Higher Audit Quality Research Articles

How female leadership and auditor affiliations shape audit fees: evidence from Egypt

Purpose This study aims to examine how female directors on corporate boards and audit committees, and auditor affiliations (Big 4 versus Egyptian firms affiliated with foreign auditors), influence audit fees. This examination is driven by the global call for increased female representation in leadership roles and its potential implications for audit quality and financial transparency. Design/methodology/approach A sample of non-financial companies listed on the Egyptian Stock Exchange is used for the period 2011–2020. The authors used multivariate regression models, the Heckman two-stage and tokenism to support the analysis. Findings The results are threefold. First, this analysis reveals that female directors, whether on corporate boards or audit committees, are more likely to choose higher-quality audits in the form of high audit fees. Second, both Big 4 firms and Egyptian audit firms affiliated with foreign auditors are positively associated with audit fees and earn significant audit fee premiums. Third, a minor difference in audit fee premiums could be attributed to the existence of female directors. Research limitations/implications Future research may expand the analysis performed in this study by investigating the characteristics related to female directors (e.g. education, experience and age) on audit fees. Practical implications This study suggests insights for regulatory bodies, corporate decision-makers, auditors and corporate governance researchers. For instance, this study reveals that the Big 4 are not homogenous and provide different audit quality levels along with significant audit fee premiums. Originality/value This study extends and contributes to the growing literature on female representation in corporate leadership. First, this study adds to the limited research in Egypt by examining the effect of female board representation on audit quality. Second, this study adds to the extant literature on the gender of financial experts by demonstrating that female financial expert is more likely to demand high-quality audits. Finally, the results have significant implications for policymakers. For instance, this study reveals that the Big 4 are not homogenous and provide different audit quality levels along with significant audit fee premiums.

Is audit firms' social performance associated with audit firm reputation? Evidence from China

We use the data of Chinese audit firms' philanthropic activities to examine the effect of such activities on audit firms' financial performance, audit quality and auditor retention. We find that audit firms with more socially responsible activities in the prior year earn more total revenues, revenue per partner or shareholder and revenue per accountant in the current year. Besides, clients audited by socially responsible audit firms have higher audit quality and report lower income‐increasing accruals, higher income‐decreasing accruals, fewer below‐the‐line items and less frequent small positive earnings. More interestingly, clients with socially responsible audit firms have fewer auditor changes.

Effect of Auditor Ethics, Audit Experience, and Auditor Motivation on Internal Audit Quality

The purpose of this study is to investigate how auditor motivation, audit experience, and ethics relate to the quality of audit result as evaluated by internal supervisors in local government. This study is driven by the perception that the government's internal oversight system lacks professionalism due to its poor performance in identifying state financial management fraud. Using Partial Least Square - Structural Equation Modeling (PLS-SEM) with SmartPLS 4 to assess the research model following the distribution of a questionnaire to thirty auditors designated to examine state financial management within the Central Halmahera Regency Government's jurisdiction. The study's findings demonstrate the significance of auditor ethics, audit experience, and motivation in completing audit duties in producing high-quality audit outcomes

Does audit quality affect auditors’ career development? Evidence from Chinese audit firms’ demise

PurposeThis study aims to test the effect of individual audit quality on career advancement the audit labour market.Design/methodology/approachThis paper uses data on auditors from two collapsed audit firms in China, namely, Ruihua and Zhengzhong Zhujiang, and tests the effect of individual audit quality on career advancement in the audit labour market.FindingsThe baseline results show that high-quality audits promote auditors’ career advancement. Our results hold after a battery of robustness tests. Further analyses support our hypothesis, indicating that client retention and audit fees are positively related to auditors’ prior audit quality. The effect of audit quality on career advancement does not hold for auditors from sanctioned branch offices or for auditors with prior culpable clients, as shared reputation damage can weaken the effect of high audit quality. Furthermore, this paper investigates whether the reputation enhancement effect of high audit quality can be strengthened by auditor experience, the title of “senior auditor” and IPO auditing experience. We also show that clients and audit firms place more weight on the quality of audits conducted by auditors in competitive markets and auditors with engagements matched with industries.Originality/valueTogether, these findings indicate the vital role of individual audit quality in auditors’ career development in the audit labour market, consistent with the reputation rationale for audit quality.

Does audit quality moderate the relationship between financial statements readability and stock price crash risk?

Purpose This study aims to examine the correlation between the readability of financial statements and the likelihood of future stock price crashes in nonfinancial companies listed on the Egyptian Stock Exchange. It further explores the possible moderating effect of audit quality on this relationship. Design/methodology/approach The study uses ordinary least squares regression, generalized least squares estimation and two-stage least squares methodology to examine and validate the research hypotheses. The sample comprises 107 nonfinancial companies registered on the Egyptian Stock Exchange from 2016 to 2019. Findings The results reveal a significant negative association between the readability of financial statements and stock price crash risk. This suggests that companies with more complex financial statements tend to experience higher future crash risks. Additionally, the study identifies audit quality as a significant moderating factor. Higher audit quality, often indicated by engagements with Big-4 audit firms, strengthens the influence of financial statements readability on stock price crash risk. This implies that while high audit quality enhances investor confidence and market stability, it also accentuates the negative consequences of complex financial statements. Practical implications The findings of this paper have significant implications for regulators and standard-setting bodies in Egypt. They should consider refining and revising existing standards to emphasize the importance of enhancing the readability of financial reports. Additionally, auditing firms should actively engage in efforts to ensure clearer and more transparent financial reporting. These actions are vital for boosting investor confidence, strengthening Egypt’s capital market and mitigating potential risks associated with information opacity and complexity. Originality/value This study represents a pioneering endeavor within the Arab and Egyptian financial environments. To the best of the author’s knowledge, it is the first examination of the association between the readability of financial statements and stock price crash risk in these contexts. Furthermore, it explores factors such as audit quality that may influence this connection.

The Impact of Corporate Governance on Financial Distress: Evidence from Listed Financial Institutions in Sri Lanka

This study focuses on the role of corporate governance in predicting financial distress of companies in the finance sector in Sri Lanka. Over the past two decades, several finance sector companies collapsed in Sri Lanka affecting numerous victims with no proper compensation payments. The study aims to unveil the impact of corporate governance on financial distress of companies in the financial sector. A number of key variables included to measure the corporate governance such as board size, board gender diversification, frequency of board meetings, audit quality, board member remuneration, CEO duality, education level of the board members, and board independence. As control variables firm size, profitability, and financial leverage are considered. Financial distress is operationalized through the measures of institutions negative profit, cash flow, or worth for three consecutive years. Data from 54 listed financial institutions in Sri Lanka were collected from 2017 to 2022. Descriptive analysis, Pearson correlation analysis, corporate governance comparison model, and regression analysis were employed for data analysis. The findings indicate that board size, board gender diversification, frequency of board meetings, higher audit quality, education level of the board, board independence, and return on equity have a significant negative impact on financial distress. These findings can help identify at-risk financial institutions, support decision-making for investors and stakeholders, guide the implementation of corporate governance policies, and inform policymakers in developing new governance policies.

High-Quality Auditor Presence and Informational Influence: Evidence from Firm Investment Decisions

SUMMARY This study examines whether the presence of high-quality auditors (Big 4 or industry specialist auditors [ISAs]) in an industry facilitates accounting information transfer among industry peers and enhances investment decisions of firms not audited by high-quality auditors (non-Big 4-ISA client firms). Consistent with the prediction of informational influence theories, we find that non-Big 4-ISA client firms that belong to an industry with a greater presence of high-quality auditors are associated with lower investment inefficiency. The effect is more pronounced for firms with less precise private information. Path analysis shows that the association between high-quality auditor presence and learning firms’ investment inefficiency is explained via a direct path of source credibility and an indirect path mediated by peer firms’ accounting information quality. Finally, we find that firms in industries with larger reductions in Big 4 presence following the Sarbanes-Oxley Act of 2002 incur more investment inefficiency. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M40; M41; M42.

BOARD CHARACTERISTICS AND AUDIT QUALITY: EVIDENCE FROM VIETNAM

This study investigates the relationship between key director characteristics, board composition, and audit quality in the context of Vietnamese listed firms on the Ho Chi Minh City Stock Exchange over the period 2015 to 2020. Based on the study of Mustafa et al (2017), we employ a comprehensive dataset comprising 415 firms, we utilize a random effects estimation model to analyze the nuances of these associations. Our findings reveal a noteworthy positive relationship between directors aged 36-55 and 46-55 years old and audit quality, suggesting that the experience and expertise of directors within these age brackets contribute positively to the enhancement of audit processes. Furthermore, our study identifies a significant positive impact on audit quality associated with interlocking directorships, emphasizing the importance of interconnected networks within corporate governance structures. In addition, our results highlight the influential role of boards populated by members holding Master's degrees, indicating a positive correlation between educational qualifications and clients' demand for high audit quality. This insight underscores the significance of academic prowess and specialized knowledge in fostering a climate conducive to rigorous audit practices.

Audit Staff Satisfaction and Audit Quality: Evidence from the Private Client Market Segment

This study investigates the relationship between audit staff satisfaction (measured by crowd-sourced employer reviews) and audit quality in the private client setting. In this setting, extrinsic incentives to provide high quality audits – such as regulatory enforcement, reputational pressure, and litigation costs – are less pronounced than for listed client audits. We find audit staff satisfaction, an important intrinsic motivational factor, is positively and significantly associated with audit quality in the private client setting. Consistent with prior research, we find no significant association between staff satisfaction and audit quality for listed clients. The significant association in the private client setting primarily applies to non-Big 4 firms, for which extrinsic factors play a less influential role than for Big 4 firms. Moreover, we show staff satisfaction moderates possible negative effects of conditions, such as the provision of non-audit services and longer audit tenure, which may pressure auditors to compromise audit quality. Overall, these findings provide new insights about the influence of audit input factors on audit quality.

Enterprise Digital Investment and Auditor Choice: An Empirical Study Based on Chinese Listed Enterprises

ABSTRACT Digital investment determines enterprises’ internal resource structure and drives them from traditional to digital business models, increasing the difficulty and risk of external audits. This study empirically examines the impact of an enterprise’s digital investment on auditor choice to clarify the impact of digital businesses on external audits. We find a positive association between enterprises’ digital investment and their propensity to hire Big Four auditors, suggesting that digital investment leads to an increased demand for high-quality audit services from enterprises. This positive effect is more pronounced in enterprises with more complex businesses, high degrees of earnings management, and high degrees of the digital economy in their location. Additional analysis suggests that enterprises with digital investments that hire Big Four auditors have lower audit delay and higher audit quality. The findings provide empirical evidence for improving subsequent digital transformation and audit quality in emerging markets.

Audit committee attributes, audit quality and performance of oil and gas companies

Purpose: This study examines the audit committee attributes, audit quality, and financial performance of listed oil and gas companies in Nigeria. Research methodology: Audit committee attributes were measured by audit committee size, audit committee independence, and audit committee financial expertise, and audit quality was measured by audit fees charged by an external auditor. Financial performance is measured in terms of earnings per share. The researcher used secondary data extracted from the ten listed oil and gas firms annual reports, and the accounts were analyzed using Panel Least Square. Results: This study reveals a positive and statistically significant relationship between audit committee independence and earnings per share. It also shows that audit quality moderates audit committee attributes significantly and increases firm performance. This study recommends that maintaining high audit quality within the audit committee is crucial for a firm if it aims to offer increased assurance to investors and stakeholders concerning the precision and dependability of its financial statements. Limitations: This study was limited to listed oil and gas companies in Nigeria ranging from to 2016-2022. Contribution: This study examined factors that can moderate the relationship between audit committees and the financial performance of listed oil and gas companies in Nigeria. One such factor is audit quality, which can potentially enhance or diminish the impact of audit committee effectiveness on financial performance. No study conducted in Nigeria has examined this relationship specifically in the oil and gas sector. This knowledge gap served as the rationale for conducting this study.

The determinants of corporate anti-corruption disclosures: evidence from construction companies in the Asia-Pacific

PurposeThis study aims to investigate the determinants of anti-corruption disclosures by construction firms in Asia-Pacific countries.Design/methodology/approachThe sample comprises construction companies from seven Asia-Pacific countries from 2015 to 2019. The authors hand-collected data on anti-corruption disclosures by using content analysis.FindingsThis study provides empirical evidence that government ownership, country-level accounting competence and high-quality auditors increase companies’ anti-corruption disclosures. Meanwhile, this study finds that uncertainty avoidance does not affect companies’ anti-corruption disclosures.Practical implicationsThis study has a number of implications. First, government and professional accountant organizations need to improve accountants’ knowledge and competence through education, training and continuous professional development. Second, public accounting firms need to ensure the quality of their auditors, particularly in the technical competence in financial and nonfinancial reporting. Finally, universities must improve and update their curriculum regarding nonfinancial reporting issues.Originality/valueThis study is among the first to examine anti-corruption disclosure practices in the most corrupted settings, i.e. the construction industry in Asia-Pacific countries. It uses the isomorphism perspective to explain the influence of government ownership, country-level accounting competence and high-quality auditors on anti-corruption disclosure transparency. The number of prior studies investigating this association is very limited. Moreover, disclosures of anti-corruption information are complex and sensitive; thus, coercive, normative and mimetic pressures are required to achieve higher transparency and sustainability.

Gender and engagement partner quality

Purpose The purpose of this study is to examine whether the gender of an audit engagement partner (EP) is associated with the quality of the EP’s audit output. Design/methodology/approach This paper defines a low-quality EP as an EP who leads the audit of at least one client firm that subsequently restates its financial statements, while a high-quality EP is an EP that is not associated with any restatement. Using a sample of 6,082 observations from 2016 to 2020, the study estimates a logistic regression of EP quality on EP gender and control variables. Findings The results show that female EPs are more likely to be high-quality EPs. With an odds ratio of 1.25, the results imply that female EPs are 1.25 times more likely to be associated with higher-quality audits compared to male EPs. Research limitations/implications The results of this study imply that female EPs are more likely to perform high-quality audits, and it supports the assertion that EP gender plays a significant role in determining EP quality. Further studies may apply gender theory to investigate the behavior of female EPs. Practical implications The results show that female EPs are more likely to be high-quality EPs. With an odds ratio of 1.25, the results imply that female EPs are 1.25 times more likely to be associated with higher-quality audits compared to male EPs. Originality/value The results of this study should be of interest to stakeholders such as audit committees, regulators, investors and creditors, as they provide an indicator for assessing the quality of audits. Moreover, considering the EP’s important role in an audit, the current study extends the existing literature by providing evidence of a relationship between EP gender and EP quality.

PENGARUH DUE PROFESSIONAL CARE DAN AKUNTABILITAS TERHADAP KUALITAS AUDIT DENGAN ETIKA AUDITOR SEBAGAI VARIABEL MODERASI (STUDI EMPIRIS PADA KANTOR AKUNTAN PUBLIK DI WILAYAH KOTA BEKASI DAN DKI JAKARTA)


 
 
 
 Audit quality is a combination of a systematic audit process in accordance with generally accepted standards, with high-quality professional judgment used by competent and independent auditors to produce high-quality audits. High audit quality means that the auditor has carried out the audit with good due professional care and accountability, guided by full auditor ethics. On the other hand, low audit quality means that the level of due professional care and accountability of the auditor is low and they have not fully implemented ethics. This research aims to measure the influence of due professional care and accountability on audit quality with auditor ethics as a moderating variable. The approach used is quantitative. The data collection technique uses a survey method through a questionnaire instrument distributed to 100 auditors who work at 5 Public Accounting Firms in the Bekasi City area and 5 Public Accounting Firms in the DKI Jakarta area. Sampling was carried out using the purposive sampling method. Distribution of questionnaires starts from November 2023 to December 2023. Measuring tools to test research hypotheses use partial tests (t tests) and Moderated Regression Analysis (MRA) with statistical test tools using the Statistical Package for Social Science version 26 (SPSS 26). The research results show that partially due professional care and accountability have a positive effect on audit quality. On the other hand, the research results show that auditor ethics is unable to moderate the influence of due professional care and accountability on audit quality.
 
 
 

Is Audit Quality Higher When Audit Committees Report Strong Oversight?

SUMMARY This article provides a summary of recent research by Bratten, Causholli, and Sulcaj (2022), who examine whether issuers with audit committees who report strong oversight over the audit function have higher audit quality. Using a novel dataset from Audit Analytics that summarizes reported audit committee activities, Bratten et al. (2022) create a composite measure that captures the strength of the audit committee’s oversight of the audit process. The study uses several measures to capture audit quality, including audit fees, discretionary accruals, and propensity to meet or just beat earnings benchmarks. The authors show that, when issuers’ audit committees report activities consistent with being more active in overseeing the external auditor, issuers, on average, have better audit quality.

Effect of Audit Quality on Earnings Management Practices

Purpose: The aim of the study was to assess the effect of audit quality on earnings management practices.
 Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries.
 Findings: Research indicates that higher audit quality is associated with reduced earnings management practices. High-quality audits lead to improved financial reporting, fraud detection, and lower costs of capital. Market reactions are positive when reputable audit firms are involved. However, outcomes may vary by industry and country, depending on regulatory and institutional factors.
 Implications to Theory, Practice and Policy: Agency theory, signaling theory and information risk and auditor reputation theory may be use to anchor future studies on assessing the effect of audit quality on earnings management practices. Audit firms should invest in ongoing training and professional development programs to enhance the skills and knowledge of auditors. Regulatory authorities should continue to strengthen their oversight of the audit profession. This includes periodically reviewing and updating auditing standards, enforcing compliance with auditing regulations, and imposing penalties for audit failures.

Retracted: International expansion and audit opinion shopping: A signaling perspective

AbstractOpinion shopping is an essential indication of audit collusion. Hence, it is crucial to explore the driving factors of audit uopinion shopping to better control and address this issue. Drawing upon signaling theory, this paper explores the relationship between international expansion and audit opinion shopping and the moderating roles of internal control quality and auditors’ quality. We find that the higher the level of international expansion of an enterprise, the greater the likelihood of audit opinion shopping. Furthermore, we also find that high internal control quality and high auditor quality can weaken the positive relationship between international expansion and audit opinion shopping. Besides, heterogeneity analysis shows that the impact of international expansion on audit opinion shopping is more pronounced in non‐SOEs and firms which stay in the growth and maturity stage. This paper contributes to the antecedent research of audit opinion shopping and exposes the possible “dark side” of international expansion. Finally, this study may provide practical implications to help the authorities better regulate internationalized enterprises as well as contribute to the healthy development of the auditing market.

Key audit matters and auditing quality in the era of COVID-19 pandemic: the case of Jordan

PurposeThis study aims to investigate the moderating effect of the COVID-19 epidemic on the relationship between key audit matter (KAM) and auditing quality.Design/methodology/approachThe authors use the ordinary least squares regression on data from 942 firm-year observations of Jordanian non-financial institutions across the period (2017–2022) to test the hypotheses. The authors use content analysis method to measure levels of KAM disclosure.FindingsThe investigation’s findings highlight the importance of KAM disclosure in achieving audit quality in line with international standard on auditing no. 701 (ISA-701) requirements. COVID-19 is also found to have a positive relationship with audit quality, further confirming the crisis’s devastating impact on audit complexity and risks and providing evidence for the need for supplementary, high-quality audit services. Due to the correlation between KAM disclosure and increased auditor workload and responsibility, the analysis reveals that the COVID-19 factor strengthens the link between KAM disclosure and audit quality.Practical implicationsThis study has the potential to be used as a basis for the creation of a new regulation or standard regarding the reporting of unfavourable events in financial filings. This study’s findings provide standard-setters, regulators and policymakers with current empirical data on the effects of implementing ISA-701’s mandate for external auditors to provide more information on KAM. The COVID-19 crisis offers a suitable setting in which to examine the value of precautionary disclosures in times of economic uncertainty, as well as the significance of confidence interval disclosures and the role of external auditing in calming investor fears. This analysis is helpful for stakeholders, regulatory agencies, standard-setters and readers of audit reports who are curious about the current state of KAM disclosures and the implementation of ISA-701. The results may have ramifications for academia in the form of a call for more evidence expanding this data to other burgeoning fields to have a clear explanation of the real impact of reporting KAM on audit practices.Originality/valueTo the authors’ awareness, this research is one of the few empirical studies on the effect of the COVID-19 crisis on auditing procedures, and more specifically, the effect of disclosures on KAM by external auditors on audit quality. This study’s findings represent preliminary scientific evidence linking the pandemic to business performance. Minimal research has been done on how auditors in developing nations react to pandemic investor protection and how auditors’ enlarged reporting responsibilities affect them. The vast majority of auditing studies have been conducted in a highly regulated system, so this research contributes by examining audit behaviour in a weak legal context.

Are country-level political uncertainty and power distance important to the CSR-audit report lag nexus? Evidence from the GCC region

ABSTRACT This study examines the effect of corporate social responsibility (CSR) performance on audit report lag and whether political uncertainty and power distance levels impact such association. We find that audit report lag is significantly lower for firms with a high CSR performance. We further find that the impact is evident only for large firms and those whose financial reports are audited by highquality auditors. However, our analysis suggests that political uncertainty and power distance intensity do not moderate the association between CSR performance and audit report lag. Our results remain robust after excluding some control variables, addressing the endogeneity issues, and using alternative audit report lag measures. This study contributes to audit delay literature by recognising CSR practices as a determinant of audit report lag in the GCC setting. The findings of this study carry valuable practical implications for regulatory bodies, policymakers, investors, and managers in the GCC region.

Directors' and Officers' Liability Insurance and Audit Fees: Evidence from China

This paper aims to deeply investigate the relationship between Directors' and Officers' Liability Insurance (hereinafter referred to as D&O insurance) and audit fees. Based on data from China's A-share listed companies from 2009 to 2022, this study empirically analyzes the specific impact of D&O insurance on audit fees. The results show that after purchasing D&O insurance, listed companies experience a significant increase in audit fees. This conclusion remains valid after robustness tests, confirming the positive role of D&O insurance in corporate governance. Further analysis of its mechanism reveals that the increase in audit fees stems from the demand for high audit quality driven by D&O insurance as a governance mechanism, reflecting its supervisory incentive effect rather than resulting from opportunistic and moral hazard behaviors. Additionally, the study finds a significant interactive effect between D&O insurance and audit fees, further validating the existence of its supervisory incentive effect. This paper provides strong evidence for the positive impact of D&O insurance on audit fees. These findings not only deepen our understanding of the governance effects of D&O insurance but also provide important theoretical support and empirical evidence for the future development of D&O insurance in China.