Purpose This paper aims to examine how audit report lags and audit fees increased for firms that engage in related party transactions (RPTs) around the introduction of Auditing Standard No. 18 (AS18). AS18, which was introduced in 2014, requires following a risk-based approach and additional audit procedures in auditing RPTs and is expected to eliminate the pre-existing inadequate audit effort in auditing RPTs documented earlier by the Public Company Accounting Oversight Board. Design/methodology/approach Using eight years of hand-collected RPT data from annual proxy statements (form DEF 14A) from the SEC EDGAR database for a sample based on S&P 1,500 firms, this paper examines the effect of AS18 on audit effort using two measures, audit fees and audit report lags. The paper conducts the analysis using both unmatched samples and entropy-balanced regression models. Findings This paper finds that audit report lags and audit fees do not significantly increase after AS18 for RPT firms in general. However, when this paper classifies RPTs into Business RPTs and Non-Business RPTs and finds that compared to non-RPT firms, Business RPT firms experience a significant increase in their audit report lags and audit fees after AS18. On the other hand, no such association is observed when comparing non-Business RPT firms with non-RPT firms. In addition, this paper shows that this significant association is only observable in firms with weaker corporate governance mechanisms. Practical implications The findings shed light on the role of auditing standards in enhancing audit effort over risky transactions and the role of corporate governance in moderating the relationship between auditing standards and audit effort. Originality/value This study is the first, up to the best of the authors’ knowledge, that examines whether the additional required procedures associated with AS18 will result in a significant increase in audit effort after AS18 or not.

PurposeLabor-related risks resulting from layoffs may pique auditors’ scrutiny. Although previous research has enriched the understanding of the economic consequences of layoffs, the authors know relatively little about the relationship between layoffs and audit fees. This study aims to investigate whether auditors are concerned about corporate layoff events and their pricing decisions under the influence of the events.Design/methodology/approachThis study examines the effect of layoff storms on audit fees using news reports from mainstream financial and economic media in China about layoffs in listed companies. Based on whether the company is reported to have layoffs by the media in a fiscal year, this study collects data on 204 layoff storms in A-share listed companies from 2008 to 2022. Then, this study uses propensity score matching to reduce the interference of basic company characteristics.FindingsThis study finds that audit fees are higher after firms experience layoff storms. Higher internal control quality and pay advantage in the industry weaken the positive relationship between layoff storms and audit fees, while higher political uncertainty strengthens this positive relationship. Further tests show that companies with proactive layoffs, persistent layoffs and media disclosures of layoff numbers face more audit fees, but the type of corporate response to the layoff does not influence audit pricing.Originality/valueThis study contributes to the literature on audit pricing and the economic consequences of layoffs by emphasizing the impact of labor-related risks on audit fees.

PurposeAlthough various stakeholder groups frequently advocate and call for greater heterogeneity among directors and managers, it remains unknown whether team heterogeneity can be beneficial for audit committee to exercise the auditor selection functions. This study aims to address this question.Design/methodology/approachDrawing on a sample of domestically listed nonfinancial A-share firms in China from 2008 to 2022, the authors empirically examine whether and how firm’s audit committee heterogeneity associates with the selection of auditors.FindingsFirms with higher levels of audit committee heterogeneity are more likely to be associated with lower-quality auditors. Further examination reveals the mediating role of risk-taking: higher levels of heterogeneity are associated with higher levels of risk-taking, influencing firms to employ lower-quality auditors. Moreover, the authors document that increased audit committee heterogeneity is associated with more audit committee meetings and lower audit efficiency, and that hiring lower-quality auditors can influence the market value of firms with high audit committee heterogeneity.Originality/valueTo the best of the authors’ knowledge, this study is the first to examine whether and how audit committee erogeneity associates with the selection of auditors. Moreover, because China is a high-power distance, collectivism-oriented, more relations-based (i.e. guanxi-based) than rules-based society, it is critical to examine the influence of team heterogeneity based on the unique cultural context and transitional nature of China’s business environment.

Purpose The purpose of this study is to analyze comment letters on Docket 034, which proposes reforms to audit reports, to shed light on the actions of various stakeholder groups in the Public Company Accounting Oversight Board (PCAOB)’s standard-setting process. The study identifies stakeholder groups, examines the timing of their involvement, and evaluates their arguments and lobbying efforts to influence regulatory outcomes. Design/methodology/approach This paper examines stakeholders’ behaviors in submitting comment letters during the PCAOB’s public consultation period for its rulemaking and their influence on regulatory outcomes. Stakeholder participation in the PCAOB’s rulemaking process is analyzed through a content analysis of 489 comment letters submitted to PCAOB’s Docket 034, using manual content analysis. Stakeholder groups are identified, including accounting professionals, financial statement preparers, financial statement users, regulators and academics. Argument strategies, such as economic, conceptual or a combination of both approaches, are also identified. Findings This paper finds that accounting professionals and preparers submit more comment letters than the other stakeholder groups. There is a significant association between stakeholder groups and their lobbying position across issues. Preparers take negative positions on all issues except independence, whereas users support all issues. There is also a significant association between stakeholder groups and their argument strategies, and the significant differences lie in preparers and accounting professionals. Preparers primarily rely on economic arguments, such as costs or time. At the same time, accounting professionals use economic and conceptual arguments (such as violating the FASB conceptual framework) to justify their positions. Originality/value To the best of the authors’ knowledge, this is the first study to examine lobbying in the PCAOB’s due process, including all stakeholder groups. The PCAOB’s audit standard-setting process and public consultation via the online docket system promote transparency and the effectiveness of public participation. This study analyzes the nature and impact of stakeholder participation in this due process. Understanding lobbying in an audit standard setting enables the PCAOB and stakeholder groups to work more efficiently on regulatory reforms. This assessment of lobbying efforts in the USA complements and enriches the growing body of literature on lobbying efforts and audit policy reforms across countries. Second, by extending the current literature, this study examines the complexities of lobbying through a detailed content analysis of comment letters. This approach provides insights into the properties of lobbying about stakeholder groups, the scope of lobbying, argument strategies, opinions and consultation periods.

PurposeSOX Section 404 requires that public companies evaluate and have their auditors attest to the effectiveness of their internal control over financial reporting (ICFR). These companies compare their ICFR effectiveness to the Internal Control Frameworks issued by Committee of the Sponsoring Organizations of the Treadway Commission (COSO). This paper aims to examine whether the implementation of the 2013 Control Framework has a positive impact on the information environment of U.S. public companies.Design/methodology/approachThe study sample comprises firms from the S&P 1500 index and the Russell 2000 index firms that filed their annual reports after December 15, 2014. This paper uses bid-ask spread as a primary measure of information asymmetry, while controlling for the simultaneous effects of the new COSO framework on trading volumes and price volatility.FindingsThis paper finds a significant reduction in bid-ask spreads – a proxy for an improved information environment – among our sample firms following the adoption of the 2013 Control Framework, leading us to conclude that the 2013 Control Framework represents a substantial improvement.Research limitations/implicationsThis study specifically examines the impact of control frameworks on the information environment under SOX 404. Future research could explore other economic consequences associated with the adoption of the new COSO Framework. Additionally, it would be valuable to investigate whether the Cadbury model, which also qualifies as a “suitable” control framework under the SEC rules for ICFR assessments, produces similar or different outcomes. Future studies could also analyze the implementation details across all five components concerning the three types of objectives.Practical implicationsThe findings will provide valuable insights for policymakers on the effectiveness of the COSO 2013 Framework in enhancing internal control reporting.Social implicationsThe findings will also contribute to improving the information environment in the capital markets by guiding policymakers and regulators in assessing the effectiveness of the new COSO framework.Originality/valueWhile extensive research has focused on the consequences of accounting and related internal control disclosures, there has been limited examination of how the underlying internal control benchmarks affect the quality and reliability of ICFR assessments and disclosures. This research aims to address this gap.

PurposeThe purpose of this study is to examine the audit efficiency and timeliness of Big 4 auditors relative to non-Big 4 auditors, where audit efficiency is defined as the auditor’s ability to conduct an audit more quickly or with fewer resources while still achieving effective outcomes.Design/methodology/approachThe authors use audit report lags (also referred to as audit delay) as a proxy for audit timeliness and efficiency, controlling for audit quality and audit fees (audit input). The authors use a propensity-score matching (PSM) approach to construct a pseudorandom sample in which each non-Big 4 client is matched with a similar Big 4 client based on their characteristics and audit quality, to control for potential endogeneity related to self-selection bias in this setting.FindingsThe authors find that non-Big 4 auditors are associated with shorter audit delays than Big 4 auditors. Additional analysis of the matched sample reveals that non-Big 4 auditors charge lower fees than Big 4 auditors do after controlling for the Big 4 premium. These findings do not support the notion that Big 4 auditors conduct audits more efficiently than non-Big 4 auditors do.Originality/valueThese results could be of interest to the management of public firms, audit committees, investors and regulators; provide valuable insights into the performance of audit firms in varying client environments; and contribute to a better understanding of audit timeliness and efficiency.

PurposeThis study aims to investigate whether the communication between the external auditor and the audit committee (AC) impacts audit quality.Design/methodology/approachThe authors use textual analysis to develop a new auditor–AC communication metric based on public AC performance reports for the period 2013–2021 in China. The authors also use both high-dimensional fixed effects linear regression and logistic regression to examine the effect of auditor–AC communication on audit quality.FindingsBy correlating this new auditor–AC communication metric with established proxies for audit quality, as outlined by DeFond and Zhang (2014), the authors find that firms with more auditor–AC communication have higher financial reporting quality, a lower probability of material misstatements and more informative audit reports. Overall, auditor–AC communication contributes to the improvement of audit quality.Research limitations/implicationsThe findings offer both practical and policy-oriented implications, particularly for policymakers in search of quantifiable audit quality indicators derived from the interactions between the auditor and the AC.Originality/valueThe study advances the field of audit quality by introducing a novel metric for auditor–AC communication. It provides empirical evidence to support the notion that the communication between the external auditor and the AC can improve audit quality.

PurposeThe purpose of this study is to examine the effect of audit committee (AC) tenure on corporate governance, a topic that has been long debated. Social capital theory explains how directors’ effectiveness varies through tenure. Consistent with this theory, this paper argues that AC tenure has an inverted U-shaped relationship with AC governance.Design/methodology/approachThis paper estimates a quadratic function that regresses constructs for AC governance on the average AC, the AC chair, and nonchair tenure, and their respective square terms. The constructs for AC governance include financial reporting quality measures and perceived auditor independence measures.FindingsThis paper finds that average AC, AC chair, and nonchair tenure have inverted U-shaped relationships with financial reporting quality, consistent with social capital theory. This paper also finds similar associations when examining perceived auditor independence. The results are generally consistent with AC directors accumulating knowledge and social capital, which improves AC governance to an optimal level, following which entrenchment and familiarity occur and AC governance declines.Originality/valueTo the best of the authors’ knowledge, this is the first study in AC governance literature to show a nonlinear relationship between AC tenure and AC governance. This paper extends Huang and Hilary (2018) by demonstrating that a nonlinear effect is also present in the AC, a key board committee responsible for monitoring financial reporting quality and appointing auditors and approving their services. This paper further documents that the AC subsumes the effect of the overall board in some areas of AC oversight, and reconciles the inconclusive findings of prior research by showing a nonlinear relationship between AC tenure and AC governance.

PurposeThis study aims to examine auditors’ perceptions of the changes in audit processes, fees, salaries and trainings during the Lebanese multidimensional crisis. The aim is to understand how going concern assessments were affected by the distortions imposed by the crisis.Design/methodology/approachData was collected through a survey distributed among auditors at Big 4 audit firms in Lebanon during the crisis. The questionnaire, inspired by prior desk study research, aims to empirically assess auditors’ attitudes toward the variances in audit operations during the crisis and their implications on going concern assessments. This study uses the structural equation modeling (SEM) technique to develop and assess the research model.FindingsThe findings reveal notable changes in audit processes, fees, salaries and training programs during the crisis. SEM results highlight the association between the crisis-driven changes in audit procedures, fees and salaries and the increased uncertainty in issuing going concern assessments.Practical implicationsThis study provides recommendations for both the auditing industry and regulatory bodies to ensure audit firms are prepared to face crises that might disrupt their work. Recommendations include the initiation of crisis management training programs, investments in technology solutions, the establishment of a protocol in response to crisis and the adoption of flexible yet reliable audit procedure to accommodate for the challenges of the crisis.Originality/valueThe originality of this study emanates from its adoption of a novel survey to assess a conceptual model that has not been empirically tested in earlier studies. The model examines changes in audit operations during the Lebanese crisis and their implications on going concern assessments, a context that has received little attention in the literature.

PurposeAudit firms have a strong historical tradition of professionalism, but they are also commercial entities. This study aims to investigate the relationship between auditor cash compensation and office-level financial performance.Design/methodology/approachThis study uses proprietary compensation expense and financial performance data from audit offices in China. Using the ordinary least squares regressions, this study tests the association between per capita compensation and office-level financial outcomes.FindingsThis study provides evidence that audit offices offering higher compensation achieve more profitable performance, as reflected in increased market share, higher return on assets and greater operating profit margins. Mechanism tests suggest that reductions in auditor turnover, driven by compensation incentives, partially account for this performance improvement. Additional tests show that the benefits of compensation incentives are particularly pronounced in audit firms licensed to conduct listed firm audits or when accompanied by staff training and technical development. Furthermore, both partner-level and staff auditor compensation significantly enhance office-level financial performance. The results might be of interest to both practitioners and regulatory bodies.Originality/valueTo the best of the authors’ knowledge, this study is the first to examine the relationship between auditor cash compensation and audit-office profitability. The findings highlight important policy implications for audit firms seeking to retain high-caliber auditors and maximize their economic benefits through human capital investments, including compensation, education, training and technical development.