Audit Clients Research Articles

Auditor Style and Common Disclosure Issues: Evidence from SEC Comment Letters

ABSTRACT Policies and procedures that centralize decision making within an audit firm create auditor style effects. Prior research suggests this style increases financial-statement comparability, implicitly making financial statements more useful. However, a potential hazard of auditor style is the propagation of decision errors. We examine the association between auditor style and common disclosure issues among audit clients. We measure auditor style as the presence of a common auditor and use comments given in the Securities and Exchange Commission’s (SEC’s) filing-review process to measure the occurrence of common disclosure issues. We find that auditor style is associated with common disclosure issues among Big 4 clientele. We also find that clients with the same auditor converge in issues as tenure increases and some evidence that clients assume the issues of a subsequent auditor. These results provide the first evidence that auditor style has potential costs in the form of common disclosure issues. Data Availability: All data are publicly available. JEL Classifications: M41; M42.

Global-Level Auditor Industry Specialization and the Cost of Equity Capital

SYNOPSIS We examine (1) the association between global-level and joint global-, national-, and city-level auditor industry specialization and audit clients’ cost of equity capital and (2) how the national investor protection environment impacts the preceding association. Our results indicate that cost of equity capital is negatively associated with global-level and joint global-, national-, and city-level auditor industry specialization. This relation is incrementally more negative when the auditor is a joint global-, national-, and city-level industry specialist than when the auditor is not a global-level industry specialist. We also find the negative relation between cost of equity capital and joint global-, national-, and city-level auditor industry specialization holds only in countries with strong investor protection. We further show investors perceive potential accentuation of accruals quality and ownership concentration on cost of equity is mitigated by joint global-, national-, and city-level specialist auditors. JEL Classifications: M42; G32; K49.

What affects auditor choice in emerging markets? New evidence on the role of cultural distance

PurposeThis paper aims to examine whether the cultural distance between an international audit firm and target audit clients in emerging countries is associated with auditor choice decisions.Design/methodology/approachBased on a sample of 104,699 firm-year observations from 20 countries over 2009–2020, logit regression analysis is used to investigate the research questions.FindingsThe authors find strong evidence that cultural distance affects the auditor selection decision. The results suggest Big N auditors are more likely to be chosen by target audit clients in emerging countries with less cultural distance. In other words, target audit clients in emerging countries prefer to choose international audit firms whose cultural characteristics are similar. Moreover, results from two-stage least squares regression further suggest that the observed effect of cultural distance on auditor choice is unlikely to be driven by potential endogeneity.Research limitations/implicationsThe auditor choice is limited to companies hiring Big N auditors; the authors exclude any switches to non-Big N auditors or switches between Big N auditors. The study also suffers from the concerns about methodological and conceptual criticism that most studies about national culture have to deal with. Finally, through this paper, the authors carry out the auditor selection process from the target audit clients’ side; the authors do not discuss the supply side of the process.Originality/valueThe authors contribute to the audit choice literature by providing evidence that the cultural distance between the countries of audit firms and target audit clients plays a role in the auditor choice decision. The study complements the prior auditor choice literature, focusing primarily on Western economies, by structuring the sample scope to emerging market economies.

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.

Opinion Shopping as Moderating Influence of Financial Distress, Audit Client Tenure and Auditor’s Reputation on Going Concern Audit Opinion

This study aims to prove opinion shopping as a moderating influence of financial distress, audit client tenure, and auditors' reputation on going concern audit opinion. This Research uses a quantitative method with a correlational approach. The subjects of this study are infrastructure, utilities, and transportation companies listed on the Indonesia Stock Exchange (IDX) for the 2014-2018 period. The number of samples used was 95 from infrastructure, utilities, and transportation companies in the 2014-2018 period obtained from the Indonesia Stock Exchange (IDX) website. The analytical method used is Partial Least Square (PLS) with the help of SmartPLS 3.0 software. The results of this study indicate that financial distress significantly influences going concern audit opinions, meaning that companies experiencing difficulty in the flow of funds have a greater chance of receiving going concern audit opinions. Second, audit client tenure and the auditor’s reputation do not significantly influence on going concern in audit opinion. Third, opinion shopping weakens the influence of financial distress on going concern audit opinion, meaning opinion shopping cannot help companies that are indicated financial distress in avoiding going concern with audit opinion. Fourth, opinion shopping does not moderate the influence of Audit client tenure and auditor’s reputation on going concern audit opinion.

Dimensions of Audit Quality: Evidence From Eritrea

Barely any research is presented concerning audit quality in Eritrea. Hence, as an icebreaker the aim of this paper is to investigate the fundamental audit quality factors and their impact on overall audit quality. Data on perception of audit quality was collected by a survey questionnaire including 41 audit variables from 119 audit clients. After categorizing the attributes into technical and functional sets, Factor Analysis was executed to identify the relevant factors. To further examine robustness and significance of the factors identified multiple regression was applied, after the data was tested for its assumptions. From the empirical results using Factor Analysis we documented four factors relating to technical audit quality and six factors associating with functional audit quality. We also justified the reliability and validity of the ten factors identified. Subsequently, the regression analysis depicted a positive and statistically significant relationship for all the ten technical and functional factors, except two. This supported our three hypotheses. With the consistent and higher rank of Eritrea on Corruption Perception Index, the originality and value of the findings can be potentially helpful to policy makers of control and audit, Eritrean audit firms and the body of knowledge in auditing concerning Eritrea.

Client Acquisition Following an Auditor’s Unethical Behavior: An Examination of Reputational Consequences Following KPMG’s “Steal the Exam” Scandal

SYNOPSIS We investigate the reputational effects of KPMG’s scandal involving the improper receipt of confidential regulator data by analyzing KPMG’s acquisition of new audit clients in the post-scandal period. While we find no evidence that KPMG had difficulty gaining clients relative to a broad class of other large auditors, we do find that KPMG’s acquisition rate decreased in the post-scandal period in comparison to other Big 4 audit firms but increased relative to large non-Big 4 auditors. This finding indicates a shift in KPMG’s position in the market for new clients. Our results suggest that a more nuanced examination of auditor reputational damages may help detect distinct effects between classes of audit firms. Importantly, our findings may be of interest to practitioners and researchers as they consider the consequences of a high-profile scandal on an audit firm’s reputation, even if the scandal does not appear to directly impact engagement-level audit quality. Data Availability: Data used in this study are available from public sources identified in the document. JEL Classifications: M42; M48.

Cybersecurity Breach at a Big 4 Accounting Firm: Effects on Auditor Reputation

ABSTRACT Public company investors rely on the Big 4 audit firms to provide assurance over internal controls and financial reporting. What, then, would happen if one of these very assurance providers suffered its own cybersecurity breach? We examine such an event in the major data breach of Deloitte in 2017. Using U.S. data from 2014 to 2019, we find Deloitte suffered significant reputational damage postbreach. Specifically, audit clients and existing shareholders became less likely to approve of Deloitte as the company’s auditor. Deloitte also charged lower audit fees after the incident. Furthermore, Deloitte’s audit clients suffered significant negative market reactions postbreach. Our results suggest pervasive implications of cyberattacks on auditor reputation and support recent congressional efforts to expand regulation in this area.

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.

Analisis Ketepatan Pemberian Opini Akuntan Publik di Indonesia

Purpose: This study aims to explain the problem of the accuracy of giving opinions given by public accountants in Indonesia, using framing theory analysis. In this study we developed an analysis of the accuracy of opinions in which we observed matters that were the causes of non-compliance by public accountants, so as to be able to provide more complex and in-depth information to understand attitudes, perceptions, emotions, beliefs about the motives and behavior of informants. Methodology: The informants for this study were 12 Public Accountants who had permission from the Ministry of Finance of the Republic of Indonesia to sign the Independent Auditor's Report. Data collection techniques were using semi-structured interviews, testing the validity of the data using the triangulation method and analyzing and processing data using Nvivo software version 12. Results: The results of the study show that the accuracy of giving a Public Accountant's opinion is influenced by: Auditor, Client Integrity, Public Accountant Integrity and Audit Planning. The violation committed by the Public Accountant is giving an opinion that is not in accordance with the actual situation, due to: not complying with Standard Auditing (SA) 230 regarding Audit Documentation, not complying with SA 500 Audit Evidence, providing audit services not through KAP, providing audit services but the license has been revoked, audit reports are not supported by working papers, receive audit assignments that are being audited by another KAP, have not complied with SA 510 Initial Balances, have not implemented Quality Control Standards, have not fully reported audit clients, and have not maintained working papers. Limitations: This study examines the existence of Framing Theory, Auditing understanding, and the problems of the practice of the Public Accountant Profession regarding the implementation of Professional Ethics and Laws. To provide input to the practice of Public Accountants that in carrying out practices must be in accordance with Auditing Standards and applicable rules.

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.

Is Audit Partner Identification Useful? Evidence from the KPMG “Steal the Exam” Scandal

SUMMARY On April 11, 2017, the Securities and Exchange Commission charged KPMG with using confidential information relating to the Public Company Accounting Oversight Board’s planned inspections of KPMG. The incident was colloquially labeled the KPMG “steal the exam scandal.” We use this setting to investigate whether the market finds information concerning individual partner identity useful. Since KPMG withheld the names of the audit partners involved in the scandal, the market was unable to distinguish between rotation-induced audit partner turnover and regulatory-related audit partner terminations. Following information economics models of nondisclosure, we predict the market would use information about KPMG audit partner turnover as evidence of regulatory-related audit partner terminations and impose costs on KPMG audit clients who experienced audit partner turnover. The results are consistent with our prediction as KPMG’s overall reputation was not damaged, whereas audit engagements involving audit partners that were potentially involved in the scandal were. Data Availability: All data was obtained from publicly available sources. JEL Classifications: M42; M48.

Does Public Company Accounting Oversight Board Regulatory Enforcement Deter Low-Quality Audits?

ABSTRACT Regulatory economics suggests that one benefit of public enforcement is the deterrence of improper conduct. Using a difference-in-differences (DiD) design, we investigate whether a deterrence effect follows the revelation of Public Company Accounting Oversight Board (PCAOB) enforcement. We find that large audit firm offices improve audit quality following enforcement naming another office within their firm while small firm offices improve following enforcement of local small firm competitors, with these responses varying by enforcement type. To understand potential mechanisms for the geographic deterrence effect, we examine the first occurrence of a revoked PCAOB registration within a market and find that results are stronger if there is greater news coverage or if nonsanctioned firms are in closer proximity to the sanctioned auditor. Supplemental tests reveal that results are stronger when nonsanctioned auditor clients are similar to the sanctioned firm’s clientele. Our findings suggest a positive but varied deterrence effect following PCAOB enforcement. JEL Classifications: G38; M42; M48.

Automated accounting system and external audit fees: empirical evidence from Nigeria

The recent development in electronic accounting has had dramatic influence on every aspect of external audit process especially on audit fee. The study therefore aims to examine the effect of automated accounting system (AAS) audit fee with focus on common audit client’s characteristics. Descriptive research design was employed, and a four Likert’s scale structured questionnaire was randomly distributed to five hundred and fourteen auditors in private practice while three hundred and eighty-nine were returned but only three hundred and sixty two found valid and subjected to analysis. Multiple Least Square was applied to test the first three hypotheses while the last was subjected to Partial Least Square - Structural Equation Model (PLS-SEM). The results revealed that AAS has positive and significant effect on audit fees in relation to client’s complexity, size and profitability while there is substantial, positive and significant effect of AAS on audit fee. The study therefore recommends that audit clients should brace up for higher audit fee in this era of accounting automation and in accordance with Social Exchange Theory, for to do otherwise will not only harm audit firms but also audit clients.

Auditor Assignments and Audit Quality

AbstractGiven the important role of individual auditors in the audit process, appropriate staffing is an essential issue in audit firms. Using unique audit data for both listed and private companies in China, we define the downward mismatch between auditors and clients as an inappropriate assignment of the engagement auditors who are supposed to serve only private companies, but sign the audit reports of public companies. We find that the downward mismatch leads to poor audit quality. The results are robust to various tests, including using alternative proxies, adopting the Propensity Score Matching (PSM) procedure, and controlling for auditor–client fixed effects and audit firm‐level mismatch. Additional analyses reveal that the negative effect of downward mismatch on audit quality is less pronounced for audit firms with more education and training expenditures, with more informatisation expenditures, and with more partners available. Moreover, this negative effect is more pronounced when clients’ business is more complex. Our findings shed light on the importance of staffing assignment decisions within the audit firm.

Intellectual capital and firm performance: the moderating effect of auditor characteristics

PurposeThis study aims to examine the impact of intellectual capital (IC) and its three components (human, structural and relational capital) on corporation performance in the Chinese transportation industry. In addition, this study also investigates auditor characteristics (both Big-N and non-Big-N auditors) as a moderating role to examine the relationship between IC and corporate performance.Design/methodology/approachThe data include 398 firm-year observations of transportation companies listed on the Shanghai and Shenzhen Stock Exchange from 2011 to 2020. Value-added intellectual coefficient (VAIC) model and its modified version (MVAIC) are applied to measure IC efficiency. Finally, the fixed effects regression analysis is used to mitigate the endogeneity issue. To investigate the moderating effect of auditor characteristics, the authors divide the samples based on the clients audited by Big-4 and non-Big-4 firms.FindingsThis study reveals that IC can enhance firm performance in China’s transportation sector. Overall, findings indicate that on the whole, IC has a positive and significant impact on corporation profitability and productivity. Human capital and physical and financial assets (capital employed) play highly important roles, but structural capital has no significant impact. The authors also found that auditor characteristics play an important moderating role in the connection between IC and corporate performance. For example, the positive association between IC and corporate performance is more pronounced when Big-4 auditors audit client firms. At the same time, the authors found a negative relationship between IC and firm performance when non-Big-4 auditors audit client firms.Practical implicationsManagers must understand that several components of IC have a total effect on corporate financial performance. Therefore, managers can dedicate more resources to such components based on the performance outcomes to emphasize their business strategies.Originality/valueThis study is the first empirical analysis of the impact of IC and its components on corporation performance in the transportation sector in China, an emerging market. Previous studies mainly focus on developed countries’ high technology and financial industries sectors but the impact of IC in transportation industry largely remains unknown. Thus, the present findings contribute to IC literature by revealing several underlying mechanisms by which the components of IC help achieve good firm performance.

Book-tax conformity and the demand for auditor-provided tax services: European evidence

PurposeThis study aims to examine the impact of different levels of required book-tax conformity (BTC) on audit clients' demand for auditor-provided tax services (APTS). In addition, the authors also investigate the effects of the European Union (EU) Regulation (2014).Design/methodology/approachThis study utilizes a sample of listed companies from 10 EU countries between 2010 and 2019. The final sample consists of 16,049 firm-year observations from 2,515 unique firms, and the authors use both probit and ordinary least square (OLS) regression models in this study.FindingsThe main finding of this paper is that companies listed in countries with a higher level of BTC are less likely to purchase tax services from incumbent auditors and pay fewer auditor-provided tax service fees. Results from further analyses confirm that firms substantially reduced their purchase of APTS after the EU Regulation (2014) was implemented, but these reduced purchases were found to be more pronounced for firms located in countries with low BTC.Originality/valueThis study advances the understanding of the determinants of APTS and the consequences of BTC. Specifically, the authors report that variation in a country-specific feature (i.e. BTC) also affects firms' decision to purchase APTS. Moreover, this paper provides some preliminary evidence of the new regulation and contributes to the literature on APTS regulation. The findings of this study have important policy implications for regulators and are also relevant for various capital market participants.

Audit Efficiency and Effectiveness Consequences of Accounting System Homogeneity across Audit Clients: A New Form of Knowledge Spillover?

ABSTRACT We examine the effects of a large number of clients in an audit office using the same enterprise-resource planning (ERP) system such as SAP or Oracle resulting in what we term “client accounting system homogeneity” on audit efficiency and effectiveness. Using a unique dataset of ERP system implementations, we find that accounting system homogeneity is positively associated with audit efficiency. Specifically, we find lower (higher) audit fees for clients using an ERP system from a vendor used by a higher (lower) proportion of clients in that office. We further document that accounting system homogeneity is associated with improved audit effectiveness as proxied by two accruals-based measures, incorrect internal control weakness reporting, and restatements. Our findings are reflective of a new form of knowledge spillover from repeated experiences auditing clients using similar accounting systems, resulting in audits that are not only less expensive but also of higher quality. Data Availability: Contact the authors.

External audit quality: its meaning, representations and potential conflict in practice

PurposeThis study provides insights into the meanings given to audit quality (AQ) by audit partners responsible for delivering audit services. It explores the influence of contextual factors in the auditing setting on constructing such meanings and its representations.Design/methodology/approachDrawing on a symbolic-interactionist framework, this study takes an interpretive approach, employing semi-structured interviews with audit partners from the United Kingdom (UK).FindingsThree primary meanings of AQ are identified. First, in contradiction to that offered by “mainstream” AQ research, audit partners in this study predominantly regarded the meaning of AQ as an economic concept in the context of the “business” of auditing, delivering the service quality (e.g. value-added auditing and value-for-money) that is expected by their audit clients. Second, the audit partners also espouse the meaning of AQ to be “fit for purpose” audit documentation and adherence to quality control that meets the standards of compliance demanded by independent audit inspections. Third, and similar to the classic convention of AQ, audit partners consider “inputs” to AQ, attributes related to individual auditors (e.g. qualifications, experience and training) as one of the key AQ meanings. A range of stimuli underlies AQ meaning construction, including the audit firm's commercial interests, legitimacy, image management and social identity resulting from audit partners' interactions with audit clients, regulators, and their own self-reflexivity. Interestingly, this study identifies a considerable potential conflict between the meanings assigned to AQ, which suggests that auditors are struggling to strike a balance between the competing demands of those meanings.Research limitations/implicationsThis exploratory study addresses only the audit partners' perceptions concerning the meaning of AQ. Findings of this study are relevant to auditors and other parties, such as regulators, in addressing competing dimensions of AQ and potential choices involving conduct and content in any individual audit engagement.Originality/valueThe study complements existing research into AQ by exposing the rationales and potential behaviours that underlie commitments to quality by those involved in commissioning audit engagements. It also adds detailed evidence of how contextual factors in the auditing environment interact with auditors' notions of AQ.

Investigating the black box of external audit practice: the paradox of auditors' failure in detecting and reporting fraud

PurposeThe study aims to explore the reasons behind external auditors' failure to detect and report fraud.Design/methodology/approachSemi-structured interviews were conducted with twenty-four experienced Big 4 auditors.FindingsThe present study reveals power issues within audit firms and how some dishonest audit partners deal with auditors' concerns at the higher echelons. It also shows how auditors are pressured and intimidated by audit clients when fraud-related issues are raised. Further, it sheds light on ethical, governance and regulatory issues inhibiting auditors’ ability to detect or report fraud.Research limitations/implicationsThis study advances the audit literature by adding practice-based evidence on why external auditors fail to discover fraud.Practical implicationsThe results draw policymakers' attention to the issues that inhibit external auditors' ability to discover fraud in practice which could help policymakers develop effective interventions. Additionally, it provides several recommendations which could aid policymakers and audit firms in designing effective audit reforms to resolve the fraud detection deficit.Originality/valueThis is the first study exploring external auditors' views on their failure to detect and report fraud and how the conflict of interests operates in the audit practice.