Client Importance Research Articles

Are Client Importance and Auditor Expertise Associated with How Material Misstatement Corrections Are Disclosed?

SUMMARY Management is often motivated to correct misstatements discreetly. Using misstatement corrections disclosed in annual reports from 2007 through 2020, I find that important clients are less likely to disclose material misstatements correctly and that auditor specialization does not seem to impact whether material misstatements are disclosed correctly. Additionally, I find that important clients disclose material misstatement corrections more discreetly when misstatements are negative, when the audit office recently lost clients, when audit market competition is high, and when the restatement auditor is the same as the misstatement period auditor. For immaterial misstatements, client importance is not associated with disclosure accuracy, but specialist auditors increase accuracy. These findings suggest that auditors may allow more discreet misstatement corrections when pressured by important clients. Moreover, specialist auditors exhibit higher quality only when correcting immaterial misstatements. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; M42; M48.

The Influence of Internal Control and Client Importance on Audit Quality with Time Budget Pressure as a Moderating Variable

This study aims to empirically examine the influence of internal control and client importance on audit quality, with time budget pressure as a moderating variable. The data used in this study was sourced from a questionnaire survey distributed to respondents in March via Google Forms. Respondents were selected using purposive sampling, with criteria including junior auditors, senior auditors, and Managing Partners (leaders) from audit firms (KAP) in Bogor, Jakarta, Bali, and East Java. The final sample used in this study was 50 observations. The results of this study show that client importance has a negative effect on audit quality. Internal control has a positive effect on audit quality. Time budget pressure moderates the relationship between client importance and audit quality in a positive direction. Time budget pressure moderates the relationship between internal control and audit quality in a negative direction. Time budget pressure itself has a positive effect on audit quality. Keywords: Internal Control, Client Importance, Kualitas Audit dan Time Budget Pressure

Does client importance affect key audit matters reporting? New Zealand evidence

PurposeThis study aims to examine the relation between a client’s relative economic importance to its auditor and the number of key audit matters (KAMs) reported in the expanded audit report.Design/methodology/approachThe authors measure a client’s economic importance at the audit firm level as well as the audit partner level using the ratio of a client’s total fees to an auditor’s total fees earned from its listed clients and the ratio of a client’s audit fees to an auditor’s total audit fees from its listed clients. The authors estimate a multivariate regression model using a sample of New Zealand-listed company-years from 2017 to 2019.FindingsResults reveal a positive relation between client importance to auditor and the number of KAMs disclosed. Furthermore, the positive association between client importance and the number of KAMs reported is more pronounced for clients audited by the Big 4 auditors and less experienced audit partners. These findings suggest that auditors’ incentive to protect against potential losses from important client engagements outweighs any impairment to auditor independence and leads to a higher number of KAMs reported for the economically more important clients. Overall, the results suggest that auditors report KAMs strategically to mitigate engagement risks.Originality/valueThis study provides the first evidence on how client economic importance relates to the disclosure in the expanded audit report and contributes to the dialogue on auditors’ reporting of KAMs in the Asia-Pacific region.

Does social media attention influence audit reporting conservatism? Evidence from China

ABSTRACT Based on stock forum data of companies listed on the Shanghai and Shenzhen Stock Exchanges from 2009 to 2021, we examine whether and how companies’ social media attention affects audit reporting conservatism. We find that companies’ social media attention is positively related to audit reporting conservatism, and this positive association is more pronounced when auditors are geographically distant from their clients. Furthermore, we observe that the effect of social media attention on audit reporting conservatism is stronger for clients with lower information transparency, lower internal control quality, and higher client importance.

The Effects of Client Importance and Career Concerns on Auditors’ Judgment Conservatism

ABSTRACT We examine how client importance affects judgment conservatism depending on auditors’ career concerns. We argue that auditors will interpret being assigned to a client of major importance as a more powerful signal of their promotion chances under strong competition than under weak competition for advancement and, hence, that they will consider their promotion opportunities to a greater extent in their judgments. We therefore predict that auditors exhibit more conservatism in their judgments regarding more important clients when competition for advancement is strong but not when it is weak. Using an experiment, we generally find results in line with this prediction. Unexpectedly, yet interestingly, we also find that less important clients are judged less conservatively under strong competition than under weak competition for advancement. Data Availability: Contact the authors. JEL Classifications: M42; M52.

Secrecy culture, client importance, and auditor reporting behavior: an international study

PurposeThis study aims to investigate whether auditors compromise their independence for economically important clients in countries with a secrecy culture.Design/methodology/approachThe authors empirically examine the research question based on a data set of 33 countries for the period from 1995 to 2018. The dependent variable is the auditors’ propensity to issue modified audit opinions, which is a proxy for auditor independence. The authors use relative client size as a proxy for client importance. The authors adopt the Heckman (1979) two-stage model to mitigate the potential endogeneity issue involved in the selection of Big-N auditors.FindingsUsing a large sample of firms and controlling for the firm- and country/region-level factors, this study reveals that both Big-N and non-Big-N auditors are more likely to issue modified audit opinions to clients located in countries with a strong secrecy culture relative to those located in other countries. However, Big-N auditors are more likely to issue modified audit opinions for their economically important clients with a secrecy culture relative to their other clients, while no or weaker evidence is found for non-Big-N auditors. The results are consistent and robust to endogeneity tests and sensitivity analyses.Originality/valueThis study enriches the literature by providing a new perspective on auditor independence that an auditor’s reporting behavior can vary depending on the client’s importance and auditor type, even under the same secrecy culture.

Are Client Importance and Auditor Expertise Associated with How Material Misstatement Corrections are Disclosed?

Are Client Importance and Auditor Expertise Associated with How Material Misstatement Corrections are Disclosed?

DOES CLIENT IMPORTANCE AFFECT AUDIT QUALITY IN MODERATION?

The financial report is a report that is very necessary in making decisions. For this reason, a quality audit is needed that can truly explain the condition of the company. Good audit quality can provide the right information for its users, while poor audit quality can cause many losses, both internal and external. The purpose of this research is to examine the influence of audit tenure, audit committee, and public accounting firm industry specialization on audit quality with client importance as a moderator. The data in this research uses secondary data obtained from the 2019 to 2021 financial reports listed on the Indonesia Stock Exchange using the purposive sampling method and using the SPSS program in data processing. The independent variables in this research are audit tenure, audit committee, and public accounting firm industry specialization. Audit tenure is calculated based on the number of years of engagement, the first year is given the number 1 and 1 is added for the following years. The audit committee is calculated based on the number of audit committee members. Public accounting firm industry specialization is calculated based on the number of companies audited by the same auditor divided by the number of companies, and if the result is more than 20% it is given the number 1, otherwise it is given the number 0. The dependent variable in this research is audit quality which is given the number 1 for the Big Four and 0 for the Non-Big Four, and the moderating variable is client importance which is calculated by the natural logarithm of total assets divided by the natural logarithm of total assets audited by the same auditor. This research uses logistic regression analysis in data processing because the independent variable indicators are dichotomous. The results of this research are that audit tenure affects audit quality, audit committees have an effect on audit quality, and public accounting firm industry specialization has no effect on audit quality. Client importance as moderation also cannot influence audit tenure, audit committee, and public accounting firm industry specialization on audit quality.

Auditor Independence And Its Influence On Accounting Behavior: A Systematic Literature Review

This paper provides a comprehensive analysis of auditor independence and its impact on accounting behavior. The research framework focuses on four main threats to auditor independence: client importance, non-audit services, auditor tenure, and client affiliation with CPA firms. The study utilizes Google Scholar as the database source and Harzing's Publish and Perish as the data search application to identify and analyze 50 relevant articles published between 2013 and 2023 in the field of auditor independence and its influence on accounting behavior. The research findings highlight the potential risks and implications of these threats on auditor independence, including financial dependence, familiarity, self-interest, and reduced skepticism. Mitigating strategies such as regulatory oversight, ethical guidelines, transparency, rotation of audit firms or engagement teams, and professional skepticism are discussed to address these threats and uphold auditor independence. The conclusions emphasize the importance of ongoing monitoring, evaluation, and improvement of audit quality to ensure the effectiveness of independence safeguards. This research contributes to a better understanding of the complex relationship between auditor independence and accounting behavior, providing valuable insights for regulators, auditing firms, and researchers in promoting the integrity of financial reporting and strengthening confidence in the auditing profession.

Measuring the importance of different barriers to opioid agonist treatment using best-worst scaling in an Australian setting

ObjectiveOpioid agonist treatment (OAT) is an effective treatment for opioid use disorder (OUD), however several client barriers to OAT are reported. Client importance of these barriers using economic preference elicitation measures have not been identified. This paper determines the most important OAT barriers using best-worst scaling (BWS) and compares the results of BWS to Likert scale. MethodsCross-sectional self-completed survey with 191 opioid dependent clients who attended Australian needle and syringe sites. Participants were presented 15 Likert scale barriers and 15 BWS barrier scenarios. The BWS data was presented using count analysis, multinomial logit and mixed logit models. The ranking of barrier items was completed using three BWS methods and one Likert scale method, with share preference results (BWS) or mean scores (Likert) used to rank the 15 barriers. ResultsThe most important client barriers were ‘enjoy using opioids’, ‘lack of support services’ and ‘hard to access’. The four ranking methods produced different barrier rankings for the most important barriers, but similar results for the least important barriers. ConclusionPolicies around OAT as a harm reduction approach, increased support services and increased availability of OAT services would be beneficial in improving OAT uptake. Comparing BWS and Likert methods produced different highest ranked barriers, indicating the method used to identify preferences has significant implications on the type of intervention prioritised.

Auditors Independence and Audit Quality of Health-Care Firms in Nigeria

This study examines the effect of auditor independence on audit quality of twenty industrial goods companies in Nigeria for a period of ten years spanning 2012 to 2021. The objectives were centered on assessing possible effect of client importance, auditor reputation, audit opinion and auditor professional qualification on audit quality of health care companies in Nigeria. To achieve this set objectives, this study employed ex-post-facto research design based on data sourced from selected firm’s yearly reports for time period that ranged from 2012 to 2021. Adopting an ex-post factor and longitudinal research design, the secondary data collected were subjected to some preliminary data tests such as descriptive analysis, Pearson moment correlation matrix and multi-collinearity analysis using Variance Inflation Factor (VIF). The research used panel least square procedure based on fixed and random effect framework and houseman test was equally employed in selecting the best model to estimate parameters contained in the model. Emanating from the review of relevant literature and theories on auditor’s independence and audit quality and based on the data collected, analyzed and the hypotheses tested the study found that auditor reputation and auditor professional qualification recorded a positive and significant effect on audit quality which was statistically significant at 5% level of significance. On this basis, therefore, it may be recommended that there is need for the audit firm to protect its independence by working within its statutory duties. The management of health care companies is hereby advised to always source for the services of reputable audit firms with professional qualification and expertise to ensure quality of audit in their firms

Pengaruh Locus of Control terhadap Dysfunctional Audit Behavior: Religious Control sebagai Pemoderasi

The purpose of this study is to obtain empirical evidence about whether locus of control, professional commitment, time budget pressure, client importance, turnover intention, and personality type (type A) has an influence on dysfunctional audit behavior moderated by religious control on the influence of locus of control and professional commitment on dysfunctional audit behavior. The population in this study are auditors who work in public accounting firms in Indonesia. The sample selection technique is purposive sampling. Based on the sample selection criteria, the number of samples collected were 86 auditors. Those data are analyzed using multiple linear regressions analysis. The result of this study shows that locus of control has a positive effect on dysfunctional audit behavior. It means that the higher the locus of control, the higher the probability of dysfunctional audit behavior. Auditors tend to perform dysfunctional audit behavior when they face pressure in doing their job. The pressure can come from time, superiors, supervisors, or audit managers which are external factors. Professional commitment, time budget pressure, client importance, turnover intention, locus of control moderated by religious control, and professional commitment moderated by religious control do not effect dysfunctional audit behavior. This study also showed that religious control does not moderate the relationship between locus of control and professional commitment with dysfunctional audit behavior.

Auditors’ response to earnings management after split-share structure reform in China

PurposeThis study aims to investigate whether and how auditors responded to the documented increases in earnings management after split-share structure reform (SSSR) in China, as manifested in auditors’ propensity to issue modified audit opinions (MAOs) after the SSSR. This study further investigates how client importance and auditor size influence auditors’ response to earnings management after the SSSR.Design/methodology/approachThis study adopts logit regression models to investigate auditors’ propensity to issue MAOs to their clients that appear to manage earnings after the SSSR. Initially, including all Chinese publicly listed firms from the CSMAR database, the sample for final analyses consists of 21,904 firm-year observations for 1,290 unique listed firms during the period 2001–2020. The sample period surrounds the implementation of the SSSR, which started in 2005, allowing the examination of auditors’ propensity to issue MAOs after vis-à-vis before the SSSR.FindingsThe authors find that non-Big10 auditors in China were less likely to issue MAOs to their economically important clients who appear to manage earnings after SSSR. However, in the years of non-tradeable shares being released to the markets, both Big10 and non-Big10 auditors were less likely to issue MAOs to their economically important clients who appear to manage earnings. The findings suggest that auditors may have compromised auditor independence in response to earnings management after the SSSR, likely due to the pressure from their economically important clients.Originality/valueThis paper contributes to the literature, specifically the practice and theory in auditing, by shedding light on ever-changing auditors’ reporting behaviour, especially with regard to auditor independence. It also adds to the growing body of literature on the impact of institutional changes on auditing practices worldwide. The findings of this study further suggest that the recently documented declining demand for high-quality audits after the SSSR may be motivated by the clients’ intention to manage earnings after the SSSR.

The effect of auditor experience on stock price crash risk

AbstractIn this study, we explore whether auditor experience has an effect on stock price crash risk. Using a sample of Chinese firms, we find a negative association between auditor experience and stock price crash risk, especially in firms with high client importance. The path analysis shows that accounting information transparency plays a mediating role in the relationship between auditor experience and stock price crash risk. And the effect of auditor experience on clients' stock price crash risk is dominant when auditor tenure is short and when the firm is audited by non‐Big Four audit firms.

Do auditors change their individual style? Examining the effects of client importance and competition on auditors' influence on earnings comparability in China

Individual auditor style implies that two client firms audited by the same individual auditors are likely to have more comparable earnings than two client firms audited by different individual auditors within the same audit firm. We investigate whether auditors in China change their individual style to cater to demands of clients that are of high importance and are located in a competitive audit market. Using a propensity score match approach, we find evidence of higher earnings comparability between a pair of client firms audited by the same individual auditors. However, in subsamples of client firm pairs that are of high importance or are located in a competitive audit market, we find earnings comparability of client firms audited by the same individual auditors diminishes. Our findings suggest that due to the influence of economic bonding in auditor–client relations in China, individual auditors change their style to cater to client demands.

Family firms, client importance, and auditor reporting behavior: evidence from China

PurposeThis study aims to investigate whether auditors compromise their independence for economically important clients in family business settings.Design/methodology/approachThe authors empirically examine the research question based on China for the years 2011 to 2020. The dependent variable is the auditors’ propensity to issue modified audit opinions, which is a proxy for auditor independence. The authors use relative client audit fees as a proxy for client importance. To address endogeneity issues in the selection of family firms, the authors use the two-stage least squares regression model and, subsequently, the propensity score matching and Hausman firm fixed effect modeling.FindingsThis study reveals that the propensity to issue modified audit opinions is positively correlated with client importance. Big-N auditors are more likely to issue modified audit opinions for their economically important family firm clients, whereas such evidence is not found for non-Big-N auditors. Results are consistent and robust to endogeneity test and sensitivity analysis.Originality/valueThis study enriches the literature on auditor independence and the effect of family firms’ ownership structure factors on audit reporting behavior for their economically important clients. Findings may prove useful for managers and practitioners interested in family business.

Client Importance and Audit Quality at the Individual Audit Partner, Office, and Firm Levels

We investigate whether audit partner level data provides a more powerful measure than office or firm level measures of client importance. We find that the likelihood of issuing a going‐concern opinion (any and first‐time) increases, and the absolute value of discretionary accruals decreases, in relation to the proportion of audit fees to the total audit fees received by audit partners from all their clients. We also find that the likelihood of issuing a going‐concern opinion (any and first‐time) increases, and the absolute value of discretionary accruals decreases, in relation to the proportion of non‐audit services fees from a client to total non‐audit service fees, and the proportion of total audit and non‐audit service fees from a client to total fees from all their clients at the office and firm levels. Our findings provide evidence to regulators, audit clients, and stakeholders that audit partners do not succumb to pressure from economically more important clients as audit quality has a positive association with client importance.

The impact of COVID-19 restrictions on audit fees and audit delay: evidence from auditor local offices

PurposeThis study aims to examine the impact of COVID-19 public health restrictions on audit fees and audit delay at the auditor local office level.Design/methodology/approachThe authors take advantage of the availability of the state-by-state lockdown data to measure the degree of public health restrictions in auditor office locations. Using multivariate regression analysis, this study empirically investigates the impact of the length of lockdown in auditors’ office locations on audit fees and audit delay. The authors also examine whether office-level characteristics (i.e. office size and office-level client importance) moderate the association between the length of statewide lockdown and both audit fees and audit delay.FindingsThe authors find that a longer lockdown in auditors’ office locations is associated with higher audit fees and longer audit delay. The increase in audit fees and audit delay due to lockdown is higher for clients of larger local offices than those of smaller offices. In contrast, the positive impact of lockdown on audit fees and audit delay is less for more economically significant clients of an auditor office than that for less significant clients. Smaller clients are more likely to bear the higher cost of audits and experience longer audit delay during the pandemic.Originality/valueThe results suggest that COVID-19 restrictions have forced auditors to change the nature, scope and timing of their tests, resulting in higher audit fees and longer delays in completing audit engagements. Beyond the main effect of lockdowns on audit fees and audit delay, the study finds evidence of the moderating effect of auditor office size and office-level client importance, providing some insights on how auditor local offices cope with COVID-19 restrictions.

Does signing auditors’ communist party membership shape audit quality? Evidence from China

In this article, we investigate the effect of signing auditors’ communist party membership on audit quality. Relying on a sample of Chinese listed firms from the period 2001 to 2019, we find that firms with signing auditors who have communist party membership conduct less earnings management, indicating that signing auditors with party membership provide high level of audit quality. Moreover, the above relationship is more pronounced in small audit firms. We also find that firms who are audited by signing auditors with party status have lower likelihood of financial statements and loss avoidance. Further analyses suggest that signing auditors with party status can earn audit fee premium. The positive relationship between signing auditors with party membership and audit quality is more pronounced in non-specialists auditors and high client importance.

Partner cross-contagion in audit offices and client reporting quality

PurposeThe purpose of this study is to examine if partner cross-contagion in audit offices is associated with client reporting quality. To this end, the authors test if the presence in an audit office of a partner with a highly aggressive style is associated with the reporting quality of other partners’ clients. Partners with a highly aggressive style are identified by their tendency to approve favorable client reporting. The authors add to the existing literature that provides limited and equivocal evidence on audit office cross-contagion.Design/methodology/approachPartner style is determined in an estimation period from 2010 to 2014. Aggressive style is identified when partners tend to approve favorable client reporting, which is shown by a positive value for their clients’ median discretionary accruals. Partners are considered to exhibit a highly aggressive style if they have positive median client discretionary accruals within the 90th percentile. Cross-contagion analysis is then conducted in a test period from 2015 to 2019 by determining if the presence in an office of a partner with a highly aggressive style is associated with the reporting quality of other partners’ clients. Two measures of client reporting quality used. These are the accuracy of current-period accruals in predicting period-ahead cash flows and earnings management related to benchmark beating.FindingsThis study finds partner cross-contagion of highly aggressive style in Big 4 offices that is associated with lower client reporting quality for non-Metals and Mining industry clients. This cross-contagion only occurs when the contagious partner has a very high level of aggressive style. This study finds Big 4 partners are susceptible to aggressive style cross-contagion regardless of their own idiosyncratic style. The results of this study show more cross-contagion in small Big 4 offices and mitigation of cross-contagion for economically important clients. Cross-contagion in non-Big 4 offices is observed for Metals and Mining industry clients.Originality/valueBy determining style from partners’ past clients’ discretionary accruals, this study extends prior cross-contagion research that relies on restatements to identify style. This study examines several other cross-contagion issues not addressed in prior studies. These include differences in cross-contagion for Big 4 and non-Big 4 offices and for large and small Big 4 offices, partners’ susceptibility to cross-contagion and the influence of client importance.