ESG rating uncertainty and audit quality

Audit quality is divided into internal audit quality and external audit quality, and the independence of the former has always been weaker than that of the latter. By selecting the two variables of internal audit outsourcing and executive power, combined with the method of empirical research, we compared the above two variables with audit quality. We will study the relationship between them and explore measures to strengthen audit independence from two perspectives, ultimately achieving the effect of improving audit quality. Based on the collation of domestic and foreign literature on factors affecting audit quality, this paper studies the relationship between internal audit outsourcing, executive power and audit quality, defines the concepts respectively, and determines the theoretical basis required for the research. From three Starting from the relationship between variables, a total of three hypotheses were put forward. An investigation was conducted using A-share listed companies in the Shanghai Securities Market from 2014 to 2018 as a research sample. Based on previous research, appropriate methods were selected to quantify the three variables and establish a model. Through empirical analysis, all three hypotheses have been verified. The first conclusion is that executive power is negatively related to corporate internal audit quality, that is, the greater the executive power, the lower the audit quality. The second conclusion is that internal audit outsourcing is positively related to audit quality, that is, the more reasonable the allocation of internal audit outsourcing services, the higher the audit quality. The third conclusion is that internal audit outsourcing will inhibit the negative relationship between executive power and audit quality.

The Effect of Auditor Type on Audit Quality: An Empirical Analysis

Agency Problems, Auditing, and the Theory of the Firm: Some EvidenceAuthor(s): Ross L. Watts and Jerold L. ZimmermanSource: Journal of Law and Economics, Vol. 26, No. 3, (Oct., 1983), pp. 613-633Published by: The University of Chicago PressStable URL: http://www.jstor.org/stable/725039Accessed: 29/06/2008 23:14

PurposeThere has been growing concern worldwide regarding audit quality in Japan after the Kanebo and Olympus accounting scandals. The purpose of this paper is to examine the Japanese audit market from 2001 to 2011 to determine whether audit quality differs between Big N and Non-Big N audit firms and whether this difference, if existed, changed during 2007 when the number of big audit firms declined from four to three and the requirements of audit quality became more rigorous.Design/methodology/approachThis study employs a sample of Japanese listed firms from fiscal year 2001 to 2011. Five proxy variables for audit quality are used and the data are analyzed using the propensity score matching method.FindingsThe authors show that irrespective of their size, all audit firms in Japan provide the same quality of service, when controlling for client characteristics including keiretsu, foreign sales ratio and bankruptcy risk measured in Japan. Additionally, the results suggest that although only three major audit firms remain in the Japanese audit market after the dissolution of PricewaterhouseCooper’s Chuo-Aoyama firm in 2007, the audit quality difference between Big N and Non-Big N remained unchanged before and after 2007.Originality/valueThe study contributes to the lack of existing empirical evidence on audit quality in Japan, a country characterized with low audit litigation risk and more emphasis on auditor reputation, given the influence of the notable change in Japanese audit market competition from Big 4 to Big 3. The study’s research design contributes to the extant literature by using multiple proxies of audit quality.

Purpose The purpose of this study is to examine whether the average continuing professional education (CPE) hours per Certified Public Accountant (CPA) in accounting firms’ audit departments affects audit quality. This paper aims to identify which segments of the audit market benefit most from enhanced professional education. Design/methodology/approach This study analyzes publicly disclosed information on the average CPE hours per CPA in accounting firms’ audit departments to examine the role of CPE in audit quality, especially in non-Big 4 auditors. The data on CPE hours is manually collected from auditors’ annual transparency reports. The sample consists of 12,884 firm-year observations from both Korean public and private firms between 2017 and 2020. Findings This study finds that increasing CPE hours improves audit quality, with the positive effect being more pronounced in firms audited by non-Big 4 auditors. This suggests that non-Big 4 auditors provide higher-quality audits when they acquire more training hours, compared to Big 4 auditors. In addition, the effect of CPE is stronger when non-Big 4 auditors serve private firms and when they are industry non-specialists. The results remain robust across alternative measures of audit quality and CPE, as well as alternative model specifications (e.g. propensity score matching, change analysis and models with auditor or firm fixed effects) to address potential endogeneity concerns. Practical implications The findings that increasing CPE hours enhance the quality of audits conducted by non-Big 4 auditors and industry non-specialists have important implications to regulators, practitioners, and academics. This paper provides evidence on which segments of the audit market benefit most from the competence gained through CPE that is crucial for enhancing audit quality. Originality/value This study provides large-sample empirical evidence that directly examines the differing effect of CPE hours on audit quality between Big 4 and non-Big 4 auditors. It also contributes to the literature on the role of CPE by enhancing our understanding of which segments of the audit market benefit most from highly educated auditors.

In this paper, we analyze the variance in audit quality among a broad cross-section of listed firms in Chinese stock market from 1999 to 2012. The purpose of the analysis is to identify the importance of audit firm, audit client, and engagement auditor effects on the variance in audit quality. Using discretionary accruals and financial restatement to surrogate audit quality and based on simultaneous ANOVA method, we find that engagement auditor can add about 19% of incremental explanatory power to the variance in audit quality. As expected, audit firm effects and audit client effects also have significant influence on audit quality, which can add about 2% and 16% of incremental explanatory power to the variance in audit quality. In addition, we find that, relative to engagement auditors with short audit experience, engagement auditors with longer audit experience have no significant incremental power in explaining variance in audit quality. The analysis enriches previous studies by investigating audit clients role and engagement auditors role in determining audit quality. Our study highlights the importance of understanding audit quality from the perspective of individual auditor.

This study examines how audit quality and board independence jointly affect corporate investment efficiency and real investment, using data from non-financial firms listed in South Korea from 2019 to 2023. Employing rigorous econometric methods – including panel regression, two-stage least squares, and propensity score matching – the analysis demonstrates that higher audit quality, measured by the absolute value of discretionary accruals, significantly improves investment efficiency by reducing information asymmetry and limiting managerial opportunism. Board independence further strengthens this effect by moderating the relationship between audit quality and both investment efficiency and real investment decisions. The results confirm a significant moderation effect, but no mediation effect, indicating that independent boards play a critical role in maximizing the benefits of audit quality. These findings provide important insights into how corporate governance mechanisms can optimize resource allocation, particularly in emerging markets with less mature institutional environments. The study’s results offer both theoretical contributions and practical guidance for managers and policymakers seeking to enhance investment outcomes and foster sustainable growth in similar contexts.

PurposeThis 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/approachThis 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).FindingsThis 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/implicationsA 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/valueThis 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.

[Purpose] This study analyzes the impact of auditor size on audit quality in SOEs and the variation in audit quality due to auditor rotation in SOEs. Due to the different characteristics and institutional environments of SOEs and non－SOEs, the results of the empirical analysis may be different. Therefore, this study aims to extend the existing studies on audit quality to SOEs and provide meaningful implications for establishing accounting oversight policies in SOEs. [Methodology] This study analyzes financial information from 2011 to 2023 for a sample of 32 SOEs in the Republic of Korea designated by the Ministry of Economy and Finance in January 2023. As proxies for audit quality, we use absolute value of discretionary accruals. [Findings] We analyze the audit quality of SOEs by auditor size and find that auditor size does not have a significant impact on audit quality. When we analyze the fluctuation of audit quality over the audit rotation period, we find that the Big4 have consistent audit quality from the first audit year to the year before the audit rotation. On the other hand, for the non－Big4, audit quality is significantly higher in the year before audit rotation and significantly lower in the year of continuation. [Implications] We find that auditor size does not have a significant impact on audit quality in SOEs, suggesting that a fair selection process is more important than auditor size in selecting external auditors. Moreover, since audit quality may be lower in the continuous audit year than in other periods, it is necessary to focus the capabilities of external supervisors and internal audit organizations on the continuous audit period, and it is necessary for non－Big4 to establish institutional mechanisms to ensure consistent audit quality throughout the audit period. In addition, the high audit quality in the year before the auditor change and the low audit quality in the year of continuous audit suggest that the auditor rotation system, which requires periodic change of auditors, is effective in improving the audit quality of SOEs.

This study aims to investigate the impact of shared auditors and same signing auditors on audit quality in M&A transactions. Existing research suggests that shared auditors in M&A transactions are considered to enhance information symmetry, thereby improving transaction quality. However, there is a lack of systematic research on how shared auditors influence audit quality in M&A, particularly regarding the interaction with same signing auditors. Using a sample of 1,083 M&A transactions from the Chinese market between 2004 and 2020, we analyze the impact of shared auditors and the same signing auditors on audit quality during the M&A process. The findings indicate that both shared auditors and same signing auditors contribute to improved audit quality in M&A. Further analysis reveals that this enhancement effect is more pronounced in M&A across industries and provinces. Moreover, the impact on audit quality is stronger when the bidder is larger, non-state-owned, or not audited by the Big 4 audit firms. This study provides empirical evidence on the roles of auditors at both the firm and individual levels in improving audit quality, highlighting the potential value of shared auditors. The conclusions offer recommendations for enhancing audit quality and make informed choices regarding auditors. Jel Classification : M42.

We argue that the association between auditor industry specialization and audit quality depends on how long the auditor has been a specialist. We measure audit quality using absolute discretionary accruals, income-increasing discretionary accruals, and book-tax differences. Our results, based on a sample of Big 4 audit clients from 2003–2015, indicate that auditors who have only recently gained the specialist designation produce a level of audit quality that does not surpass that produced by non-specialist auditors, and is generally lower than the audit quality produced by seasoned specialists. We estimate that the seasoning process takes two to three years. In contrast to prior research that finds no effect of specialization after propensity score matching, we find that seasoned specialists generally produce higher-quality audits than other auditors even after matching. This suggests that the audit quality effect associated with seasoned industry specialist auditors is not due to differences in client characteristics. JEL Classifications: M42. Data Availability: Data used in this study are available from public sources identified in the text.

Do Seasoned Industry Specialists Provide Higher Audit Quality? A Response

This literature review evaluates 103 empirical research studies on the link between rotation and non-audit services on the one hand and their influence on earnings quality, audit quality and investor perceptions on the other hand. After the financial crisis 2008/09, regulators all over the world are aware of decreased stakeholder trust in earnings and audit quality. As a reaction, stricter rules on rotation and non-audit services by public interest entities (PIEs) have been implemented (e.g. in the European Union). However, the impact of these regulations on earnings and audit quality is still controversial. We briefly introduce the theoretical, normative and empirical audit framework that comprises an adequate structure of the state-of-the-art of empirical research in this field. We summarize the findings in each research area, while we split our rotation analysis in an audit firm and audit partner rotation and tenure and our dependent variables in earnings quality, audit quality and investor perception measures. Most of the cited studies are linked to earnings-related measures, especially abnormal accruals models. The mixed results can be explained by the different theoretical impacts of agency- and resource-based view. Finally, we will discuss the current limitations of the studies and give useful recommendations for future empirical research activities on this topic

Recent proposals on audit regulation, whether in the EU or by the PCAOB, have been motivated by efforts to increase audit quality. However, there does not exist any generally agreed upon definition of audit quality. This paper aims to critically assess the status quo of the discussion regarding audit quality and its operationalisation in empirical research. We show that the applied audit quality surrogate is able to drive research findings. Conducting a correlation analysis, we find that some of the proxies are not positively correlated at statistically significant levels and thus seem not to be fully consistent with each other. Moreover, we find that significance levels of various influence factors on audit quality vary depending on the applied audit quality surrogate. Therefore, we point to the fact that researchers as well as practitioners and policymakers have to be careful when using and interpreting research findings that apply different audit quality.

The Challenge of Measuring Audit Quality: Some Evidence