Audit Clients Research Articles

Auditor-Client Interactions—An Exploration of Power Dynamics during Audit Evidence Collection

SUMMARYAccounting research finds that staff auditors, who increasingly interact with high-level client management, maintain positions of lower power in auditor–client interactions. We conducted semistructured interviews with 22 practicing associate- and senior-level auditors to investigate staff auditor–client interactions and their outcomes. Our results shed light on a deep-rooted power dynamic between staff-level auditors and their clients, whereby clients maintain the upper hand during the evidence-collection process. We also document auditors’ concerns for their clients’ perception of them and the audit team. Finally, we observe that auditors often struggle to fulfill their professional responsibilities while also ingratiating themselves to the client. These forces often lead to audit quality-threatening behaviors such as client avoidance and “ghost ticking.” Our results suggest that ongoing power disparities between staff auditors and their clients may impair staff auditors’ operational independence.

The effect of PCAOB inspections on corporate innovation: evidence from deficiencies about the valuation of intangibles

I examine the economic consequences on corporate innovation when PCAOB inspections cite auditors for insufficient procedures in auditing the valuation of intangibles. I find that the clients of deficient auditors recognize larger and timelier impairments of intangibles, suggesting that affected auditors increase scrutiny about the valuation of intangibles in subsequent audits. This effect obtains only for valuation-related deficiencies and is salient for the clients of auditors who receive such deficiencies repeatedly. I also document real effects that the clients of deficient auditors exhibit less use of external mergers and acquisitions—which yield recognizable intangibles whose valuation is subject to increased auditor scrutiny. Overall, these results suggest that the intervention by the PCAOB effectively alters the measurement of intangibles and perhaps unintentionally affects how clients invest in corporate innovation.

Do High-Quality Auditors Improve Non-GAAP Reporting?

ABSTRACT Prior research finds that clients of high-quality auditors report higher-quality GAAP earnings. We extend this research to investigate whether auditor quality is associated with the quality of voluntarily disclosed non-GAAP earnings measures. Using a sample of Australian firms disclosing annual non-GAAP metrics, we find that clients of high-quality auditors are more likely to voluntarily disclose non-GAAP earnings numbers. However, clients of high-quality auditors make adjustments in calculating non-GAAP earnings (non-GAAP exclusions) that are less predictive of future earnings and less value relevant than those of other firms. These results indicate that their adjustments are of higher quality. We also find similar results for U.S. firms using a sample of quarterly non-GAAP earnings disclosures. Overall, our evidence indicates that commonly used indicators of audit quality for GAAP reporting are positively associated with the quality of voluntarily disclosed non-GAAP earnings measures. JEL Classifications: J33; M41.

What Do Audit Clients Want from Their Auditor?

What Do Audit Clients Want from Their Auditor?

Investigating the factors of selecting audit clients: Evidence from an emerging market

This study investigates the insights and criteria audit partners use to select prospective clients in an emerging market. We use questionnaires to solicit responses from a sample of auditors at the partner/manager level in Big and non-Big 4 audit firms with international affiliations in an emerging economy. Descriptive statistical tools including the chi-square test and multiple logistic regression analysis are used for the analysis. This study finds that auditor reputation enhancement and corporate governance effectiveness are significantly associated with the acceptance of listed companies and that the higher financial reporting quality of listed companies and the need to promote audit and assurance services are significant factors affecting such decisions. Audit firms tend to select parents or subsidiaries because of the expected effective audits and reduced misstatement and litigation risks and audit firm industry expertise is needed to mitigate expected client risks to significantly affect the selection of clients with prior-year audit qualifications. Fraud is significantly associated with the selection of clients with prior violations reported by government monitoring bodies. This study is among the few empirical studies in emerging economies that provide insights from practicing auditors on a set of comprehensive attributes that affect the selection of audit clients. The findings have implications for audit partners and firms, auditees, and the audit profession in selecting clients that fit the firm’s and profession’s vision of audit branding and reputation

The Effect of Distance on Distracted Auditors: Evidence from Non-Accounting related Lawsuits against Audit Clients

The Effect of Distance on Distracted Auditors: Evidence from Non-Accounting related Lawsuits against Audit Clients

Changes in Auditor–Client Engagements After the Auditor Is Penalized

Changes in Auditor–Client Engagements After the Auditor Is Penalized

The Implications of Face-to-Face Auditor Client Interactions: Evidence from Auditors’ Taxi Rides to the Clients’ Headquarters

The Implications of Face-to-Face Auditor Client Interactions: Evidence from Auditors’ Taxi Rides to the Clients’ Headquarters

Malaysian Internal Auditor’s Risk Judgment Performance: Examining the Impact of ISA 610 “Using the Work of the Internal Auditor”

Effective from December 2016, the Malaysian external auditor is required under the revision of the International Standard on Auditing (ISA) to give comments on Key Audit Matters (KAM) in the audit client’s financial statement which indirectly increases the relevancy of ISA 610 “Using the Work of Internal Auditor”. This study aimed to explore the impact of two main aspects under ISA 610 namely “external auditor engagement quality (EX_QUAL)” and “external auditor reliance (EX_RELY)” on internal auditor’s risk judgment performance. The survey of 274 internal auditors in the Malaysian public and private sector found that internal auditors who experienced high EX_QUAL outperform risk judgment as a result of awareness that the judgment made must be reflective of their own competency, independence, work performance and due care. Unfortunately, internal auditors who experienced high EX_RELY did not perform as expected since internal auditor’s anxieties on the bad consequences of full disclosure risk faced by the company. EX_QUAL could be one of monitoring mechanism to improve internal audit’s risk judgment. Furthermore, mitigating action, such as external auditor involvement in internal audit annual risk assessment plan could deter internal auditor bias and increase objectivity, and thus induce a positive impact of EX_RELY on internal auditor’s risk judgment performance. Keywords: risk judgment, performance, reliance, internal auditor, external auditor

Pengaruh Fee Audit, Rotasi Audit, Audit Capacity Stress dan Ukuran Perusahaan Terhadap Earning Manipulation dengan Moderasi Kualitas Audit

The survey was conducted on 40 manufacturing companies listed on the Indonesian Stock Exchange during the observation period from 2016 to 2020. The sampling method used in this study was targeted sampling. The hypothesis of this study was tested using multiple regression analysis to measure the effect of the relationship between dependent and independent variables. The purpose of this study was to examine the variables Audit Fee (FA), Audit Rotation (RA), Audit Ability Stress (ACS), and revenue operation size representative of the Beneish M-score, with audit quality as a moderator variable, as experienced by manufacturing firms. to analyze it objectively. Listed on the stock exchange. effect. A sample of 40 and 200 Indonesian securities for the period 2016-2012. The results of this study show that the Beneish M-Score is highly influenced by exam fees, exam rotation, exam capacity load, and size. The FA variable has a 10% significant negative impact on profit manipulation (Beneish M-score). That is, the higher the audit fee accepted by management, the less evidence of manipulation of the financial statements. The RA variable has a very positive effect on profit manipulation. In other words, the more often audit rotations occur, the higher the likelihood of balance sheet manipulation. ACS variables have a significant negative impact on yield manipulation (beneish M-score) at = 10%. That is, the more audit clients, or the higher the ACS, the higher the monitoring that does not lead to manipulation of the financial statements. Finally, the size variable has a large positive impact on profit manipulation. H. The larger the company size, the more evidence of balance sheet manipulation. The results of the Model 2 study indicate that the presence of trial quality as a moderator variable can influence the relationship between FA, RA, ACS and size (Benish M score) in the profit manipulation. If the presence of audit quality (QA) weakens the impact of almost all variables on earnings manipulation (Benish m Score), this suggests that the presence of a reputable audit quality KAP enhances corporate scrutiny and reduces earnings manipulation and investor interest. It means avoiding useful information. and interested persons. Account holders and these factors are considered by investors and stakeholders to provide more relevant information.

Audit quality and independence concerns after major audit reforms within a developing country: stakeholder perceptions from Vietnam

PurposeThe purpose of this exploratory study is to investigate the perceptions of key stakeholders in Vietnam on the impact on audit quality and independence after major reforms to audit.Design/methodology/approachUsing new institutional sociology, this study seeks to explain how Vietnamese external auditors and accountants have responded to audit reforms and provides perceptions on how audit quality and independence may have been impacted. This study draws on semi-structured interviews conducted with 33 highly experienced participants, representing various stakeholder groups in Vietnam.FindingsThe findings indicate that after almost a decade since the full implementation of the Law of Independent Audit (2011) in Vietnam, the audit and assurance market in Vietnam is characterised by low quality audits, a lack of compliance with standards and auditor independence concerns, specifically amongst the smaller audit practitioners. Participants indicated that competition for new audit clients or retaining existing clients is a priority over improving audit quality and independence.Originality/valueBy examining a combination of different factors relating to audit quality and independence, the authors further demonstrate the impact of these factors in Vietnam, helping audit professionals and regulators to have a better and more meaningful understanding of that state of the audit profession. This study also considers audit concerns or issues arising because of the COVID-19 pandemic in Vietnam.

The interdependence between market structure and the quality of audited reports: the case of non-audit services

This paper addresses the effects of a prohibition of providing non-audit services (NAS) to audit clients. By combining a strategic auditor–client game with a circular market-matching model that has an endogenous number of auditors, we take into account the interdependence between the auditors’ and clients’ incentives, the market structure, and the quality of audited reports. We show that the regulation’s effects depend on the preexisting audit market concentration and the types of blacklisted NAS. In sharp contrast to the effects that regulators desire, a prohibition of providing NAS to audit clients can further increase audit market concentration and decrease the quality of audited reports if the fees that auditors previously earned from providing the blacklisted NAS were relatively high, compared to the reduction in audit costs that result from spillovers. In contrast, a prohibition of the NAS that generate intense spillovers and low NAS fees can have the unexpected—but desired—effect of decreasing market concentration; however, reporting quality also decreases.

Government contracts and audit fees

Topics concerning government contracts have recently attracted much attention from researchers and the public because of the US government's significant spending on goods and services. In this study, we investigate whether audit fees are associated with audit clients' government contracts. We find that firms with a higher proportion of government sales to total sales pay higher audit fees than other firms. Our further analysis shows the audit premium is driven mainly by the federal government and local government contracts. We also show that local government contracts have a larger effect than federal government contracts on the determination of audit fees. Taken together, our findings enhance our understanding of a potential determinant of audit fees and imply that auditors may view firms with and without government contracts differently.

Do socially responsible audit firms provide higher audit quality? An investigation of corporate social responsibility activity in audit firms

PurposeThe paper aims to examine the corporate social responsibility (CSR) activity of audit firms.Design/methodology/approachUsing hand-collected data on all Chinese audit firms’ CSR activities from 2007 to 2020, this study constructs two measures to proxy for audit firms’ CSR engagement: a dummy variable to indicate whether an auditor engages in CSR activities in year t and the frequency with which auditors conduct CSR activities in year t. The authors use ordinary least squares regression as a baseline methodology, along with the entropy balancing method and instrumental variable approach to alleviate potential endogeneity concerns.FindingsThe baseline results show that socially responsible audit firms provide higher quality audit services than their counterparts. In particular, the authors find that clients audited by socially responsible audit firms are less likely to receive an aggressively clean opinion. Moreover, the findings suggest that CSR activities related to community and employees are more relevant in improving audit quality compared with those related to other dimensions of CSR. Further analyses show that capital markets and audit clients react positively to audit-firm CSR activity. Audit firms engaging in CSR increase their audit inputs in response to risky clients, as compared with their counterparts. Finally, cross-sectional analyses show that the positive relationship is more pronounced for non-Big 4 and non-industry experts and is attenuated by within-firm geographic dispersion. In terms of client characteristics, the positive effect of audit-firm CSR is stronger when their clients face the higher financial risk or have lower CSR awareness than others. Taken together, these findings are consistent with the ethical view of audit-firm CSR engagement.Practical implicationsThe study advances investors’ understanding of audit-firm CSR engagement and helps them evaluate the credibility of audited financial reports. Besides, the findings may also help guide the audit firms to conduct more CSR activities and help guide the audit clients to choose CSR audit firms.Originality/valueTo the best of the authors’ knowledge, this study provides the first large-sample evidence by empirically examining the association between audit-firm CSR activity and audit service performance. Besides, this paper also explores audit-firm CSR activity from two competing perspectives, thereby providing a comprehensive understanding of this issue. Finally, this work responds to the call for more CSR research in emerging markets.

Accounting transparencies and audit fees of auditor-designated mutual savings banks in Korea

In 1998, the act on mutual savings banks was amended to create a legal basis for auditor designation for certain mutual savings banks in Korea. Also, a series of restructuring processes for the savings banking industry took place in 2011 due to the insolvency of some savings banks. This study empirically analyzes whether the auditor designation rule has affected how mutual savings banks set aside allowance for bad debts and thus help improve their accounting transparency (better asset quality and less earnings management), as well as the impact of this rule on audit fees. It also looks into whether there is any notable difference in accounting transparency and audit fees between before and after the savings bank incident in 2011. We specifically set the six hypotheses about the effect of auditor designation on asset quality, earnings management, and audit fees, and the different effect of savings bank incident on these three factors. We investigate the hypotheses using regression models with 809 firm-year sample from 2005 to 2014. The results show that asset quality has improved for auditor designated mutual savings banks and after the incident. With respect to earnings management, mutual savings banks with designated auditors are found to be less likely to manage their earnings using allowance for bad debts, but there is no statistical significance in difference between before and after the savings bank incident. As for audit fees, the amount of fees is large for auditor-designated mutual savings banks, and after the incident. This study would offer useful insights to financial regulators, auditors, audit clients, and other stakeholders.

Audit Firm Attributes and External Auditors’ Switching Behaviour of Insurance Companies in Nigeria

Auditor replacement has been a critical issue in research to be solved in order to enhance the quality of audit reports. This study investigated the nexus between audit firm characteristics and external auditors’ switching behaviour of insurance companies in Nigeria. The specific objectives include the relationship between audit delay, audit tenure, audit fees, audit client size and audit firm size on audit switching. The study employed ex post facto and correlational research designs with a population of forty-seven (47) insurance companies. The study used the Taro Yamene formula to determine the sample size of forty-two (42) insurance companies and data was collected from the financial reports of sampled companies. The secondary data obtained from the annual reports were analysed using univariate, bivariate and multivariate analysis. The multiple regression analysis revealed that audit delay negatively and significantly impacts on audit switching of listed insurance companies in Nigeria; audit tenure negatively and significantly impacts on audit switching of listed insurance companies in Nigeria; audit fees positively and significantly impact on audit switching of listed insurance companies in Nigeria; audit client size negatively and insignificantly impact on audit switching of listed insurance companies in Nigeria; audit firm size positively and significantly influence external auditor switching of listed in insurance firms in Nigeria. On the basis of the findings, the study concluded that audit firm characteristics influence the level of external auditor switching of listed insurance companies in Nigeria. Hence, the study recommended amongst others, that companies should conduct proper short and long term effects of audit delay, audit tenure, audit fees, audit client size and audit firm size on external auditors replacement before selection and engagement of new auditor because each wrong decision might affect audit quality. The implication of this study was to improve the research on the relevance of external auditors’ switching because of the decision of the firms in defining audit firm services and audit quality.

A hybrid convolutional long short-term memory (CNN-LSTM) based natural language processing (NLP) model for sentiment analysis of customer product reviews in Bangla

Sentiment Analysis (SA) examines how people feel about products, services, people, organizations, events etc. Most of the Natural language processing on SA research has focused on English. In the case of Bangla, it lacks sufficient study as well as a proper dataset. All previous analyses employed KNN, NB, and other methods. We develop a natural language processing (NLP) model for separating opinion and sentiment from Bangla customer surveys. This technology isolates extreme client opinions to help with business and marketing decisions. Bangladesh is embracing e-commerce and f-commerce. Client comments and evaluations are becoming more significant in judging product or service quality, and this industry is evolving toward internet distribution. Organizations utilize client audits to check product quality. Our objective is to systematically collect client feedback and understand their product reaction. We used a hybrid CNN-LSTM based NLP model to classify Bangla texts in 3 viewpoint categories (positive, negative and neutral). We tested our model using a Bangla dataset that we generated. For our dataset, we collected polls and comments from websites and social media. Finally, among the three evaluation matrices, the f-1 score is providing the highest average, and the three-opinion technique is 87.22 percent accurate in determining the performance of our task.

Who affects whom? Impact of the national culture of international audit firms and their affiliates on the financial reporting quality of audit clients

This paper examines whether the financial reporting quality of audit clients is affected more by the national culture of the home country of an international parent audit firm or the national culture of its affiliates' host country. The study uses 111,949 firm-year observations for 16,444 unique industrial firms across 51 countries from 2009 to 2019. Financial reporting quality is proxied by accrual-based earnings management. The national culture of the countries in which the parent firm's head office and foreign affiliates are located is represented by the Hofstede Model of Cultural Dimensions. The results demonstrate that the national culture of parent firm's home country has a more significant impact on earnings management than the national culture of the foreign affiliates' country. Findings also support the homogeneity hypothesis on the association between international parent firms and their affiliates. The global audit network, which is dominated by this international parent firm, has common cultural characteristics. The results remain unchanged after the different home country assumptions, alternative sampling procedures, endogeneity, and firm- and country-level factors are controlled.

Ethical Decision Making Among Auditors in Indonesia: Examination on State Professional Skepticism and Auditor Independence

Auditors’ ethical behavior has become a concern globally with the continued occurrence of financial scandals. As a result, regulators, researchers and other stakeholders are focusing on auditors’ ethical behaviour, auditor independence and professional skepticism. As there are limited studies on the issue, the purpose of this study was is to examine the influence of professional skepticism and independence on the ethical behaviour of Indonesian auditors based on Rest’s model within the context of certain material audit adjustments to be recorded by an audit client. This study was also intended to examine the mediation effect of state professional skepticism on the relationship between auditor’s independence threat and auditors’ ethical decision making. This study adopted the experiment approach by utilizing case scenarios. There were 121 auditors from the Big 10 firm in Indonesia as participants of this study. This study found that despite auditors not recognizing the ethical issues due to independence threat, they still can act ethically. Further, state professional skepticism did not affect ethical decision making of auditors. Keywords: ethical decision making, professional skepticism, auditor independence

Determinants of Going Concern Audit Opinion on Manufacturing Companies Listed on the Indonesia Stock Exchange

The going concern audit opinion shows the auditor's doubts about the business continuity of the company. This study aims to analyze the effect of financial condition, company size, company growth, auditor client tenure and previous year's audit opinion on the acceptance of going concern audit opinion. This research is a type of associative quantitative research. The population in this study were manufacturing companies listed on the Indonesia Stock Exchange as many as 162 companies and using purposive sampling technique in determining a sample of 108 manufacturing companies. The data collection technique used is the documentation technique and the data analysis technique used by SPSS windows version 23 software. The results show that simultaneously, the variables of financial condition, company size, company growth, auditor client tenure and previous year's audit opinion affect the acceptance of audit opinions. going concern. However, partially the company growth variable and auditor client tenure have no effect on the going concern audit opinion acceptance, while the financial condition variable, company size and the previous year's audit opinion affect the going concern audit opinion acceptance.