Demand For Audit Research Articles

Competitive Position of Enterprises, Corporate Growth and Audit Fees: Based on Empirical Evidence from Chinese A-Share Listed Companies

The competitive position of an enterprise usually changes dynamically with the continuous growth and development of the enterprise. In this process, the business risks of the enterprise also change. According to the audit demand insurance theory, companies often use auditing to avoid and reduce risks, and auditors usually consider the corresponding risk premium in order to protect their own interests. This article uses the non-financial companies in China’s A-share market from 2011 to 2016 as a sample to study the impact of enterprises’ competitive position and growth on its audit fees. The research results show that: the competitive position of the company has a negative impact on audit fees; the growth of the company has a positive impact on audit fees; Further research shows that the impact of enterprises’ competitive position on audit fees is no longer significant in high-growth companies and still significant in low-growth companies, so corporate growth has a weakening effect on this relationship. This research enriches the content of the research on influencing factors of audit fees, and also has certain significance for the audit fees of accounting firms in practice.

Product Market Competition’s Effect on Earnings Management When Audit Quality Is Endogenous: Theory and Evidence

Abstract A long standing question is whether product market competition disciplines a firm’s incentive to engage in earnings management. This paper argues that this question cannot be investigated adequately without accounting for the quality of firms’ auditors, because auditors affect the probability of discovering earnings management. Since firms choose their auditor, a non-compliant firm can alter its own probability of being detected. Consequently, a firm’s decision to manage earnings is a function of its auditor’s quality, which is itself endogenously chosen by the firm. To study this issue we develop a game-theoretic model that captures the potential inter-relationship between industry competition, the firms’ choice of audit quality, and compliance with accounting regulations (or the degree of earnings manipulation). We show that the link between financial compliance and product market competition is affected by the endogenously chosen audit quality. We estimate this model’s structural parameters and find that greater competition reduces both compliance and the demand for high quality audits.

Voluntary CSR disclosure, institutional environment, and independent audit demand

Using a sample of A-share listed companies on the Shanghai and Shenzhen Stock Exchanges, this study examines the impact of voluntary corporate social responsibility (CSR) disclosure on independent audit demand in different institutional environments. The sample covers the 2008–2016 period and excludes firms that are required to disclose CSR information. The findings show that compared with companies that choose to not disclose such information, companies that voluntarily disclose CSR information prefer to employ “small” accounting firms for auditing services, although the auditing fees are much higher. However, as the institutional environment improves, this preference is weakened. Further analyses show that this preference is stronger in enterprises where CSR disclosure is driven by strong political motivations and managerial self-interest motivations. Legitimate motivations and economic motivations do not significantly impact the preference for “small” audit firms. Furthermore, this preference is more obvious in enterprises with poor operational performance and low information disclosure quality, and it increases as CSR disclosure level decreases. The study enriches our understanding of the economic consequences of voluntary CSR disclosure and the factors that influence independent audit demand. The results also have implications for the construction and regulation of China’s system for supervising CSR information disclosure in the transitional phase.

Pengaruh Jumlah Anggota, Size, Likuiditas, dan Rentabilitas Koperasi terhadap Permintaan Jasa Audit Eksternal

The purpose of this research is to empirically examine the influence of the number of members of the cooperative, size, liquidity, and rentability of cooperatives to demand external audit services. This study uses a sample of Cooperative Employees (Kopkar) in the city of Bandar Lampung during 2009-2011 using purposive sampling method. The analysis in this study uses logistic regression equation. The result of this study found that the size variable has a significant influence on the demand for external audit services. While the variable of a number of cooperative members, liquidity, and rentability do not significantly influence the demand for external audit services.Keywords: Request for External Audit Services, Cooperative of Employees,�Number of cooperative members, Size, Liquidity, and Rentability.

Market Reactions to a High-Quality Auditor and Managerial Preference for Audit Quality

SUMMARYWe insert an automated high-quality (HQ) auditor into established experimental audit markets to test the impact of high-quality competition on other auditors' supply of and managers' demand for audit quality. Theory predicts that managers will demand high levels of audit quality to avoid investors' price-protecting behavior. This demand should result in the HQ auditor dominating the market and increase other auditors' audit quality provision to compete with the HQ auditor. However, we find that the HQ auditor does not dominate the market—despite holding audit costs constant and investors placing a premium on HQ auditor reports. We also find that adding an HQ auditor results in other auditors lowering audit quality. Additional analyses indicate some managers demand lower audit quality to avoid negative audit reports, consistent with loss aversion as a potential explanation. Our findings indicate a need to develop a more comprehensive theory of the demand for auditing.Data Availability: The laboratory market data used in this study are available from the authors upon request.

The effect of insured liabilities on the demand for external audits: The case of privately‐held United States banks

AbstractWe examine the relationship between government insurance for bank deposits and bank management's voluntary audit choice for a set of privately‐held U.S. banks. Unlikely publicly‐traded banks, U.S. regulations do not require private banks to obtain annual audits. However, all U.S. banks have the feature of insurance on customer deposits that is provided by the Federal Deposit Insurance Corporation—these insured customer deposits comprise a significant portion of the debt of most banks. Consistent with prior research we find that the voluntary choice to be audited is positively related to agency costs as measured by the size of bank assets. Our results show a negative association between a bank's insured deposits and the choice to be audited but (consistent with prior literature) a positive association with uninsured liabilities. In addition, we hypothesize and find that the bank's voluntary audit choice is positively related to the bank's growth rate and related to the bank's primary federal regulator. Taken together, these findings are consistent with the notion that audits create value primarily for uninsured depositors and have implications for bank managers, their customers, and regulators.

Особенности налогового аудита и проблемные вопросы налогообложения нефтегазодобывающих компаний

Th e article reveals the main goals and objectives of tax audit. Th e demand for tax audit in Russia is justifi ed. The problematic, complex and controversial issues of taxation of oil and gas companies are considered. Th e possible tax risks in the calculation and payment of a new tax on additional income from the production of hydrocarbons are analyzed.

Large Shareholder Incentives and Auditor Choice

SUMMARY This study investigates the impact of large shareholder incentives on firms' auditor choice using a quasi-natural experiment setting provided by the split share structure reform in China. The reform converted the previously non-tradable shares held by large shareholders into tradable shares and thus enhanced the alignment of large shareholders' and outside investors' interests. We find that firms switch from large auditors to small auditors following the completion of the reform. The results are robust to the audit firm merging effect and the firm fixed effects. Further analyses reveal that the effect is more pronounced in firms with greater agency costs prior to the reform and in firms located in a weak legal environment. Taken together, these results suggest that a reduction in conflicts between large shareholders and outside investors leads to a declining demand for high-quality audits. JEL Classifications: M42; G34. Data Availability: Data are available from the public sources cited in the text.

Other Comprehensive Income, Auditor Practice Experience and Audit Pricing

The audit pricing problem has always been the focus of academic research. Based on the relevant research of scholars at home and abroad, based on the audit demand theory and the high-level echelon theory, this paper selects the data of A-share listed companies in Shanghai and Shenzhen from 2011 to 2017 as the research sample, and deeply analyzes the relationship among other comprehensive income, auditor practice experience and audit pricing. The study found that: 1) When other conditions remain unchanged, other comprehensive income is positively correlated with audit pricing, and the risk brought by other comprehensive income and the increase of audit cost make auditors need corresponding compensation. 2) When other conditions remain unchanged, other comprehensive income is positively correlated with audit pricing. Auditors with rich experience in providing audit services can make audit clients feel higher audit quality and obtain audit premium. 3) When other conditions remain unchanged, the auditor’s practice experience will weaken the positive correlation between other comprehensive income and audit pricing. The experienced auditors are more accurate in interpreting and judging other comprehensive income information, so the risk assessment will also become more reasonable and targeted to carry out further audit procedures, so that the positive relationship between other comprehensive income and audit pricing is weakened to some extent. This research further enriches the relevant theoretical research on audit pricing and provides relevant research basis for audit practice.

Responding to Payer Audits: Have a Policy and Procedure

Each practice should have policies explaining how requests for medical records and chart reviews and audits will be handled, as well as the process for handling requests. This article presents tips for creating policies and procedures to help your practice identify and respond appropriately to the increasing demand for chart reviews and audits.

Board diversity, audit committee characteristics and audit quality: The moderating role of control-ownership wedge

This study illustrates how control-ownership wedge impacts the monitoring role of the corporate board through the quality of audit services in Turkey. Turkey has made essential amendments in the field of external audit in order to enhance the quality of the financial report and integrate its own capital market with that of the EU. It would be of interest to examine the influence of these changes on clients' demand for high quality audit. The agency theory is integrated with the resource dependence theory to show that boards possess distinct incentives and ability to demand high quality audit to monitor management activities. Logistic regression and feasible generalized least squares (FGLS) were used for regression estimations. The results indicate that board demographics, cognitive and structural diversity of board of directors, audit committee characteristics and audit quality are complementary and control-ownership wedge weakens the relationship between them which is an unfavorable outcome for minority shareholders. Thus, this study proposes that regulators should increase law enforcement to enhance good corporate governance in Turkey to accommodate the unique features of wedge firms and provide a protected environment for minority shareholders.

Company reputation and auditor choice: evidence from fortune 1000 companies

PurposeThe purpose of this paper is to investigate how companies’ reputation affects their selection of auditors.Design/methodology/approachThis paper measures company reputation using the reputation scores from Fortune’s “America’s Most Admired Companies” list. Multivariate analysis is performed to examine the impact of company reputation on public companies’ auditor choice. Robustness checks include conducting Heckman procedures and instrumental-variable two-stage least square regressions to control for self-selection bias and using alternative measures to proxy for company reputation and auditor industry expertise.FindingsThis paper finds that companies with higher reputations are more likely to hire industry-specialist auditors than their counterparts. The results suggest that because of reputation concerns, high-reputation companies have strong incentives to maintain and signal their financial reporting quality, which in turn increase their demand for audit quality.Practical implicationThis paper suggests that company reputation constitutes an important determinant of auditor selection and, therefore, has both policy and practical implications for the demand of audit services. The paper provides policy-makers and practitioners with insights into critical factors influencing companies’ complex decision process of auditor selection.Originality/valueThe findings of this paper on the empirical link between company reputation and auditor choice contribute to the auditing literature by enhancing the understanding of the effects of different company-level characteristics in financial reporting and audit planning process. This paper also adds to the growing literature on the influence of company reputation on corporate behavior by documenting the important role that company reputation plays in the managerial decision-making process.

The relationship between shareholder protection through regulation and the demand for external auditor services

Auditing is one of the most obvious corporate governance mechanisms, and auditors play one of the most central gatekeeping roles in the corporate governance system. The auditing function has typically been examined as if it is essentially independent of the legal context in which it is applied. However, some studies emphasize that the auditor’s governance role is likely dependent on the national corporate governance system in which an auditor operates. One area that has received attention is how the legal environment, including the strength of shareholder protection regulations, affects the demand for auditing. However, entirely contradictory understandings of this relationship can be derived from the literature: that these two mechanisms act as substitutes and that they act as complements. A potential explanation for this discrepancy is that prior studies use static measures of regulations as proxies for shareholder protections and proxies for auditing service demand that have been criticized for being too rough. By using the Shareholder Protection Index developed by the Centre for Business Research at Cambridge and four measures capturing nuances of auditing service demand, this study makes a novel contribution to this line of research. By using data from two countries, the UK and Sweden, that belong to different legal traditions, the analysis also tests whether this aspect has any impact on the relationship between shareholder protections and auditor demand. The analysis shows that the demand for auditor services in general is positively correlated with the level of shareholder protection imposed by regulations, i.e., these two corporate governance mechanisms are compliments. There is no support for the argument that a country’s legal origin affects this relationship. The general interpretation is that the level of shareholder protections imposed by regulations will drive the demand for auditor services and that this is the case irrespective of a country’s legal origin. This study provides in-depth knowledge on the relationship between the legal environment and the demand for auditing, offers valuable information about the impact and consequences of legal reforms and is therefore especially valuable for policymakers and academics interested in this topic.

Analisis Pengaruh Ukuran Perusahaan, ROA dan DAR terhadap Audit Delay (Studi Empiris Pada Perusahaan Sektor Industri Barang Konsumsi yang Terdaftar di Bursa Efek Indonesia Tahun 2011-2016)

Development of capital market in Indonesia has an impact on increasing demand for financial statement audit. A delay in financial reporting is indirectly interpreted by investors as a bad signal for the company. This study aims to analyze the factors that affect the audit delay in the consumer goods sector companies listed on the Indonesia Stock Exchange (BEI) observation period is 6 years from 2011 to 2016. This test uses multiple linear regression model. The sample of the research is 27 companies engaged in the industry of goods and consumption. The results showed partially firm size, ROA, and DAR have significant effect on audit delay.
 Keywords: Company Size, ROA, DAR, and Audit Delay

Managerial overconfidence, ability, firm-governance and audit fees

Prior studies document that managerial overconfidence potentially increases the risk of financial misstatements, and that overconfident managers purchase lower quality audits and pay lower audit fees. As a part of the research that evaluates the information value of managerial characteristics to auditors, our study examines how the relationship between managerial overconfidence and audit fees is impacted by managerial ability, and board and audit committee effectiveness in the post-Sarbanes–Oxley (post-SOX) environment. In general, we find a significantly positive relationship between managerial overconfidence and audit fees consistent with the supply-side risk based perspective of audit pricing. However, this relationship is significantly attenuated in higher managerial ability firms where overconfident managers are better able to make proper accounting estimates and judgements required for producing reliable financial statements, and synthesize firm-specific information into appropriate forward looking projections. We find that on an average, the overconfident firms with higher managerial ability pay 6.3% lower audit fees than the overconfident firms with lower managerial ability. Our analyses further show that board characteristics positively impact the relationship between managerial overconfidence and audit fees, suggesting that stronger board monitoring increases the demand for higher quality audits to mitigate the reporting risk of the overconfident firms. On an average, the firms with managerial overconfidence pay additional 9.3% higher audit fees when they are subject to stronger and more effective board oversight. However, we find weaker evidence on the effect of audit committee characteristics on audit fees of the overconfident firms. Our primary results hold for a battery of supplemental tests including the tests using propensity-score matched sample. The study contributes to audit fee and corporate governance literature, and has useful implications for regulators, accounting practitioners, and auditors.

Institutional Influence, Transition Management and the Demand for Carbon Auditing: The Chinese Experience

AbstractThe primary objective of this study is to investigate factors associated with the increase in demand for carbon auditing in China. Based on an analysis of publicly available carbon‐related information and data, the paper documents the large amount of carbon auditing that occurred in the public sector during the period 2009–2013. We find that the creation of carbon institutions and the significant increase in governmental green funding were the main reasons for the emergence of carbon auditing in this period. The change in models of economic development attempting to balance GDP growth and ecosystem protection, in addition to institutional reform, has led carbon auditing from rhetoric to practice. In addition, we show that carbon auditing serves as a tool for the management of transitions and the governance of sustainable socio‐technical and organisational innovation and transformation.

Investor Demand for Internal Control Audits of Large U.S. Companies: Evidence from a Regulatory Exemption for M&A Transactions

ABSTRACT Because internal control audits never existed before the passage of the Sarbanes-Oxley Act (SOX), and these audits simultaneously became mandatory for all U.S. accelerated filer companies, it has been difficult to assess the extent of investor demand for these audits. To understand whether investors demand internal control audits for these large companies, we exploit a regulatory exemption that permits companies to exclude acquired operations from an internal control audit. Using this voluntary setting, we find that investors react negatively if a company excludes acquired operations from their internal control audit. This negative reaction is larger when more of the company's operations are excluded from audit and when there is greater information uncertainty. Further, companies that exclude acquired operations from internal control audits are more likely to have a subsequent restatement. Collectively, these findings are consistent with investors perceiving value in (i.e., demanding) internal control audits for large U.S. public companies. JEL Classifications: M41; M42.

The effectiveness of internal corporate governance and audit quality: the role of ownership concentration – Malaysian evidence

PurposeThis study is motivated by the competing views on whether internal governance mechanisms complement or substitute for external auditing, and how this association is affected by ownership concentration. The complementary view predicts that good internal governance mechanisms are related to high-quality audit. On the other hand, corporate governance mechanisms may be substituted for each other, so more investment in governance mechanisms leads to less investment in external auditing. Therefore, this study aims to examine the association between internal governance mechanisms and the demand for audit quality.Design/methodology/approachData from Malaysian listed companies during the period 2009 to 2012 are used. Ordinary least square (OLS) regression is applied to analyse the data.FindingsCompanies with a higher concentration of ownership are less likely to demand extensive auditing. In addition, the study provides supporting evidence for the complementary association between a company’s governance and audit fees. However, the ownership concentration plays a minor role in the positive association between internal corporate governance and audit quality. Further tests are conducted and support the main findings.Practical implicationsSignificant implications are provided for the audit profession in emerging economies, where concentrated ownership is common, to help policymakers and regulators in determining the power of controlling shareholders on audit quality and firm’s governance. The study’s findings open up avenues for further research.Originality/valueThis is the first work to address the role of ownership concentration in the association between corporate governance and audit quality; it suggests that the ownership structure must be considered in examining the effectiveness of corporate governance. The study also provides a comprehensive combination of internal governance mechanisms.

Voluntary Auditing: A Synthesis of the Literature

Voluntary auditing has received increased attention from researchers in recent decades. Empirical studies that have examined demand for voluntary audits have suggested that regulatory intervention may not always be necessary, though some argue that regulators protect society from market failure by demanding statutory audits [Barton, J., & Waymire, G. (2004). Investor protection under unregulated financial reporting. Journal of Accounting and Economics, 38, 65–116]. To date, there has been no review of the literature on determinants of voluntary audits. I provide a research framework to categorize the attributes that affect demand for voluntary audits and identify areas that need further examination. While the given compact body of literature has served different purposes, two major reasons for voluntary auditing are apparent: the importance of audited financial statements to lenders and the intention to further deregulate audits for smaller companies to relieve cost burdens. However, I contribute to the auditing literature by identifying the main attributes associated with the demand for voluntary audit. In doing so, I develop a framework consisting of firm attributes, separation of ownership and control attributes, agency relationship attributes, management attributes, and signalling attributes.

The Effects of Generalized Trust and Civic Cooperation on the Big N Presence and Audit Fees Across the Globe

SUMMARYWe examine the impact of country-level generalized trust and civic cooperation (i.e., societal trust) on Big N auditor choice and audit fees. Because higher societal trust countries are associated with lower levels of agency problems, we expect a negative association between societal trust and Big N auditor choice and audit fees. We find this to be the case in countries with strong investor protection, i.e., a substitution effect. However, because higher trust societies may also experience higher costs of inappropriate behavior and place higher value on a strong audit function, we could observe a positive association between societal trust and Big N audit demand or audit fees. We find this to be the case in countries with weaker investor protection, i.e., a complementary effect. These results suggest that both formal institutions (audit, investor protection) and informal attitudes (trust, civic cooperation) can influence the demand and supply for audit services.