Big Audit Firms Research Articles

The state of IFRS in Africa

PurposeThe purpose of this paper is to appraise existing literature on International Financial Reporting Standards (IFRS) in Africa. It covers all 54 African countries and their membership in regional and international accounting bodies.Design/methodology/approachThis paper uses qualitative research methods, including review and synthesis of a variety of archival materials.FindingsUnlike the numerous variations in IFRS adoption on other continents, IFRS countries in Africa have adopted the standards as issued by International Accounting Standard Board (IASB). However, most countries are slow to implement the ROSC (AA) recommendations for IFRS adoption due to lack of institutional and professional capacity. With regards to the unintended consequences, IFRS adoption has made international professional qualifications such as Association of Certified Chartered Accountants popular in Africa; hence, national accounting qualifications are not attractive to prospective accountants. Similarly, IFRS adoption has created a competitive advantage for the Big4 audit firms because companies in IFRS countries prefer the services of the Big4 to that of the local audit firms.Originality/valueIt is concluded that international organisations that recommend IFRS to Africa, such as the IFRS foundation, IMF and World Bank, should build the sustainable professional and institutional capacity of the countries before persuading them to adopt IFRS, because in Africa, adopting a law is easy but operationalising it has always been the challenge.

Narratives of the Big-4 transparency reports: country effects or firm strategy?

PurposeThe purpose of this paper is to examine whether audit firms use transparency reports (TRs) as a tool to standardize their brand image or whether the semantic and content analysis in these reports indicates a higher importance of country effects.Design/methodology/approachThe sample includes 28 TRs published in English by the Big-4 audit firms from five EU countries (the UK, Ireland, Luxemburg, Hungary and Malta), as well as in the USA and Australia.FindingsUsing content analysis, this research finds that there is variation in the language used in TRs both across audit firms and jurisdictions. Most TRs from different countries of the same firm tend to be clustered, suggesting that audit firms use transparency reporting as a strategy to differentiate themselves from their competitors. In fact, EY and KPMG seem to have more standardized internal procedures and standardized information. Regarding country effects, the results indicate that TRs in the UK are longer and show more detailed information.Originality/valueOverall, this research is innovative in the sense that it applies a new methodological approach to an emerging topic such as audit transparency reporting. It identifies emerging topics of voluntary disclosure, such as financial data of the firm, gender and ethnic origin of employees, community involvement or sanctions, among other topics of interest which might be explored in detail by future research to understand the construction of the profession.

Mandatory audit rotation and audit market concentration – evidence from Poland

The new audit regulation came into force in Poland in 2017 and imposed mandatory audit rotation. The new regulation aims to strengthen the auditor’s independence but it might also affect concentration on the audit market. The aim of this paper was to analyse whether mandatory audit rotation has a potential to reduce the audit market concentration in Poland. The sample included 198 capital groups with the parent company listed on the Warsaw Stock Exchange. The own compilation was prepared based on the audit opinions which included information about appointed audit firms in the period 2011-2017 (1,386 observations in total). The paper includes the analysis of audit tenures, their length, frequency of changing the audit firm and direction of the changes (to Big-4 or to Non-Big-4). The results showed that the biggest capital groups tend to appoint Big-4 audit firms and if they change auditor—they choose another firm from the Big-4. Additionally, the high number of short-term tenures (up to five years) suggests that Big-4 firms have strong bargaining power and they benefit more from the rotation of the clients rather than from their retention. The findings significantly contribute to the hypothesis that mandatory audit rotation will not reduce the concentration on the audit market in Poland. The findings might be valuable for the regulators and supervisory authorities responsible for the monitoring of the concentration level on the audit market.

Does Big N matter for audit quality? Evidence from Japan

PurposeThere has been growing concern worldwide regarding audit quality in Japan after the Kanebo and Olympus accounting scandals. The purpose of this paper is to examine the Japanese audit market from 2001 to 2011 to determine whether audit quality differs between Big N and Non-Big N audit firms and whether this difference, if existed, changed during 2007 when the number of big audit firms declined from four to three and the requirements of audit quality became more rigorous.Design/methodology/approachThis study employs a sample of Japanese listed firms from fiscal year 2001 to 2011. Five proxy variables for audit quality are used and the data are analyzed using the propensity score matching method.FindingsThe authors show that irrespective of their size, all audit firms in Japan provide the same quality of service, when controlling for client characteristics including keiretsu, foreign sales ratio and bankruptcy risk measured in Japan. Additionally, the results suggest that although only three major audit firms remain in the Japanese audit market after the dissolution of PricewaterhouseCooper’s Chuo-Aoyama firm in 2007, the audit quality difference between Big N and Non-Big N remained unchanged before and after 2007.Originality/valueThe study contributes to the lack of existing empirical evidence on audit quality in Japan, a country characterized with low audit litigation risk and more emphasis on auditor reputation, given the influence of the notable change in Japanese audit market competition from Big 4 to Big 3. The study’s research design contributes to the extant literature by using multiple proxies of audit quality.

Studying the Effect of Stakeholders on the Disclosure of Corporate Social Responsibility by Banks: Evidence from Egypt

Stakeholders have become more attentive to community and social information worldwide. However, their influence on the CSR disclosure is highly contextual and contingent upon several institutional factors. Therefore, this study pursues to identify the stakeholders’ group which has the most powerful effect on the CSR disclosure. The researchers examined the CSR disclosure provided by 38 banks operating in Egypt for the year 2015. Two main indices have been developed; one measures the extent of the CSR disclosure and denoted as as the CSR quantitative index. The other measures the qualitative aspects and denoted as the CSR qualitative index. In addition, five sub-indices have been developed to measure the CSR disclosure as recommened by the GRI. The relationship between these two main indices and the sub-indices and the seven groups of stakeholders have been examined using the OLS regression models. The non-parametric tests are also used to enhance the robustness of our findings and to identify the differences between the stakeholders for each index. Concerning the stakeholder effect, the Egyptian Stock exchange, audit committee and big audit firms are found to have the most powerful impact in our case. On contrary, independent directors, bank’s clients and bank specialty show insignificant results. Generally, the quality and extent of CSR disclosure by the banking sector still undeveloped, particularly for the national banks. Accordingly, the Egyptian Stock Exchange and the Central bank of Egypt need to issue vigorous guidelines and regulations to raise harmonization in the CSR disclosure and to empower their supervisory role in this respect.

Big audit firms as regulatory intermediaries in transnational labor governance

AbstractDue diligence and corporate disclosure initiatives effectively expand the role of professional service firms as regulatory intermediaries in the governance of conditions of production in global supply chains. In this paper, we examine the rise of the “Big Four” audit firms in the market for services connected to transnational labor governance. Through a qualitative case study of audit firms in modern slavery governance, we argue that the Big Four's political repertoire for transnational labor governance expands beyond the roles that are typically linked to their services, and promotes an agenda that touches on key debates on what constitutes proper transnational labor governance. Big audit firms engage in a variety of informal and covert influencing practices and are shown to promote an agenda of incrementalist soft‐law labor governance, opposing concrete performance targets, binding public regulation and an independent watchdog role for civil society.

The effects of IFRS adoption and Big 4 audit firms on audit and non-audit fees: Evidence from Ghana

The study was conducted to examine the effect of IFRS adoption on audit and non-audit fee and also the relationship between the big4 audit firm and audit and non-audit fees. Using a sample of financial and non-financial firms in Ghana, the results show that IFRS adoption has a positive and significant relationship with audit and non-audit fees post IFRS adoption. The results further revealed that there is positive association between the year of IFRS adoption (transition period) and audit and non-audit fees. On the big4 audit firms, the results show that the big4 charge higher audit and non-audit fees than non-big4 as there was a positive and significant relationship between Big4 and audit and non-audit fees. The results support the argument that the adoption of IFRS increased the complexities of financial reporting and audit risk resulting in a higher audit and non-audit fees charged during the transition period and post IFRS adoption. The paper extends previous studies on the subject matter by including the year of IFRS adoption and non-audit fees within the context of a developing economy with weak financial regulatory regime.

How to regain public trust in audit firms? The case of the Financial Reporting Council

PurposeThis study aims to provide a better understanding of the role of the Financial Reporting Council (FRC), as the unified regulator of the audit profession in the UK, in restoring public trust in audit profession in the UK. It further analyses the views of partners in the Big 4 audit firms on this role.Design/methodology/approachThe research data were gathered by conducting 17 semi-structured interviews with the top management of FRC’s members and executive partners of the Big 4 firms in the UK. The interviews were complemented by analysing data available on the web pages of the Big 4 firms and published reports related to the FRC’s projects.FindingsThis study identified three main strategies followed by the FRC to promote the trust and enhance the choice of auditors in the UK audit market. These strategies are improving the audit quality, increasing the transparency of the big audit firms and reducing the barriers to compete in the big audit market.Practical implicationsAn analysis of the FRC’s efforts may help auditors to identify what they are expected to do to improve the reliability of information provided in the capital market. Audit committees can get a better understanding of the criteria that they need to improve the process of auditors’ choice. Auditors will also better understand how and why current audit regulations have been issued. This may improve their satisfaction with regulations and standards, and their efficient implementation. Furthermore, it is believed that audit regulators need to get feedback additional to the formal feedback they receive to improve their performance and current regulations.Originality/valueThis paper contributes to the literature by discussing the auditors’ criticism to the Audit Inspection Unit’s inspectors and the way the inspectors defend themselves. The findings suggest that partners of the Big 4 believe that the FRC’s projects effectively participate in improving the audit quality, as well as providing wider information about the audit firms to the public. However, different actions need to be taken to enhance the choice of auditors and increase the number of big audit firms that compete in the market.

Signing Auditor-Specific Characteristics And Audit Report Lag: A Research From Turkey

The purpose of this paper is to examine the effect of signing auditor-specific characteristics on the audit report lag using 968 firm-year observations from Borsa İstanbul in the period 2008-2013. The main findings indicate that the gender and education level of signing auditor have a positive effect on audit report lag. Also big4 audit firms in Turkey encourage auditees to present financial statements timely and they play a substantial role in the reporting. Audit opinion directly affects audit report lag. Firm performance and firm age inversely affect audit report lag. Moreover, big 4’s female signing auditors lead to more audit delay. The higher educational level of signing auditors leads to more audit report lag. Signing auditors who hold master’s or Ph.D. degrees and also female signing auditors are associated with more audit report lag in firms audited by big4 and non-big4 firms.

High-quality auditors vs. high-quality audit: the reality in Oman

The objective of this study is to explore the unique setting of Oman with respect to audit quality. This study measures the quality of audit by examining whether big-4 audit firms and industry specialist auditors have a role in improving the quality of the audit. We use data from the companies listed on the Oman capital market between 2006-2013. Using a panel data approach and two measures of audit quality for the purpose of this study, we find that the audit quality of big-4 audit firms and industry specialist auditors is low because they do not enhance the quality of discretionary accruals and do not have a propensity to issue going-concern audit opinion. We also document that big-4 audit firms and industry specialist auditors consider that religion and risk factors provide the means for achieving high-quality audit. This paper is different from prior studies because it is the first to comprehensively examine audit quality in a unique setting - the Gulf Cooperation Council (GCC). Furthermore, it extends our understanding of the role of religiosity in audit quality.

High-quality auditors vs. high-quality audit: the reality in Oman

The objective of this study is to explore the unique setting of Oman with respect to audit quality. This study measures the quality of audit by examining whether big-4 audit firms and industry specialist auditors have a role in improving the quality of the audit. We use data from the companies listed on the Oman capital market between 2006-2013. Using a panel data approach and two measures of audit quality for the purpose of this study, we find that the audit quality of big-4 audit firms and industry specialist auditors is low because they do not enhance the quality of discretionary accruals and do not have a propensity to issue going-concern audit opinion. We also document that big-4 audit firms and industry specialist auditors consider that religion and risk factors provide the means for achieving high-quality audit. This paper is different from prior studies because it is the first to comprehensively examine audit quality in a unique setting - the Gulf Cooperation Council (GCC). Furthermore, it extends our understanding of the role of religiosity in audit quality.

Expression of Concern

Purpose The purpose of this paper is to investigate the effect of various corporate governance mechanisms such as board structure, ownership structure and debt level on the demand for better external audit quality. Design/methodology/approach Using a sample of 142 non-financial Moroccan companies, the authors examine the impact of the above corporate governance mechanisms on the audit quality of firms. The empirical model is tested with firms which include family businesses as well as listed and non-listed Moroccan companies. Findings The authors find a positive association between the demand for audit quality and the proportion of independent directors. The authors find evidence that the debt level has no impact on the demand for a better external audit; however, that there exists a complementary effect between the control exercised by independent directors and the demand for external audit quality. For ownership structure, the authors find a significant negative relation between the presence of blockholders and institutional investors and the demand for differentiated external audit quality, confirming the substitution hypothesis. Originality/value The paper has practical importance for corporate governance mechanism and audit quality in the developing economies of Africa. The study highlights that most family businesses have efficient corporate governance mechanism and therefore do not need to rely on the big audit firms for quality audit.

Are Audits of Financial Statements Born Unequal?

Audit is getting more and more importance in assuring the reliability of financial information including financial statements for all parties. Commonly, quality of an audit is viewed as probability that financial reports are free from material irregularities. In the previous literature, there is a positive relationship between size of audit firm and audit quality that has long been understood. This has resulted in many publications to gather evidence of differential audit quality relating to audit firm size. In consequence, the conclusion has been focused that bigger audit firms produce higher audit quality than smaller ones. However, the collapse of many big international audit firms, typically Arthur Andersen has reduced the statement that large audit firms have higher audit quality than small ones. Therefore, this study looks into audit quality basing on the extent of compliance with disclosure requirements pertaining to goodwill impairment of large listed firms in Hong Kong context in the second year transition to IFRS. We found that audit firm identity appears to be a substantial variation, in which compliance levels changed significantly among auditors in the context of Hong Kong.

From joint to single audits – audit quality differences and auditor pairings

This study analyses audit quality differences between audits by a single big audit firm and joint audits with either one or two big audit firms. We exploit the unique situation in Denmark beginning on 1 January 2005, at which time a long-standing mandatory joint audit system for listed companies was replaced by a voluntary joint audit system. First, we report the results of a survey of Danish CFOs’ views on and their experiences with the choice of single or joint audits and their perceptions of audit quality. Second, based on data from the mandatory joint audit abolition year and the following two years, we test the audit quality differences using abnormal accruals. Most CFOs perceive that audit quality by a single big four audit firm is the same as it is in joint audits with either one or two big four audit firms. The results of our empirical analysis are in line with the perceptions. We find no evidence of audit quality differences between audits made by a single big four firm and those conducted by either of the two combinations of joint audits.

Entry Threats and Audit Fees: Evidence from the Merger of Professional Accounting Bodies in Canada

Studies show that incumbents reduce prices in response to higher entry threats in consumer industries. We provide new insights on the importance of an incumbent firm’s reputation to the limit-pricing decision by examining a professional service industry where the supplier’s reputation serves as an existing barrier. The recent staggered passage of mergers of three Canadian accounting certification bodies exogenously increases the probability of future entry to incumbent audit firms. Employing difference-in-differences analyses and a strict fixed effects structure (client-firm, audit-firm, province, and year-month fixed effects), we find that incumbent audit firms reduce audit fees in response to a higher entry threat induced by the merger. The microstructure of the audit industry provides further insights—Non-Big4 audit firms reduce fees after the merger, while Big-4 audit firms can withstand higher entry threats and do not adjust fees.

Audit Partners Gender, Auditor Quality and Clients Value Relevance

Several corporate scandals around the world have aggravated the investors’ need for reliable and relevant accounting information. In fact, the study is inspired by prior research which suggests women audit partner or auditor possess a higher level of preparation, risk aversion and ethical behaviour in audit process. Thus, we investigated the possible effect of women audit partner on the client value relevance of accounting information on 2,478 firm-year observations from year 2012 to 2014 for Malaysian listed firms. This article uses time series cross-sectional ordinary least squares (OLS) regressions upon a large sample of the Malaysian listed firms. Basically, the regression results indicate that the signing women audit partner from Big-4 audit firms improves the reliability and value relevance of earnings. Furthermore, our additional analysis shows that firms that engaged the women audit partner from Big-4 audit firms report high relevant equity book values. This study provides a valuable contribution on the positive effect of signing women audit partner from Big-4 audit firms on client value relevance of accounting information to researchers, regulators, investors and all other interested parties in financial information.

Mandatory Audit Firm Rotation and Big4 Effect on Audit Quality: Evidence from South Korea

In South Korea, due to concurrent financial scandals, Korean legislators implemented two major audit policies in the 2000s; the mandatory audit “partner” rotation policy in 2000 and the mandatory audit “firm” rotation policy in 2006. The mandatory audit “firm” rotation policy was introduced as a mean to improve audit quality based on the auditor entrenchment hypothesis. In this paper, we compare the audit quality of firms subjected to mandatory audit “firm” rotation with two benchmark groups, a sample that adopted the policy voluntarily; the second group consists of the mandatory “firm” rotation sample in years prior, a period firms were subject to mandatory audit “partner” rotation. Using accrual-based measures as proxies for audit quality, we find evidence that audit quality of the mandatory rotation firm sample is lower compared to firms that voluntarily adopted the policy. Furthermore, we find evidence that audit quality of the mandatory rotation firm sample is lower compared to the mandatory audit partner firm sample. Additionally, we also find evidence that the mandatory audit firms rotation sample whose auditors were rotated from Non-Big4 to Big4 are generally associated with lower levels of abnormal accruals consistent with the argument that the audit quality of Big4 accounting firms is superior to Non-Big4 firms. Finally, longer audit tenure and switches to Big4 audit firms generally have a positive effect upon audit quality. These findings suggest that extended audit tenure improves audit quality due to accounting firm’s accumulated client specific knowledge. Thus, our evidence suggests that the mandatory audit firm rotation policy did not have the desired effect in a Korean context.

Audit fee premium: The potential effect of King III

In the wake of corporate scandals at world-renowned companies such as Enron (in 2001) and WorldCom (in 2002), public confidence in the role of the auditing profession was eroded. Consequently, in the United States, the Sarbanes-Oxley Act of 2002 (SOX) introduced a raft of mandatory corporate governance initiatives; in the United Kingdom measures included expanding the role of the Financial Reporting Council, the updating of the Combined Code in 2003 and the 2005 Company Law Reform Act; while in France, the Financial Security introduced provisions which were deemed to be very similar to SOX. In South Africa, corporate reforms included the introduction of the King I to III codes of corporate governance, the Companies Act No.71 of 2008 and the Auditing Profession Act No. 26 of 2005. In particular, King III introduced the concept of integrated reporting (IR) which recommends that companies report holistically on both financial and sustainability (economic, social and environmental) issues. In contrast to SOX, however, the application of King III is voluntary, operating on an ‘apply or explain’ basis. The introduction of SOX was postulated to have increased compliance costs and created fee opportunities for the audit profession, giving rise to questions as to whether or not the introduction of IR in King III had introduced similar opportunities for the auditing profession in South Africa, resulting in audit firms charging an audit fee premium1.In this study, multiple regression analysis was conducted on two sets of models to test two hypotheses: (i) that the BIG42 audit firms potentially charged an audit fee premium in response to the recommendations of King III on IR, and (ii) that audit fees are related to non-audit service fees. Results of the research do not show any evidence to suggest that the advent of King III was related to audit fee premiums, yet a strong relationship was found between audit3 and non-audit service fees4. Further, certain of the BIG4 audit firms were found to obtain an audit fee premium. The findings of this study add a South African dimension to the existing body of knowledge on the relationships between audit fees and governance initiatives in this context.

Diversification by the audit offices in the US and its impact on audit quality

In the past six years, the average number of industries (2-digit SIC) serviced by audit offices in the United States has grown by 20% and the number of industries where the office has specialization has fallen by 40% (Data Source: Audit Analytics). This suggests a trend away from specialization towards diversification. Strategic management theory suggests that diversification can affect the quality of output, depending on the nature and circumstances of diversification. This paper examines the effect of diversification at the audit office level on audit quality. Four proxies of audit quality are examined, mainly, discretionary accruals, propensity to meet-or-beat earnings expectations by a cent, propensity to restate financial statements, and propensity to receive a comment letter after an SEC review. Results suggest that, holding audit office and client attributes constant, diversification has detrimental effects on audit quality, possibly because such diverse audit engagements strain the resources of the audit office. On the other hand, when the diversification is part of the audit firm level strategy, the detrimental effects on audit quality are dampened, probably due to larger inter-office resources available to the audit team. Moreover, when the diversification at the office level is a part of a revenue expansion strategy, the audit quality is adversely affected; while under a portfolio rebalancing strategy, there is no detrimental effect on the audit quality, probably because under the expansion strategy, the office is more likely to face resource shortage. Also, unrelated diversification leads to more adverse effect on audit quality than related diversification.Results also suggest that when the audit office is located in a market with more (less) diversified client base, the adverse effects of diversification on audit quality are weaker (stronger). One reason for this effect could be that audit offices located in diversified markets are better adapted to deal with diversification. Finally, the offices of big-4 audit firms handle diversification better with less adverse effect on audit quality, possibly due to more resources at their disposal. These results are robust to various controls from extant research. The findings of this paper are important since they identify additional factors that explain audit quality at the audit office level.

Reviewing relationship between audit institute size and audit quality

Purpose of this paper is to examine relationship between auditor size and audit quality (abnormal accruals) in firms listed in Tehran Stock Exchange during the years 2006–2014. This means that if size of audit firm is an important determinant of audit quality or not? To empirically test variables, audit quality is measured by unsigned abnormal accruals based on ball-Shivakumar and Kothari models and results of audit are investigated with only big institution, audit organization, in Iran. In this study, the panel data is used to test hypotheses. The results show that the size of the audit firm has significant negative relationship with audit quality. This negative correlation indicates that big audit firms with high client numbers, compared to small audit firms with low client numbers have lower audit quality.