Search results
1 – 10 of over 5000Gordon Mwintome, Joseph Akadeagre Agana and Stephen Zamore
The authors examine the association between two important audit partner characteristics and the readability of key audit matters (KAMs) disclosed in the audit reports…
Abstract
Purpose
The authors examine the association between two important audit partner characteristics and the readability of key audit matters (KAMs) disclosed in the audit reports. Specifically, the authors examine how the readability of KAMs is associated with audit partner tenure and workload.
Design/methodology/approach
The authors conduct the study in the audit context of Norway and applied the Flesch reading ease scale to measure the readability levels of reported KAMs in the audit reports of companies listed on the Oslo Stock Exchange. Panel data estimation techniques are applied in estimating how partner tenure and workload are associated with the readability of KAMs. In addition, several robustness tests including different measures of KAMs readability and subsample analyses are performed.
Findings
The authors find that audit partner tenure and workload have significant associations with the level of KAMs readability. Specifically, the results show that the reported KAMs become more readable as the audit partner tenure increases but are less readable for partners with more workload. These results appear stronger in subsamples of KAMs typically noted to be more complex and associated with higher risks.
Research limitations/implications
As KAMs represent the most significant issues in financial statements audit, these results provide important insights to stakeholders on the potential impact of audit partner tenure and workload on KAMs readability. Less readable KAMs could derail stakeholders' desire to bridge the information gap between auditors and users of the audit report. The uniqueness of this study lies in its focus on audit partner characteristics as opposed to the audit firm.
Practical implications
Excessive audit partner workload impairs KAMs readability.
Originality/value
As KAMs represent the most significant issues in financial statements audit, these results provide important insights to stakeholders on the potential impact of audit partner tenure and workload on KAMs readability. Less readable KAMs could derail stakeholders' desire to bridge the information gap between auditors and users of the audit report. The uniqueness of this study lies in its focus on audit partner characteristics as opposed to the audit firm.
Details
Keywords
Qiliang Liu, Lei Zhao, Li Tian and Jian Xie
This paper aims to investigate whether close auditor-client relationships affect audit quality over the tenure of the audit partner and the potential role of partner rotation in…
Abstract
Purpose
This paper aims to investigate whether close auditor-client relationships affect audit quality over the tenure of the audit partner and the potential role of partner rotation in mitigating this effect.
Design/methodology/approach
Using the Chinese mandatory audit partner rotation setting, the authors identify the existence of a close auditor-client relationship if the audit partner tenure with a client is larger than the audit firm tenure with that client. The sample period (1998–2009) is divided into voluntary and mandatory rotation periods when examining the effects of audit partner tenure on audit quality for the normal and close auditor-client relationship subsamples, respectively. The authors also conduct a propensity score matching analysis to address a selection issue.
Findings
The paper finds that under the voluntary partner rotation regime, audit quality decreases with audit partner tenure for the subsample with close auditor-client relationships, whereas this effect is not shown in the normal relationship subsample. However, audit quality no longer declines with audit partner tenure under the mandatory partner rotation regime.
Originality/value
This is the first study that directly examines the effect of audit partner tenure on audit quality associated with close auditor-client relationships under the voluntary and mandatory partner rotation regimes.
Details
Keywords
Wan Nordin Wan Hussin, Hasan Mohamad Bamahros and Siti Norwahida Shukeri
Motivated by a recent call from DeFond and Zhang (2014) for auditing scholars to use “a richer set of audit firm, auditor office, and individual auditor characteristics to capture…
Abstract
Purpose
Motivated by a recent call from DeFond and Zhang (2014) for auditing scholars to use “a richer set of audit firm, auditor office, and individual auditor characteristics to capture competency”, this study aims to extend the related line of research by examining the association between lead engagement partner workload, defined as the number of public listed clients the partner is in charge of, and audit lag. The moderating effects of partner tenure on the partner workload–audit lag relationship have also been examined.
Design/methodology/approach
The association between auditor workload and financial reporting timeliness on 651 non-financial firms listed on Bursa Malaysia is tested in this study. Data to compute the partner workload are based on 222 lead engagement partners who signed off the audit reports for all 892 public listed firms in 2013.
Findings
The busy auditors are observed to prolong audit lags, and the effect is more acute for non-Big 4 clients, busy season clients and a short partner tenure. The engagement partners with heavy workload can also mitigate the adverse effects of reduced audit report timeliness when they have a longer partner–client tenure.
Research limitations/implications
This study may understate the level of engagement partner workload when partners have private firms in their client portfolios. Notwithstanding that, this study reiterates the growing importance of examining accounting and auditing outcomes at the individual partner level.
Practical implications
The findings that over-burdened engagement partner takes a longer time to complete the audit add to the current debate, where audit regulators and various stakeholders are actively promoting discussions on potential indicators of audit efficiency and quality.
Originality/value
This study provides new evidence on the association between partner workload and audit reporting lag, which has hitherto been unexplored. This study also extends the research carried out by Gul et al. (2017) and Sharma et al. (2017) by providing additional evidence on the relationship between partner tenure and audit delay.
Details
Keywords
Neil Fargher, Ho‐Young Lee and Vivek Mande
This paper aims to examine the effect of audit partner tenure (PARTEN) on client managers' accounting discretion.
Abstract
Purpose
This paper aims to examine the effect of audit partner tenure (PARTEN) on client managers' accounting discretion.
Design/methodology/approach
The authors contend that, when a new audit partner is from the same audit firm as the outgoing audit partner (audit partner rotation), audit quality increases because the new audit partner brings “fresh eyes” to the engagement.
Findings
The results confirm this conjecture. The authors find that, in the initial years of tenure of a new audit partner, client managers' accounting discretion decreases when the new partner is from the same audit firm as the outgoing partner. However, when the new audit partner is from a different audit firm as the outgoing partner (audit firm rotation), it is found that client managers' accounting discretion increases in those initial years.
Originality/value
The results provide support for recent legislation in the US restricting audit PARTEN and should be of interest to other regulatory bodies contemplating mandatory audit partner rotation.
Details
Keywords
Using a sample of US nonprofit organizations, where the identity of the auditor in charge of the audit is revealed, I investigate whether individual auditor characteristics…
Abstract
Purpose
Using a sample of US nonprofit organizations, where the identity of the auditor in charge of the audit is revealed, I investigate whether individual auditor characteristics (gender, engagement size and tenure) are associated with audit quality.
Design/methodology/approach
To investigate how individual audit partner characteristics affect audit quality, I follow Petrovits et al. (2011) and Fitzgerald et al. (2018) who investigate client characteristics and partner tenure as determinants of ICDs in nonprofits. I add three characteristics of the auditor in charge – gender, engagement size and tenure – to their models. In additional analyses, I use subsamples partitioned by client risk and audit firm size, and find that individual auditor characteristics generally play a more significant role in the issuance of ICDs and QAOs for riskier clients than for less risky clients.
Findings
My results show that female auditors are more likely to report internal control deficiencies and issue qualified audit opinions (QAOs) to nonprofits. I also find that auditors with more Single Audit engagements within the same year are less likely to report ICDs. In addition, auditor tenure is negatively associated with the likelihood of issuing an ICD report, suggesting that auditors become complacent as the length of the auditor–client relationship lengthens or, alternatively, that they are better able to assist their clients in correcting ICDs and in maintaining stronger internal control environments as they gain client-specific knowledge over time. Additional analysis suggests tenure and engagement load results are sensitive to the sample specification employed.
Research limitations/implications
One caveat of this study is that self-selection bias may be present when a client chooses an audit firm, the audit firm selects a client, and the audit firm assigns a partner to the engagement. Future study with more advanced econometric models is needed to mitigate self-selection bias. Another limitation is that my sample consists of nonprofit organizations and may not be generalizable to for-profit firms. Another caveat of this study is that the tenure variable is truncated compared to prior literature (e.g. Fitzgerald et al., 2018). Also given the rarity of audit quality measures in the nonprofit setting, internal control deficiencies and qualified opinions are used as proxies for audit quality because they reflect both the quality of audit work and the quality of organizations' internal control and financial reporting. Future studies with data including additional audit quality measures could shed more light on the topic.
Originality/value
This study contributes to the literature in several ways. First, this study offers a more comprehensive examination on the impact that a broader set of individual auditor characteristics on audit quality in the nonprofit setting, compared to Fitzgerald et al.'s (2018) study. Second, the findings should be of interest to policymakers who recently mandated engagement partner disclosures from US audit firms (PCAOB, 2015b). Finally, another distinctive feature of this study is that I examine the impact of individual auditor characteristics on audit quality in a setting where Big 4 audit firms are not dominant.
Details
Keywords
Yunqi Fan, Guanglei Hu and Xiaoxue Chen
This study aims to examine whether mandatory audit partner rotation is associated with future stock price crash risk.
Abstract
Purpose
This study aims to examine whether mandatory audit partner rotation is associated with future stock price crash risk.
Design/methodology/approach
This study makes use of a regulatory change from the Ministry of Finance of China and the China Securities Regulation Commission, which requires mandatory rotation of audit partners since 2004, as a natural experiment to establish causality and applies a difference-in-difference research design.
Findings
Audit partner rotation leads to a significant decrease in future stock price crash risk in the departing partner’s final year of tenure preceding mandatory rotation, consistent with peer monitoring argument of mandatory rotation. Inconsistent with other arguments, including client-specific knowledge, fresh perspective and auditor independence, no significant effect takes a place in the incoming partner’s first year of tenure following mandatory rotation. Mechanism analysis documents that mandatory audit partner rotation reduces stock price crash risk by improving audit quality and constraining managerial empire building.
Originality/value
The results shed new light on the capital market consequence of mandatory audit partner rotation and the cause of stock price crash risk.
Details
Keywords
Devi Sulistyo Kalanjati, Damai Nasution, Karin Jonnergård and Soegeng Sutedjo
The purpose of this paper is to investigate the association between audit rotation – at the audit partner and audit firm level – and audit quality. As mentioned in the literature…
Abstract
Purpose
The purpose of this paper is to investigate the association between audit rotation – at the audit partner and audit firm level – and audit quality. As mentioned in the literature, audit rotation has several benefits, and one of them is it can bring a fresh look to audit tasks and subsequently improve audit quality. Moreover, audit itself can help a client to improve its financial reporting. However, ineffective communication between predecessor and successor audit partners or audit firms, and pseudo-rotation can hamper that benefit.
Design/methodology/approach
This study uses multivariate regression analysis to test its hypotheses. Using data from companies listed on the Indonesia Stock Exchange, the sample consists of 688 company-year observations covering the period 2003–2016.
Findings
This study finds that the cumulative number of audit partner rotations is positively associated with audit quality, indicating that rotations at the audit partner level will enhance audit quality. Conversely, it finds that the cumulative number of audit firm rotations is negatively associated with audit quality.
Practical implications
The study’s findings may assist regulators in crafting standards regarding audit rotation. As the findings show, audit partner rotation will improve audit quality, but the audit firm rotation will decrease audit quality. As this study tries to explain the decreasing audit quality from audit firm rotation could be a consequence of ineffective communication or pseudo audit firm rotation. Regulators should try to tackle these problems.
Originality/value
Instead of using tenure as a proxy for a rotation, this study creates a new proxy named the cumulative number of audit partner and audit firm rotations to provide evidence on the benefits of audit rotation.
Details
Keywords
He Xiao, Jianqun Xi and Hanjie Meng
This study aims to investigate the impact of mandatory audit partner rotation (MAPR) on Chinese listed firms’ insider trading, as well as the moderating effects of firm…
Abstract
Purpose
This study aims to investigate the impact of mandatory audit partner rotation (MAPR) on Chinese listed firms’ insider trading, as well as the moderating effects of firm characteristics on this impact. The economic mechanism behind this impact is also explored.
Design/methodology/approach
This study conducts a regression analysis on firms associated with mandatory and voluntary audit partner rotation based on 2009–2019 firm data and examines whether corporate insiders of these two types of firms increase their share sales within 12 months before their financial statements are submitted to a new rotated auditor.
Findings
Client firms’ corporate insiders increase their share sales within 12 months before their financial statements are submitted to a new mandatory rotated auditor. In addition, such an association is less pronounced for client firms that changed from Big 4 auditors to those with higher financial constraints. This is more pronounced for client firms with higher information asymmetry. The economic mechanism of the finding is that is the MAPR implementation reduces earnings management activities from client firms. Moreover, client firms’ buy-and-hold stock returns decline in the first year after MAPR.
Research limitations/implications
This study should assist investors, corporate shareholders and Chinese policymakers. Investors can be well protected through the adoption of MAPR because upcoming auditors enhance the audit quality of clients by restraining managers’ manipulation of reported earnings and declining firms’ insider trading afterwards. Investors, Chinese policymakers and corporate shareholders should pay more attention to firms’ financial report quality, auditor selection, financial situation, corporate governance and the information environment. Explicitly, firms with less transparent financial report quality, non-big 4 auditors and fewer financial constraints are more likely to be involved in insider trading.
Originality/value
To the best of the authors’ knowledge, none of the extant studies have examined the impact of MAPR on insider sales. This study extends the research on the effect of the audit process on firm market performance by investigating the impact of audit partner rotation policy on insider trading behaviors.
Details
Keywords
Minjung Kang, Sangil Kim and Ho-Young Lee
This study aims to examine the effects of allocation of audit hours to year-round audits and audit partners on audit quality when a new partner is appointed.
Abstract
Purpose
This study aims to examine the effects of allocation of audit hours to year-round audits and audit partners on audit quality when a new partner is appointed.
Design/methodology/approach
Using proprietary data of partners’ names and audit hours in the year-round context, the authors build a model testing input factors related to audit production and new partner assignment in 1,209 Korean listed firms during the period of 2015–2018.
Findings
The results show that in the partner rotation, the more audit hours spent, the more audit hours are allocated to the year-round audit, or more nonpartners’ audit hours are allocated to the year-round audit, the higher the audit quality. Subsample analyses show that these findings are concentrated in firms with longer audit tenure or low audit risk.
Research limitations/implications
The findings may provide regulatory authorities with practical guidelines concerning partner rotation and how to allocate audit hours to different audit stages and ranks (partner vs staff).
Originality/value
To the best of the authors’ knowledge, this study provides the first evidence of the joint effects of partner rotation and audit hour allocation on audit quality.
Details
Keywords
Frendy and Fumiko Takeda
Partners are responsible for allocating audit tasks and facilitating knowledge sharing among team members. This study considers changes in the composition of partners to proxy for…
Abstract
Purpose
Partners are responsible for allocating audit tasks and facilitating knowledge sharing among team members. This study considers changes in the composition of partners to proxy for the continuity of the audit team. This study examines the effect of audit team continuity on audit outcomes (audit quality and report lags), pricing and its determinant (lead partner experience), which have not been thoroughly examined in previous studies.
Design/methodology/approach
This study employs string similarity metrics to measure audit team continuity. The study employs multivariate panel data regression empirical models to estimate a sample of 26,007 firm-years of listed Japanese companies from 2008 to 2019.
Findings
The study reveals that audit team continuity is negatively associated with audit fees, regardless of the auditor’s size. This finding contributes to the existing literature by showing that audit team continuity represents one of the determinant factors of audit fee. For clients of large audit firms, companies with higher (lower) audit team continuity issue audit reports in less (more) time. The experience of lead partners is a strong predictor of audit team continuity, irrespective of audit firm size. Audit quality is not associated with audit team continuity for either large or small audit firms.
Originality/value
This study proposes and examines audit team continuity measures that employ string similarity metrics to quantify changes in the composition of partners in consecutive audit engagements. Audit team continuity expands upon the tenure of individual audit partners, which is commonly used in prior literature as a measure of client–partner relationships.
Details