Audit Quality Differences Research Articles

The differential impact of distracted auditors in managing portfolio of financially distressed audit clients on audit quality: the role of professional skepticism

This study hypothesizes that distracted auditors affect audit quality. As a result of resources scarcity, auditors pay more attention to financially distressed audit clients rather than non-financially distressed audit clients at the same audit client portfolio which eventually leads to differences in audit quality. In this context, earnings restatement of audit clients is used as a distraction event of auditors. Distracted auditor is measured by the percentage of the audit fees of financially distressed audit clients to total audit fees and audit quality is proxied by total accruals. The data is obtained from firms listed on the US stock market over eleven years between 2010 and 2020. The results indicate that financially distressed audit clients of distracted auditors receive higher audit quality than non-financially distressed audit clients of the same audit client portfolio. Further analysis suggests that this difference in audit quality between financially distressed audit clients and non-financially distressed audit clients decreases with skeptical auditors. This study introduces a new comprehensive approach to measure professional skepticism using KAMs disclosure. The results are robust to different measurements of distracted auditors, audit quality and professional skepticism. Overall, the empirical analyses suggest that distracted auditors have a decreasing differential impact on audit quality by professional skepticism.

The Effect of Periodic Auditor Designation on Audit Quality: Focusing on the Amount of Conservatism

Purpose - This purpose of this study is to verify how the periodic auditor designation system, which was implemented in Korea in 2019, affects audit quality using the amount of conservatism. Design/Methodology/Approach - To establish hypotheses, previous studies were reviewed, and 1,031 samples were selected from KOSPI-listed companies in Korea for 2019 and 2020. The dependent variable was the amount of conservatism; the impact of periodic auditors, Big 4 auditors, debt ratios, total assets, ROA, loss, and audit complexity were empirically analyzed. Findings - The study found significant differences in audit quality among other variables, and confirmed a statistically significant difference in audit quality based on periodic auditor designation between the Big 4 and Non-Big 4 accounting firms. The study concluded that periodic auditor designation is effective in suppressing opportunistic behavior and enhancing the reliability of financial reporting, ultimately strengthening conservatism. Research Implications - This study is meaningful in that it targets empirical data from 2019 and 2020 using the amount of conservatism on the effect of periodic auditor designation on audit quality. Since this system was first implemented in Korea in 2019, there are not many related data, so there are limitations in the analysis of related studies.

Do Philanthropic Auditors Provide Higher-Quality Audit Services? Evidence From China

Synopsis The research problem This study investigates whether auditors who participate in philanthropic activities (hereafter “philanthropic auditors”) have stronger incentives to deliver high-quality audits than the auditors who do not participate. Motivation Prior studies call for research that examines the difference in audit quality across individual auditors. In recent years, regulators in developed markets, such as the United States and the European Union, have also promulgated new regulations requiring audit firms or public companies to disclose the names of engagement partners. Another growing body of literature examines the effect of economic agents’ personal traits on their decisions and/or firm policies and practices. By examining the impact of individual auditors’ unobservable personal traits on audit quality, measured through their philanthropic actions, we link and contribute to both streams of the above literature. The test hypotheses We test a null hypothesis in this study: individual auditors’ philanthropic activity is not related to their audit quality. Target population Stakeholders of high-quality auditing including accounting regulators, audit firm partners, and company managers. Adopted methodology Ordinary least squares (OLS) regressions and archival data. Analyses In a sample of more than 19,000 Chinese firm-years from 2008 to 2017, we identified 9.40% of the observations were signed by at least one auditor who contributes either money or time to a charitable activity. We used two measures of audit quality: the propensity to issue modified audit opinions (MAOs) and unsigned abnormal discretionary accruals. Findings First, we find that philanthropic auditors are significantly more likely to issue MAOs than are their non-philanthropic counterparts. Second, they are more likely to issue MAOs to distressed companies but not to financially healthy companies. The higher propensity of philanthropic auditors to issue MAOs indicates higher audit quality rather than a higher level of audit conservatism. Third, financial statements audited by philanthropic auditors contain significantly lower discretionary accruals (DACC). Fourth, to mitigate the concern that endogeneity drives our findings, we implement the propensity score matching (PSM) approach and the client fixed effects model. Our finding that philanthropic auditors provide higher-quality audit services than other auditors holds. Fifth, the main results are robust to the inclusion of other individual auditor characteristics, such as gender, educational background, and political affiliation, and to several proxies for individual auditors’ wealth.

Big N auditors and the quality of earnings: Evidence from Middle Eastern and North African countries

In recent years, the importance of audit quality has garnered significant attention by managements, academics and the general public. In this study, we examine the relationship between Big N auditors and earnings quality in the Middle Eastern and North African (MENA) countries, where cultural and institutional contexts are quite different from those in Western countries. In addressing this issue, we employ three audit quality metrics – value relevance, abnormal accruals and earnings persistence – and use the propensity score matching technique to deal with the potential endogeneity arising from the nature of external auditor choices. Contrary to the view that Big N auditors supply quality-differentiated audits, the results obtained employing a cross-country sample of publicly listed non-financial firms of 10 MENA countries during 2009–2019 provide evidence that Big N auditors are insignificantly associated with the three measures of audit quality. Furthermore, we find that the differences in audit quality between the two auditor groups are mainly due to the clients’ innate characteristics, rather than the competency of Big N auditors. Our results hold after performing different sensitivity analyses. Overall, our findings challenge the conventional notion that Big N auditors deliver quality-differentiated audits.

Audit Tenure, Audit Firm Reputation and Audit Quality Study on Indonesian Manufacture Companies

The debate on audit quality still continues due to different results and arguments on audit tenure, audit firm reputation and audit quality. This study provides empirical evidence on the differentiation of audit quality by considering the audit tenure and audit firm reputation. Using the data from IDX of manufacturing companies in 2019 and 2020, the researcher examines the difference in audit quality, measured by discretionary accruals, in terms of audit tenure and audit firm reputation. This study also examines 247 companies that are analyzed using Mann-Whitney test. Findings from this study reveal that there is no significant difference between the audit quality of companies that have repeated and non-repeated audits. However, this study indicates that there is a significant difference in the audit quality of a company that is audited by the big 4 and non-big 4 audit firms. Based on the result, it can be suggested that auditor rotation is not necessary to enhance the audit quality since independent auditors tend to sustain their reputation and maintain their service qualifications.

Quality comes cheap: Evidence from auditing in Islamic banks

In this paper, we examine the audit market in Islamic banks, focusing on the pricing of audit services. To our knowledge, academic research has not yet examined the role of external auditors in Islamic banking. We argue that significant differences between Islamic and conventional banks, most notably in terms of activities allowed, corporate governance structure and ethical aspects of the business model, may lead to different audit outcomes. We find a fee discount of approximately 50% for Islamic banks relative to conventional banks, after controlling for the cross-sectional determinants of fees. This result is in line with the view that the risks borne by auditors are lower in Islamic banks than in conventional banks. In addition, we document that the fee discount for Islamic banks is lower if auditors have higher expertise in Islamic banking. On the other hand, we do not observe significant differences in audit quality between Islamic and conventional banks. Therefore, importantly, the fee discount for Islamic banks comes at no cost for the quality of audit services.

PCAOB Inspections and the Differential Audit Quality Effect for Big 4 and Non–Big 4 US Auditors*

ABSTRACTIn this study, we investigate whether the increase in regulatory scrutiny epitomized by the initial PCAOB inspection impacted audit quality differentially for Big 4 and non–Big 4 auditors to better understand the consequences of PCAOB inspections for different audit firm types. Because of competing views on the effect of PCAOB inspections, the relation between PCAOB inspections and the audit quality differential between Big 4 and other auditors is an empirical issue. Empirically, we take the endogenous choice of auditor as a given and utilize a difference‐in‐differences specification that takes into account the staggered timing of the initial PCAOB inspection for different‐sized auditors in the United States. Our results suggest that the initial PCAOB inspection improved audit quality more for Big 4 auditors than for other annually inspected or triennially inspected non–Big 4 auditors. We also examine annually and triennially inspected non–Big 4 auditors separately, and find that the pre‐post Big 4/non–Big 4 differential audit quality effect is more pronounced for the triennially inspected non–Big 4 firms. In the larger context of the highly concentrated US audit market, our findings that PCAOB inspections accentuate the Big 4/non–Big 4 audit quality differential are of potential interest to public company audit clients contemplating an auditor change, investors interested in learning about the consequences of PCAOB inspections, regulators concerned about the Big 4 dominance of the US audit market, and academics investigating audit quality differences.

The Differences of Audit Quality on the Regulation of Audit Tenure and Auditor Rotation in Indonesia

This study examines the differences in audit quality on the regulation of audit tenure and auditor rotation in Indonesia. In Indonesia, there have been several audit-related scandals that occurred after the implementation of regulations on the audit tenure limitation and auditor rotation. The last regulation that applies to date is the Peraturan Pemerintah Republik Indonesia No. 20/2015 about Public Accountant Practices Chapter V regarding the Limitation of Audit Services in Article 11 that the provision of audit services on a historical financial statement on an entity by a Public Accountant is limited to a maximum of five consecutive financial years. These analyses use discretionary accruals as audit-quality proxies. In this study, the output of audit quality is measured, namely the earnings quality. This research was conducted on all non-financial companies listed on the Indonesia Stock Exchange start from 2012 to 2017, using the purposive sampling method obtained 554 research samples. Hypothesis analyses in this study use different test analysis. Specifically, there is a significant difference in the audit quality in the first year of the tenure and the last year of the tenure. We also find significant differences in audit quality before and after auditor rotation.

Audit fees and earnings management: differences based on the type of audit

In spite of the extensive research about the impact of audit fees on audit quality, there is no research examining if the association between voluntary audits and audit pricing affects audit quality. Therefore, the aim of this paper is to empirically examine whether the effect of audit fees on audit quality, measured by the level of earnings management, is affected by the type of audit (voluntary vs mandatory), as well as whether the effect of audit fees on audit quality is different depending on the type of audit. Using a sample of Spanish SMEs composed of both voluntarily and mandatorily audited companies, we find that voluntary audits have higher quality when audit fees are lower, but the differences in audit quality between voluntary and mandatory audits reverse as audit fees increase, and mandatory audits are more effective at deterring earnings management when audit fees are high. Additional analyses show that voluntary audits do not directly affect earnings management; instead, voluntary audits are associated with abnormal fees, which in turn negatively affect earnings management. The results also show that audit fees are only negatively associated with earnings management when accruals are income-increasing, which is related to auditor conservatism.

PCAOB Inspections and Audit Fees: An Analysis of Inspection Rounds of Small Audit Firms

This study investigates the impact on audit pricing of PCAOB inspection outcomes on the quality control systems of small audit firms. Quality control deficiencies (QCDs) provide a strong signal about audit quality, which is expected to lead to price changing. We first document that audit fees in the pre-inspection period were higher for small audit firms without QCDs, implying that quality differences were already partially known and priced in the market. Next, we find evidence that in the post-inspection period audit fees further increase for firms without QCDs, while there is limited evidence for fee increases for firms with remediated QCDs, suggesting changes in audit firm reputation. Interestingly, we do not find support for fee changes for audit firms with disclosed quality control deficiencies. Finally, the magnitude of change in audit fees decreases over time. Collectively, these findings contribute to our understanding of audit quality differences amongst small audit firms and the functioning of the small audit firm market.

Profitability, Market Incentive and Audit Quality of Financial Misstatements: Evidence from Malaysian Public Listed Companies (PLCs)

The purpose of this study is to examine whether there is mean difference in profitability (Profit), market incentive (EPrice) and audit quality (AudQ) variables between restatement and non-restatement firms in Malaysia. The sample comprises of 285 public listed companies on the Main Board of Bursa Malaysia for the years between 2005 and 2013. A descriptive statistics analysis is performed to differentiate the characteristics of restatement and non- restatement firms. The study finds significant difference between restatement and non-restatement firms in the profitability and market incentive variables. The results show that restatement firms reported higher profit than non- restatement firms in the year prior to the restatement year. And, restatement firms have higher earnings-to-price ratio (proxy for market incentive) relative to the non-restatement firms that are matched by total assets, but lower than non-restatement firms which not matched by total assets. This indicates that restatement firms are able to maintain high growth expectations embedded in the firm’s share price. The study finds no significant difference in audit quality between misstatement and non-misstatement firms. The comparable audit fees between restatement and non-restatement firms indicate that the external auditors of restatement firms failed to appropriately assess the audit risk of these firms.

Exploring PCAOB inspection results for audit firms headquartered outside of the US

This study examines the audit quality, measured using Public Company Accounting Oversight Board (PCAOB) reports, for audit firms headquartered outside of the United States (US). We hypothesize and test if differences in firm audit quality as measured by PCAOB inspection deficiencies exist depending upon the size and nature of arrangements with other audit firms. More specifically, we examine five different categories of auditing firm arrangement: Big Four network affiliates; BDO and Grant Thornton network affiliates; firms with other network affiliations; firms with associations and alliances; and other (unknown or no stated affiliation). In this underexplored area of research, we find that non-US firms without formal connections to other firms have lower audit quality in comparison to the other four arrangement types. Our analysis also suggests that those with more formal connections (i.e., networks and larger associations/alliances arrangements) have similar levels of audit quality. Moreover, our results suggest that network firms that primarily do work referred to them by US audit firms have better results on PCAOB inspections; however, we do not find this relationship for associations and alliances. As the PCAOB explores group audit work standards, it is imperative that a more nuanced understanding of global audit quality progresses.

A longitudinal study of audit quality differences among independent auditors

PurposeThe purpose of this paper is to investigate the differences of audit quality of financial statements among auditors, including Big 4 and non-Big 4 auditors.Design/methodology/approachBy employing cross-sectional analysis of compliance (a proxy of audit quality) of goodwill impairment testing of listed firms in the context of Hong Kong, the variation of audit quality of financial statements of auditees has been shown.FindingsAudit quality of Big 4 auditors is viewed to be higher than that of non-Big 4 audit firms and the homogeneity of audit quality among Big 4 auditors is not long accepted, but variation.Practical implicationsEven though unqualified opinions have been given on the auditors’ reports, the quality of financial statements audit is a skeptical issue because of the high level of non-compliance of goodwill impairment testing under International Financial Reporting Standards.Originality/valueThis study does emphasize the higher audit quality of financial statements of Big 4 auditors than that of non-Big 4 auditors and stresses the variation of audit quality among Big 4 auditors.

ANALYSIS OF AUDIT QUALITY DIFFERENCES, MANAGERIAL OWNERSHIP, FINANCIAL STABILITY, AND CAPITAL TURN OVER ON FRAUD AND NON-FRAUD COMPANY

The purpose of this research ic to analyze audit quality differences, managerial ownership, financial stability and capital turnover on fraud and non fraud company. Population of this research are manufacturing company listed in Indonesian Stock Exchange (ISE) in year 2012 — 2014. Total sample of this research is 254 manufacturing company. Mann —Whitney test is used as the analysis method. The result of this research shows that audit quality and managerial ownership variables has significant differences between fraud and non fraud company. Whereas financial stability and capital return variables does not show any difference between fraud and non fraud company.

The Effects of Auditor Tenure on Fraud and Its Detection

ABSTRACT We examine the strategic effects of auditor tenure on the auditor's testing strategy and the manager's inclination to commit fraud. Most empirical studies conclude that longer tenure improves audit quality. Proponents of restricting tenure argue that longer tenure impairs auditor independence and a “fresh look” from a new auditor results in higher audit quality. Validating this argument requires testing whether the observed difference in audit quality between a continuing auditor and a change in auditors is less than the theoretically expected difference in audit quality without impairment. Our findings provide the guidance necessary for developing such tests. Our results show that audit risk (the probability that fraud exists and goes undetected) is lower in both periods for the continuing auditor than with a change in auditors. More importantly, we show that across both periods, expected undetected fraud is lower for the continuing auditor than with a change in auditors.

Auditor choice and information asymmetry: evidence from international syndicated loans

Analyzing a large sample of non-US public firms from 31 countries that obtain private loans, we find that loan syndicates that lend to borrowers that employ Big N auditors are larger and less concentrated and that the lead arrangers and largest investors of these syndicates are able to hold a lower proportion of the loan after issuance. Further analysis demonstrates that this effect exists only in countries with strong creditor rights and in those countries with high levels of societal trust, suggesting that both sound formal and informal institutional factors are prerequisites for lenders and borrowers to benefit from differential audit quality on loan syndicate structure efficiency. Furthermore, we find that the loan syndicate structure benefits for borrowers that employ Big N auditors are higher for borrowers with greater information asymmetry problems, but we do not find that Big N audits are able to address the information asymmetry and moral hazard issues between the lenders themselves.

The Importance of Auditor Choice and International Loan Syndicate Structure: New Evidence on the Role of Formal and Informal Institutions

Analyzing a large sample of non-U.S. public firms from 31 countries that obtain private loans, we find that loan syndicates that lend to borrowers that employ Big N auditors are larger and less concentrated and that the lead arrangers and largest investors of these syndicates are able to hold a lower proportion of the loan after issuance. Further analysis demonstrates that this effect exists only in countries with strong creditor rights and in those countries with high levels of societal trust, suggesting that both sound formal and informal institutional factors are prerequisites for lenders and borrowers to benefit from differential audit quality on loan syndicate structure efficiency. Furthermore, we find that the loan syndicate structure benefits for borrowers that employ Big N auditors are higher for borrowers with greater information asymmetry problems, but we do not find that Big N audits are able to address the information asymmetry and moral hazard issues between the lenders themselves in the global debt market. Our results are robust to various additional tests that address endogeneity issues.

The Impact of Consulting Services on Audit Quality: An Experimental Approach

ABSTRACTWe use experimental markets to examine whether providing consulting services to a non‐audit client impacts audit quality. Our paper directly addresses concerns raised by the Public Company Accounting Oversight Board that the largest public accounting firms’ growth in their consulting practices threatens audit quality. We conduct an experiment proposed using a registration‐based editorial process. We compare a baseline where the auditor does not provide consulting services to conditions where auditors provide consulting to audit clients or where auditors only provide consulting services to non‐audit clients. Our unique design provides evidence on whether providing consulting to non‐audit clients strengthens the salience of a client‐cooperative social norm that reduces audit quality. We do not find differences in audit quality by condition in our planned analysis, however we find greater variation in audit quality in the conditions where auditors provide consulting services compared to the baseline. In unplanned analyses, our results suggest providing consulting services increases auditor cooperation with managers, increasing audit quality when managers prefer high audit quality and decreasing audit quality when managers prefer low audit quality.

The emergence of second-tier auditors in China: analysis of audit fee premium and audit quality

Strong government support for the growth of domestic audit firms has contributed to the emergence of second-tier auditors as an alternative to the Big 4 for Chinese listed companies in the post-2007 period. This paper examines audit fee and audit quality differences across the Big 4, second-tier auditors, and other small auditors. Controlling for auditor choice bias, we find the Big 4 earn a fee premium relative to second-tier auditors, although the audit quality between them is indistinguishable. Relative to other small auditors, however, second-tier auditors earn a fee premium that is accompanied by superior audit quality.

Are Audits of Financial Statements Born Unequal?

Audit is getting more and more importance in assuring the reliability of financial information including financial statements for all parties. Commonly, quality of an audit is viewed as probability that financial reports are free from material irregularities. In the previous literature, there is a positive relationship between size of audit firm and audit quality that has long been understood. This has resulted in many publications to gather evidence of differential audit quality relating to audit firm size. In consequence, the conclusion has been focused that bigger audit firms produce higher audit quality than smaller ones. However, the collapse of many big international audit firms, typically Arthur Andersen has reduced the statement that large audit firms have higher audit quality than small ones. Therefore, this study looks into audit quality basing on the extent of compliance with disclosure requirements pertaining to goodwill impairment of large listed firms in Hong Kong context in the second year transition to IFRS. We found that audit firm identity appears to be a substantial variation, in which compliance levels changed significantly among auditors in the context of Hong Kong.