthermore, the consultative approach acts as a catalyst, ensuring that the actors involved with public sector health service delivery, specifically the auditees, accept the selected topic. This leads to a lack of resistance to and criticism of the topic; the selection process, therefore, is legitimatised, and credibility is added to the audits. Because of the consultative approach taken by the NZAGs, the actors, including the performance auditors, continue to believe that the Office acts independently from third party influence in selecting their audit topics, elevating the NZAGs’ moral legitimacy with respect to their public accountability role.

Research limitations/implications

The study’s focus group does not include parliamentary representatives, only representatives from the DHBs, the MOH and the NZOAG; therefore, the conclusions on effective discharge of the NZOAG’s accountability role and Parliamentary acceptance is not conclusive – the NZOAG acts on behalf of the Parliament in discharging its accountability role and the latter is also the formal recipient of the reports.

Practical implications

The implications for practitioners and policymakers are that the use of a consultative approach to select topics for performance audit in the absence of performance auditing standards ensures auditee readiness and acceptance of such audits. This also promotes mutual benefits and “trust” between the AG and auditees. Such audits can be used to bring about efficacy in health service delivery.

Social implications

The selected topics for audits will have an impact on citizens’ lifestyles, with improved health services delivery.

Originality/value

There is a dearth of research on who initiates the ideas for performance auditing and how the Office of the Auditor-General selects topics for such audits. This study adds a new dimension to the existing performance auditing literature. The authors reveal how the NZOAG seeks to legitimise the selection of topics for such audits by consulting with the auditees and other actors associated with public sector health service delivery, while upholding its independent status and making transparent how it discharges its accountability role within the context of performance auditing.

Details

Qualitative Research in Accounting & Management, vol. 17 no. 2
Type: Research Article
ISSN: 1176-6093

Keywords

Article
Publication date: 1 May 2006

Andrew Goddard and Mussa Juma Assad

The purpose of this paper is to investigate the phenomenon of accounting in non‐governmental organisations (NGOs). It seeks to understand accounting processes and…

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Abstract

Purpose

The purpose of this paper is to investigate the phenomenon of accounting in non‐governmental organisations (NGOs). It seeks to understand accounting processes and reporting practices in NGOs and the conditions that sustain those processes and practices. NGOs have become important institutions in world affairs but accounting research has not developed significant interest in their operations.

Design/methodology/approach

The research executes a grounded theory strategy as the principal methodology for the inquiry. Fieldwork was undertaken in three Tanzanian NGOs.

Findings

The research established the importance of accounting in the process of navigating organisational legitimacy. This was achieved due to its important role in symbolising organisational competence. Two principal strategies were employed by organisations in navigating legitimacy – building credibility and bargaining for change.

Originality/value

The paper makes a contribution to the limited empirical research into accounting in NGOs in developing countries and to grounded theory, accounting research. The principal finding, that in the NGOs studied the primary purpose of accounting was its symbolic use in navigating legitimacy and that it has a minimal role to play in internal decision making, is an important finding for practice as well as for understanding and knowledge. Finally, the paper sheds light on accountability in NGOs by narrating how the phenomenon is constructed and perceived by organisations and stakeholders. Future research should extend our understanding of these phenomena across a broader range of NGOs to incorporate differences in geographical location, religious affiliation and also include Northern donor organisations.

Details

Accounting, Auditing & Accountability Journal, vol. 19 no. 3
Type: Research Article
ISSN: 0951-3574

Keywords

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