CPA Firms Research Articles

CPA-Firm Merger: An Investigation of Audit Quality

It would be interesting to know how the theories and hypotheses in auditing developed for a mature economy work in an emerging market. This paper uses the merger of Diwan, Ernst & Young and J.T. Lai & Co., CPAs in Taiwan in 2000 as a target to study the effects of a CPA-firm merger on audit quality, measured by discretionary accruals. Diwan, Ernst & Young and J.T. Lai & Co., CPAs belonged to Big 5 and non-Big 5 CPA firms in Taiwan, respectively, before they merged. The magnitudes of the increased size and reputation caused by the merger are different between the two firms. Therefore, we also analyse whether the merger has different effects on audit quality of these two firms. The empirical evidence shows that after the merger, the discretionary accruals of the two firms' clients significantly decrease. In addition, the magnitude of the change is greater for the clients of J.T. Lai & Co., CPAs than for those of Diwan, Ernst & Young. The results are consistent with predictions of both size and reputation effect hypotheses.

A Cross-Sectional Analysis Of Motivating Needs And Public Accounting Success

Seventy-five practicing auditors participated in the study which measured their needs using a modification of the Steers and Braunstein (1976) Manifest Needs Questionnaire. ANOVA and nonparametric statistics were used to compare the needs profiles of the auditors across their ranks in the firm (Staff, Senior, Managers, and Partner). Only the need for achievement varied systematically with position in the organization. These results are consistent with prior studies of needs as motivators. Suggestions are made for CPA firms to incorporate needs considerations into their human resource planning.

The Determinants of the Establishment of a Risk Management Committee: A Case of Banks Listed in Indonesian Stock Exchange

This research explores the establishment factors of Bank’s Risk Management Committee. The factors are firm characteristics, bank risks and audit committee characteristics on Indonesian banking sector listed companies. Independent variables related to firm characteristics which used in this research are Total Assets, Subsidiary Company Ownership, Institutional Ownership and Big Name CPA firms. Audit Committee Size and Audit Committee Expertise are independent variables of Audit Committee characteristics. Bank risks used as proxies are Capital Adequacy Ratio, Loan to Deposit Ratio, Non Performing Loan and Net Interest Margin. This research employs banks listed in Indonesian Stock Exchange in 2004-2006. A logistic regression analysis is used to predict the relationship proposed in the hypotheses for the establishment of risk management committee and independent variables. The results show that Assets, Ownership, AC Size and NPL are significant factors of establishment of a risk management committee at 10 % significant level.

Detecting firms with going-concern risk based on the industry affiliation, corporate governance characteristics, and financial performance

Detecting firms with going-concern risk is precisely critical to all financial professionals. The analytical features included three aspects: the industry domain, the corporate governance characteristics, and the financial performance. An enhanced two-step analytical approach was developed in this study. First, the multivariate analysis (MA) applied to explore influential factors affected the uncertain behaviors of a firm. Secondly, with the prioritized significant factors identified in MA model, the classification and regression tree (CART) technique was adopted to generate decision tree. There were nine significant factors: size of the board of directors, percentage of independent directors, ratio of shares pledged, family-owned type, ratio of cash right deviation, hiring Big 4 CPA firms, earnings per share, debt ratio, and return on assets. These practical finding provides comprehensive understandings of the behaviors of the firms with C-G risks. Weighing from the decision tree modeling, the testing results showed 87.5% successful rate which demonstrated itself as an effective and analytical tool and will suffice the practical needs for detecting firms with going-concern risk. Key words: Going-concern, industry affiliation, corporate governance, financial performance, multivariate analysis, classification and regression tree (CART), decision tree.

Auditor Independence: The Performance Of Consulting Engagements With Audit Clients

<span>As the size and complexity of client information system needs have risen, CPA firms have found it necessary to co-contract with non-CPA firms as a means of efficiently providing services to clients. The increase in frequency of these engagements has raised concerns regarding the propriety of co-contracting with an audit client. The Securities and Exchange Commission has taken the position that co-contracting with audit clients is unacceptable because it impairs audit independence. Through a series of petitions, the Big Eight (now the Big Six) CPA firms have proposed certain safeguards in an effort to satisfy the SECs concerns. The purpose of this article is to (1) discuss independence issues related to CPA firms co-contracting with audit clients, (2) consider arguments both for and against the SEC stance which prohibits contracting between CPA firms and their audit clients, an d(3) consider possible regulatory responses from the SEC.</span>

Gender-Based Differences Of Partners In CPA Firms: Evidence From Kentucky

This paper investigates whether a relationship exists between situation-centered factors and the holding of partner status in a public accounting firm, and to determine if gender differences exist in the relationship between these variables. From a sample of 1227 Kentucky public accountants, it was found that the population of a county, number of other partners and associates in a firm, and years of experience are significantly related to the holding of partner status. However, women are less likely to be a partner in a firm with a larger number of associates and population does not appear to influence a womans chances of being a partner. The authors discuss the implications of these findings for practicing public accountants and provide suggestions for future research.

A hybrid fuzzy MCDM approach for evaluating website quality of professional accounting firms

Due to the popularity of internet, the CPAs can develop websites that properly deliver professional information and represent their firms. Effective use of CPA firm websites can increase communication with existing clients and attract potential clients. This study aims to build a hybrid approach that combines the fuzzy analytic network process (FANP) and fuzzy VlseKriterijumska Optimizacija I Kompromisno Resenje (FVIKOR) for evaluating website quality of the top-four CPA firms in Taiwan and provide worthwhile recommendations for enhancing website design and content. The results show that CPA firms included in this study do not utilize the Internet to its full potential and need to improve their websites. Deloitte has the best overall performance, follow by PricewaterhouseCoopers, Ernst & Young, and KPMG. Additionally, the top-five evaluation criteria in order of importance are richness, understandability, assurance, relevance, and reliability. Therefore, the findings of this study can help CPAs identify the strengths and weaknesses of their own websites and in comparison with those of their competitors, and then make resource allocation decisions about how to improve the status quo and achieve ideal websites.

Book Reviews

JOHN FLOWER, Accounting and Distributive Justice (New York, NY: Routledge, 2010, ISBN 978-0-415-87177-8, pp. 201)

Liability Insurance Decisions And Premium Charges Among CPA Firms: An Empirical Analysis

<span>In 1993 accountants faced 5,000 liability suits in which judgments were sought exceeding $30 billion. In response to potential litigation, numerous CPA firms have purchased liability insurance for protection. AT present little is known about the types of firms that become insured, and factors influencing the sources from which insured firms buy their coverage. Results o this study indicate that insurance coverage is less likely among small firms and firms that provide data processing services, while tax firms are more likely to acquire coverage. Among firms that purchase insurance, premiums tend to be higher among older firms, partnerships, and firms providing data processing services. Provision of auditing or tax services tends to be associated with lower premiums, other factors held constant. We do not find evidence of self selection bias in the determination of premiums. Further results provide insight into choices among insured firms regarding the sources of coverage.</span>

PENGARUH HUMAN CAPITAL TERHADAP KINERJA AUDITOR (STUDI EMPIRIS PADA KANTOR AKUNTAN PUBLIK DI JAKARTA)

The purpose of this research were to analyze individual capability, individualmotivation, leadership factor, organizational climate will influence the publicaccountants’ performances in CPA Firm at DKI Jakarta. Data were collected bydistributing questionnaires to external auditors working at CPA Firm and only127 respondents returned and used in this research. The result of this researchshowed that individual capability, individual motivation and workgroup effectiveness have no influence on auditor performane, but significant influencefrom leadership and organizational climate. Future research should consider theexperience of auditor in demographic respondent and used sample CPA from other big cities.Keywords: Human capital, individual capability, individual motivation, leadership, the organizational climate, workgroup effectiveness, auditors’performances.

Auditors’ Organizational Form, Legal Liability, and Reporting Conservatism: Evidence from China*

This study uses a unique institutional setting in China to investigate empirically the association between the organizational form of CPA firms (unlimited liability versus limited liability) and the reporting conservatism of auditors. Based on a sample of 5,007 audits of Chinese listed companies from the period of 2000 to 2004, we find that auditors in unlimited liability partnership firms are more likely to issue modified audit opinions than are auditors in limited liability CPA firms. This auditor conservatism stems from distressed firms with going-concern opinions, and we find no statistical evidence that partnerships give more modified opinions for non-distressed firms. In addition, auditors are less likely to issue modified reports after they incorporated the firm in the limited liability form. These analyses support our hypothesis that a limited liability regime induces lower auditor reporting conservatism. Our study contributes to the broader debate on liability reform in the auditing profession.

Effects of organizational ethical culture on the ethical decisions of tax practitioners in mainland China

PurposeThe purpose of this paper is to examine the impact of organizational ethical culture on the ethical decisions of tax practitioners in mainland China.Design/methodology/approachThe study is based on a field survey of practicing public accountants.FindingsAs hypothesized, certain dimensions of ethical culture had highly significant effects on intentions to engage in aggressive tax minimization strategies. Cultures characterized by strong ethical norms and incentives for ethical behavior significantly reduced the reported likelihood of engaging in unethical behavior in a high moral intensity case. In a low moral intensity case, intentions to engage in questionable behavior were significantly higher when participants felt that top managers in their firm were unethical and rewarded unethical behavior. Relativism judgments (judgments of what is traditionally or culturally acceptable or acceptable to one's family) emerged as the strongest determinant of behavioral intentions across both cases. Participants also appeared highly sensitive to questions regarding what is traditionally or culturally acceptable in Chinese tax practice.Originality/valueThis is the first study of ethical decision making among tax practitioners in mainland China, and the findings add to a growing body of literature documenting the significant effects of organizational ethical context on public accountants' decision making processes. This has important implications for CPA firms, suggesting that proactive steps should be taken to promote supportive ethical contexts. The findings for the effects of relativism judgments raise concerns regarding the ethical decisions of Chinese tax practitioners, implying they are likely to engage in unethical behavior if they feel such behavior is common in their cultural environment.

Social Skills Preferences Among Internal Auditors An Explanatory Study Using The FIRO-B

<span>This study applies the FIRO-B technique to analyze the social interaction preferences of certified internal auditors working in U.S. corporations. Surveys were developed using the FIRO-B technique and obtained information on internal auditors from corporations located in the Western and Southeastern sections of the United States. This study will determine the social interaction scores of certified internal auditors, and compare them to the scores of other accounting professionals. This study indicates that social interaction skills are of increasing importance to the working success of internal auditors. The SII number is higher than prior research of CPAs employed in large international CPA firms but similar to those results found among accountants at regional CPA firms and national business professionals. This study did not segment the sample by industry to determine if there are any effects due to industry or company size. Future research might compare the internal auditors might make these comparisons. Also, the study did not include samples from outside of the United States. Understanding the social interaction of certified internal auditors is important since such information sheds light on the types of professionals who are most likely to succeed in the diverse work environment that internal auditors face. This is the first exploratory study using the FIRO-B on internal auditors.</span>

Formal Versus Informal Mentoring Of MAS Professionals

<span>CPA firms have consistently experienced high turnover and poor performance amongst their management advisory and information systems professionals. As Keller (2008) suggests, mentoring programs are a mechanism to help attract and maintain good employees. The extant accounting literature well documents the benefits of mentoring such as enhanced communication, greater organizational commitment, higher professional performance and reduced personnel turnover (Scandura & Viator, 1994; Siegel & Reintein, 2001; Siegel et al., 1997). In light of their potential benefits, CPA firms have begun to develop formal mentoring programs for accounting specialists to ensure that the advantages of mentoring are maintained rather than relying on happenstance (Siegel et al., 1997). The extant literature also addresses the benefits and shortcomings of formal mentoring programs for both auditing and tax professionals. (Viator, 2001; Siegel, et al., 1997; Herbohn, 2004). However, to date, no research addresses formal mentoring relative to management advisory services (MAS) professionals employed by CPA firms. MAS professionals work milieu is generally less structured than other professionals employed by CPA firms. In addition, they have greater operating autonomy than is usually the case in public accounting. Thus the purpose of this study is to compare the effects of formal and informal mentoring program effects on MAS professionals working at international public accounting firms. To evaluate the different mentoring programs, the study examines the mentoring processes within the tax departments of two international CPA firms that employ both formal and informal mentoring programs. The results indicate no significant differences between formal and informal programs on MAS professionals career development. However, the statistical analysis did show a significant difference in the perceived influence of the programs at two professional levels on personal development that appears at the middle range of the programs. The results suggest that the informal mentoring approach leads to stronger personal relationships but does not extend to higher professional firm levels. Neither formal nor informal programs appear to have a significant influence to staff level professionals.</span>

An Account Analysis Of PCAOB Inspection Reports For Triennially-Inspected Audit Firms

Since 2005, the PCAOB (Public Company Accounting Oversight Board) has been issuing inspection reports for triennially-inspected audit firms as part of its overall mission to improve audit quality. This study analyzes the findings in the PCAOB inspection reports by classifying the audit deficiencies cited in the reports by area of deficiency and type of audit failure. CPA firms can utilize these findings in their efforts to reduce client engagement audit risk. The results indicate that the overall number of cited deficiencies is declining each year, revenue and asset accounts are the most frequently cited accounts, business combinations and equity transactions are the most cited transactions, and insufficient testing or documentation is the primary type of audit failure. We also document that most departures from GAAP occur in the accounting for business transactions or in liability accounts.

Peer Relationships, Learning Forums, And Work Outcomes: An Empirical Analysis

The pace of organizational and environmental change seems to demand that such professional organizations as CPA firms become learning organizations in order to compete with other firms. The flattening or thinning out of traditional hierarchical structures within organizations argues that traditional mentoring and supervisory structures may be inadequate for fostering needed individual learning about (a) organizational goals and politics, and (b) personal learning about job context and skill development, thus the ability of individuals within CPA firms to master new skills may be impaired. One effect of the lack of such learning may be increased role stress, job burnout, loss of commitment to the organization, intention to leave, and diminished job satisfaction. Using a sample of 440 accounting professionals from major CPA firms in the southeastern, southwestern, and northeastern regions of the United States, this research studies the ability of peer developmental relationship functions foster the requisite personal and organizational learning, and also to directly and indirectly influence attitudinal outcomes. We further examine whether the impact of developmental peer relationships on attitudinal outcomes is mediated by personal and organizational learning.A hierarchical regression-based test was used to evaluate our hypotheses. The results partially supported our expectations that such peer developmental relationship functions were significantly related to attitudinal outcomes, to elements of organizational learning, and to the skill development aspect of personal learning. Elements of organizational socialization, personal learning, and team-source learning were significantly related to attitudinal outcomes as well.

The Impact Of Non-Audit Fees Disclosures On Company Value Following The Enron Collapse

<p class="MsoBodyTextIndent2" style="text-align: justify; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-style: normal; font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;">Investor confidence regarding the reliability of financial statements is absolutely critical for publicly traded companies. The bankruptcy of Enron has brought to the forefront the issue of auditor independence and financial statement reliability. As a response to the criticism that the growth in consulting services by CPA firms was leading to a conflict of interest and significantly hindering auditor independence, the SEC approved new auditor independence regulations that required publicly traded firms to disclose the level of fees that were paid to their external auditor for non-audit services.<span style="mso-spacerun: yes;">  </span></span></span></p><p class="MsoBodyTextIndent2" style="text-align: justify; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-style: normal; font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;"> </span></span></p><p class="MsoBodyTextIndent" style="text-align: justify; line-height: normal; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;">This paper investigates the impact that the Enron collapse has had on investor perceptions about auditor independence and financial statement reliability. Using data from proxy statements concerning non-audit fees paid to external auditors, we find evidence that auditor independence and therefore financial statement reliability are compromised by the provision of these non-audit services. The results indicate that in the wake of the Enron revelations, investors perceive financial statements as being less reliable and thus require an additional risk premium, which translates into lower stock prices and a loss of firm value. We also find that there is negative relationship between the extent to which firms use non-audit services and the negative abnormal returns they suffered during the Enron collapse.</span></span><span style="font-size: 10pt; mso-bidi-font-size: 12.0pt;"></span></p>

The Effect Of Leadership Style Perception On Auditors Communication Behavior: A LISREL Analysisx

The purpose of the study was to determine whether the leadership style perception is associated with auditors’ communication behavior for information gathering activities. Questionnaire data were collected from 195 Taiwanese auditors with at least one year of audit experience. As proposed, the study indicates that CPA firms’ leadership style would have a significant effect on auditors’ communication behavior for exchanging and gathering information. According to the LISREL analysis, leaders in the participating Taiwan CPA firms tend to adopt initiating leadership style that concurs with the perception that CPA firms are formalized and structured. This initiating leadership style helps auditors’ communication behavior in information accuracy and satisfaction with supervisors. However, initiating leadership style has a negative effect on boundary spanning. It is the suggestion of the study that leaders in the CPA firms might want to encourage their auditors to engage more in boundary spanning activities for a better decision quality.

Benchmarking CPA Firms For Productivity And Efficiency: A Decade Comparison 1994 Versus 2004

<p class="MsoNormal" style="text-align: justify; margin: 0in 0in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">CPA firms are continuously being ranked and compared to each other. Most rankings are based on total revenue or total clients and convey a measure of prestige. But is ranking by total revenue the best way to compare firms, and benchmark and judge performance? Linking revenues to the resources used to generate them would give a more meaningful basis for evaluating firm performance regardless of size.</span></span></p>

Auditor Choice: After Enron

In this study, the author examines the choice of auditor for firms who had contracted with Arthur Andersen prior to its collapse in the aftermath of Enron. This study was motivated by previous research on factors affecting the choice, including but not limited to size, geography, industry and financial condition. The results, in general, indicate that the choice among the Big Four accounting firms is not affected by these variables. This opens two possibilities: either that the choice is based on less tangible factors or such factors are overwhelmed by the size of the Big Fours accounting firms. However, when considered together, multivariate discriminant analysis (MDA) develops a model that is able to predict which firm will be chosen at a significantly higher than simply guessing among the Big Four CPA firms. This result is driven by the results of two of the four firms.