Auditor Choice Research Articles

Common auditor, knowledge transfer and audit quality: international evidence

Purpose Using an international sample of firms affiliated with a business group, this paper aims to investigate the audit quality of common auditors, i.e. auditors shared by multiple firms affiliated with the same business group. Design/methodology/approach This paper utilizes a large sample of group-affiliated firms from 35 regions. Following the frameworks of DeFond and Zhang (2014) and Fung et al. (2017), this paper measures audit quality using the absolute value of abnormal accruals and modified audit opinions. Ordinary least squares (OLS) regression is used to address the research question. Findings The findings demonstrate that audit quality improves for firms that share the same auditor with other group members. Importantly, cross-country analyses reveal that this relationship is stronger when auditors operate in countries with stricter local auditor inspection programs and an overall opaque information environment. Additionally, the impact of common auditors on audit quality is more pronounced for group affiliates that have a more opaque firm-level information environment and are monitored by heightened institutional ownership. Practical implications While affiliates are more likely to select the same audit firms as common auditors, the evidence regarding the effects of common auditors is mixed. The results of this study provide further insights into auditor choices for group-affiliated firms and offer a potential avenue for better protecting shareholders' interests. Originality/value The results of this study add to the ongoing debates regarding the costs and benefits of common auditor choice for group affiliates. To the best of the authors’ knowledge, this study is the first to demonstrate that the effects of common auditors may vary in different external environments.

CEO inside debt and industry specialist auditor

PurposeThis paper aims to examine the effect of executive compensation incentives, specifically CEO inside debt holdings, on the choice of industry specialist auditor.Design/methodology/approachHigh inside debt holdings are expected to constrain excessive managerial risk-taking and align the interests of managers and outside debtholders. The authors hypothesize that reduced debtholders’ expropriation concerns will decrease the demand for high audit quality, measured by industry specialization. The authors investigate a sample of US firms from 2006 to 2018 using OLS regression and use CEO relative leverage to proxy for CEO inside debt holdings. The authors conduct an additional two-stage least squares regression analysis to address potential endogeneity issues.FindingsThe paper finds that firms with higher levels of CEO inside debt tend not to appoint an auditor with industry specialization. This result is consistent with the notion that inside debt mitigates agency conflicts between managers and debtholders, reducing the demand for high-quality audits as a monitoring mechanism. The paper also finds that among firms which are excessively leveraged, those with higher levels of CEO inside debt tend to appoint an industry specialist auditor.Originality/valueThe findings contribute to the literature on agency cost and auditor choice by demonstrating that CEO inside debt has both substitutive and complementary effects on demand for industry specialist auditors.

How regulatory media information disclosure affects auditor selection–Empirical evidence based on the interaction platform between investors and listed companies

This study uses a econometric model to assess how online interactions between investors and listed companies influence auditor selection. It observes auditor choice as a metric to gauge management's response to market reactions from information disclosed on investor-company platforms. Findings reveal that more effective online interactions lead to the selection of higher quality auditors, especially in companies with greater marketization and higher institutional investor shareholding ratios.

Multiple large shareholders and audit fees: Demand‐side evidence from China

AbstractThis paper provides evidence on the role of multiple large shareholders (MLSs) in the determination of audit pricing from a new demand‐side perspective, rather than the typical supply‐side perspective. We find that for Chinese A‐share listed firms, the presence of MLS is associated with significantly higher audit fees. The results are robust after we address endogeneity concerns and use auditor choice as an alternative proxy to capture demand for auditing. Further tests show that audit fees increase with the number and relative power of noncontrolling large shareholders. The positive impact of MLS on audit fees is more pronounced for state‐owned enterprises (SOE) than in family‐owned enterprises. Moreover, this positive impact of MLS is more pronounced for SOEs with foreign blockholders and non‐SOEs with independent institutional blockholders. This positive impact is also more pronounced for firms with higher information asymmetry, severe agency problems and higher litigation risk. Overall, our results provide consistent evidence that firms with MLS are likely to demand high‐quality auditing, leading to higher audit fees.

Audit Market Concentration for Listed Entities in Romania and the Impact Following the Latest EU Audit Reform

Abstract The concentration of the audit market has been of interest for several years as the dominance of a few companies has always been an issue of debate. The need or not to address this situation, the reasons that cause it, any possible risks assessed and solutions to reduce them have been addressed by a wide range of studies. Our research seeks to examine the structure of the Romanian Audit Market for listed entities, both before and following the recently adopted European Union Audit Reform. The main purpose is to understand the market structure, identify some of the main factors that influence auditor choice and if there was any impact following the new directive. The analyses focused on 74 listed companies, for the period from 2013 to 2022, for which we collected the relevant data in order to analyze the audit market structure, its evolution following the new audit directive and, using linear regressions models, test the influence that size, share class category, existence of long-term debt, shareholder type, evidence of shareholder direct involvement and auditor office location has on choosing one of the Big 4 auditors or not. Our analysis showed that Big4 auditors ecreased in market share especially after 2016, the date the new audit reform came into effect, from 49% to 41% and that the number of auditor changes increased significantly after this date. We also found that the number of cases where another Big4 auditor was selected decreased from 64%, in the period from 2013-2016, to only 28%, in the period from 2017-2022. These findings support therefore the assumed existence of an impact in the market following the latest European Union audit directive. The linear regression analysis performed showed no significant influence for the variables analyzed, when it comes to choosing a Big4 Auditor, the highest coming from the share class variable (26%) and size (12%). Even though our paper offers some light regarding the audit market for listed companies in Romania and the evolution following the new directive further research is needed to better understand client behavior and what influences auditor choice.

Informal Institutions and Audit Pricing: Cross-Country Evidence of National Culture and Audit Fees

Synopsis The research problem In this study, we examined the effect of an important informal institution, namely, national culture, on audit fees in an international context. Motivation In recent years, extant literature has increasingly focused on country-level differences in the audit environment, as these might have a significant influence on how financial statement audits are conducted across the globe. We contribute to this stream of literature by investigating the impact of national culture on audit fees. The test hypotheses Based on the demand- and supply-side perspectives of audit fees, we hypothesized that national culture dimensions — namely, uncertainty avoidance, power distance, individualism versus collectivism, and masculinity versus femininity — affect audit fees. Target population We used a sample of 27,670 firm-year observations across 22 countries over the 2002–2019 period. Adopted methodology We used ordinary least squares (OLS) regressions as baseline technique and entropy-balanced method (EBM) and system-generalized method of moments (GMM) to address endogeneity concerns. Analyses We examined the impact of Hofstede’s four national culture dimensions — uncertainty avoidance, power distance, individualism versus collectivism, and masculinity versus femininity — on audit fees. We also tested the robustness of results using alternative measures of national culture, subsample analyses, and additional firm-level factors. Findings Consistent with our hypotheses, we find that audit fees are higher (lower) in countries with higher uncertainty avoidance, individualism, and masculinity (power distance) scores. Our further analyses reveal that earnings management proxied by abnormal accruals does not impact the relationship; however, country-level creditor rights influence audit fees in high power distance and masculine cultures. We also note that national culture influences auditor choice and audit opinion. Our main findings are robust to alternate proxies and subsample analysis, as well as to address potential endogeneity concerns. Overall, our findings offer important implications for firms operating in global markets and for the audit profession.

Capital market effects of corporate transparency and sustainability: evidence from an emerging economy

PurposeThe study aims to examine the association between corporate transparency and firm value (capital market effect) and investigate whether auditor choice moderates this relationship.Design/methodology/approachThis study uses the Malaysian Institute of Corporate Governance (2017) data set, which provides scores on anti-corruption commitment, organisational transparency and sustainability of Malaysia’s top 100 listed firms. The methodology entails an ordinary pooled least square regression method for empirical research.FindingsThe positive association between corporate transparency and firm value is more evident in anti-corruption and sustainability initiatives. More importantly, government-linked companies have higher scores. Firms with enhanced anti-corruption commitment are more likely to have higher firm value, and this relationship is more evident for politically connected firms. This study also finds that auditor choice is associated with the firm value in the sampled listed firms.Practical implicationsThe findings provide implications for investors and regulators on the role of corporate transparency in an emerging capital market.Social implicationsThe study recommends that emerging market regulators continue enhancing corporate governance codes and practices to improve reporting transparency for listed firms.Originality/valueThis study contributes to the growing literature on sustainability disclosures by incorporating corporate reporting transparency, explicitly relating to firms’ commitment to anti-corruption, organisational transparency and sustainability.

Enterprise Digital Investment and Auditor Choice: An Empirical Study Based on Chinese Listed Enterprises

ABSTRACT Digital investment determines enterprises’ internal resource structure and drives them from traditional to digital business models, increasing the difficulty and risk of external audits. This study empirically examines the impact of an enterprise’s digital investment on auditor choice to clarify the impact of digital businesses on external audits. We find a positive association between enterprises’ digital investment and their propensity to hire Big Four auditors, suggesting that digital investment leads to an increased demand for high-quality audit services from enterprises. This positive effect is more pronounced in enterprises with more complex businesses, high degrees of earnings management, and high degrees of the digital economy in their location. Additional analysis suggests that enterprises with digital investments that hire Big Four auditors have lower audit delay and higher audit quality. The findings provide empirical evidence for improving subsequent digital transformation and audit quality in emerging markets.

Do auditors value social trust? Evidence from China

ABSTRACT Using a sample of Chinese listed companies between 2007 and 2021, we investigate the association between social trust and audit outcomes. Results suggest that regional level of social trust can improve audit efficiency and reduce audit fees. We further find client firms reside in high-trust regions are less likely to engage with Big10 auditors in China. Both audit efficiency and auditor choice play partial mediating roles in lowering audit fees. The negative effect of social trust on audit fees is more pronounced in firms located in strong legal enforcement region, with state ownership, or in firms audited by non-Big10 auditors. By documenting the reduced audit fees and the lower likelihood of hiring Big10 auditors do not lead to deterioration in audit quality, our study has important social and policy implications for strengthening informal norms in regions with low social trust.

Auditing in family firms: Past trends and future research directions

ABSTRACT This systematic literature review synthesizes and maps existing research on auditing in family firms across multiple areas of study. The review includes 71 systematically selected academic articles published through to 2023. Our findings suggest that many audit-related issues, such as audit fees, audit quality, and auditor choice, differ significantly among family and nonfamily firms. Our review suggests that the positioning of the issues across different disciplines adds complexity and, to some extent, hinders the development of the field. This complexity, resulting from the intermixing of multiple concepts from different disciplines, pushes the majority of the reviewed articles toward theoretical singularity rather than a leap forward in terms of empirical relevance or theoretical plurality. By developing a field map that identifies gaps in current knowledge, our review not only suggests improvements to the status quo, but provides future research directions inspired by recent developments in family business and auditing.

Who should select the external auditor in emerging economies? Role of institutional ownership and family ownership

Aim/purpose – This study reports the demand for Big 4 audits among institutional and family owners, the two dominant ownerships in the GCC countries. We conducted this in-depth study to gain an understanding of the type of firms, family-owned or institu- tional-owned firms that lead to choosing audit firms. Design/methodology/approach – This study employed a quantitative cross-country study by selecting a sample based on secondary data extracted from the Capital IQ data- -set from a panel of 1827 non-financial firms listed on the stock exchanges of the Gulf Cooperation Council (GCC) countries from 2010 to 2018. The hypothesized effects of institutional ownership (IO) and family ownership (FO) on the selection of external auditors in these countries were examined using logit, probit, and heteroskedastic probit analysis. Findings – The study finds that institutional investors play a crucial role in influencing firms’ choice of auditors in the GCC. Family-owned firms tend to hire non-Big 4 firms when the owners actively monitor the firms’ financial transactions. In addition, the study finds that both domestic and foreign institutional investors have a significant positive effect on auditor selection, with domestic institutional investors having priority. These findings support the efforts of market authorities in the GCC to highlight the critical role of IO over FO in improving audit quality. Research implications/limitations – The results are highly relevant for shareholders, executives, institutional investors, regulators, and academics. They help them improve the growth of capital and audit markets by developing best practices, thereby helping achieve an optimal framework for auditor choice that matches higher audit quality. This study focuses on only two types of ownership structures (institution and family) despite the many options because of the extensive debates and discussions on the association between the studied ownership types and auditor choice. Originality/value/contribution – Study highlighted the role of institutional investors in GCC countries as one of the most attractive emerging economies in the Middle East. Since no research has been conducted on the role of institutional and family investors in selecting external auditors in GCC countries, this study has made a significant contribu- tion to the accounting and auditing literature. It mitigates the gap in the literature on emerging markets. The findings can provide policymakers with guidelines for including institutional investors and FO in GCC countries to ensure high-quality audits. Keywords: institutional ownership (IO), family ownership (FO), auditor choice, Gulf Cooperation Council, emerging economies. JEL Classification: G23, G32, D10, M42.

Auditor choice, board of directors’ characteristics and ownership structure: Evidence from Greece

Auditing is a key factor of financial reporting quality which reduces information asymmetry, improves regulatory compliance, and enhances internal control effectiveness. The decision to select an audit firm is complex and the reasons for choosing a specific auditor are likely to differ across organizations (Knechel et al., 2008). Several factors drive auditor selection, including ownership structure, governance attributes, the risk of information asymmetry, and country-level determinants (Habib et al., 2019). This study aims to examine whether corporate governance mechanisms affect auditor choice. For this purpose, using a sample of the biggest companies listed on the Athens Stock Exchange (ASE) for the period of 2014 to 2018, a logit regression model was developed to investigate the influence of the board characteristics and ownership structure on the decision to appoint a Big Four or non-Big Four audit firm. Results indicate that corporate governance mechanisms do affect auditor selection in Greece. Firms with larger boards, with more independent members and women on their boards’ composition, are more likely to appoint a Big Four audit firm. On the other hand, family-owned firms are less likely to engage a Big Four audit firm. The study’s results add new evidence on the factors that affect auditor choice in a European emerging market and could be useful to the regulatory authorities, investors, boards, and all other parties engaged in corporate governance.

Determinants of Auditor Choice in Emerging Markets: Evidence from Egypt

Determinants of Auditor Choice in Emerging Markets: Evidence from Egypt

THE AUDITOR’S RATIONAL CHOICE OF THE AUDITOR BOARD OF THE REPUBLIC OF INDONESIA IN EXAMINING GOVERNMENT FINANCIAL REPORTS

Abstract - This research aims to determine the dilemma of rational choice of auditors from the Audit Board of The Republic of Indonesia in examining government financial reports during the Covid-19 Pandemic. This research using phenomenological approach with interpretive paradigm. Methods of qualitative research were applied in this research. The method used in this research is the phenomenological approach. The subjects of this study serving as informants are those who hold functional positions as auditors within the Audit Board of the Republic of Indonesia. The findings of this study suggest that the challenge faced by the auditors of The Audit Board of The Republic of Indonesia during the Covid-19 outbreak is the auditor's dilemma when evaluating financial accounts. Limited engagement with other people is one of the challenges faced by auditors, making it challenging to gather information or data that ought to be simple. The practice of Working from Home (WFH) could frequently lead to misunderstandings with auditors. This is due to the fact that there is not any face-to-face direct communication between colleagues. Conclusion: The auditors of the Audit Board of The Republic of Indonesia always attempt to make decisions based on careful consideration and sensible choices in order to accomplish the audit objectives when performing their responsibilities. Additionally, there are concerns that emerge based on an auditor's feelings.
 Keywords: Auditor; Covid-19; Rational Choice Dilemma; The Auditor Board of the Republic of Indonesia

ESG Performance, Auditor Choice, and Audit Opinion: Evidence from an Emerging Market

This study examines the effect of environmental, social, and governance (ESG) performance on auditor choice and audit opinion for Egyptian-listed firms. We use univariate and multivariate analyses of 612 firm-year observations for a sample of 68 firms listed on EGX100 over 2014–2022 using binary logistic regression models. Consistent with the ethical perspective of corporate social responsibility, we found that firms listed in the ESG index are more likely to assign one of the Big4 auditors, and less likely to receive a qualified opinion. Through an additional analysis, we found that COVID-19 moderates the relationship between ESG performance, auditor choice, and audit opinion. Our results confirm the value of ESG performance for audit practices in emerging economies. This research indicates that ESG performance can enhance financial reporting quality. Further, it ensures that binding guidelines and regulations are crucial to oversee corporate ESG performance, especially during crisis times, and enhance investors’ protection and firms’ sustainability.

The Impact of Credit Market Development on Auditor Choice: Evidence from Banking Deregulation

ABSTRACTWe exploit the staggered state‐level adoption of the Riegle‐Neal Interstate Banking and Branching Efficiency Act (IBBEA) to examine how banking deregulation and the resulting increase in bank competition affect firms’ auditor choices. We find that an exogenous increase in the degree of interstate branch banking deregulation leads to a reduction in firms’ propensity to engage a Big N or industry expert auditor. This main result, when combined with our cross‐sectional analyses, offers evidence suggesting that deregulation leads to less demand for higher quality auditors because (1) firms have increased access to credit, which reduces the benefits of higher audit quality; (2) entering banks’ lending expertise substitutes for higher quality financial statements; (3) incumbent banks with less lending expertise seek to protect their rents by preferring that borrowers provide lower quality financial statement information; and (4) external stakeholders delegate their monitoring to banks to a greater degree, resulting in less demand for higher quality financial statements. As such, our study sheds light on how the U.S. credit market's infrastructure shapes firms’ auditor choice decisions.

The impact of the IFRS adoption reform on audit market concentration, auditor choice and audit quality

PurposeThe study examines the changes in audit market concentration, auditor choice and audit quality in Russia following International Financial Reporting Standards (IFRS) adoption. Scholars have called for further examination of the effects of IFRS adoption on auditors, with an emphasis on the importance of analyzing emerging markets that are characterized by enforcement challenges and lack of proper infrastructure. It focuses on a unique feature of Russian companies – dual audits under Russian Accounting Standards (RAS) and IFRS – and investigates changes in audit concentration and audit quality for the two audit markets.Design/methodology/approachThe authors rely on the audited financial statements of Russian public companies and perform pre-/post-IFRS adoption estimation using a logit regression to ascertain whether public firms change auditors from local firms with limited IFRS expertise to those with global reputation, namely Big 4 audit firms. Further, they examine whether the change in audit market concentration post-2012 affects audit quality as proxied by companies' propensity to receive a modified audit opinion and discretionary accruals. Auditor attributes were hand-collected from audited financial statements and matched with financial variables from Datastream.FindingsThe IFRS audit market was dominated by the Big 4 audit firms prior to 2012, and there is strong evidence that audit market share (concentration) increases for IFRS reports but not for RAS reports. In addition, companies are more likely to choose a Big 4 audit firm for an RAS audit, conditional upon a Big 4 firm conducting the IFRS audit. The authors do not find evidence of decrease in the probability of audit firms issuing a modified audit opinion under either RAS or IFRS, indicating that, in the Russian setting, increased auditor concentration post-IFRS adoption does not lead to enhanced risk or decline in audit quality. Moreover, they find that discretionary accruals decline post-2012. Overall, the findings indicate that the concern of global regulators regarding audit market concentration is not justified.Research limitations/implicationsThe Russian reporting environment is unique and generally characterized by significant agency problems, and the study’s estimation sample is not large, compared to prior studies conducted predominantly in Western jurisdictions. Nevertheless, the authors shed light on the audit concentration phenomenon within emerging markets, for which empirical evidence is scarce. Future research could explore the impact of other capital market events and exogenous shocks, not limited to IFRS adoption, on the characteristics of Russia's audit market.Practical implicationsThe IFRS reporting regime is commonly associated with enhanced reporting quality and improved information transparency among public companies. Yet, impairment of audit quality as a result of IFRS-driven increase in audit market share of Big 4 can potentially negate these capital market effects. This study shows that the concerns of global regulators are not valid and that audit quality does not change with increased share of Big 4 post-IFRS adoption.Originality/valueDual audits, whereby companies must prepare two sets of financial statements per the IFRS mandate, are not unique to Russia, and the evidence of IFRS reporting on the structural changes in the audit market and implications for audit quality under a dual regime is scarce. Accordingly, the study's findings are important and timely and are expected to aid regulators of countries that have announced or are contemplating the adoption of IFRS for public reporting purposes.

Influence of perceived economic dilemma on ethical choices of auditors

This paper is an in-depth analysis of the pressures that come upon the auditors in public practice and corporate organisations. Struggle is the meaning of life. When you try to solve one problem you tend to complicate others. Several literature and previous were reviewed, the majority of them with discovery and strong perception that ethical dilemmas involved choosing powerful seemingly ‘justifiable’ non-ethical considerations over strict ethical choices. Such is sometimes the economic dilemma created when auditors are being accountable for their actions. The auditors are sometimes confronted with conflict of interest as considered in most literature reviewed. The TP (Temporary Predictive Behaviour) Cognitive Model with Moral Seduction Theory also forms part of the analysis in this paper. This economic dilemma faced is prop out of fright of the “self-fulfilling prophecy effect” which was further described as the auditor’s fear to precipitate client failure after the release of a warning signal because of its impact on current and potential investors, creditors, suppliers, and customers. The paper concluded that the eventual evaluation of the auditors is vital to the investment decision of the clients’ financial statement users and poses a danger to the continued existence of the client. The study further recommended action that may provide greater economic incentives for the auditor to conduct an ethical audit.

Auditor Choices in Family Companies

This study aims to empirically examine the comparison of auditor choice and audit fees in family firms, as well as to test more comprehensively how the characteristics of family firms will influence the choice of auditors and audit fees in family firms. The purposive sampling results of this study show that the number of sample companies in this study is 133 non-financial companies listed on the Indonesia Stock Exchange in 2015-2021, with a total of 931 observations. The results of the logistic regression analysis of the auditor's choice model in this study indicate that family firms tend to be less choosing a high-quality auditor (auditor of KAP BIG4) and the presence of a CEO who is descended from the founder's family company is negatively related to the appointment of an auditor for KAP BIG4. In addition, the percentage of family ownership, the presence of the founder CEO of the family company and the presence of a professional CEO of the family company are not related to the appointment of KAP BIG4 auditors. The results of ordinary least square regression analysis using the robust standard error estimation method on the audit fee model show that family firms and the percentage of family members in top management are negatively related to audit fees, while the percentage of family ownership and the percentage of family members on the board of commissioners is not related to audit fees.

Does local vs. national government ownership, and auditor choice matter for audit pricing? Evidence from China

Purpose The Chinese data setting allows researchers to explore the influence of local versus national (central) government ownership on companies. This study aims to examine the influence of government ownership (local versus national) and auditor choice (choosing larger or smaller firms) on audit pricing in China. Design/methodology/approach This study executed three panel data regressions to examine the two hypotheses using 19,626 observations from 2009 to 2017 in the Chinese data setting. This study also uses the Sobel test to investigate the moderating effect of auditor choice. Findings This study first examines whether choosing a large audit firm positively influences audit pricing and whether listed state-owned enterprises (SOEs) charge less audit fees to audit firms after controlling for various variables. However, the interaction influence of government ownership and audit firm size on audit pricing is positive, suggesting that a large audit firm charges a client company more, even if the client is an SOE. More importantly, when we divide SOEs into national- and local-SOEs, the results of the influence of auditor choice, government ownership and the interaction of government ownership on audit pricing are consistent (plus, minus, plus), and audit firms charge local-SOEs less than national-SOEs. Furthermore, from the additional analysis, this study finds that the strong auditor type has a moderate effect on the case of local-SOEs on audit pricing and local-SOEs choose smaller auditors. Originality/value Research on the differences between local and national government ownership is limited. This study adds empirical results from this perspective. In particular, the findings suggest a further audit pricing research direction to consider the influence of client companies’ ownership types and auditor choice, especially in countries with planned economies.