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1 – 10 of over 2000Hui Liu, Charles Cullinan and Junrui Zhang
Companies may be defendants in lawsuits that are unresolved at year-end. This paper aims to consider whether the financial statements of companies facing litigation claims…
Abstract
Purpose
Companies may be defendants in lawsuits that are unresolved at year-end. This paper aims to consider whether the financial statements of companies facing litigation claims (pending litigation) are more time-consuming to audit due to the complexity and subjectivity of contingent liabilities associated with pending litigation. The authors consider whether auditors tailor their approach to pending litigation based on two distinct factors in the Chinese business environment: the client’s government ownership status and the legal development of the region in which the company is based.
Design/methodology/approach
Data on litigation against companies and their audit report lags were obtained for 18,029 firm-year observations of Chinese companies from 2008 to 2017. The sample was subsequently divided based on whether the company was a state-owned enterprise (SOE) and based on whether the company was based in a region of China with a more-developed and more market-oriented legal system.
Findings
The overall results indicate that audits of companies with pending litigation take 2.9 days longer than those of companies without pending litigation. For companies with multiple pending claims, each additional claim is associated with 1.9 more days of audit report lag. These effects are weaker for SOEs and for companies in regions of China with less developed legal systems. The results are consistent with the idea that auditors tailor their response to pending litigation based on the risk profile of the client, including consideration of SOE status and regional legal development.
Originality/value
This paper is the first to consider the potential effect of pending litigation (including claims not disclosed or recognized in financial statements) on audit report lags and how environmental business factors can influence this relationship.
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Dahlia Robinson, Thomas Smith, James Devin Whitworth and Yiyang Zhang
This study aims to investigate whether accounting-related litigation is associated with a break in the client’s earnings string and the auditor’s response to a break in the…
Abstract
Purpose
This study aims to investigate whether accounting-related litigation is associated with a break in the client’s earnings string and the auditor’s response to a break in the earnings string.
Design/methodology/approach
The authors use regression models on a sample of publicly-traded USA companies with earnings strings.
Findings
The authors find that clients’ earnings string breaks are associated with increased accounting litigation risk and audit fees. The results are more prevalent for larger breaks.
Research limitations/implications
The findings suggest auditors anticipate string breaks by clients which implies that audit fee research should consider earnings string characteristics in the fee models.
Practical implications
The auditor’s access to private information allows them to anticipate string breaks and potential increase in litigation risk.
Originality/value
An earnings string break represents a convergence of concerns highly relevant to the auditor: more users relying on the financial statements with greater expectations, increased likelihood of losses to those users, an environment where the likelihood of misstatement may increase, and explicitly stated professional responsibilities in response to the latter. Despite that, and a rich earnings string literature, prior studies have not directly examined auditors’ response to a client’s string break.
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Practising internal and external auditors regularly find that crucial concepts governing how they operate are the twin terms of independence and objectivity. Part of the problem…
Abstract
Practising internal and external auditors regularly find that crucial concepts governing how they operate are the twin terms of independence and objectivity. Part of the problem is that the two terms are often equated. The impact can be conflict with the auditee, misunderstanding with other stakeholders, impairment of efficiency and effectiveness, and role conflict within the internal audit department. The Institute of Internal Auditors is reviewing some of the cherished notions of internal audit in the light of pressures and developments in the business environment. It has already produced a new definition of internal auditing, which, as before, includes the terms independence and objectivity. Consistently, it decided to re‐evaluate these two terms, and established an international research team. This was the briefing submission from the UK, which was highly influential in determining the final product, not yet in the public domain. It considers professional statements and standards, research and developments in both internal and external auditing.
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Yanghui Liu, Jeff Zeyun Chen, Wuchun Chi and Xiaohai Long
This paper aims to investigate the relation between audit firms’ switch to limited liability partnership (LLP) from limited liability company (LLC) and client firms’ earnings…
Abstract
Purpose
This paper aims to investigate the relation between audit firms’ switch to limited liability partnership (LLP) from limited liability company (LLC) and client firms’ earnings comparability. If LLP auditors, who have a higher liability exposure than LLC auditors, are more consistent in implementing generally accepted accounting principles and executing firm-wide audit methodologies, client firms’ earnings comparability will increase.
Design/methodology/approach
Using data from China, the authors examine whether client firm-pairs of LLP auditors have higher earnings comparability than client firm-pairs of LLC auditors. The authors also perform cross-sectional tests to shed light on the mechanisms through which auditors’ litigation exposure affects client firms’ comparability.
Findings
The authors find that firm-pairs in which both firms are audited by LLP auditors exhibit higher earnings comparability than other firm-pairs. This result is stronger when client firms are audited by the same auditor, when client firms are audited by the top 10 auditors and when the auditors are less dependent on the client firms. The authors also document that firm-pairs in which both firms are audited by LLP auditors have lower average analyst earnings forecast error and forecast dispersion.
Originality/value
To the best of the author’s knowledge, this study is the first to examine the relation between auditor’s litigation exposure and client firms’ earnings comparability. It also extends the literature on audit firm organizational form and audit quality.
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John Goodwin, Pamela Fae Kent, Richard Kent and James Routledge
The purpose of this study is to examine if partner cross-contagion in audit offices is associated with client reporting quality. To this end, the authors test if the presence in…
Abstract
Purpose
The purpose of this study is to examine if partner cross-contagion in audit offices is associated with client reporting quality. To this end, the authors test if the presence in an audit office of a partner with a highly aggressive style is associated with the reporting quality of other partners’ clients. Partners with a highly aggressive style are identified by their tendency to approve favorable client reporting. The authors add to the existing literature that provides limited and equivocal evidence on audit office cross-contagion.
Design/methodology/approach
Partner style is determined in an estimation period from 2010 to 2014. Aggressive style is identified when partners tend to approve favorable client reporting, which is shown by a positive value for their clients’ median discretionary accruals. Partners are considered to exhibit a highly aggressive style if they have positive median client discretionary accruals within the 90th percentile. Cross-contagion analysis is then conducted in a test period from 2015 to 2019 by determining if the presence in an office of a partner with a highly aggressive style is associated with the reporting quality of other partners’ clients. Two measures of client reporting quality used. These are the accuracy of current-period accruals in predicting period-ahead cash flows and earnings management related to benchmark beating.
Findings
This study finds partner cross-contagion of highly aggressive style in Big 4 offices that is associated with lower client reporting quality for non-Metals and Mining industry clients. This cross-contagion only occurs when the contagious partner has a very high level of aggressive style. This study finds Big 4 partners are susceptible to aggressive style cross-contagion regardless of their own idiosyncratic style. The results of this study show more cross-contagion in small Big 4 offices and mitigation of cross-contagion for economically important clients. Cross-contagion in non-Big 4 offices is observed for Metals and Mining industry clients.
Originality/value
By determining style from partners’ past clients’ discretionary accruals, this study extends prior cross-contagion research that relies on restatements to identify style. This study examines several other cross-contagion issues not addressed in prior studies. These include differences in cross-contagion for Big 4 and non-Big 4 offices and for large and small Big 4 offices, partners’ susceptibility to cross-contagion and the influence of client importance.
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Yudi Irmawan, Mohammad Hudaib and Roszaini Haniffa
– The purpose of this paper is to explore the perceptions of auditors and users of their reports on auditor independence in Indonesia.
Abstract
Purpose
The purpose of this paper is to explore the perceptions of auditors and users of their reports on auditor independence in Indonesia.
Design/methodology/approach
Auditors and users are requested to stated their confidence in the level of independence in 34 scenarios. Descriptive and χ2 test are the used to analyse the difference of perceptions amongst groups. The paper then conduct an interview with a senior officer of audit regulator body to better understand the findings.
Findings
Both groups have less confidence on auditor independence in 30 situations. Results between auditors and users indicate auditors having lower confidence on auditor independence than users in situations related to crossover from audit firm to client, provision of NAS, auditor litigation and indirect financial interest through shareholdings while users have lower confidence on auditor independence involving personal relationship with a political figure and client imposing strict budget on audit fees. Within the auditor group, non-Big 4 auditors expressed more concerned for situations related to family relationship and restriction on audit fees.
Originality/value
Research on auditor independence in Indonesia remains scarce despite the country's eagerness to adopt “international” accounting and auditing standards. In addition, the cultural context of Indonesia also helped in explaining our findings.
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Business risk and inherent risk both bear on the audit; the auditrisk model; and the nature, timing, and extent of work performed.Inherent risk and business risk bear an inverse…
Abstract
Business risk and inherent risk both bear on the audit; the audit risk model; and the nature, timing, and extent of work performed. Inherent risk and business risk bear an inverse relationship to detec‐tion risk and have a direct effect on the level of work performed. Neither risk can be eliminated totally and neither is controllable by the auditor. Business risk relates to the financial statements and affects overall audit risk; inherent risk applies to an individual audit area. Inherent risk is explicitly included in the professional standards and the audit‐risk model while business risk is not and has only an indirect bearing on the model. Management can take steps to affect the level of inherent risk, but the perceptions of users of the financial statements bear on business risk.
Austin Otegbulu and G.K. Babawale
From the perspective of plant and machinery valuation, this paper aims to assess the factors that constrain accuracy in plant and machinery valuation in the Nigerian context.
Abstract
Purpose
From the perspective of plant and machinery valuation, this paper aims to assess the factors that constrain accuracy in plant and machinery valuation in the Nigerian context.
Design/methodology/approach
This paper is based on the technical, economic and market infrastructure affecting machinery and equipment valuation in Nigeria and surveyed 150 practicing firms in Lagos to elicit from them what they believe are the major constraints to valuation accuracy.
Findings
The findings reveal that, due to lack of specialization in machinery and equipment valuation, very few valuers have sufficient knowledge content to engage in the exercise. Four significant factors are established to be contributing most to valuation inaccuracy.
Originality/value
This study is the first on inaccuracy in machinery and equipment valuation, and consequently highlights the need to equip Nigerian valuers to face the challenges of the expertise required in this specialized area of valuation.
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Zhong-Lu Teng and Jin Han
This study aims to provide evidence on the association between abnormal tone and audit fees, as well as between abnormal tone and audit report lag.
Abstract
Purpose
This study aims to provide evidence on the association between abnormal tone and audit fees, as well as between abnormal tone and audit report lag.
Design/methodology/approach
This study uses a fixed-effects model to examine the relationship between abnormal positive tone and audit engagement (audit fees and audit report lag). Following Blanco et al., the authors used propensity score matching to examine the robustness of the findings.
Findings
Abnormal positive tone affects the audit process. An abnormal positive tone in annual reports is associated with greater audit effort and higher audit fees.
Originality/value
This study contributes to the determinants of audit fees and audit lag by analyzing the impact of an abnormal positive tone on audit engagement. The literature analyzing the determinants of audit engagement often focuses on the quality of non-textual information. This study analyzes the impact of the quality of textual information (measured by abnormal tone) on audit engagement, which provides evidence of the association between textual disclosure and audit.
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Jingxin Lv, Shuang Zhang and Shuang Zhang
The purpose of this study is to examine the impact of chief executive officer (CEO) hometown identity on company audit fees in the Chinese setting.
Abstract
Purpose
The purpose of this study is to examine the impact of chief executive officer (CEO) hometown identity on company audit fees in the Chinese setting.
Design/methodology/approach
This study uses data from Chinese public companies in the Shanghai Stock Exchange and the Shenzhen Stock Exchange for the period 2008–2019. This study investigates the impact path of CEO hometown identity on company audit fees and further examines the moderating role of internal and external governance level.
Findings
This study finds that CEO hometown identity is significantly and negatively related to company audit fees. In addition, CEO hometown identity can reduce audit fees by alleviating agency risk and litigation risk. Moreover, the negative effect of CEO hometown identity on audit fees is more pronounced in companies with a higher percentage of institutional investors shareholding and more analysts tracking quantity.
Practical implications
This study may provide new references for executives’ selection, auditors’ optimization decisions and regulators’ information disclosure system.
Originality/value
This study contributes to the literature by exploring the effect of CEO hometown identity on audit fees in the context of China.
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