Audit Clients Research Articles

The Effects of Auditor-level Cybersecurity Breaches on Auditor-Client Relationships

Between 2005 and 2019, Big4 auditors experienced fifteen data breaches. In this paper, we examine how client firms respond to an auditor-level data breach and whether auditors adjust their behavior in response. Using auditor-client pair observations, we find a higher likelihood of auditor turnover among clients of breach-affected auditors compared to those of non-breach auditors. When switching auditors, clients are more likely to choose an auditor who has not experienced a data breach in recent years (typically within the past 3–5 years). We also find that a data breach is negatively associated with audit quality – breach-affected auditors become less conservative and allow greater discretion in financial reporting during the breach year. Furthermore, auditors increase audit fees following exposure to a data breach. Overall, our findings suggest that auditor-level cybersecurity breaches impair auditors’ reputations and impose significant costs.

The Geographic Proximity Among Firms, Auditor Office and SEC office and Audit Fees

This paper investigates the geographic distances among the auditors, audit clients, and the regulatory agency Securities & Exchange Commission (SEC) and their impact on audit quality. Consistent with the exacerbated information asymmetry issue caused by distance, we find the audit quality is negatively associated with the distance between the client/auditor and the SEC offices. We further find that auditors charge higher fees when they are closer to the SEC office, irrespective of the client’s distance to the SEC. This suggests that the distance between auditor and the SEC has a more prominent influence than the client’s location on the audit quality.

Blockchain: Exploring its Impact on the Business Models of Australian Accounting Firms

AbstractThis paper reports on a study that investigated how the business models of Australian accounting firms are impacted by audit clients using blockchain technology. Semi-structured interviews with a range of stakeholders including audit partners from big-4 accounting firms reveal that firms are gradually adapting their business models by offering value propositions that involve efficiency, complementarities and novelty, despite a formative blockchain ecosystem in Australia. This ecosystem is characterized by clients’ reluctance to use blockchain platforms for financial systems and a lack of clear direction on applicable accounting standards and consensus on blockchain standards and governance.

Auditor Office Reputation Damage and Their Audit Clients’ Voluntary Disclosures

SUMMARY We examine how client firms of reputationally damaged auditor offices respond to perceived lower audit quality, focusing on the issuance of management forecasts. We find that nonrestating client firms that stay with their reputationally damaged auditor office increase their number of management forecasts, which is consistent with a substitution effect between audited financial reporting quality and voluntary disclosure. Further, the disclosure response of these clients is more pronounced when the client firm is exposed to a higher information demand environment or is exposed to lower proprietary costs of disclosure. Finally, we document that increases in management forecasts bring market benefits for clients audited by reputationally damaged auditor offices by reducing the cost of equity and improving realized returns for these firms. Data Availability: All data used in the study are available from public sources identified within. JEL Classifications: M41; M45; M49.

Accounting Firm Organization Structure and Audit Risk Management: Evidence from Chinese Domestic Accounting Firms

ABSTRACT Accounting firms play an important role in improving the quality of accounting information and reducing information symmetry risk in capital markets. In this paper, we argue that organizational structure and relevant internal management can affect audit quality and audit risks. We identify three main types of structure in accounting firms: mango-type structure (completely centralized control), banana-type structure (completely decentralized control), and olive-type structure (moderately decentralized control). We manually collect the organizational structure information of domestic accounting firms in China from 2013 to 2019. We find that olive-type firms can manage audit risks in a better manner, as such firms are more likely to issue nonstandard audit opinions and charge higher audit fees based on client audit risks. Our findings would contribute to audit culture and climate literature regarding what changes in control climate can be implemented to influence auditor behavior and improve audit quality. Data Availability: Data are collected from public sources and websites of accounting firms. JEL Classifications: M42; M48; L22; G32; G34.

Why do female lead auditors charge a fee premium? evidence from the UK audit market

Existing research documents a fee premium for audits led by female partners (Ittonen & Peni, 2012; Hardies et al., 2015; Burke et al., 2019; Lee et al., 2019; Hardies et al., 2021). We take this work forward by investigating a possible justification for the observed premium by examining how auditor gender is related to audit report lag and whether the female partner audit fee premium is driven by audit report lag. We find that United Kingdom companies audited by a female lead auditor have a significantly shorter audit report lag but pay a significantly higher audit fee. In further analysis, we find that the fee premium for female partner–led audits is higher for clients receiving a more timely audit opinion. Our findings are consistent with female lead auditors delivering more timely audits and with audit clients being prepared to pay a premium for such timeliness. Our study extends our understanding of the importance of gender in the auditing process and the value clients see in audits led by female auditors. Given the relatively low proportion of female lead auditors, our findings should also encourage audit firms to appreciate the economic value of female lead auditors and to actively facilitate their progression to senior roles.

IMPACT OF AUDIT QUALITY ON EARNINGS MANAGEMENT OF CONSUMER GOODS FIRMS IN NIGERIA

This study examines the impact of audit quality on earnings management of listed consumer goods firms in Nigeria. The study adopted correlational research design. The population of the covers all twenty-one (21) listed consumer goods firm in Nigeria and two-stages filter was used to arrive at a sample size of fifteen (15) consumer goods firms listed the floor of Nigerian Exchange group as at 31st December, 2022, the data were extracted from annual reports and accounts of the sampled firms for the period of ten (10) years from 2013-2022. Multiple regression was used as a technique of data analysis, regression result shows that audit reporting lag, audit client’s importance and auditor independence have a positive and significant impact on earnings management of the sampled firms, while auditor’s tenure has a negative and significant impact on earnings management. Based on the findings, the study concluded that audit reporting lag, audit client’s importance and auditor independence enhanced the earnings management. while, auditor tenure does not affect earnings management. Based on findings and conclusion, it is therefore, recommends that the regulatory bodies such as Financial Reporting Council of Nigeria and Security and Exchange Commission in Nigeria should ensure that audited reports for private companies are release within a regulated period, this is because prolonged audit lagged increase earnings management by giving management of the companies enough time to manipulate earnings. This will impede the users of financial information to take an informed decision.

Do major public emergencies affect audit quality? —Evidence from China

ABSTRACT Taking Chinese listed firms from 2019 to 2021 as research samples, we examine the impact of major public emergencies on audit quality using COVID-19 as exogenous shock. Distinguishing the location of audit clients and that of auditors, we find that if major public emergency occurs in the city of audit clients during the period of annual report audit, audit quality will be significantly reduced. If emergency occurs in auditor’s city, audit quality has improved instead of declining. Through the heterogeneity test, we find that the information level of audit clients has a double effect. When public emergencies in audit clients’ locality have a negative impact on audit quality, the information level of clients can alleviate the negative impact. However, when emergencies occur in auditor’s locality, the higher information level of the client may lower audit quality. However, whether public emergence occurs in the city of clients or auditors, auditing firms’ information technology level and more information technology personnel in auditors’ team are conducive to improve audit quality. The research has enriched the relevant research on audit quality in the context of public emergencies, and provided a theoretical basis for the urgency of digital transformation of accounting and auditing industry.

Can a Viral Blunder Damage Auditor Brand Name Reputation? Evidence From Envelopegate

“Envelopegate” is a term used to describe PricewaterhouseCoopers’ (PwC)’s service failure that occurred during the 2017 Academy Awards ceremony (“the Oscars”). For PwC, the error resulted in immediate and unprecedented negative publicity, which was driven by a viral response on social media and other online media platforms. Thus, Envelopegate offers a unique opportunity to observe the potential spillover effects of negative viral events on the brand name reputation of an audit firm. Using intraday and daily client stock returns, we find a significant negative market response for PwC audit clients within the first minute of trading on the day following Envelopegate. The negative market effect is driven by clients with higher demand for auditor reputation, but we find no evidence that results are driven by any specific audit market region. Thus, our research underscores the susceptibility of an audit firm’s brand value to negative viral events, even when the event is unrelated to audit services. The findings of this study should be of interest to scholars exploring how audit firms form and maintain reputations as well as to professional service firms that engage in highly visible client services as part of their strategic efforts to enhance brand value.

The Impact of Blockchain Technology Activation by Audit Clients on Internal Control Structure Effectiveness: An Experimental Study

The research aimed to study and test the impact of blockchain activation by audit clients on the effectiveness of the internal control structure. To achieve the research objective, an experimental approach was used to test the research hypotheses on a sample of auditors belonging to accounting and auditing firms in Egypt. According to auditing standards, specifically the second fieldwork standard, the auditor is responsible for performing tests of compliance and adherence related to internal controls for the purpose of assessing the level of control risk, and thus the risk of material misstatement, leading to the planning of detection risk. The theoretical part of the research concluded that blockchain technology is one of the most impactful technological applications in the current work environment. Additionally, there is a near consensus in previous related studies that activating this technology has an impact on the five main components of the internal control structure . In its practical part, the research concluded that the five research hypotheses related to the components of the internal control structure were accepted, confirming auditors' awareness of the potential benefits of blockchain activation by audit clients to enhance the effectiveness of the internal control structure. KEYWORDS blockchain technology, control activities, digital transformation, Egyptian market, financial transactions, internal audit

The Importance of Business Development Incentives to Audit Partners: Evidence from the Propensity to Issue Modified Opinions to Group-Affiliated Audit Clients

SUMMARY We analyze a unique incentive motivating audit partners to pursue new revenue streams from potential audit clients related to incumbent clients. In auditing clients belonging to business groups, a partner who issues a modified audit opinion (MAO) to a group-affiliated client risks losing not only that client but also the opportunity to extend their audit services to other member companies. We document that partners are less likely to render MAOs to group-affiliated clients when other group members are large relative to the partners’ client portfolio, and this relation intensifies when the incumbent group-affiliated clients themselves are economically less important. We also find that partners who issue MAOs to group-affiliated clients underperform in attracting new clients from the same business group. Further, investors perceive that audit quality is higher in these partners’ non-group-affiliated clients, reflecting that reputation protection forces discipline partners to resist the temptation to issue unwarranted clean opinions. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42.

Pengaruh Gratis Ongkos Kirim, Diskon dan Online Customer Review Terhadap Keputusan Pembelian Konsumen Tiktok Shop

Development of Technology Over the past few years, technology has advanced rapidly and will continue to do so indefinitely. In Indonesia today, online shopping has emerged as a trend and option for acquiring a wide range of desired goods. This study aims to determine how free delivery, limits, and online customer surveys influence purchase decisions on the Tiktokshop Commercial center. Comparative causality is used in this study. This study uses a type of quantitative data because the presented data are related to numbers or scoring. Customers who use TikTok Shop are the focus of this study. Subsequently, the plan of this study utilizes a quantitative methodology, utilizes a coincidental examining technique, and afterward utilizes a non-likelihood testing strategy to make a populace and an example. The study reveals that TikTok Shop purchase decisions are influenced simultaneously by free shipping, discounts, and online customer reviews. The connection between free transportation, limits and online client audits is at the same time sure, intending that in the event that the general factors of free delivery, limits and picture are improved, the buy choice will increment.

Regulation risk and the quality of key audit matters: an analysis based on the auditor’s disclosing motivation

ABSTRACT This research investigates the effect of regulatory risk on the quality of key audit matters (KAMs) through the lens of the auditors’ motivations. Employing STATA to conduct regression analysis on data encompassing 22,075 firm-year observations from Chinese A-share listed companies over the period from 2017 to 2022, we find that auditors with higher regulation risk disclose more KAMs, especially the differentiated KAMs, and provide more details through longer text content. This behaviour is driven by the desire to signal client risks and mitigate audit liability. Additional analysis indicates that the heightened regulatory risk makes auditors more sensitive to the risks related to non-accounting areas, which are less auditable. Meanwhile, audit clients may hinder auditors from disclosing more information in KAMs to avoid additional costs. Finally we also reveal that the regulatory risk enhances the quality of KAMs disclosed by non-Big 4 auditors. Our study sheds light on the motivations behind auditors’ disclosure motivations while informing regulators and investors to pay closer attention to the quality of KAMs.

Do Small Audit Clients “Pay the Price” for Audit Partner Busyness Caused by Acquisitions of Large and New Clients?

Do Small Audit Clients “Pay the Price” for Audit Partner Busyness Caused by Acquisitions of Large and New Clients?

Sparked Intuition Power: An Audit Risk Activity

This case explores the subjective nature of professional judgment related to audit risk through the lens of a fictitious company, Sparked Intuition Power (SIP). SIP has just been accepted as a new audit client by an international accounting firm. Students play the role of associates on the audit engagement team. As part of their work on the audit, the students identify potential risks present at SIP as part of the initial risk assessment process. Once these risks have been identified, the students decide how to assess the potential severity of each risk and determine the resulting effect on the overall auditor workload. Through interaction and discussion with their instructors, the students should be better able to navigate the decision-making process related to risk evaluation in an audit engagement.

Audit firm tenure and corporate tax avoidance: evidence spanning COVID-19 pandemic

Purpose This study aims to examine the effect of audit firm tenure (AFT) on corporate tax avoidance (CTA) and the moderating effect of the COVID-19 pandemic. Design/methodology/approach The sample comprises 41,074 firm-year observations from 32 countries from 2015 to 2020, for which data are collected from various sources: financial data from the Refinitiv database, country corporate tax rates from the Tax Foundation, and other country-level data from the World Bank database. The authors use the book tax difference to measure CTA and multiple proxies for AFT. Findings This study finds that a longer AFT is associated with higher CTA, confirming the notion that long AFT impairs auditor independence. The findings remain robust when considering various AFT proxies, incorporating Hofstede’s cultural factors, using weighted least-squares estimation and addressing endogeneity through propensity score matching. This study also finds a non-linear relationship between extended client and auditor relationships and CTA, supporting the mandatory audit firm rotation regulation and increasing investors’ caution regarding the consequences of extended client–auditor relationships on firm behaviour. Research limitations/implications This study offers new evidence on the effect of the COVID-19 pandemic on the link between AFT and CTA and documents a non-linear relationship between AFT, which has not been addressed in prior studies. Practical implications The findings of this study have several significant practical implications. First, governments and policymakers gain insights into the consequences of extended auditor–client relationships, hence calling for a review of auditing and taxation regulations. Second, the findings provide important insights into the issue of auditor independence, especially during long engagements and crises such as COVID-19. Finally, investors and tax authorities should be more cautious about the risks of aggressive tax avoidance during crisis periods. Originality/value To the best of the authors’ knowledge, this is the first study to use a global data set to investigate the effect of AFT on CTA during the COVID-19 pandemic.

Strategic alliances and shared auditors

Strategic alliances are voluntary corporate arrangements for mutual benefit. Although alliances are common as an alternative to M&As, they require cooperation between alliance partners who continue to operate as independent companies. Thus, relational risk—the probability and consequences of unsatisfactory cooperation or opportunistic behavior—is inherent in alliances and a major determinant of alliance success. In this paper, we examine and find that alliance announcement CARs are higher for companies sharing the same auditor with their alliance partner. Further, our findings suggest that the shared auditor effect is stronger for alliances where potential relational risk between alliance partners is greater. Our findings hold when we use “withdrawn” (i.e., the withdrawal of an announced alliance before its start date) as an alternative, albeit inverse, measure of alliance success. Collectively, we provide novel evidence which suggests that auditors add shareholder value by playing a matchmaking role in alliance formation, building inter-company trust and mitigating relational risk by facilitating the sharing of non-financial information between potential alliance partners among their audit clients.

О проведении аудита системы управления промышленной безопасностью на примере ООО «Газпром трансгаз Томск»

The results of the audit of the industrial safety management system of Gazprom transgaz Tomsk, LLC, with the participation of the independent expert organization Scientific and Technical Center for Industrial Safety Problems Research, JSC, are provided. Notably, the audit of the industrial safety management system has been combined with the “classic” industrial safety audit. Brief information on Gazprom transgaz Tomsk, LLC, is provided, with the main focus on typical hazardous production facilities selected for the audit. The audit planning process, including the distribution of executives among the facilities to visit, in accordance with their geographic location, is described. The principles of establishment of criteria for the audit are listed. The parallel coordination of the jobs within the audit by the manager of the group of auditors and the representatives of the audit client is mentioned. A description of the stages of audit where the main attention has been paid to the industrial safety management system audit is provided. Notably, depending on the specifics of a visited department, the audit’s focuses change as well. The obtained results have been analyzed. The problem of currently missing requirements for the implementation, functioning, and evaluation of the efficiency of industrial safety management systems has been mentioned. The conclusion on the possibility and advisability of the industrial safety management system auditing combined with the control over the extent of compliance with the industrial safety requirements for hazardous production facilities as proof of the system's efficient functioning has been made. It is stated that such an experience can be used to develop regulatory and legal acts adopting the changes introduced in the Federal Law of July 21, 1997, № 116-FZ «On industrial safety of hazardous production facilities».

Audit market concentration in an emerging economy

The aimed of this study is to ascertain the relationship between audit attributes and audit quality in an emerging economy. The study deliberately cover the post-Enron era and postaudit reforms era decipher the activities of audit after the demise of Enron. This study used selected quoted firms in Nigeria for a period of sixteen (16) years, 2006 – 2021. The models were built based on a study of extant literature, GOA and audit reforms. Ordinary least square econometric technique was employed to analyze data extracted from a secondary source. The outcomes of this study revealed that Audit client size has positive relationship with audit quality. The result further revealed that audit client complexity has negative relationship with audit quality. Finally, the result revealed that audit client business risk has no significant relationship with taudit quality. This study recommended that Alternative appointment processes for auditors, e.g. involving shareholder panels, or appointment by regulator.

Governance mediation in the era of disruptive technologies: unveiling new perspectives on the risk of material misstatements

Purpose This study aims to examine the mediating effects of corporate governance mechanisms like the board of directors on the association between disruptive technology adoption by audit clients and the risk of material misstatements, including inherent risk and control risk. In particular, the authors study the mediating effects of board characteristics such as board size, independence and gender diversity. Design/methodology/approach Based on a sample of 100 audit clients listed on the FTSE 100 from 2015 to 2021, this study uses structural equation modelling to test the research objectives. Findings The findings indicate a significant and negative association between disruptive technology adoption by audit clients and inherent risk. However, there is no significant evidence observed for control risk. The utilisation of disruptive technology by the audit client has a significant impact on the board characteristics, resulting in an increase in board size, greater independence and gender diversity. The authors also find strong evidence that board independence mediates the association between disruptive technology usage and both inherent risk and control risk. In addition, board size and gender exhibit distinct and differential mediating effects on the association and across the two types of risks. Research limitations/implications The study reveals that the significant role of using disruptive technology by audit clients in reducing the risk of material misstatements is closely associated with the board of directors, which makes audit clients place greater emphasis on the construction of effective corporate governance. Practical implications This study offers essential primary evidence that can assist policymakers and standard setters in formulating guidance and recommendations for board size, independence and gender quotas, ensuring the enhancement of effective governance and supporting the future of audit within the next generation of digital services. Social implications With respect to relevant stakeholders, it is imperative for audit clients to recognise that corporate governance represents a fundamental means of addressing the ramifications of applying disruptive technology, particularly as they pertain to inherent and control risks within the audit client. Originality/value This study contributes to the existing literature by investigating the joint impact of corporate governance and the utilisation of disruptive technology by audit clients on inherent risk and control risk, which has not been investigated by previous research.