Audit Firms Research Articles

Enhancing audit quality in non-Big 4 firms: the role of remote auditing and audit staff capabilities

Purpose The purpose of this study is to explore the impact of remote auditing on audit quality in non-Big 4 firms in Jordan. It also examines the role of auditors’ capabilities in this relationship, emphasizing their importance in implementing this technology effectively. Design/methodology/approach The perspectives of non-Big 4 audit firms regarding the influence of remote auditing on audit quality were gathered through the administration of a comprehensive questionnaire. Findings This study demonstrates that remote auditing can enhance audit quality in non-Big 4 firms. The strength of this effect is bolstered by the auditor’s technical knowledge, communication skills and professional skepticism. Practical implications Remote auditing is a promising alternative to traditional methods for non-Big 4 firms, with significant implications. Effective remote audits require technical knowledge, communication skills and professional skepticism. To succeed, firms must invest in training programs that equip auditors with the necessary remote auditing techniques. Originality/value This groundbreaking study investigates the effects of remote auditing on audit quality in Jordanian non-Big 4 firms and examines the influence of auditors’ capabilities. Results show that auditors’ capabilities enhance the positive impact of remote auditing on audit quality.

Accountants and Sustainability Reporting

This study enhances the understanding of sustainability reporting by examining Icelandic auditors’ readiness to engage with existing sustainability frameworks. In collaboration with the Association of Certified Public Accountants in Iceland, a survey was conducted in 2022. The results highlighted a significant gap in knowledge and experience among Icelandic auditors regarding eight specific sustainability frameworks—which, notably, lacked any legal audit requirements at the time. In a similar survey in the United States focused on auditors’ familiarity with sustainability reporting within financial statements and their practical experience in this area came to comparable conclusions. To build on these findings, future research could utilize qualitative interviews to delve deeper into auditors’ perspectives and practices, particularly within audit teams. Exploring how audit firms develop expertise in sustainability reporting practices could also yield important insights into effective strategies. This study points to a critical need for improved education and training in sustainability reporting. The recent requirement for mandatory audits of sustainability reports—introduced after our survey—underscores the urgency of addressing these educational gaps.

How female leadership and auditor affiliations shape audit fees: evidence from Egypt

Purpose This study aims to examine how female directors on corporate boards and audit committees, and auditor affiliations (Big 4 versus Egyptian firms affiliated with foreign auditors), influence audit fees. This examination is driven by the global call for increased female representation in leadership roles and its potential implications for audit quality and financial transparency. Design/methodology/approach A sample of non-financial companies listed on the Egyptian Stock Exchange is used for the period 2011–2020. The authors used multivariate regression models, the Heckman two-stage and tokenism to support the analysis. Findings The results are threefold. First, this analysis reveals that female directors, whether on corporate boards or audit committees, are more likely to choose higher-quality audits in the form of high audit fees. Second, both Big 4 firms and Egyptian audit firms affiliated with foreign auditors are positively associated with audit fees and earn significant audit fee premiums. Third, a minor difference in audit fee premiums could be attributed to the existence of female directors. Research limitations/implications Future research may expand the analysis performed in this study by investigating the characteristics related to female directors (e.g. education, experience and age) on audit fees. Practical implications This study suggests insights for regulatory bodies, corporate decision-makers, auditors and corporate governance researchers. For instance, this study reveals that the Big 4 are not homogenous and provide different audit quality levels along with significant audit fee premiums. Originality/value This study extends and contributes to the growing literature on female representation in corporate leadership. First, this study adds to the limited research in Egypt by examining the effect of female board representation on audit quality. Second, this study adds to the extant literature on the gender of financial experts by demonstrating that female financial expert is more likely to demand high-quality audits. Finally, the results have significant implications for policymakers. For instance, this study reveals that the Big 4 are not homogenous and provide different audit quality levels along with significant audit fee premiums.

Strength of Audit Firms’ Human Resource Systems and Client-Level Audit Outcomes: Evidence from a Multiple Source Study

SYNOPSIS We examine whether differences in HR systems among audit firms can affect client-level audit outcomes. Based on the audit quality framework of Knechel, Krishnan, Pevzner, Shefchik, and Velury (2013b) and the strategic HRM literature, we posit that audit firms with stronger HR systems are likely to deliver more desired audit outcomes, ceteris paribus. Building on systems theory, we outline and capture a wholistic picture of the audit firm HR system as consisting of three dimensions: competency-, motivation-, and opportunity-enhancing practices. We draw on two distinct data sources for our analyses: a survey allowing us to tap into the HR systems of large audit firms servicing PIE clients in The Netherlands and corresponding client-level archival data to measure audit outcomes. Our results suggest that HR systems are an internal context factor affecting client-level audit outcomes. Supplemental analyses indicate that competency- and opportunity-enhancing HR practices are associated with more desirable audit outcomes. Data Availability: Part of the data are available from the sources cited in text. JEL Classifications: M42; O15.

Effect of government policy and controller’s connection with relevant parties on information quality of Vietnamese audit firms in the context of COVID-19

Accounting information provides the financial state, performance, cash flow, and notes to the enterprise’s financial statements. Information quality plays an essential role for stakeholders in making business decisions. The study examines the impact of government policy and the controller’s connection with relevant parties on the information quality of Vietnamese audit firms in the context of COVID-19. The surveyed subjects include 347 controllers of audit firms in Vietnam. The paper uses quantitative methods, specifically the exploratory factor analysis method, and the ordinary least squares are used to test the model’s hypotheses. Agency and stakeholder theories are used to explain the basis of the study’s theory. The results show that the government policy and the controller’s connection with relevant parties positively affect the information quality of Vietnamese audit firms. The level of correlation between factors is appropriate, between 0.126 and 0.618. Government policy is one of the most influential factors in information quality (0.412). Relevant parties include audit firms, relatives, and the community, and the level of connection between the controller and relatives and the community (0.298) is better than that of audit firms (0.183). The study proposes policies to connect controllers and relevant parties in cooperation and mutual support to ensure strict control activities and improve the information quality of Vietnamese audit firms.

Examining Mandatory Audit Firm Rotation and Audit Quality in South Africa: Practitioner and Academic Perspectives

In this study, we examined the perceptions of practitioners and academics perspectives about the impact of mandatory audit firm rotation (MAFR) on audit quality (AQ) in South Africa within the province of KwaZulu-Natal. The paper considered the position of the European Union (EU) and the South African Independent Regulatory Body for Auditors (IRBA) regarding its policy shift on MAFR. The study examined the logical connection between MAFR and AQ. This was through the opinion of 101 practitioners and academics gathered from Tier 2 audit firms and two public institutions about the readiness of the rule in South Africa’s jurisdiction. We utilised a quantitative research method through descriptive statistics to understand the influence of the policy on AQ. Opinions of audit experts through closed-ended questionnaires were a distinct feature of our research, while analysis of the descriptive study was on the usage of feedback from respondents. Results from the data analysis presented provided a general overview of respondents’ opinions on the rule. Affirming our research aim, data from the majority of respondents agreed that the policy would strengthen AQ but maintained that the results of the additional imposition of cost could be worse. While this paper contributes to the existing literature on MAFR and AQ, it recommends that further research should concentrate on pre and post-implementation of the policy employing views from registered auditors and academics from different provinces in South Africa to measure the policy effects of the rule on AQ.

Reflections of including key audit matters in the audit quality and audit fees of publicly traded companies in Brazil

Considering the context of the changes implemented by the revised ISA 700, which required including items such as Key Audit Matters (KAMs), this article aimed to examine the effects of the changes in ISA 700 on audit quality and fees. Accounting and market data, information on the responsible audit firms, and the number of KAMs disclosed by publicly traded companies in Brazil were collected from 2014 to 2017. Overall, the results did not demonstrate evidence of improvement in audit quality after adopting the revised ISA 700. Audit fees also did not show statistically significant changes when comparing the period before and after adopting the new requirement. So, the study concluded that, during the four-year period surrounding the adoption of the new requirements, there was no evidence of an increase in audit quality or auditor fees for publicly traded companies in Brazil. This article expands academic discussions in the Brazilian capital market regarding the implications of including KAMs in audit reports, as well as the analysis of the practical effects of applying standards issued by regulatory bodies.

Is audit firms' social performance associated with audit firm reputation? Evidence from China

We use the data of Chinese audit firms' philanthropic activities to examine the effect of such activities on audit firms' financial performance, audit quality and auditor retention. We find that audit firms with more socially responsible activities in the prior year earn more total revenues, revenue per partner or shareholder and revenue per accountant in the current year. Besides, clients audited by socially responsible audit firms have higher audit quality and report lower income‐increasing accruals, higher income‐decreasing accruals, fewer below‐the‐line items and less frequent small positive earnings. More interestingly, clients with socially responsible audit firms have fewer auditor changes.

Does audit quality affect auditors’ career development? Evidence from Chinese audit firms’ demise

PurposeThis study aims to test the effect of individual audit quality on career advancement the audit labour market.Design/methodology/approachThis paper uses data on auditors from two collapsed audit firms in China, namely, Ruihua and Zhengzhong Zhujiang, and tests the effect of individual audit quality on career advancement in the audit labour market.FindingsThe baseline results show that high-quality audits promote auditors’ career advancement. Our results hold after a battery of robustness tests. Further analyses support our hypothesis, indicating that client retention and audit fees are positively related to auditors’ prior audit quality. The effect of audit quality on career advancement does not hold for auditors from sanctioned branch offices or for auditors with prior culpable clients, as shared reputation damage can weaken the effect of high audit quality. Furthermore, this paper investigates whether the reputation enhancement effect of high audit quality can be strengthened by auditor experience, the title of “senior auditor” and IPO auditing experience. We also show that clients and audit firms place more weight on the quality of audits conducted by auditors in competitive markets and auditors with engagements matched with industries.Originality/valueTogether, these findings indicate the vital role of individual audit quality in auditors’ career development in the audit labour market, consistent with the reputation rationale for audit quality.

The impact of financial risk on boilerplate of key audit matters: Evidence from China

This paper examines whether auditors of firms with higher financial risk disclose less boilerplate of KAMs. Our empirical study demonstrates that KAMs are more differentiated if the firms are subject to higher financial risk. This association is only pronounced for client firms in the weaker legal environment and audit firms with larger market shares. In addition, client pressure will weaken the motivation of auditors to differentiate KAMs of firms with a higher level of financial risk. We also find that auditors are more likely to differentiate KAMs related to firms’ profitability if firms are subject to high financial risk.

Hedge accounting, IFRS 9, and audit fees: Evidence from China

AbstractUsing data for 2016–2021 on a sample of Chinese non‐financial firms, this study documents a positive association between the use of hedge accounting and audit fees and finds that the new requirements under International Financial Reporting Standards 9 (IFRS 9) help mitigate this positive relationship. Channel analyses show that the new hedge accounting requirements mitigate earnings volatility and accruals management, which results in audit fee reductions. Further, the post‐IFRS 9 audit fee decrease is greater among large audit firms, firms in regions with higher marketisation levels and firms with better corporate governance.

Using Field-Based Evidence to Understand the Antecedents to Auditors’ Skeptical Actions

SUMMARY We provide field-based evidence on antecedents to auditors’ skeptical actions, with participants including over 600 auditors across all ranks from six audit firms. We evaluate the relative importance of situational, client, and individual auditor characteristics, along with measures of auditors’ cognitive processing in relation to their self-reports of skeptical actions on one of their own audits. We find that the most important antecedents are each audit firm’s overall professional orientation, auditors’ individual feelings of accountability, their trait skepticism, their motivation, and their intentions to behave skeptically. Auditors’ intentions are most influenced by social norms and less influenced by attitudes toward and self-efficacy about behaving skeptically. Other important antecedents include each audit firm’s quality control systems, certain individual auditors’ personality traits, their client-related industry expertise, and their audit knowledge. Our findings support various aspects of prior conceptual models and suggest ways in which audit firms can promote skeptical actions.

PCAOB Inspections and Auditor Liability

SUMMARY The PCAOB has been inspecting firms for almost 20 years, yet there is little evidence regarding the effect of PCAOB inspections on auditor liability. We examine conditions under which a clean PCAOB inspection finding (at the engagement level) provides auditor liability protection for an audit subsequently called into question. Using source credibility theory, we predict and find that the defense introducing a clean PCAOB inspection finding for the litigated engagement reduces jurors’ negligence assessments by increasing the perceived credibility of the firm’s defense. We also find that, if the plaintiff introduces a PCAOB-issued control criticism (firm-wide level), jurors’ negligence assessments increase, regardless of whether a clean PCAOB inspection finding for the engagement is present. Collectively, results suggest that PCAOB inspection findings influence jurors’ negligence assessments. These findings have implications for audit firms, the PCAOB, and other public policy makers, as well as attorneys and triers of fact in audit litigation. Data Availability: Please contact the authors.

Misleading the Auditor with Fractional Truths

ABSTRACT This descriptive study examines the nature and rationalization of deception by client management when communicating with the external auditor. We placed experienced financial reporting professionals in the role of a CFO responding to an auditor inquiry. Participants chose one of four responses: the complete truth, clear mistruth, or one of two “fractional truths” (i.e., a response that is technically true but omits or is vague about relevant information). More than half of the participants chose a deceptive response, with the most common type of deceptive response chosen being a fractional truth. Many participants rationalized their deceptive responses as strictly responding to the question asked and not speculating about the unknown. Most participants who responded deceptively preferred email for communication, whereas those who responded truthfully preferred in-person communication. We discuss the implications of client deception for audit firms and offer suggestions for future research. Data Availability: Data are available from the authors upon request. JEL Classifications: M4.

Measuring an audit quality climate among employees

The International Standard on Quality Management requires, among other things, that audit firm leadership promotes a quality‐oriented culture in firms. We add a novel contribution to the audit quality literature by developing an instrument to measure the audit quality climate in audit firms. Our data consisted of perceptions of non‐executive employees at large South African audit firms and the Auditor‐General of South Africa. Instrument development followed a rigorous scale development process, beginning with the adaptation of a widely used organizational climate measure to explore audit quality at employee level. Exploratory factor analysis determined six audit quality climate dimensions. Confirmatory factor analysis provided evidence of construct validity. The six dimensions of our audit quality climate measurement instrument fit into the three types of culture currently identified in audit firms. The findings of our study are a starting point to develop an acceptable audit quality climate scale for employees in audit firms.

Relationship between Solvent Polarity and Reaction Rate in Organic Synthesis

Purpose: The aim of the study was to assess the relationship between solvent polarity and reaction rate in organic synthesis. Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries. Findings: Polar solvents tend to enhance reaction rates for polar reactions due to their ability to stabilize charged intermediates and transition states. Conversely, nonpolar solvents often accelerate nonpolar reactions by minimizing solvation effects and promoting favorable interactions between reactants. However, there are exceptions to these trends, as solvent effects can also be influenced by factors such as hydrogen bonding, solute-solvent interactions, and solvent viscosity. Additionally, the choice of solvent can impact the selectivity and yield of the desired product. Thus, understanding the interplay between solvent polarity and reaction kinetics is crucial for optimizing organic synthesis processes. Experimental studies and computational modeling techniques play key roles in elucidating these relationships and guiding solvent selection for specific reactions. Implications to Theory, Practice and Policy: Transition state theory, solvent-solute interactions and microscopic solvation models may be used to anchor future studies on assessing the relationship between solvent polarity and reaction rate in organic synthesis. Audit firms should invest in ongoing training and professional development programs to enhance the skills and knowledge of auditors. This includes staying updated on industry-specific issues, emerging risks, and advanced audit methodologies. Regulatory authorities should continue to strengthen their oversight of the audit profession. This includes periodically reviewing and updating auditing standards, enforcing compliance with auditing regulations, and imposing penalties for audit failures.

Labor supply and M&A in the audit market

Using labor supply shocks from the 150-Hour Rule, I find that a reduction in the labor supply of accountants increases audit firms' mergers and acquisitions (M&A) and the audit market concentration. These M&A deals connect audit firms serving clients in the same states and lead to greater industry specialization of the merging firms. Although both small and large auditors generally engage in labor supply–driven M&A deals, large audit firms’ engagement in M&A is restricted to markets with a tight supply of accounting labor. Attenuations of the labor supply restrictions tend to limit the heightened M&A activities and mitigate the rise in the audit-market concentration from the 150-Hour Rule. I conclude that labor supply reductions affect the boundaries of audit firms, potentially changing the structure of the entire audit market.

Is There No Sin Down South of the Equator? Brazilian Auditors’ Perception of the Gendered and Racialized Dynamics in Audit Firms

ABSTRACT We aim to analyze the perception of Brazilian auditors regarding differences in career development for women and black people. Methodologically, we conducted a web survey totaling 329 answers from professionals with diverse profiles regarding the length of service, job position, age, sex, and race. The results show that even men perceive the career as being harder for women. An important finding is that the main difficulties are found in medium and small-sized auditing companies. We contribute to the literature on three fronts: (i) by expanding the theme to cover medium and small-sized companies; (ii) by bringing to the Brazilian scenario the discussion on the perception of differences in the careers of external auditing professionals; and (iii) by contrasting perceptions about the career and the environment for professionals from diverse groups in terms of sex and race. As a practical implication, we conclude that if there is an interest in turning audit into a more just and equitable profession, much has to be changed in auditing careers, even in companies situated to the South of the Equator, so that the sins from elsewhere would not be the same here, sins that were imposed by a colonial conceptualisation of gender and race.

Do auditors care about what retail investors say? Evidence from China

Using China's stock forum postings from 2008 to 2020, we document that when client firms exhibit pessimistic investor sentiment, auditors exert greater effort and charge higher fees from those clients. This increase in audit fees is attributed to the downward pressure on stock prices and the elevated litigation risk of the clients. We also reveal that the impact of pessimism on audit fees is stronger for firms with more widespread pessimism, those audited by larger audit firms and auditors with higher rankings, and those with a greater retail investor influence.

Work Overload, Time Pressure and Social Influence on the Work Efficiency of the Financial and Tax Auditor: Evidence from Peru

Objective: This research presents a research model on the effects of work stress and its components: work overload, time pressure and social influence on audit efficiency, taking into account the perceptions of both the financial and tax auditor. Methodology: A partial least squares structural equation model (PLS-SEM) was used on the basis of a total of 240 responses from financial and tax auditors belonging to the Professional Associations of Lima and Callao in Peru. Results: According to the PLS-SEM model, it is suggested that work overload is the most important factor affecting audit efficiency. Time pressure has an impact on the quality of work, as well as social influence on audit efficiency and its components: quality of work and employee welfare. Research Implications: Further research could address the evolution of the effects of the variables. Also, cross-cultural research should be considered, considering other cities in Latin America. Practical Implications: Senior management and boards of audit firms should consider constructing a career path that encompasses the variables investigated and their impact over time on the auditor's career. Originality/value: The study contributes to the development of scientific literature on the characteristics of financial and tax auditing in Peru and the behavior of auditors.