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Article
Publication date: 21 December 2023

Meena Subedi

The current study uses an advanced machine learning method and aims to investigate whether auditors perceive financial statements that are principles-based as less risky. More…

Abstract

Purpose

The current study uses an advanced machine learning method and aims to investigate whether auditors perceive financial statements that are principles-based as less risky. More specifically, this study aims to explore the association between principles-based accounting standards and audit pricing and between principles-based accounting standards and the likelihood of receiving a going concern opinion.

Design/methodology/approach

The study uses an advanced machine-learning method to understand the role of principles-based accounting standards in predicting audit fees and going concern opinion. The study also uses multiple regression models defining audit fees and the probability of receiving going concern opinion. The analyses are complemented by additional tests such as economic significance, firm fixed effects, propensity score matching, entropy balancing, change analysis, yearly regression results and controlling for managerial risk-taking incentives and governance variables.

Findings

The paper provides empirical evidence that auditors charge less audit fees to clients whose financial statements are more principles-based. The finding suggests that auditors perceive financial statements that are principles-based less risky. The study also provides evidence that the probability of receiving a going-concern opinion reduces as firms rely more on principles-based standards. The finding further suggests that auditors discount the financial numbers supplied by the managers using rules-based standards. The study also reveals that the degree of reliance by a US firm on principles-based accounting standards has a negative impact on accounting conservatism, the risk of financial statement misstatement, accruals and the difficulty in predicting future earnings. This suggests potential mechanisms through which principles-based accounting standards influence auditors’ risk assessments.

Research limitations/implications

The authors recognize the limitation of this study regarding the sample period. Prior studies compare rules vs principles-based standards by focusing on the differences between US generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) or pre- and post-IFRS adoption, which raises questions about differences in cross-country settings and institutional environment and other confounding factors such as transition costs. This study addresses these issues by comparing rules vs principles-based standards within the US GAAP setting. However, this limits the sample period to the year 2006 because the measure of the relative extent to which a US firm is reliant upon principles-based standards is available until 2006.

Practical implications

The study has major public policy suggestions as it responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US Securities and Exchange Commission (SEC), to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the International Accounting Standards Board (IASB) Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks such as climate change.

Originality/value

The study has major public policy suggestions because it demonstrates the value of principles-based standards. The study responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US SEC, to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information as business transactions and investor needs continue to evolve globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the IASB Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks like climate change. The study fills the gap in the literature that auditors perceive principles-based financial statements as less risky and further expands the literature by providing empirical evidence that the likelihood of receiving a going concern opinion is increasing in the degree of rules-based standards.

Article
Publication date: 12 March 2024

Muiz Abu Alia, Islam Abdeljawad, Mamunur Rashid and Renad Anwar Frehat

This study aims to explore the use, effectiveness, motives and obstacles of analytical procedures (APs) used by auditors in Palestine, a context characterised by a pool of small…

Abstract

Purpose

This study aims to explore the use, effectiveness, motives and obstacles of analytical procedures (APs) used by auditors in Palestine, a context characterised by a pool of small and medium enterprises (SMEs), a limited skill set, poor quality of data, political uncertainty and a community-based business culture.

Design/methodology/approach

The study considers the audit market in Palestine using a sequential mixed-methods approach combining a questionnaire survey and a series of in-depth interviews. A total of 129 Big-4 and non-Big-4 auditors were surveyed.

Findings

The use of APs is driven by the auditor size (Big-4 vs non-Big-4) and the client size (large vs SMEs). Even though the use of APs has increased over the past decade, audit objectives, know-how, and personal, family and social connections among auditors and clients influence the quality of the audit process.

Practical implications

Small firms take advantage of the lack of audit governance in Palestine. Our findings suggest that the regulators should help bridge the knowledge-sharing programmes between the small and large audit firms to help improve audit quality.

Originality/value

Studies on audit quality, particularly using APs, in the context of politically unstable cases such as Palestine are limited. The study has implications for the use of APs in the case of SMEs to prepare for the technological revolution that will modernise audit procedures and quality soon.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 13 June 2023

Bita Mashayekhi, Ehsan Dolatzarei, Omid Faraji and Zabihollah Rezaee

This study aims to identify the intellectual structure of expanded audit reporting (EAR), offers a quantitative summation of prominent themes, contributors and knowledge gaps and…

Abstract

Purpose

This study aims to identify the intellectual structure of expanded audit reporting (EAR), offers a quantitative summation of prominent themes, contributors and knowledge gaps and provides suggestions for further research.

Design/methodology/approach

This research uses various bibliometric techniques, including co-word and co-citation analysis for EAR science mapping, based on 123 papers from Scopus Database between 1991 and 2022.

Findings

The results show EAR research is focused on Audit Quality; Auditor Liability and Litigation; Communicative Value and Readability; Audit Fees; and Disclosure. Regarding EAR research, Brasel et al. (2016), article is the most cited paper, Bédard J. is the most cited author, Laval University is the most influential university, The Accounting Review is the most cited journal and USA is the leading country. Furthermore, the results show that in common law countries, in which shareholder rights and litigation risk is high, topics such as disclosure quality and audit litigation have been addressed more; and in civil legal system countries, which usually favor stakeholders’ rights, topics of gender diversity or corporate governance have been more studied.

Practical implications

This research has practical implications for standard setters and regulators, who can identify important, overlooked and emerging issues and consider them in future policies and standards.

Originality/value

This paper contributes to the literature by providing a more objective and comprehensive status of the accounting research on EAR, identifying the gaps in the literature and proposing a direction for future research to continue the discussion on the value-relevance of EAR to achieve more transparency and less audit expectation gap.

Details

Meditari Accountancy Research, vol. 32 no. 2
Type: Research Article
ISSN: 2049-372X

Keywords

Article
Publication date: 22 May 2023

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.

Details

Journal of Accounting in Emerging Economies, vol. 14 no. 2
Type: Research Article
ISSN: 2042-1168

Keywords

Article
Publication date: 31 May 2023

Md Jahidur Rahman, Hongtao Zhu and Xinyi Jiang

This study aims to investigate whether auditors compromise their independence for economically important clients in family business settings.

Abstract

Purpose

This study aims to investigate whether auditors compromise their independence for economically important clients in family business settings.

Design/methodology/approach

The authors empirically examine the research question based on China for the years 2011 to 2020. The dependent variable is the auditors’ propensity to issue modified audit opinions, which is a proxy for auditor independence. The authors use relative client audit fees as a proxy for client importance. To address endogeneity issues in the selection of family firms, the authors use the two-stage least squares regression model and, subsequently, the propensity score matching and Hausman firm fixed effect modeling.

Findings

This study reveals that the propensity to issue modified audit opinions is positively correlated with client importance. Big-N auditors are more likely to issue modified audit opinions for their economically important family firm clients, whereas such evidence is not found for non-Big-N auditors. Results are consistent and robust to endogeneity test and sensitivity analysis.

Originality/value

This study enriches the literature on auditor independence and the effect of family firms’ ownership structure factors on audit reporting behavior for their economically important clients. Findings may prove useful for managers and practitioners interested in family business.

Details

Meditari Accountancy Research, vol. 32 no. 2
Type: Research Article
ISSN: 2049-372X

Keywords

Article
Publication date: 9 August 2022

Saeed Rabea Baatwah, Ehsan Saleh Almoataz, Waddah Kamal Omer and Khaled Salmen Aljaaidi

This study investigates the consequences of the key audit matter (KAM) disclosure requirement by considering two salient audit proxies: audit fees and audit report lag. This…

Abstract

Purpose

This study investigates the consequences of the key audit matter (KAM) disclosure requirement by considering two salient audit proxies: audit fees and audit report lag. This investigation is relevant because most auditors worldwide are required to expand their audit report including discussion on key matters faced in the audit engagement. However, the emerging literature on the implications of KAM is inconclusive.

Design/methodology/approach

Using a distinctive dataset of 601 year-observations for firms listed on the Omani capital market over 2012–2019, this study employs pooled panel data regression with robust standard error.

Findings

Results indicate that auditors increased their fees considerably during the period of KAM but substantially shortened audit report lag. Conversely, using the KAM period as a sample, the authors find marginal or insignificant evidence for the effect of the number of KAM on both proxies. In additional analyses, this study shows that entity-level risk KAM is associated with higher fees and shorter audit report lag, while KAM related to account-level risk does not have the same effect. Interestingly, it is observed that KAM disclosure is strongly associated with higher fees and high-quality audit even when the auditors issue their report in a shorter time.

Originality/value

This study contributes to the limited research examining the consequences of KAM in emerging markets. It is also the first to show that KAM is associated with shorter audit report lag.

Details

International Journal of Emerging Markets, vol. 19 no. 3
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 20 March 2024

Clinton Free, Stewart Jones and Marie-Soleil Tremblay

The purpose of this paper is to synthesize insights from the emerging work in accounting on greenwashing and sustainability assurance and propose an agenda for future research in…

Abstract

Purpose

The purpose of this paper is to synthesize insights from the emerging work in accounting on greenwashing and sustainability assurance and propose an agenda for future research in this area.

Design/methodology/approach

This article offers an original analysis of papers published on greenwashing and sustainability assurance research in the field of accounting. It adopts a systematic literature review and a narrative approach to analyse the dominant themes and key findings in this new and rapidly evolving field. From this overview, specific avenues for future research are identified.

Findings

In the past few years there has been a substantial spike in concern relating to greenwashing among academics, practitioners, regulators and society. This growing concern has only partly been reflected in the research literature. To date, research has primarily focused on: (1) the characteristics of firms adopting sustainability assurance, (2) the challenges facing sustainability auditors, (3) the development of appropriate assurance standards and regulations, and (4) capital market responses to greenwashing and sustainability auditing/assurance. Three key future research issues with respect to greenwashing are identified: (1) the future of standard-setter attempts to regulate greenwashing, (2) professional jockeying in sustainability reporting assurance, and (3) capital market opportunities and challenges relating to greenwashing and assurance.

Originality/value

Despite the profound economic and reputational impact of greenwashing and the rapid development of sustainability assurance services, research in accounting remains fragmented and emergent. This review identifies avenues offering considerable scope for inter-disciplinarity and bridging the divide between academia and practice.

Details

Journal of Accounting Literature, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 8 February 2024

Md Khokan Bepari, Shamsun Nahar and Abu Taher Mollik

This paper aims to examine the perspectives of auditors, regulators and financial report preparers on the effects of key audit matters (KAMs) reporting on audit effort, fees…

Abstract

Purpose

This paper aims to examine the perspectives of auditors, regulators and financial report preparers on the effects of key audit matters (KAMs) reporting on audit effort, fees, quality and report transparency.

Design/methodology/approach

The authors conducted 21 semi-structured interviews with stakeholders (13 Audit Partners, 5 Chief Financial Officers and 3 regulators) and thematically analysed the interviews. They use the frame of “Paradox of Transparency” to explain the findings.

Findings

Auditors perceive that the overall quality control of their audits has improved both in the planning and execution stages, and such improvement can mostly be attributed to the coercive pressures from professional bodies and regulators. Nevertheless, audit fee remains unchanged. Auditors disclose industry generic items and descriptions of KAMs, sometimes masking the real problem areas of the clients. Even after improving the performative audit quality, transparency of audit reporting has not improved. Issues that warrant going concern qualifications or audit report modifications are now reported as KAMs. Hence, KAMs reporting might make the audit report less transparent.

Practical implications

Localised audit environments and institutions affect the transparency of KAMs reporting. Without attention to corporate governance and auditors’ independence issues, paradoxically, performative improvement in audit quality (due to the KAMs reporting requirement) does not enhance the transparency of audit reports.

Originality/value

To the best of the authors’ knowledge, this study is the first to provide field-level evidence in Bangladesh and other developing countries about the perceptions of auditors, financial report preparers and regulators on the effects of KAMs reporting on audit efforts, fees, quality and report transparency.

Details

Qualitative Research in Accounting & Management, vol. 21 no. 2
Type: Research Article
ISSN: 1176-6093

Keywords

Article
Publication date: 9 January 2024

Dereck Barr-Pulliam, Marc Eulerich and Nicole Ratzinger-Sakel

This study aims to examine the extent to which external auditors (EAs) use the work of the internal audit function (IAF) based on the purpose of its primary activities. The…

Abstract

Purpose

This study aims to examine the extent to which external auditors (EAs) use the work of the internal audit function (IAF) based on the purpose of its primary activities. The authors rely on attribution theory, which suggests that individuals search for meaning when an event occurs. In this setting, the authors explore how the overall (assurance vs advisory) or specific (e.g. risk management and evaluating internal controls) focus of IAF activities influences perceived EA reliance on the IAF’s work.

Design/methodology/approach

The authors first explore the research question with data extracted from a broad, longitudinal survey conducted triennially by the national chapters of the Institute of Internal Auditors in Austria, Germany and Switzerland. The data includes responses from 2014, 2017 and 2020 administrations of the survey. The authors conduct a parallel survey with practicing EAs attending two training sessions of a European office of a global network firm. Hypotheses were tested using ordered logistic regression.

Findings

Among the chief audit executive (CAE) participants, the authors observe that a balanced or primarily assurance-related purpose of the IAF, relative to a primarily advisory-related purpose, is associated with higher perceived EA reliance. The authors observe similar perceptions of the extent of reliance among the EA participants.

Originality/value

With a unique data set of practicing internal auditors from three countries, coupled with a sample of EAs, to the best of the authors’ knowledge, this study is the first to examine differences in EA reliance across the IAF’s primary roles. The study relies on data from three European countries, which differs from prior EA reliance literature with a largely North American focus. Further, comparison between perceptions of EAs and CAEs is a novel approach and this paper’s findings suggest that perceptions of CAEs could be a reliable proxy for EA-intended behavior.

Article
Publication date: 2 February 2024

Adriana Tiron-Tudor, Stefania Mierlita and Francesca Manes Rossi

The objective of this study is to systematically review the current body of literature in order to gain insights into the progress of research in accounting and auditing of…

Abstract

Purpose

The objective of this study is to systematically review the current body of literature in order to gain insights into the progress of research in accounting and auditing of cryptocurrencies, while also highlighting the associated risks and identifying gaps for future exploration.

Design/methodology/approach

To achieve this, a structured literature review was carried out, presenting a thorough and critical assessment of the available studies focused on cryptocurrencies within the accounting and auditing domain.

Findings

The analysis reveals that the majority of the research has concentrated on the reporting and measurement aspects of cryptocurrencies, neglecting the auditing aspect. Regarding the methodology, future investigations should incorporate both theoretical and empirical manners to address this gap. Various spheres require further exploration, as they have the potential to significantly impact practitioners and academics.

Originality/value

The significance of this paper lies in its comprehensive examination of the existing literature, synthesizing and organizing information pertaining to accounting and auditing considerations of crypto transactions. Moreover, it provides valuable insights into best practices and prompts identifying avenues for further research in this field.

Details

The Journal of Risk Finance, vol. 25 no. 2
Type: Research Article
ISSN: 1526-5943

Keywords

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