Purpose Prior research finds that auditors often fail to disclose existing material weaknesses in internal controls before they lead to material misstatements. This study aims to investigate whether auditors are aware of such control issues and how they respond by examining subsequent audit-related outcomes of firms with undisclosed control problems (UCPs). Design/methodology/approach Using a prediction model developed by prior research, the study first identifies firms likely to have UCPs. The study then empirically analyzes how these identified UCPs influence changes in audit fees, audit reporting lags and the likelihood of auditor changes in the subsequent year. The study analysis is based on a large sample of accelerated filers from 2007 to 2019. Findings The study finds that firms with UCPs are likely to experience higher audit fees and longer reporting lags in the following year, indicating auditors’ awareness of these problems and their proactive responses. However, these increases are smaller than those for firms with formally disclosed material weaknesses, suggesting that auditors perceive UCPs as less severe. In addition, firms with UCPs exhibit a higher likelihood of subsequent auditor dismissal and replacement with higher-quality auditors, which implies that audit committees may be dissatisfied with auditors’ decisions not to publicly report these control deficiencies. Originality/value This study contributes new empirical evidence regarding auditor and audit committee reactions to internal control deficiencies that remain undisclosed, addressing a critical yet largely overlooked issue in the auditing literature. This study offers unique insights into auditors’ internal risk assessments, materiality judgments and audit committees’ oversight roles, providing practical implications for regulators, auditors and audit committees in enhancing financial reporting transparency and audit quality.

Purpose This study aims to examine the relationship between environmental, social and governance (ESG) and the adoption of key audit matters (KAMs) in Japan. It also investigates the implications of KAMs on audit and nonaudit fees, firms’ subsequent performance and the effect of ESG on these relationships. Design/methodology/approach Using probit and logit regressions, this study investigates whether ESG plays a significant role in the likelihood of firms adopting KAMs early (early adopters). Using ordinary least squares (OLS), propensity score matching (PSM), fixed effects and random effects, this study examines the effect of ESG on the number of KAMs items disclosed in audit reports and the relationships between KAMs and audit fees, nonaudit fees and subsequent performance after KAMs become mandatory (post-KAMs). Findings This study found a positive relationship between firms’ ESG, the likelihood of firms participating in early KAMs adoption and the number of KAMs items disclosed in the audit report. Moreover, audit and nonaudit fees were higher during the post-KAMs period for firms with higher ESG scores. Mandatory KAMs are associated with greater subsequent accounting and market performance for firms with higher ESG scores. Practical implications Firms with greater sustainability practices adopt greater financial disclosure (i.e. voluntarily adopting KAMs one year before mandatory KAM disclosure) to send a positive signal to stakeholders to protect their reputational capital. While KAMs increase audit and nonaudit fees for firms with higher ESG scores, these firms are rewarded with greater accounting and market performance during the post-KAMs period and when they disclose more KAMs items in their audit reports. Social implications Firms’ sustainability and financial disclosure practices are related. Firms with greater sustainability objectives are more willing to adopt new regulatory disclosure requirements for financial reporting. Originality/value This study provides new insights into the role of firms’ sustainability (ESG) in KAMs adoption and disclosure as signals of their commitment to provide greater transparency to stakeholders. It also presents evidence of the interrelationships between ESG and the voluntary adoption of KAMs, firms’ audit and nonaudit fees and subsequent performance during the post-KAMs period.

Purpose In recent years, a notable phenomenon has emerged among Chinese listed companies: the simultaneous persistence of greater cash holdings and interest-bearing debts (SP-GCHID). Instead of directly operating with their existing cash reserves, these companies tend to borrow additional debt, which incurs higher interest costs. This study aims to explore the implications of SP-GCHID and its impact on auditor risk response behavior. Design/methodology/approach Using a sample of Chinese listed companies, this study explores whether such anomaly is an important indicator of latent risks for companies, and whether auditors have effectively responded to these risks. Findings The findings reveal that SP-GCHID firms have higher agency and misstatement risks. Furthermore, auditors are inclined to increase audit inputs, charge higher audit fees and issue more modified audit opinions for SP-GCHID firms. Originality/value Given the increasing prevalence of credit defaults and financial fraud among SP-GCHID firms, the assessment of risks and hidden dangers associated with SP-GCHID firms is of great concern. This study offers an additional perspective by examining the consequences of SP-GCHID and provides novel insights into auditors’ risk response behaviors. The conclusion also helps regulators and investors better understand corporate cash policies.

Purpose This study aims to investigate whether the frequency of Public Company Accounting Oversight Board (PCAOB) inspections affects the quality of internal control opinions issued by auditors and to explore the underlying factors behind this impact. Design/methodology/approach This study analyzes a sample of accelerated filers from 2008 to 2019 that were audited by non-Big Four firms. The frequency of PCAOB inspections is determined by the number of clients served by the audit firm. Firms with more than 100 clients are classified as annually inspected audit firms, while those with 100 or fewer clients are classified as triennially inspected audit firms. Internal control opinion quality is assessed based on the presence of errors in the auditor’s internal control opinion, which are classified as either Type I or Type II errors if they occur. Multiple regression models and logit regression models are used to examine the relationship between PCAOB inspection frequency and internal control opinion quality. Findings This study finds that audit firms with less frequent inspections are more susceptible to errors in internal control opinions. The findings reveal that audit firms subject to triennial inspections report fewer errors in internal control during inspection years, suggesting potential opportunistic behavior among auditors. Furthermore, under steady disciplinary pressure, PCAOB inspections encourage audit firms to continually improve and sustain their capabilities, thereby enhancing the quality of internal control reports. Practical implications These findings can guide future policy decisions on PCAOB inspection frequency. Although more frequent inspections may lead to higher costs, they can play a crucial role in enhancing auditors’ skills and, consequently, in improving overall audit quality. Originality/value This study provides a more comprehensive assessment of the relationship between inspection frequency and financial statement quality, contributing to the literature on the outcomes of PCAOB inspections.

Purpose This study aims to investigate the factors influencing auditors’ decisions to disclose firm-specific information in key audit matters (KAMs) and the implications of such disclosures in the Chinese auditing context. While firm-specific information in KAMs is an important feature that distinguishes the expanded audit report from traditional boilerplate audit reports, it is important to understand whether KAMs contain firm-specific information de facto. Design/methodology/approach The authors explore the association between audit risk and the disclosure of firm-specific information in KAMs through a textual analysis of audit reports from Chinese listed firms between 2017 and 2021. In this context, firm-specific information contained in KAMs is defined as the dissimilarity between a focal firm’s KAMs disclosures and those of its industry peers. Findings The authors demonstrate that audit risk affects auditors’ disclosure behavior and is positively associated with firm-specific information disclosures in KAMs. The firm-specific information contained in KAMs is value relevant in that it is positively associated with the earnings response coefficient (ERC). The positive impact on the ERC is more pronounced for firms with higher levels of information asymmetry and those with higher audit risk. The authors identify two potential channels for the effect on the ERC: (1) enhanced accounting quality, as evidenced by the reduced likelihood of accounting restatements and (2) increased regulatory scrutiny, as evidenced by the increased likelihood of receiving a comment letter. Originality/value The authors provide direct evidence for the debates on whether the expanded audit report remains boilerplate. By exploring the factors that drive auditors to disclose firm-specific information in KAMs, the study deepens the understanding of auditors’ behavior in response to the audit report reform. Moreover, whether KAMs convey value-relevant information remains controversial. The authors provide evidence from the perspective of firm-specific idiosyncratic information. Last but not least, the study provides important implications to understand the channels through which firm-specific information in KAMs enhances informativeness.

Purpose This study aims to examine how executives’ information technology (IT) expertise influences audit opinions in the context of digital transformation, aiming to uncover its role in improving corporate governance and audit risk evaluation. Design/methodology/approach Analyzing 2011–2020 data from Chinese A-share listed companies through regression models, it uses mechanism tests on internal control quality and governance practices, with heterogeneity analyses across ownership structures, digital maturity levels and executives’ decision-making authority. Findings Results demonstrate that IT-proficient executives significantly increase the likelihood of receiving standard unqualified audit opinions, primarily by strengthening internal controls and optimizing governance frameworks, with amplified effects observed in state-owned enterprises, digitally advanced firms and organizations granting greater strategic power to IT-experienced executives. Originality/value This paper explores new areas in audit research by identifying executive technology literacy as a non-traditional determinant of audit outcomes, bridging the study of executive characteristics with the digital governance discourse and providing actionable insights for auditor risk assessment and corporate leadership selection in technology-intensive environments.

Purpose This study aims to investigate how Confucianism in audit firms influences corporate fraud in China. The research seeks to highlight the enduring relevance of Confucian principles in modern auditing practices, particularly in promoting effective corporate governance and underscores the global significance of informal regulations in mitigating corporate fraud. Design/methodology/approach Based on China A-share listed corporations from 2009 to 2021, this paper uses empirical analysis, including ordinary least squares, instrumental variable regressions, to investigate the relationship between auditors’ Confucian values and client fraud. Findings Results indicate that Confucianism in audit firms significantly reduces both the likelihood and incidence of fraud in audited companies. This effect is attributed to improved corporate governance and the promotion of Confucian ethics – including Loyalty, Benevolence, Righteousness, Discipline and Wisdom – in client firms. Besides, Confucianism in audit firms exerts stronger effect on client firms in the regions with poorer formal institution, and Confucianism in audit firms majorly inhibits audited firm’s information disclosure fraud. Originality/value This research uniquely contributes to understanding how external auditors’ Confucian values influence corporate behavior, extending beyond previous studies that focused primarily on the impact of Confucianism among corporate insiders.

Purpose This study aims to examine the relationship between environmental, social and governance (ESG) performance and audit fees among Indian firms, while investigating the moderating roles of firm size and auditor type. The study also seeks to understand how the environmental, social, and governance dimensions of ESG influence audit pricing differently. Design/methodology/approach The study employs panel regression analysis on a sample of 268 Indian firms over the period from financial year 2012–2013 to 2021–2022. Firm size and auditor type are incorporated as moderating variables to analyze their influence on the relationship between ESG performance and audit fees. Findings The results reveal a significant negative relationship between ESG performance and audit fees, primarily driven by the social and governance pillars. In contrast, environmental performance does not have a significant effect. This negative association is stronger for larger firms and those audited by Big Four auditors, suggesting that better ESG performance leads to lower audit fees. Practical implications The findings hold significant implications for corporate governance, auditors and policymakers. Firms aiming to reduce audit costs should prioritize strengthening social and governance practices, as these factors significantly impact audit pricing. Regulators in emerging markets can leverage these insights to refine ESG disclosure norms, ensuring greater transparency and risk assessment efficiency. Originality/value This study is original in its exploration of the differential impacts of ESG pillars on audit fees, an area where limited research exists, particularly in the context of emerging markets like India. By demonstrating that social and governance factors significantly drive the negative relationship between ESG performance and audit fees, this paper fills a critical gap in understanding how specific ESG dimensions influence audit pricing. Additionally, it advances the literature by examining how auditor type, firm size and auditor industry expertise and independence moderate this relationship. These findings provide fresh insights into how organizational characteristics and auditor expertise shape the ESG–audit fee dynamic, offering a more comprehensive understanding of the intersection between ESG performance and audit practices.

Purpose This study aims to examine the impact of peer Management Discussion and Analysis (hereafter referred to as MD&A) risk information disclosure on the corporate audit demand. Design/methodology/approach Ordinary least square is used to analyze data for firms listed on China’s A-share market from 2011 to 2021. Findings The study finds that peer MD&A risk information disclosure significantly increases the demand for audits, manifested by the increase of hiring experienced auditors’ and increased audit fees, exhibiting a positive spillover effect. The mechanism test results show that peer MD&A risk information disclosure promotes corporate audit demand by increasing the perception of corporate business risk, investor attention and industry competitive pressure, thereby incentivizing companies to opt for high-quality audit services. The results of moderating effect test indicate that accounting information comparability, analyst attention and institutional investor ownership significantly enhance the positive spillover effect of peer MD&A risk information disclosure on corporate audit demand. Moreover, peer MD&A risk information disclosure improves audit quality, as reflected in reduced earnings management. Corporate audit demand can play an intermediary role in this relationship. Practical implications This study not only enriches the research in the fields of risk information disclosure and auditing but also provides a reference for information users to understand nonfinancial information disclosure. It suggests that the government should enhance the scrutiny and regulation of the quality of nonfinancial information disclosure by listed companies, creating a favorable market information environment and promoting the sustainable development of the capital market. Social implications This study provides new evidence demonstrating that strengthening and improving the nonfinancial information disclosure plays an important role in promoting audit practices, enhancing the transparency and standardization of capital markets and achieving long-term sustainable development goals. Originality/value This study innovatively explores the relationship between MD&A risk information disclosure, corporate audit demand and sustainable development. Based on this exploration, we propose policy recommendations emphasizing the need for regulatory authorities to strengthen oversight of nonfinancial information disclosure. This would promote audit practices and market transparency, thereby supporting the achievement of sustainable development goals.

Purpose This study aims to investigate whether equity incentives granted to rank-and-file employees influence audit pricing in US firms. While prior research has primarily focused on executive compensation, this study explores how broad-based stock options compensation impacts auditors’ risk assessments and engagement outcomes, particularly through the lens of agency theory and behavioral risk theory. Design/methodology/approach Using a sample of 19,588 firm-year observations from 2004 to 2020, the study uses multivariate regression models, path analysis, entropy balancing and two-stage least squares to examine the relationship between rank-and-file employees’ stock options and audit outcomes. Findings This study documents a significant positive association between rank-and-file employees’ stock options and audit fees, suggesting that auditors view these incentives as indicators of elevated audit risk. This association is more pronounced among smaller firms, where governance and oversight mechanisms tend to be weaker. A path analysis shows that the relationship is mediated by a higher likelihood of material internal control weaknesses. Additionally, this study finds that rank-and-file equity incentives are associated with longer audit report lags, consistent with increased audit effort by auditors. Practical implications The findings of this study suggest that audit standards should be broadened to include the evaluation of compensation and financial arrangements not only for executives but also for rank-and-file employees. Originality/value By extending the audit pricing literature beyond executive incentives, this paper highlights how broader compensation structures shape audit risk perceptions and engagement outcomes. It further uncovers a mechanism through which rank-and-file stock options influence audit fees, offering new insight into how employee compensation incentives affect audit outcomes.