Audit Clients Research Articles

Non-audit fees and auditor independence: Nigerian evidence

Purpose This study aims to investigate the extent to which the provision of non-audit services (NAS) by external auditors to audit clients affects auditors’ independence and the audit expectation gap in Nigeria. Design/methodology/approach The study adopts an interpretivist approach. In total, 30 semi-structured, face-to-face interviews were conducted to explore the views expressed by audit partners and pension fund managers in Nigeria; group responses were evaluated and presented separately. After transcribing the interview audio recordings, a thematic data analysis of the two groups’ responses was performed. Findings Interpretation of the interview responses indicates that the provision of NAS by audit firms to their audit clients is regarded by auditors as a matter of economic necessity. Nevertheless, it is also perceived as impeding auditors’ independence and increasing the gap between the auditor and public expectations. Practical implications This study contributes to the debate surrounding the need for an independent body to oversee auditing standard setting distinct from the current practice to enhance transparency. Originality/value A qualitative analysis of the nuanced responses obtained from the semi-structured interviews reveals starkly the perceived economic pressures on auditors to accept non-audit work. Moreover, it endorses the regulation to restrict non-audit work in support of a sustainable fee level for an independent audit.

Audit Partners’ Co-Working Experience and Audit Outcomes

Issues related to audit team personnel and the resultant effects on audit outcomes have not been investigated widely with archival data due to data unavailability. In this study, we examine whether and how increases in co-working experience between the lead and the concurring partners impact engagement audit quality and audit efficiency. A priori, increases in co-working experience could increase or decrease audit quality. In contrast, we expect increases in co-working experience will increase audit efficiency. Using a unique setting, Taiwan, where the identities of these two partners are known, we find increases in co-working experience are positively associated with audit quality and audit efficiency. Our results are robust to alternative measures of co-working experience and audit quality and to controlling for potentially omitted variables and selection bias. Further tests show that the effects of co-working experience on audit quality and audit efficiency are more pronounced when client audit risk is higher, the audit firm is not an industry expert, audit firm tenure is relatively shorter, and the two audit partners more consistently serve in only one role.

Pengaruh Financial Distress, Pertumbuhan Perusahaan Klien, Ukuran Kap, Dan Audit Delay Terhadap Auditor Switching

This study aims to examine the effect of financial distress, client company growth, KAP size and audit delay on auditor switching. This study is classified as comparative causal research. The population in this study are mining companies listed on the Indonesia Stock Exchange period of 2013 to 2017. By using purposive sampling method, there were 85 companies as the research samples. Auditor switchingare measured by dummy. The type of data used is secondary data obtained from www.idx.co.id and use logistic regression analysis. The results of this study indicate that financial distress, client company growth, KAP size and audit delay have no influence on auditor swtiching..

The effects of audit client tenure, audit lag, opinion shopping, liquidity ratio, and leverage to the going concern audit opinion

Purpose The going concern audit opinion is an audit opinion issued by an auditor to evaluate the company’s ability in maintaining the business continuity. The purpose of this paper is to discover the effects of audit client tenure, audit lag, opinion shopping, liquidity ratio and leverage on the going concern audit opinion. Design/methodology/approach The study used secondary data obtained from financial reports and independent audit reports published by Indonesian Stock Exchange (ISE) as well as Indonesian Capital Market Directory. Besides, the population of the study included manufacturing companies registered in ISE from 2009 to 2013. Further, the present study applied purposive sampling technique which resulted in 16 companies used as the sample of the study. Then the hypothesis was examined by applying logistic regression. Findings Results of the hypothesis examination indicated that the variables of opinion shopping and leverage affected the going concern audit opinion, whereas the variables of audit client tenure, audit lag and liquidity ratio did not affect the going concern audit opinion. Originality/value Results of the hypothesis examination indicated that the variables of opinion shopping and leverage affected the going concern audit opinion, whereas the variables of audit client tenure, audit lag and liquidity ratio did not affect the going concern audit opinion.

Evaluating the performance of auditors: a driver or a stabilizer of auditors’ behaviour

Purpose The purpose of this paper is to identify differences in auditors’ dysfunctional behaviour when expecting performance appraisal. Its main aim is to examine variances across countries; UK vs Kuwait. Also, it identifies differences between experienced and inexperienced auditors. Design/methodology/approach The paper focuses on dysfunctional audit behaviour (DAB) where premature sign-off and under-reporting of chargeable time are chosen as the two main signalling proxies. A survey made up of statements included in performance appraisal templates is distributed among auditors working for the Big Four firms in both, the UK and Kuwait. Findings The paper shows how performance evaluation of external auditors affects their behaviour in the workplace. From a cultural standpoint, assessing the performance of auditors whilst working in a competitive market in a developed country is regarded as a potential driver for DAB variations. Evaluating auditors’ performance in a developing country is seen as a stabiliser of DAB. This research paper demonstrates that experienced auditors have a greater tendency to behave dysfunctionally as compared to inexperienced auditors. Originality/value Prior studies have been conducted to assess auditors’ performance through using internal and external attributes (Kaplan, 1985), offshoring basic steps of audit work (Downey, 2018), and the perception of audit clients about auditors’ performance (Reheul et al., 2013). Such studies were conducted mostly on developed countries on a standalone basis. In this study, the focus has been shifted from focusing on one country to comparing two different countries. The paper examines DAB between experienced and inexperienced auditors in the UK and in Kuwait when expecting performance evaluation.

Do Audit Clients Prefer Watchdogs or Lapdogs? The Effect of Strictness on Audit Offices’ Market Shares

Regulators frequently interpret a high audit market concentration as a threat to audit quality and want to foster competition. However, both the direction and the sign of the link between quality and concentration are unclear. This paper investigates the link between audit offices’ market shares and two dimensions of their strictness: The probability to issue going concern opinions and the tolerance for earnings management. We develop an analytical model in which the information content of the audit outcome for the addressees of financial statements and the financial statements preparers’ preferences drive the client firms’ demand for audit services of a certain strictness. The model predicts an inverse u-shaped relation between an office’s strictness and its market share. In the empirical part of the paper, we use U.S. data from 2000 to 2016 to test the model’s prediction. For the Big 6 as well as for the non-Big 6 market and according to both dimensions of strictness, we find lower market shares for the strictest offices compared to offices with average levels of strictness. Moreover, relative to Big 6 offices with average strictness, we find lower market shares of Big 6 offices that are lenient in their going concern decisions, but not if they are lenient in terms of discretionary accruals. In contrast, non-Big 6 offices that allow for high levels of discretionary accruals have lower market shares, but not if they issue going concern opinions only rarely.

Employee Movements from Audit Firms to Audit Clients

ABSTRACTRegulators have expressed concerns about the “revolving door” between auditors and clients, whereby audit employees move directly from audit firms to audit clients (i.e., “direct alumni hires”). Regulators are concerned that these direct hires could compromise audit quality, partly because these employees could have previously audited their hiring company's financial statements. In contrast, we examine accounting and finance executives who move indirectly from audit firms to audit clients and who could not have previously audited the hiring company's financial statements (i.e., “indirect alumni hires”). We show that indirect hires occur more often than the direct hires that have concerned regulators. We predict and find that both direct and indirect alumni hires are associated with lower rates of executive turnover and audit firm turnover. However, there is no evidence that the reduced rates of executive turnover are explained by managerial entrenchment or that these hires are associated with lower audit quality. Overall, our findings suggest that direct and indirect employee movements from audit firms to audit clients are beneficial to executives, audit clients, and audit firms because they reduce the incidence of costly turnover.

Loan loss provisions in large publicly quoted European banks and auditor independence

The European Commission, citing deficiencies in the financial statements of banks during the financial crisis, has questioned the independence of the auditors of European banks at the onset of the crisis. We test for evidence of impaired auditor independence by examining if the economic bond between auditors and clients is associated with the audit quality of banks, controlling for the strength of banking regulation of the country in which a bank operates. We find no evidence of income‐increasing loan loss provisions being positively associated with the auditor–client economic bond. There is no indication that auditor independence is impaired in EU banks. Stronger country regulation is associated with more conservative provisioning before and after the formation of the European Banking Authority. We also find that the strength of banking regulation mitigates any tendency of auditors' independence to be compromised by the auditor–client economic bond.

Associations and Networks of International Accounting Firms

Commonly examined attributes of audit quality in international markets include accounting firm size (proxied for by Big 4 membership) and industry expertise, which is highly correlated with accounting firm size. In this study, we focus on an important but often overlooked sector of the international audit market: non-Big 4 accounting firms. Specifically, we examine whether membership in an international accounting association or network (AAN) allows non-Big 4 accounting firms to provide higher audit quality. Using a difference-in-differences research design and data from 24 countries, we find that audit quality improves after small international accounting firms join an AAN. We also find that AAN-member audit quality is not significantly different from Big 4 audit quality when audit clients are similarly sized. These findings have important implications for accounting firms, audit committees, regulators, and investors in international markets.

PENGARUH PENERAPAN GOOD CORPORATE GOVERNANCE, OPINION SHOPPING, KUALITAS AUDIT, DAN AUDIT CLIENT TENURE TERHADAP PENERIMAAN OPINI AUDIT GOING CONCERN AUDITING

The Impact of Good Governance, Opinion Shopping, Quality Audit and Audit Client Tenure Application towards Going Concern Opinion Audit Acceptance (Empirical Studies on Infrastructure Services Company, Utility, and Transportation which Registered at Indonesian Stock Exchange (ISE) during 2013 – 2017 Period). Essay. Tegal: Economic & Business Faculty, Pancasakti University Tegal. 2018. The aim of this research is to finding out the impact of institutional ownership, independent commissioner, committee audit, opinion shopping, quality audit, audit client tenure towards going concern’s opinion audit on infrastructure services company, utility, and transportation which registered at ISE during 2013 – 2017 period. The population in this research are infrastructure services company, utility, and transportation which registered at ISE during 2013 – 2017 period and the sample determination by using purposive sampling method, so within the result obtained 15 company’s samples. The data analysis method used is logistic regression analysis. Based on logistic regression analytic, the research result concluded that institutional ownership (0,109), audit committee (0,429), opinion shopping (0,607), and quality audit (0,998) are not affecting the going concern opinion audit. Meanwhile, the independent commissioner (0,006), and audit client tenure (0,004) are affecting the going concern opinion audit. Keywords: going concern, opinion audit, institutional ownership, independent commissioner, committee audit, opinion shopping, quality audit, audit client tenure

Managerial ownership, audit firm size, and audit fees: Australian evidence

We analyze the extent to which managerial ownership is associated with auditor selection and the audit firm’s assessed overall risk of audit clients. We test the association between managerial ownership and both audit firm size and audit fees in a sample of Australian-listed companies between 2005 and 2015. Prior literature analyzing the relationships in US, UK, and Hong Kong settings found that the significance and direction of the relationship is related to the level of managerial ownership. When managerial ownership levels are compatible with shareholder interests (i.e., “convergence-of-interests”), the relationship between managerial ownership and audit firm size and audit fees is negative. Conversely, when managerial ownership levels are contrary to the interests of shareholders (i.e., “entrenchment”), the relationship is positive. Our results are largely consistent with prior literature, but we document more specifically the levels of ownership at which convergence-of-interests and entrenchment occur in the Australian market.

Auditor Style and Common Disclosure Deficiencies: Evidence from SEC Comment Letters

Policies and procedures that centralize decision-making within an audit firm create auditor style effects. Prior research suggests this style increases financial statement comparability, implicitly making financial statements more useful. However, a potential hazard of auditor style is the propagation of decision errors. We examine the association between auditor style and common disclosure deficiencies among audit clients. We measure auditor style as the presence of a common auditor and use disclosure issues identified through the SEC’s filing review process to measure the occurrence of common disclosure deficiencies. We find that auditor style is associated with common disclosure deficiencies among Big 4 clientele. We also find that clients with the same auditor converge in deficiencies as tenure increases and some evidence that clients assume the deficiencies of a subsequent auditor. These results provide the first evidence that auditor style has potential costs in the form of common disclosure deficiencies.

Auditor Response to Negative Media Coverage of Client Environmental, Social, and Governance Practices

SYNOPSIS We use new data to examine auditor response to negative media coverage of client environmental, social, and governance (ESG) practices. This coverage can be indicative of an increased risk of material misstatement, which is an important assessment in client retention and pricing decisions. Specifically, media criticism can threaten a client's financial condition, as well as reveal management effectiveness and integrity issues that are further compounded by negative attention and related financial problems. We therefore predict that auditors will notice and incorporate media-provided ESG information in their risk response, which has not been examined by prior research. Supporting this prediction, we find that ESG-related negative media coverage of an audit client is associated with a higher likelihood of auditor resignation and increased audit fees. This response is incremental to the issues that underlie this media coverage. Overall, these findings identify an additional economic incentive for companies to avoid poor ESG practices.

NON-AUDIT SERVICES AND THE CORPORATE GOVERNANCE OF AUDIT CLIENTS

This paper investigates the relationship between corporate governance qualities and the purchase of non-audit services among Malaysian Listed Companies. The sample consists of 709 companies listed on Bursa Malaysia during the year 2014. The study posits that CEO duality, board independence, audit comitte independence, big 4 auditors, the audit committee size, and the frequency of audit committee meetings are associated with the amount of non-audit services. This is basically based on the argument that weaker governance allows the company to jeopardise the independence of external auditor, hence higher level of non-audit services. Company size, profitability, leverage, growth and industry are also included in the study as the control variables. Using the ordinary least square regression model and relevant diagnostic tests, findings shows that only board independence, audit committee independence, audit committee size and big 4 auditors are associated with the level of non-audit services. The results of this study contribute to the present literature on the determinants of non-audit services, especially in emerging market. The result would also be informative to regulators worldwide when considering to apply new policies related to non-audit services.

Faktor-Faktor Yang Mempengaruhi Pergantian Auditor:

This research aims to determine the influence of audit quality, change in audit fees, change in management, financial distress and client size on auditor switch. This type of research is causative research. The population and sample in this research are companies listed on the Indonesia Stock Exchange (IDX) for the 2014-2017. The sample selection in this research used a purposive sampling method. Data type is secondary data. Data collection is done by collecting documentation data of financial statements of companies listed on the Stock Exchange for the 2014-2017. The data analysis method used is logistic regression analysis, with auditor switching as the dependent variable and audit quality, change in audit fees, change in management, financial distress and client size as independent variables. The results of the research concluded that audit quality, change in audit fees, financial distress and client size have significant relationship with auditor switchi while management change does not have a significant relationship with auditor switch. The next researcher can consider using other variables such as share growth, company growth, audit tenure, audit delay and other variables that might influence auditor switch

Audit Firm Reputational Consequences of Alleged Non-Accounting Misconduct by Clients: How Bargaining Power Temporarily Shifts Around Securities Litigation

SUMMARYThis study examines how auditor-client bargaining power changes when misconduct unrelated to accounting, which we proxy for using non-accounting securities fraud lawsuits, is revealed at another client of the auditor. This type of misconduct can cause perceived reputational damage for the auditor that temporarily increases client bargaining power. In the year after suit filing, fees are lower for clients in the same city-industry office as the sued client, but are unchanged for clients of other auditors in the same city-industry, suggesting the effect is not due to economic distress. This effect is stronger (1) when suits are severe, likely because the negative information is more salient, and (2) when client bargaining power is stronger. Overall, these results provide evidence that reputation is important for U.S. audit firms. Further, the results also support the notion that reputation is susceptible to temporary damage from events beyond auditors' control.JEL Classifications: K22; M42; M49.

Corporate social responsibility risk and auditor–client retention

Literature suggests that firms engaging in irresponsible corporate social responsibility (CSR) activities are more likely to increase auditor's engagement risk. Using audit firm tenure as a continuous measure for retention decisions made by either auditors or client firms, we find a significant and negative association between CSR risk and auditor tenure. Moreover, when the continuous variable audit tenure is replaced with a dichotomous variable auditor change, the likelihood of auditor change intensifies with increases in CSR risk. These results suggest that both clients and auditors are more likely to sever relationships when client firms exhibit high CSR risk than low CSR risk. This study has implications for future research on audit firm tenure and audit outcomes.

Pengaruh Beban Kerja, Klien Baru, Dan Ukuran Klien Terhadap Defisiensi Audit

This study aims to examine whether public accountants’ workload, new clients, and size of clients influence the occurrence of audit deficiencies conducted by public accountants on the basis of the data collected by the Finance Professions Supervisory Centre (PPPK), Ministry of Finance. PPPK is given the authority to ensure that the audits carried out by public accountants are in accordance with applicable standards. This is a quantitative research using multiple linear regression analysis of public accountants’ data examined by PPPK from 2013 to 2016. Test results show that only the client size affects the audit deficiencies identified by PPPK in a positive direction. This research is expected to be a resource for public accountants to give proper attention during audits of large clients and help PPPK in determining the examination samples of public accountants each year.
 Keywords: audit, audit deficiency, PPPK, public accountant

Audit Partners’ Risk Tolerance and the Impact on Audit Quality

Relying on their history of legal infractions to measure individuals’ risk tolerance, we examine the association between engagement partners’ risk appetites and audit quality in the U.S. Criminology and economics research links criminal activity with enduring personality traits that capture an individual’s risk tolerance. Our evidence supports the prediction that partners known to engage in risky off-the-job behaviors conduct lower quality audits. Specifically, we find that clients of partners with prior legal infractions exhibit greater propensity to misstate, fewer material weaknesses, and less timely loss recognition, while also paying lower audit fees and completing the audit earlier. We also document that risk-tolerant partners are more likely to pursue alternative sources of benefit by attracting larger non-audit fees from their audit clients. Reflecting that Big 4 firms have robust quality control systems and more standardized audit procedures that narrow the scope for partner characteristics to matter, we largely find that the Big 4 better constrain risk-tolerant partners from undermining audit quality. In additional cross-sectional analyses, we generally find supportive evidence that the impact of partners’ risk tolerance on audit quality subsides in offices with industry expertise, offices that are closer to the audit firm’s national office, and offices in the same city as the SEC. Collectively, our analysis contributes to emerging research on the role that individual partner characteristics play in shaping audit outcomes.

Auditor Communication Provisions in Private Loan Agreements: Do They Matter?

We examine auditor communication provisions (ACPs) in private loan agreements, which are private contracting mechanisms between external auditors and audit clients which establish communication between lenders and their borrowers' auditors. We provide evidence that lenders value privately-contracted auditor communication and often specify multiple ACPs that facilitate lender monitoring. In terms of debt contracting outcomes, we find ACPs are associated with a lower ex ante likelihood of loan covenant violation. We also examine audit fee implications for the borrower and find that ACPs are associated with higher audit fees, which is consistent with auditors responding to the litigation risk these provisions impose. We corroborate this by providing evidence that this relationship is concentrated in samples where the risk of third-party litigation is greater. Finally, we find evidence that ACPs lead auditors to become more conservative as their clients exhibit lower signed discretionary accruals when the risk of third-party litigation is greater.