Client Importance Research Articles

Auditor’s Ethical Judgments: The Influence of Moral Intensity, Ethical Orientation and Client Importance

This study examined auditors’ ethical judgments using two theoretical perspectives; (1) Moral intensity constructs of Jones’ (1991) Model and (2) Forsyth’s (1980) framework of individual ethical orientation. The importance of the moral issues and how they affected the auditors’ ethical judgments together with the influence of individual’s ethical orientation and the client importance is discussed. A research instrument consisted of two scenarios with different level of moral intensity issues and utilized a 12-item of moral intensity measurement and a Forsyth’s (1980) scale to measure ethical orientation along two dimensions, idealism and relativism. The client importance is manipulated in this between-subjects study. The results of 152 auditors’ found that the effects of the moral intensity construct and the client importance on auditors’ ethical judgments is different based on the issues intensity level of the scenarios. Whereas, both dimensions of the individual ethical orientation (idealism and relativism) are found significant in both of the scenarios tested. The limitations of the study and recommendation for future studies are also discussed.

Pengaruh Rotasi Audit, Spesialisasi Industri KAP, dan Client Importance Terhadap Kualitas Audit (Studi dengan Pendekatan Earning Surprise Benchmark)

This research was aimed to examine empirically the effect of several factors to audit quality. These factors are Audit Rotation, Audit Firm Specialization and Client Importance. The population that will be used in this research are company listed in Indonesia Stock Exchange. This study uses sampel of 85 manufacturing companies listed in Indonesia Stock Exchange in the period 2015-2017. In this study, audit quality is measured by earning surprise benchmark. The method used was purposive sampling. The method of data analysis in this study use logistic regression with SPPS version 23. The results of this prove that (1) audit rotation is not proven to have an impact on audit quality, where sig value 0,915 > 𝛼 0,05 which means H1 is rejected (2) audit firm specialization is proven to have an impact on audit quality, where sig value 0,04 < 𝛼 0,05 which means H2 is accepted (3) client importance is not proven to have an impact on audit quality, where sig value 0,809 > 𝛼 0,05 which means H3 is rejected. The amount of Adjusted R is 0.036 gives the sense that rate is 3,6% of level audit quality can be explained by independent variables while 96.4% can be explained by the other independent variabels that are not tested in this study.Keywords: Audit Rotation, Audit Firm Specialization, Client Importance, Audit Quality

Client importance, bank risk, and systemic risk

PurposeThe purpose of this paper is to investigate the effects of audit client importance on future bank risk and systemic risk in US-listed commercial banks.Design/methodology/approachThe authors use archival research method.FindingsThe authors mainly find that client importance is negatively related with future bank-specific crash risk and distress risk, and also with sector-wide systemic crash risk and systemic distress risk in the future. The authors also report some evidence that these relations become more pronounced during the crisis period than during the non-crisis period. Moreover, the effect of client importance on systemic risk is found to strengthen in banks audited by Big-N auditors, by auditors without clients who restate earnings, and by auditors with more industry expertise.Research limitations/implicationsThese findings contribute to the auditing and systemic risk literature.Practical implicationsThis study has implications for regulating the banking industry.Originality/valueThis study provides original evidence on how client importance affects bank-specific risk and systemic risk of the banking industry.

Auditor human capital and financial misstatement: Evidence from China

In this study, we examine whether education, as an important component of the human capital of auditors, is related to the occurrence of financial misstatement, and investigate the moderating effect of professional experience. Using a sample of 16,651 firm-year observations from the Chinese stock market from 2003 to 2014, we find that the education level of signing auditors is significantly negatively associated with the likelihood of financial misstatement, which suggests that higher education can enhance the ethics and independence of auditors and mitigate the risk of financial misstatement. In addition, professional experience attenuates the negative relation between the education level of signing auditors and financial misstatement. Our findings are also robust to a variety of sensitivity tests, and our conclusions still hold after using a two-stage OLS-logistic regression to address the endogeneity problem. Lastly, the negative effect of education level on financial misstatement holds only for 985 Project universities, low individual-level (audit-firm-level) client importance, and state-owned enterprises.

Can clients of economically dependent auditors benefit from voluntary audit firm rotation? An experiment with lenders

This study utilizes a nationwide random selection of 111 lenders in a 2 × 2 between-subjects experiment to determine whether the level of an auditor's economic dependence on a client and type of auditor rotation affect lenders’ independence and reliability perceptions and decisions to lend money to a potential borrower. Previous literature shows that financial statement users use client importance as a measure of audit quality when revenue streams are not equal across clients. This can negatively affect perceptions of independence and financial statement reliability. As United States regulators look for ways to improve audit quality under the current partner rotation mandate, this study explores whether an audited entity that voluntarily adopts a policy of firm rotation can mitigate the negative effects of the auditor's dependence on the client. Findings suggest that lenders view clients of economically dependent auditors (CEDA) as less independent from its auditor and perceive its financials as less reliable than clients without a dependent auditor (non-CEDA). Lenders are less likely to grant a loan to CEDA. However, under firm rotation, there is not only an increase in lenders’ perceptions of reliability of CEDA financials, but also no difference in perceptions of reliability of CEDA and non-CEDA financials.

Client importance and audit quality, office level evidence from the banking industry: a pitch

PurposeThis paper aims to discuss the application of Faff’s pitch template to a research proposal on client importance and audit quality.Design/methodology/approachThe “cocktail glass” approach and “3-2-1” design provide junior researchers with an effective tool to develop, evaluate and communicate research ideas in a simple way.FindingsThe author further provides a commentary and reflections based on his own experience in this letter.Research limitations/implicationsBased on my pitching experience, pitching requires significant preparation. Further, the pitching template is a useful means to deposit research ideas and as a control and supervisory tool.Originality/valueIt is a PRL submission.

The Effects of Mandatory Audit Firm Rotation on Client Importance and Audit Industry Concentration

ABSTRACT Recently, a system of audit firm rotation has been implemented for the audits of listed companies conducted in the European Union (EU). In the U.S., in contrast, the regulator decided against such rotation. Whereas proponents argue that rotation would strengthen independence and decrease audit market concentration, opponents stress the importance of auditors' learning effects, which would be eliminated by a change in auditors. In extending the market matching model of Salop (1979), we provide an analysis that integrates these contradictory views. We assume that both auditors' industry expertise and their experience in auditing a client decrease audit costs. We investigate the bidding strategies applied to re-acquire clients that were lost due to rotation, auditors' profit contributions, the equilibrium number of auditors (i.e., audit market concentration), and the economic importance of specific clients. Our findings indicate that the regulators' goals of simultaneously decreasing client importance and audit market concentration are in direct conflict and, therefore, the rotation system might have unintended consequences. Our model, thus, suggests how different institutional parameters give rise to economic forces that can support diverging decisions regarding the implementation of MAR.

Effect of Audit Quality on Earnings Management of Listed Oil Marketing Companies in Nigeria

This paper examines the effect of audit quality attributes on earnings management of listed oil marketing companies in Nigeria. Secondary data were extracted from nine companies listed on the Nigerian Stock Exchange (NSE) from 2009 to 2014 and analyzed using panel multiple regression technique. The result of Hausman specification test suggests that the fixed effect regression model is most appropriate for the dataset. The result of the fixed effect regression model showed that audit firm size, auditor industry specialization, client importance and audit committee financial expertise are positively associated with earnings management of the firms at 1%, 5%, 1% and 5% level of significance respectively. In contrast, auditor tenure and the interaction between audit committee financial expertise and auditor industry specialization were negatively and significantly associated with earnings management of the firms at 5% level of significance respectively. The paper therefore concludes that audit quality has significant effect on earnings management of listed oil marketing companies in Nigeria. In line with the findings, the paper recommends among others that public companies who hire the services of audit firms in Nigeria should judge audit firms on the basis of performance in prior assignments and not just the size of the audit firm in view of the fact that audit firm size is not associated with less earnings management of Nigerian firms. Also, regulatory authorities such as SEC should come out with a policy that will encourage audit firms in Nigeria to specialize along industry lines of companies listed on the Nigerian Stock Exchange (NSE) to enable effective audit service. Regulatory bodies such as SEC and Financial Reporting Council of Nigeria (FRCN) should also come out with a policy that makes it mandatory for Nigerian companies to publish both audit and non-audit fees paid to their auditors. The disclosure of both fees will enable users of audited financial statements in Nigeria to determine the level of auditor client importance and consequently, the reliance to place on the auditor’s report.

Net Losses and the Relationship between Auditor Independence and Client Importance: Evidence from a Cubist Regression-Tree Model

ABSTRACT This paper uses a cubist regression-tree model to explore when and why auditors compromise their independence. Using data from companies in Taiwan, we study the association between client importance and auditor independence. The results show a positive relationship between client importance and auditor dependence when clients report net losses in the current year. We also find that auditors allow more important clients to manage their discretionary accruals slightly upward, but the clients still report net losses on their financial statements. This suggests that auditors may impair their independence for clients with certain characteristics and acceptable levels of audit risk.

The Effects of Mandatory Audit Firm Rotation on Big 4 and Mid-Tier Audit Firmss Market Shares and Client Importance

The Effects of Mandatory Audit Firm Rotation on Big 4 and Mid-Tier Audit Firmss Market Shares and Client Importance

Client importance and audit quality: evidence from China

This study investigates whether the economic bond between auditor and client impairs audit quality at partner-level in China. Prior research does not present a clear conclusion on this topic. We employ a relatively novel proxy for audit quality, audit adjustment, which is not publicly disclosed, yet is believed to be more suitable than most proxies used in prior research. We find that client importance is negatively associated with audit quality. Our study contributes to the literature by using new measure to test how client importance affect audit quality and adding new evidence on the determinants of audit quality at the partner level.

Ownership Concentration, Client Importance, and Earnings Management: Evidence from Pakistani Business Groups

The purpose of this study is to investigate the earnings management behavior in Pakistani business groups by empirically testing the impact of ownership concentration as well as client importance on earnings management. A novel measure for client importance is proposed. This measure uses information on whether the business group is using the same auditor for two or more of its affiliates. The study finds a positive impact of group affiliation on earnings management. However, this relation is weak during the energy-crisis period, suggesting an increased reliance of Pakistan business groups on external capital markets and a redistribution of external financing through transactions on group-internal capital markets. The findings also reveal efficient earnings management in non-family business groups as well as in independently operated family firms. Moreover, there seems to be a positive and non-linear relation between group affiliate’s ownership concentration and earnings management. The presence of institutional investors constrains the business groups from earnings management and this is mainly due to the proportion of domestic institutional investors. Finally, the results indicate a statistically significant positive relation between client importance and earnings management in family-owned business groups. This result is not sensitive to the size of the auditor firm used.

Auditor tenure and accounting conservatism: evidence from Greece

Purpose This study aims to examine the relationship between auditor tenure and conservatism for firms in Greece. Greece not only has a high incidence of earnings management but is also required under the new European Commission (EC) regulation to comply with mandatory auditor rotation. Therefore, Greece is an ideal setting in which to study the association between auditor tenure and accounting conservatism. Design/methodology/approach Similar to Jenkins and Velury (2008), this paper uses Basu’s (1997) asymmetrical timeliness of earnings as a measure of conservatism. Following Li (2010), the regression is re-estimated for subsamples based on client importance as measured by the ranking of client sales among all clients audited by the firm. Findings In contrast to Li (2010), the results of this study, which used a sample of firms in Greece, indicate that conservatism decreases as the auditor–client relationship lengthens. Client importance does not appear to affect the relationship between auditor tenure and conservatism, as measured by asymmetric timeliness of earnings. However, when using the accrual–cash flow measure of conservatism (Ball and Shivakumar, 2005), it is found that auditor tenure is positively (negatively) associated with conservatism for less (more) important clients. The results suggest that longer auditor tenure may have a negative impact on audit quality in certain countries where accounting quality has been found to be poor. Therefore, the new EC regulation requiring mandatory auditor rotation may in fact improve audit quality for firms in Greece. Research limitations/implications This study’s sample consists of firms on the Athens Stock Exchange for the period of 1998-2011. This sample was purposely selected because of the unique conditions of rampant earnings management and low incentive in Greece for the auditors to exert effort to detect such practices. Moreover, Greece is subject to the new EC regulations requiring mandatory auditor rotation beginning in 2014. Future studies could examine this issue in alternate settings and over different time periods. Also, other cross-sectional variations among firms which affect the association between auditor–client tenure and audit quality may exist. Practical implications The findings are important to regulators such as the EC and indicate that Greece may be an appropriate setting in which to require mandatory auditor rotation. These results are also useful to auditors who wish to improve the audit quality and the public’s perception of their work. Originality/value Auditor tenure has been the subject of considerable debate, and regulators contend that long auditor tenure reduces audit quality. There may be a valid argument in favor of mandatory auditor rotation in countries particularly susceptible to low accounting quality due to issues such as rampant earnings management. Greece appears to be one such example, and this study provides support in favor of that argument by demonstrating that longer auditor tenure may lead to lower accounting quality in terms of conservatism. Therefore, the recent EC regulation may result in improved audit quality for firms in Greece.

An analysis of US accounting firms’ cross-country audit quality of China concepts stocks

PCAOB once issued an article challenging US accounting firms’ practice of outsourcing the audit of US-listed Chinese companies. By analysing China concepts stocks audited by US firms from 2001 to 2012, this paper seeks to find the optimal mode for cross-country auditing. The study shows that integration and alliance outsourcing have significantly higher quality than non-alliance outsourcing, although no significant difference has been found between the former two modes. However, as the length of cooperation extends, the audit quality of non-alliance outsourcing improves significantly, which remarkably narrowed its difference with alliance outsourcing. Moreover, for the integration mode, audit quality decreases significantly as client importance increases, and consequently reduces its superiority in audit quality over outsourcing. Hence, although both integration and alliance outsourcing are favourable for cross-country auditing in China, special attention should be paid to integration where firms may compromise audit independence for large clients.

Client Importance and Audit Quality under Civil Law versus Common Law Societies

Client Importance and Audit Quality under Civil Law versus Common Law Societies

Litigation risk, auditor tenure, and auditor specialisation and their effect on reporting quality

Prior research on the effect of client importance on audit quality or financial reporting quality provides mixed evidence, whether before or after the Sarbanes Oxley Act of 2002. I test whether the association between client importance and financial reporting quality is affected by other related constructs that mitigate the association between these two variables. Using data over the period 2000-2014, I first test the effect of client importance on financial reporting quality measured by the absolute value of performance-adjusted discretionary accruals; secondly, I test whether litigation risk, auditor tenure, and auditor specialisation mitigate this effect. The results show that there is a negative effect of client importance on financial reporting quality. However, the three variables tested do not seem to mitigate the effect of client importance on financial reporting quality.

The Audit Pricing of Terrorism

We examine the audit pricing of terrorism. We find that in terrorism-intense countries, auditors charge higher audit fees. A similar result is obtained using the September 11, 2001 terrorist attack in the US as a quasi-natural experiment. These findings suggest that auditors incorporate terrorism into risk assessment and charge a fee premium accordingly. Cross-sectional analyses reveal that shareholder litigation strengthens the impact of terrorism on audit pricing. However, such an impact weakens as client importance increases. Finally, we show that in terrorism-intense countries, auditors are more likely to issue non-clean opinions. We conclude that auditors price terrorism.

Client importance and earnings quality: an analysis of the moderating effect of managerial incentives for target beating versus auditors’ incentives to avoid reputational losses and litigation

I examine the effects of client importance on accounting quality. In particular, I analyse whether these effects are moderated by managerial incentives to engage in earnings management (like benchmark beating) or by auditors’ incentives to maintain their reputation and avoid litigation. While the managerial incentives would lead to lower earnings quality, auditors’ incentives would lead to higher earnings quality. My results are in line with client importance being associated with better quality accounting. In particular, I show that auditors’ incentives are important and moderate the relation between client importance and accounting quality.

A cross-sectional examination of non-Big 4 firms’ reliability

Purpose – The purpose of this study is to examine the impact of service-related independence impairments on perceptions of local and regional non-Big 4 Firms’ financial reporting reliability. This study is motivated by recent public policy, which proposes that service-related independence impairments may improve financial reporting reliability. Design/methodology/approach – Commercial lending officers respond to a within-subjects experiment. The variables of interest are client importance, expertise and their related interaction. These variables are regressed on the perceived reporting reliability of local and regional firms. Findings – Client importance is positively and significantly associated with the lenders’ selection of non-Big 4 firms, which supports Taylor et al.’s (2003) assertions that service-related independence violations improve financial reporting reliability. However, client importance is negatively associated with regional firms. Practical implications – Client importance is significantly associated with regional firms only, which suggests that cross-sectional differences exist among non-Big 4 firms. The negative association between regional firms and client importance confirms Goldman and Barlev’s (1974) concerns that large firms are not exempt from client pressure. Client importance is also significantly (and positively) associated with lenders’ selection of the type of non-Big 4 firm to perform the engagement, which supports recent public policy’s proposal for joint attest and non-attest services (Exposure Draft for Statement for Accounting and Review Services No. 18). Originality/value – The study overcomes within-subjects design limitations to provide a natural environment to understand lending officers’ perceptions of non-Big 4 firms. The results continue to fill the void in the literature which examines cross-sectional differences in non-Big 4 firm quality.

Quality Determinants of Independent Audits of Banks

Since DeAngelo's study (1981) on audit quality, the latter has been a topic well discussed in the international accounting literature; however, there is little evidence about audit quality in the financial market. In Brazil, studies on audit quality began only in the 2000s, although without a specific focus on banks. The purpose of this study was to identify the quality determinants of audit work in Brazilian banking institutions. Using the practice of earnings management as a proxy for audit quality - more specifically, the discretionary accruals related to the process of the constitution of the Loan Loss Provision (LLP) - tests were performed based on the quarterly information of commercial and multipleservice banks and savings banks from 2001 to 2012. Empirical tests have shown that the quality of audit work has several types of relationships as follows: negative with the client importance level for the auditor; negative with the works after the sixth year of the contract; positive with the establishment of the Audit Committee by the banks; positive with the judgment of punitive administrative proceedings against independent auditors; and positive with the level of rigor of the regulatory environment. Of the tested hypotheses, three were not confirmed empirically. The first hypothesis predicted an association between audit quality and the auditor degree of specialization in the banking industry. The second hypothesis predicted that audit quality would be negatively correlated with the degree of concentration of audit activity within the National Financial System (Sistema Financeiro Nacional - SFN). The third hypothesis predicted that audit quality would be lower when the auditorclient relationship is of a short term. The results of the study contribute to the debate concerning the role of auditors in the transparency and solidity of the financial system, including their role as a complementary or auxiliary supervisor.