Audit Regulation Research Articles

Leader versus lagger: How the timing of financial reports affects audit quality and investment efficiency

AbstractThis paper examines how relative timing affects the quality of financial reports in a staggered reporting system in which some firms report earlier than others. We show that the audit quality of the leading firm exceeds that of the lagger. Investment efficiency also differs systematically across firms, depending on the relative reporting timing as well as the audit market structure. Audit regulations mitigate the misalignment of interests between auditors and investors but limit the effect of information spillovers. We characterize the socially optimal auditing standards and show how and why imposing minimum audit quality requirements complements and/or substitutes for adjusting auditors' legal liability. Overall, we show that a staggered reporting system dominates a simultaneous reporting system in enhancing audit quality and investment efficiency through regulation.

Strengthening the Application of the DAIDS GCLP Guidelines: The Implementation of an Integrated Laboratory Oversight Framework.

The Division of AIDS (DAIDS) Good Clinical Laboratory Practice (GCLP) Guidelines establish a framework to guide the oversight of laboratories supporting DAIDS-sponsored clinical research or trials. Compliance with these guidelines promotes data reliability, validity, and safety of the clinical research or trial participants and laboratory staff and ensures adherence to regulatory requirements. Acknowledgment and adoption of the DAIDS GCLP Guidelines are critical in building laboratory capacity and preparedness for conducting clinical trials. In collaboration with DAIDS, laboratory experts support the implementation of the DAIDS Integrated Laboratory Oversight Framework (Framework) activities. This article describes the implementation of the GCLP Guidelines, the Framework activities, and the coordinated efforts to strengthen laboratory performance. The Framework activities include four components: Quality Assurance Oversight, GCLP Audits, GCLP Training, and Laboratory Quality Improvement. Comparison of GCLP Guidelines with other regulations or standards, including U.S. Clinical Laboratory Improvement Amendments regulation 42 CFR 493, College of American Pathologists, World Health Organization GCLP, and International Organization for Standardization, ISO 15189:2012 standards, highlighted the differences and similarities to guide integration and harmonization efforts. Processes related to the Framework activities are outlined in detail, including key data derived from the managed activities of over 175 laboratories worldwide. Via the evolution of the DAIDS GCLP Guidelines and laboratory oversight workflows, the laboratories participating in DAIDS-sponsored clinical research and trials have successfully participated in internal and external regulatory audits. The collaborative and integrated oversight approach promotes knowledge-sharing and accountability to support the implementation of the DAIDS GCLP Guidelines and compliance monitoring. Lessons learned have helped with the implementation of the DAIDS integrated laboratory oversight approach and quality oversight programs at multiple laboratories worldwide.

Does Gender and Ethnic Diversity among Audit Partners Impact Office-Level Outcomes?

SUMMARY Accounting firms have invested significant resources in diversity initiatives related to recruiting, retention, and promotion. Audit regulators suggest these efforts can have positive repercussions on audit quality. This article summarizes the key findings by Condie, Lisic, Seidel, Truelson, and Zimmerman (2023) (CLSTZ) regarding the influence of a more diverse group of audit partners within an audit office on office-level outcomes. Specifically, CLSTZ examines whether gender and ethnic diversity among audit partners within an office influences audit personnel retention and audit quality. CLSTZ finds that greater diversity (greater changes in diversity) among an office's audit partners is associated with less (reduced) turnover among the audit professionals in that office and higher (increased) audit quality. These findings provide empirical evidence regarding the influence of a more diverse group of office audit partners on office-level outcomes and have important implications for accounting firms. JEL Classifications: M41; M42.

Investigating the impact of adopting big data and data analytics on enhancing audit quality

Purpose This study aims to empirically investigate the impact of adopting big data and data analytics (BD&A) on audit quality (AQ). Design/methodology/approach A questionnaire was distributed among audit practitioners working at audit firms in Egypt and 205 responses were collected. Partial least square structural equation modeling (PLS-SEM) was used to analyze and test research hypotheses. Findings The results reveal that BD&A has a direct significant positive effect on the audit process (AP) and auditor competence (AC). However, an insignificant impact of BD&A is found on audit fees (AF). In addition, the results indicate that BD&A has significant positive direct and indirect impacts on AQ. Research limitations/implications The results of this study will benefit several auditing stakeholders, such as audit firms, audit regulators, novice financial auditors and academic scholars. Originality/value This research is one of the earliest to empirically address the role of BD&A in enhancing AQ. It incorporates AP, AC and AF as mediators into a single model to explain the impact of BD&A on AQ. Also, it attempts to provide empirical evidence from a developing country with a less-regulated audit environment.

Administrative audit regulation and the quality of accounting information: Evidence from China securities regulatory commission’s random inspection system

Based on the “double random” inspection system implemented by the China Securities Regulatory Commission (CSRC) on accounting firms, our study uses staggered DID method to examine the effect of administrative audit regulation on the quality of corporate accounting information. The results suggest: (1) The administrative audit regulation can effectively improve corporate accounting information quality; (2) The mechanism test reveals that the administrative audit regulation improves the quality of accounting information by improving internal control; (3) Further study reveals that the governance effect of the administrative audit regulation is more pronounced for firms with non-Big four auditing, high risk of misstatement and more agency costs. Our study investigates the governance effect of the CSRC’s random inspection system on the quality of corporate accounting information, providing theoretical and empirical evidence for the effectiveness of administrative audit supervision from the perspective of corporate accounting information system.

Evaluating Audit Oversight Board’s Regulatory Impact: Analysis of Sanctions Imposed on Malaysian Audit Firms

This study analyzes the 12-year trend of cases involving auditor wrongdoing as disclosed on the Audit Oversight Board (AOB) Malaysia's website from 2012 to 2023. Utilizing content analysis, the research examines the nature, frequency, and severity of penalties or sanctions imposed on audit firms for various offenses. Findings indicate a dynamic pattern of regulatory actions, reflecting Malaysia's evolving landscape of audit quality and regulatory oversight. It was revealed that a total of 56 breaches of the Securities Commission Act 1993 involving 30 audit firms were reported and disclosed by the Audit Oversight Board over the period from 2012 to 2023. The findings revealed that most misconduct cases relate to the failure of audit firms to comply with the requirements of International Auditing Standards, International Standard on Quality Control and Malaysian Institute of Accountant By-Laws. There has been a notable decrease in cases involving auditors over the past six years. This could also indicate the dedication of the AOB to monitoring auditors' conduct to prevent their involvement in malpractice. This study contributes to the understanding of audit regulation effectiveness and the behavioral patterns of auditors in response to regulatory scrutiny.

Transforming experimental radiology: Design and implementation of an innovative ePACS image storage system for AI imaging research environments

Introduction and purpose: We present the needs, design, development, implementation, and accessibility of a crafted experimental PACS (ePACS) system to securely store images, ensuring efficiency and ease of use for AI processing, specifically tailored for research scenarios, including phantoms, animal and human studies and quality assurance (QA) exams. The ePACS system plays a crucial role in any medical imaging departments that handle non-care profile studies, such as protocol adjustments and dummy runs. By effectively segregating non-care profile studies from the healthcare assistance, the ePACS usefully prevents errors both in clinical practice and storage security. Methods and results: The developed ePACS system considers the best practices for management, maintenance, access, long-term storage and backups, regulatory audits, and economic aspects. Moreover, key aspects of the ePACS system include the design of data flows with a focus on incorporating data security and privacy, access control and levels based on user profiles, internal data management policies, standardized architecture, infrastructure and application monitorization and traceability, and periodic backup policies. A new tool called DicomStudiesQA has been developed to standardize the analysis of DICOM studies. The tool automatically identifies, extracts, and renames series using a consistent nomenclature. It also detects corrupted images and merges separated dynamic series that were initially split, allowing for streamlined post-processing. Discussion and conclusions: The developed ePACS system encompasses a successful implementation, both in hospital and research environments, showcasing its transformative nature and the challenging yet crucial transfer of knowledge to industry. This underscores the practicality and real-world applicability of our innovative approach, highlighting the significant impact it has on the field of experimental radiology.

Relationship between Auditor Independence and Financial Statement Quality in Rwanda

Purpose: The aim of the study was to assess the relationship between auditor independence and financial statement quality in Rwanda. 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: The study demonstrated that when auditors maintain a high level of independence, they are more likely to detect and report financial misstatements or irregularities accurately. This leads to higher-quality financial statements that investors and stakeholders can rely on for decision-making purposes. Conversely, when auditor independence is compromised, such as through close relationships with management or financial incentives, there is a greater risk of overlooking errors or fraudulent activities, ultimately reducing the quality of financial reporting. Regulatory bodies and professional standards, such as the Sarbanes-Oxley Act and the International Standards on Auditing, emphasize the importance of auditor independence to safeguard the integrity of financial information. Companies that prioritize auditor independence and engage independent audit firms tend to have stronger financial statement quality, which contributes to market confidence and investor trust in the transparency and accuracy of financial reporting. Implications to Theory, Practice and Policy: Agency theory, institutional theory and stakeholder theory may be used to anchor future studies on assessing the relationship between auditor independence and financial statement quality in Rwanda. In terms of practical implications, it is essential to encourage audit firms and companies to adopt best practices that ensure auditor independence. From a policy perspective, collaboration with regulatory bodies is essential to review and enhance existing audit regulations, standards, and guidelines.

Information and cybersecurity audit: Statutory regulation and performance issues

Subject. This article focuses on the issues related to the audit of information systems and cybersecurity. Objectives. The article aims to determine the key areas of legal regulation of information security audit, taking into account the requirements of the time, technical capabilities and digital transformations taking place in society and the global space. Methods. For the study, we used a case study method, analysis, computational and graphical method, data systematization, and the ecosystem approach. Results. The article identifies gaps in the methodological framework and statutory regulation of the audit of information systems, substantiates the need for systematization and further development of the legislative framework for the audit of information security, and identifies the objects of information technologies that require special attention. It proposes to make certain changes to the Federal Law On Auditing regarding the introduction of information security checks of business entities into the list of other services, as well as develop standards for government auditing, which will unify this type of activity. Conclusions and Relevance. The number of cybercrimes is steadily growing, and this is due to both the widespread digitalization of ecosystems and the high level of technical and intellectual training of persons committing fraudulent actions. Ensuring the information security of economic entities and government agencies is impossible without conducting an audit that reduces the risk of cyber threats. The results of the study can be used to develop the regulatory framework for the audit of information systems, as well as for further scientific research and practical application.

Effects of the 2014 European reform on audit activity, the audit outcome and the audit market: the auditors’ view

PurposeThis paper aims to examine the effects of the 2014 European regulatory reform on auditors’ activity, the audit outcome and the audit market, with a focus on the Spanish market.Design/methodology/approachThe research is based on in-depth, semistructured interviews with partners of the main audit firms operating in the Spanish market. This qualitative approach provides a precise identification of the cause-effect relationships of the new measures introduced by the European audit regulation.FindingsThe findings indicate that, based on auditors’ opinions, the costs of the main regulatory changes outweigh the benefits. The European Union (EU) Audit Regulation imposes more demanding provisions, such as an extended auditor’s report, mandatory audit firm rotation, more banned nonaudit services and stricter quality controls, resulting in substantial side effects on audit activity and the audit market. This could undermine the objective of enhancing the quality of audit services.Originality/valueTo the best of the authors’ knowledge, this is the first study to analyze the effect of the 2014 EU regulatory reform on audit activity, audit market and audit outcome based on auditors’ perceptions. The findings may be of interest to academics, professionals and regulators alike, as they offer valuable insights for assessing the effectiveness of the new audit provisions. Additionally, the qualitative methodology used facilitates a causal analysis of the key elements introduced by the regulations, potentially paving the way for future research avenues.

Partnership Disparity and Audit Quality

This study explores the effects of partnership disparity within Chinese audit firms on audit quality using novel data on their partnership arrangements. The results indicate a U-shaped relationship between the partnership disparity extent and the violations assessed by regulators, including financial misstatements of clients. Audit firms with mid-level unequal partnership structures achieve superior audit quality than their counterparts with either “flat” or “high-skewed” partnership structures. Additional analyses confirm the role of client complexity as the boundary condition and indicate that the geographical remoteness of audit firms asymmetrically moderates partnership disparity. These results are robust to different audit quality proxies and alternative research designs including change analyses and after controlling for the effects of engagement partners. This study contributes to research on diversity and performance in the partnership context. This approach opens the “black box” of power-related culture in audit firms and carries managerial implications for the managing partners and audit regulators of audit firms.

Key audit matters disclosures and informed traders

We examine whether the audit regulation of disclosing key audit matters (KAM) provides value-relevant information to short sellers as informed investors. The theoretical underpinning for examining short sellers' ability and incentives to use KAM disclosures in their stock valuation implications is based on a prediction theory and a skilled information processing theory of short sellers. Using a sample of expanded auditor's reports from UK-listed firms during the 2010–2017 period and hand-collecting a dataset of KAM disclosures, we find no evidence that the short interest is different for the period before than after the U.K.'s expanded auditor's report regulation. However, in our cross-sectional tests, we find that KAM disclosures have a marginal effect on short interest and a positive association between short interest and unexpected and severe KAM disclosures. We conclude that, except for severe KAM that is value-relevant to sophisticated investors, the disclosures in the expanded auditor's report have no valuation implications for short sellers. Our results are robust in examining the reactions of the financial market and analysts to KAM disclosures and addressing potential endogeneity concerns.

Audit Quality Assessed through Independence Indicators

Audit quality is one of the most important concerns of audit firms, statutory audit regulators and academia. The purpose of this study is to analyze and evaluate the influence of auditor independence indicators on the quality of services provided. Based on the data available in the Audit Analytics database, a sample of 31 companies listed on the Bucharest Stock Exchange was selected, for which 124 observations were reported during four consecutive years. The results of the quantitative analysis performed demonstrated the existence of a significant and positive correlation between the variables that measure auditor independence, such as the provision of non-audit services, financial independence, Big 4 membership and turnover and the dependent variable - the quality of audit services.

ENVIRONMENTAL AUDIT: THEORETICAL AND APPLIED ASPECTS OF CONDUCTING

The legal regulation of environmental audit in Ukraine are examined and the existing approaches to identifying the economic essence of environmental audit are highlighted. The main stages of environmental audit are analyzed as well as the total emissions of pollutants and groups of substances into the air from Obolon PrJSC in 2022. The efficiency of Obolon’s treatment facilities is investigated. The list of wastes generated by the studied enterprise is analyzed. Conclusions on the environmental impact of Obolon’s activities in order to determine the level of compliance with its environmental policy and the requirements of the legislation in the field of environmental protection and rational use of natural resources are drawn.

Problems in The Implementation of Sharia Audit in Indonesia: A Systematic Literature Review using PRISMA

This research aims to find out the problems encountered in the practice of sharia auditing to be recommended to stakeholders in order to get solutions and find solutions. The method used is qualitative with a literature study approach. Data analysis tools with PRISMA (Preferred Reporting Items for Systematic Reviews and Meta-Analyses) technique. This research uses secondary data taken from the Publish or Perish software on the Google Scholar database. The results showed that there were 41 papers that became the population, then filtered and produced 17 final articles which became the main data source in the study. Of the 17 articles processed, all of them are problems encountered by Islamic audit practitioners encountered in the field. It was found that there are five basic problems in Islamic auditing that can be a reference for the relevant stakeholders to solve in order to improve the performance of Islamic auditing. The five problems are (1) Sharia audit regulations that have not been accommodated nationally, (2) Availability and competence of Human Resources as sharia auditors that are not optimal, (3) Management of the sharia audit process that is not effective and efficient, and (4) The practice of the sharia audit process still focuses on operational audits rather than audits of sharia aspects, (5) Unclear scope of sharia audits.

ISSUES OF CONSTITUTIONAL AND LEGAL REGULATION OF ECOLOGICAL AUDIT: NATIONAL AND FOREIGN EXPERIENCE

In this article, the importance of legal provision of environmental audit in the Republic of Uzbekistan at the present time, the issues of legal regulation of environmental audit, the difference between the concepts of audit and environmental audit, the opinions expressed by scientists on this issue, the experiences of national and foreign countries in the legal regulation of environmental audit, as well as this Proposals regarding the issue are presented.

Do Joint Audit Have an Impact on Audit Quality: A Comparison Between Mandatory and Voluntary Regulation of Joint Audit

Do Joint Audit Have an Impact on Audit Quality: A Comparison Between Mandatory and Voluntary Regulation of Joint Audit

Supreme Audit Institution Recommendations and the Legal System: The Case of Indonesia

Abstract The audit recommendations of the Indonesian supreme audit institution (Badan Pemeriksa Keuangan, BPK) acquired new significance after the collapse of the authoritarian state in 1998 and constitutional amendments in 1999–2002 that reformed the regulation and institutional governance of public sector audit in Indonesia. However, while the reform of public sector audit regulation was carried out through a strong adoption of private sector audit standards and the Westminster SAI model, the BPK retained some of its Napoleonic legacy. This syncretic organisation led to confusion about the BPK’s role and position in the Indonesian legal system. Using a historical and case study approach, this paper analyses the relationship between the BPK’s audit recommendations and the Indonesian legal system. It argues that it is important for the BPK to develop auditing standards that take full account of higher rules, administrative law, and national interests, or at least not to adopt and abolish auditing standards that are counterproductive to its judicial function – not merely to accommodate private international law instruments developed by private non-state actors operating outside the legal framework of a sovereign state.

Does audit regulation improve corporate decision making? Evidence from the disclosure of tax‐related key audit matters

AbstractOur study examines changes in corporate cash tax savings around the disclosure of tax‐related key audit matters (tax KAMs). We expect publicly disclosed tax KAMs to increase the visibility of a firm's tax complexity and uncertainty, thereby motivating the firm to improve its tax function. In turn, we expect to observe increased cash tax savings as an outcome of improvements to corporate tax functions. As predicted, we document that firms exhibit lower cash effective tax rates in the period after their auditors disclose tax KAMs. Additional tests suggest that disclosure of tax KAMs does not increase the likelihood of firms being aggressive in cash tax planning and increased cash tax savings are primarily driven by firms that adjust toward their optimal levels of cash tax savings. Cross‐sectional analyses support our expectation that post‐disclosure increases in cash tax savings are less pronounced when investors were better informed about firms’ tax strategies in the pre‐disclosure period and when firms faced stronger tax enforcement in the pre‐disclosure period. Collectively, our results highlight the role of KAM disclosure requirements in prompting firms to improve their internal operational decisions.

Mythmaking in audit regulation: the Canadian initiative on ‘enhancing audit quality’

Although extant literature has provided accounts of regulatory processes that failed to produce new or improved regulation, we know less about how regulators attempt to devise an ‘illusion of regulatory action’ to prevent their initiatives from being labelled failures and deflect public criticism. This study’s focus is on the regulatory initiative in Canada in response to a global post-crisis regulatory trend seeking to address the problem of low audit quality. Despite decisive regulatory responses elsewhere, the Canadian project leaders not only concluded with weak regulation based on problematic assumptions, but they also actively pursued efforts to argue the opposite, thereby creating an illusion of a meaningful regulatory response. By reference to Barthes’s work on mythmaking, we examine the relevant project documents to make sense of such arguments and claims essentially as instances of regulatory actors’ mythmaking designed to diffuse criticism and garner public support. Our findings enable us to offer insights into and consider the role of regulatory myths as important elements in the discursive repertoires by which regulators maintain their legitimacy and authority. We also discuss certain conjectures which increase the likelihood of regulatory mythmaking.