Higher Audit Research Articles

Auditor distraction: The case of outside job opportunities for external auditors and audit quality

AbstractPublic accountants are in high demand by non‐accounting firms. While this demand attracts high‐quality accountants to public accounting, it can negatively impact audit quality by distracting auditors. We find that the number of metropolitan statistical area–level busy season job postings for public accountants by non‐accounting firms is positively associated with misstatements. Results are most pronounced (1) when outside job opportunities are from non–publicly traded companies, which likely provide better work‐life balance, and (2) when auditors are under a heavier workload, as captured by higher audit fee‐to‐auditor ratios and increased job postings by audit offices leading into the busy season. Results also suggest that accounting firms that provide large pay increases before the busy season can mitigate the negative audit‐quality effects of busy season job postings for public accountants. These results suggest that accounting firms are not immune to negative effects of auditor distraction from outside job opportunities despite accounting firms knowing that their auditors are highly sought after by non‐accounting firms.

Non-Big 6 audit firms’ access to external resources through inter-organisational relationships

Small audit firms try to reduce their resource constraints in serving clients by creating inter-organisational relationships (IORs) through membership in accounting networks or in agreements with individual firms. Through these relationships, firms have access to audit manuals/methodology, personnel, and may perform joint audits and joint marketing of their audit services. We identify the existence of IORs from PCAOB Form 2 filings and test whether audit quality and fees vary cross-sectionally as a function of the specific resource obtained from the IOR. We find evidence that firms with access to audit technology through IORs charge higher audit fees and provide higher quality audits, in terms of smaller clients’ performance-matched discretionary accruals, higher auditors’ likelihood of issuing going concern opinions to financially distressed clients, and fewer audit deficiencies identified in PCAOB inspection reports. The findings highlight the importance of access to audit technology through IORs in improving small audit firms’ real and perceived audit quality.

The Influence of Factors on the Demand for Performance Auditing in the Public Sector

Performance audits (PA) are becoming essential in supreme audit institutions (SAIs). This study aims to explain why developing countries need to expand the function of PA and to explore and measure the impact of each factor on the need to develop PA in Vietnam. The research combines qualitative (group discussion) and quantitative methods by surveying 157 state auditors of the State Audit of Vietnam (SAV). Data is processed through SmartPLS 4.0.8.5 to verify the measurement and linear structure models. The results of the statistical analysis also show that all three factors have an impact on the development of PA, including (i) the degree of public governance reform, (ii) the accountability of SAV, and (iii) occupational influence. Besides, the model test results show that, from the perspective of SAV, the need to improve performance is higher than accountability. Public governance reform factors, external support, and SAI accountability contribute to enhancing the value of PA. The findings of this study complement the audit theory on three fronts: (i) PA will become more important when pursuing the goal of increasing accountability rather than improving performance; (ii) PA continues to evolve to adapt to social changes; and (iii) additional empirical evidence demonstrating that countries with low levels of transparency and accountability and inconsistent legal systems have higher audit “demand” but low supply of PA. This study proposes a PA development model to: (i) forecast the ability and level of the development audit of each SAI; and (ii) contribute to enhancing the value of PA using the PA topic selection tool. In addition, the developed scale is tested to ensure its reliability and validity. So this scale can be used to survey the needs, feasibility, and expected value that each audit subject brings before and after implementation. Doi: 10.28991/ESJ-2024-08-01-07 Full Text: PDF

Audit fees, audit report lag and abnormal tone: evidence from China

PurposeThis study aims to provide evidence on the association between abnormal tone and audit fees, as well as between abnormal tone and audit report lag.Design/methodology/approachThis study uses a fixed-effects model to examine the relationship between abnormal positive tone and audit engagement (audit fees and audit report lag). Following Blanco et al., the authors used propensity score matching to examine the robustness of the findings.FindingsAbnormal positive tone affects the audit process. An abnormal positive tone in annual reports is associated with greater audit effort and higher audit fees.Originality/valueThis study contributes to the determinants of audit fees and audit lag by analyzing the impact of an abnormal positive tone on audit engagement. The literature analyzing the determinants of audit engagement often focuses on the quality of non-textual information. This study analyzes the impact of the quality of textual information (measured by abnormal tone) on audit engagement, which provides evidence of the association between textual disclosure and audit.

Social security contributions, financing constraints and demand for higher audit quality-evidence from China

ABSTRACT This paper discusses the impact and mechanism of corporate social security contributions on the demand for higher audit quality. The study finds that social security contributions increase high-quality audit demand of firms. The mechanism is found to be that social security contributions motivate firms to raise capital by increasing financing constraints, and then firms choose high-quality audit services to strive for financing. Heterogeneity analysis shows that the impact of social security contributions on the demand for higher audit quality is more significant in non-state-owned firms and firms with higher labour intensity. The above findings respond to audit demand signalling theory in terms of theoretical and empirical data and provide thinking for better understanding the effects of social security contributions.

Auditor pricing of abnormal income from sales of available for sale securities: evidence from the banking industry

We examine the relationship between abnormal income from sales of available for sale (AFS) securities and bank external auditor fees. Prior research finds that income from sales of AFS securities is used to achieve financial and regulatory reporting objectives, helpful in predicting future bank income, and assigned a persistent valuation multiple by investors. Building on prior research that suggests real activities management leads to negative outcomes, we predict and find that auditors respond to abnormal income from AFS securities sales with increases in audit fees and the effect is stronger among high risk (i.e. higher stock return and earnings volatility) banks relative to low risk banks. In additional analyses concerning a bank’s limited flexibility to achieve regulatory capital objectives through managing loan loss provisions, we find evidence of higher audit fees for banks with low regulatory capital and aggressive income-increasing AFS security sales. Among other robustness tests, we find higher audit fees as abnormal income from sales of AFS securities increases among banks with liquidity concerns and those approaching failure. Our findings suggest that auditors interpret abnormal income from AFS securities sales as an indicator of increased client business risk.

Involvement in Offshore Financial Centers and Audit Fees: Evidence from U.S. Multinational Firms

This study examines how a U.S. firm’s involvement in offshore financial centers (OFCs), by setting up subsidiaries or affiliates in OFCs, is associated with audit fees. After controlling for tax aggressiveness, firm strategy, international operation, and other firm characteristics, we find that U.S. multinational enterprises (MNEs) with OFC operations pay higher audit fees than U.S. MNEs without OFC operations. In addition, a greater extent of OFC operations is further associated with higher audit fees. This result is robust to using different measures of OFC involvement and controlling for issues of self-selection, endogeneity, and joint determination effect of audit and non-audit fees. We also find that a higher level of OFC operations is associated with higher audit risk, as measured by internal control weaknesses and the probability of financial reporting-related litigation. Further analysis shows that the audit fee increasing effect of OFC involvement is unlikely to be driven by corporate tax planning strategy and tax rate differential between the U.S. and OFCs, but driven by the regulatory arbitrage opportunities and secrecy policies of OFCs. In sum, this paper contributes to the literature on audit fees and OFCs.

The Relationship between IFRS Adoption and Audit Fees: Evidence from China

We investigate the effect of International Financial Reporting Standards (IFRS) mandatory adoption on audit fees, and how auditor type (Big 4 vs. non-Big 4) could moderate this relationship. Standard setters argue that IFRS adoption has a lot of benefits since it would lead to improving the accounting information quality. However, IFRS adoption has incremental costs also. our findings suggest that auditors charge higher audit fees after IFRS adoption. However, findings reveal that this relationship is more pronounced for non-big 4 audit firms. This study’s findings are important to standard setters as they evaluate the benefits and cost of IFRS adoption.

USING COBIT FRAMEWORK FOR REDUCING THE AUDIT RISKS OF ACCOUNTING INFORMATION SYSTEMS

The fast transition of accounting information systems from manual to electronic media impacts the financial reporting process linked to information technology. First, significant dependence on electronic accounting information systems may expose the company’s databases to information security threats, resulting in higher audit risks. As such, this study seeks to demonstrate how information technology governance structures may aid in protecting information in the context of electronic accounting information systems. Second, the study investigates the impact of improving information technology governance in Iraqi private banks in decreasing audit risks using the COBIT framework for internal control. The results indicate that implementing IT governance mechanisms in Iraqi private banks can reduce audit risks identified by external auditors. This framework increases the reliability of accounting information systems and enhances information security in the context of electronic accounting information systems. In addition, the field findings indicated a positive and statistically significant relationship between audit risk reduction and the dimensions of information technology governance (mechanisms and automation, policies, plans, and procedures, responsibility and accountability, skills and experience, knowledge and communication, and goal setting and measurement). Finally, the study proposes that Iraqi private banks implement the COBIT framework for internal control to govern information technology and risk management in electronic accounting information systems

Faktor-faktor penentu korupsi pada pemerintah daerah di Indonesia

This study examines the effects of fiscal decentralization, internal audit capability, bureaucratic reform, and performance accountability on corruption that occur in local governments. Corruption in this research was measured by the number of corruption cases found in local governments based on the court verdict. This quantitative research was conducted using multiple regression analysis methods.The research sample was taken using a purposive sampling method from the population of all districts/cities in Indonesia from 2016 to 2019.Hence theresearch obtained a sample of 225 districts/cities (900 observations). The examination results reveal that fiscal decentralization affects the increase of corruption in local governments, while internal audit capability and bureaucratic reform significantly decrease corruption cases. On the other hand, performance accountability has no significant effect on increasing or decreasing corruption in local governments. Based on these results, the central government might consider providing additional incentives funds for local governments with high internal audit capability and bureaucratic reform. It was intended to encourage local governments to improve their internal audit capabilities and bureaucratic reforms, which are proven to help reduce the level of corruption in local governments.

Real Earnings Management: Do the Experience and Gender of Big4 Auditors Matters?

Objective - This study examines whether the experience and gender of auditors in Big4 firm in relationship of deterring Real Earnings Management (REM).Different from the majority of previous studies, this study focuses on auditors in Big4 audit firms and real earnings management within Malaysian business environment. Big4 audit firms are associated with high quality audit because of the reputation to uphold, thus adopted stringent quality control and assurance approach, systems and procedures. Once adopted, the effect of individual characteristics may become less important. Thus, it is questionable whether individual characteristics such as auditor experience and gender could still have an influence on the outcomes of an audit, in this case, REM, when the audit firms are Big 4 (assuming very stringent quality control procedures are adopted). Methodology/Technique –This study substantiates prior literature and conducted tests only on companies audited by Big4 audit firms. We also find that auditor experiences confirms to Agency Theory where REM reduces when the experience increases. Data was obtained from the Companies Commission of Malaysia (SSM), DataStream and Bursa Malaysia. Findings - The result confirms prior literature that auditor experience is still an important factor that can limit REM, even in companies audited by the Big4 firms. The results however reveal that Big4 female auditors do not have any significant effect in reducing REM. Novelty -Although female auditors are claimed by Gender Socialization Theory, to have better moral judgments than male auditors, the result shows both genders are equal, at least in limiting REM. Type of Paper: Empirical. JEL Classification: M40; M41; M42 Keywords: Big4 Auditors; Auditor Experience; Real Earnings Management; Auditor Gender; Bursa Malaysia

Political control and audit fees: an empirical analysis of local state-owned enterprises in England

IMPACT We need to know more about the financial accountability of corporatized public services. In this article, the authors analyse the audit fees of a large sample of English local SOEs from 2009–2017, assessing the impact of board composition and ownership structure on those fees. SOEs with more politicians on their boards of directors had higher audit costs and this was especially so for majority-owned SOEs. This article highlights the need for policy-makers to evaluate the consistency of auditing arrangements for the hybrid arm’s-length organizations delivering public services.

Does access to developed audit markets improve home audit quality? Evidence from China

In December 2010, Hong Kong regulators allowed 12 mainland Chinese registered audit firms to audit companies incorporated in mainland China and listed in Hong Kong (H-shares). In this study, we examine whether access to the Hong Kong audit market improves the quality of audits conducted by these Chinese audit firms for clients listed in the mainland markets (A-shares). Using data from 2008 to 2016, we find that mainland auditors with H-share clients provide higher quality audits, as measured by more modified audit opinions, higher audit fees and less earnings management, than auditors without H-share clients. This effect is more pronounced when the auditors are non-Big 4 firms and the clients are listed only in mainland China. Further analysis shows that A-share investors react positively to the initial announcement that mainland auditors are permitted to conduct H-share audits. Overall, our findings suggest that H-share audits have a positive spillover effect on the quality of A-share audits.

ЯКІСТЬ АУДИТУ: ДО ПРОБЛЕМИ УТОЧНЕННЯ ПОНЯТТЯ

Анотація. Метою статті є систематизація та узагальнення наявних підходів до трактування поняття якості аудиту і деяких практичних аспектів його застосування. Однією з важливих тенденцій, яка чітко проявилася в останній час, є найсуворіша вимога до високої якості аудиту. Подальший розвиток аудиту на всіх рівнях нерозривно пов’язаний із підвищенням його якості. Аудиторська інформація є першоосновою для ухвалення управлінських рішень, тому підвищення якості аудиторської інформації і як наслідок якості аудиту сприятиме підвищенню якості управлінських рішень, що звичайно позначиться на економічному та фінансовому стані на всіх рівнях управління, а також сприятиме зниженню інформаційного ризику під час ухвалення рішень усіма користувачами фінансової інформації. Розглянуто значення якості аудиторської інформації в сучасних економічних процесах. Вивчено питання впливу аудиту на розвиток економічних процесів на мікро- і макрорівні. Досліджено теоретичні розробки в напрямі визначення якості аудиту, що має визначальне значення на методологію проведення аудиту, оцінку його якості, достовірність аудиторської інформації, її значення для всіх користувачів фінансової інформації. Ці теоретичні розробки мають також суттєвий вплив на практичну аудиторську діяльність, достовірність наданої інформації, її якісні показники та інші фактори, важливі для користувачів аудиторської інформації. Доведено, що основним критерієм якості аудиторської інформації є її достовірність і відповідність фактичному стану об’єкта аудиту. Дослідження причин глобальної економічної кризи, що розгорнулася 2008 року, із усією гостротою виявило спектр проблем, викликаних рішеннями, які ухвалювалися на підставі аудитованої фінансової звітності. Серед основних причин цієї фінансової кризи, крім загальноекономічних, є якість бухгалтерського обліку і якість проведеного аудиту, які визначально вплинули на банкрутство ключових фінансових установ, що згодом призвело до кризи, а також недостатній контроль для запобігання шахрайським діям підприємств, які перевіряють аудиторські фірми, що є наслідком аудиту низької якості. Дано нове визначення якості аудиту, яке істотно відрізняється від більшої частини чинних на нинішній день. Це, у свою чергу, дає можливість більш точно і правильно визначити напрями, методи, принципи та інші складові аудиторських перевірок, суттєво підвищивши їхню якість. У перспективі підвищення якості аудиту має суттєво скоротити ризики кризових явищ у реальному секторі економіки. Ключові слова: якість аудиту, аудит, аудиторські послуги, оцінка, контроль, достовірність, фактичний стан, об’єкт аудиту. Формул: 0; рис.: 0; табл.: 2; бібл.: 31.

Does Shareholding Heterogeneity on First Major Shareholder Incentively Affect Audit Characteristics?-Evidence From Tobacco and Non-tobacco Enterprises

Objectives: This study is to examine the effect of first major shareholders on audit characteristics, and emphasize their incentives towards corporate reform. In addition, we also emphasize on the tobacco industry that is totally state-owned by Chinese central government, as their internal audits are mainly conducted by the State Council. Methods: Taking A-share listed enterprises in Chinese Shanghai and Shenzhen Stock Exchange as samples, this paper analyzes the changes in corporate audit characteristics, which are caused by the holding heterogeneity on the first major shareholders. Then a series of endogenous and robustness tests are to confirm the baseline results. Based on the results of population, we specifically analyze and forecast the tobacco industries. Results: This positive relationship remains significant. Also, the channels for the first major shareholder to reduce non-standard audit opinions originate from their constraints and incentives, which reflect on enhanced supervision, sustainable business operation and market competition. These contribute to their revised managerial behavior. Finally, additional tests illustrate that the effect of strengthened equity is heterogeneous in terms of size, equity nature and growth stage of enterprises. Conclusion: The study domestrates the importance of equity structure and first major shareholders, which calls attention to managerial motives and behavior. The marginal effect is supposed to be shrunk in tobacco business as it is initially in absolute control by public authority. The already economic profits have made it reached favorable audit report. The enhanced shareholdings of first major shareholders could alleviate managerial myopia and moral hazard, and give the inspiration to enterprises in the reform of the ownership structure. Research limitations/implications-Effect of increasing first major shareholders’ holdings on audits is required to be applied in certain situations. However, the unavailable data and minimal samples of listed tobacco enterprises make it hard to clearly estimate the shareholding effect in this certain industry. Therefore, we have to qualitatively analyse tobacco business based on average population. Originality/value-This paper enlarges the role of major shareholders in audit characteristics, and emphasizes their managerial behavior towards audit process. The study indicates that stronger first major shareholdings tend to obtain qualified and standard audit opinions, pay higher audit fees and select high-quality auditors. The results and anlyses could enlight the tobacco and non-tobacco industries.

THE COVID-19 FINANCIAL PROBLEMS AND ASPECTS OF AUDIT QUALITY ASSURANCE IN GEORGIA

THE COVID-19 FINANCIAL PROBLEMS AND ASPECTS OF AUDIT QUALITY ASSURANCE IN GEORGIA

Impact of key audit matters (KAMs) reporting on audit quality: evidence from Thailand

PurposeThe study aims to examine the relationship between key audit matters (KAMs) reporting and audit quality of companies listed on the Stock Exchange of Thailand (SET).Design/methodology/approachCorporate annual reports from 2016 to 2019 were used as samples, with 100 companies and their 400 annual reports. The word count from KAMs paragraph in the audit report was used to assess KAMs reporting, while the Modified Jones Model was used to assess audit quality. In addition, external audit characteristics were used as variables in this study. The data were analyzed using descriptive analysis, correlation matrix and panel multiple analysis.FindingsAs the results, there was a positive significant relationship between KAMs reporting and audit quality. Moreover, the study found the impact of audit tenure, auditor firm size, audit independence, corporate size and corporate risk on audit quality.Research limitations/implicationsThe number of samples as well as the proxies of KAMs reporting and audit quality are listed as limitations of this study.Practical implicationsInvestors can use KAMs reporting as important information to their decision-making because KAMs information is associated with a high audit quality.Originality/valueThe study demonstrates that communication theory can be used to describe the positive impact of the new audit reporting on audit quality in an emerging country like Thailand as well as in developed countries.

Does Independent Director Experience Improve Individual Auditors’ Audit Quality?

This study examines whether individual auditors with experience as independent directors provide better audit performance than those without independent directorship experience. Using the Chinese setting where audit partners’ names are publicly disclosed, we find that audit partners with independent director experience provide higher audit quality for clients that operate in the same industries as the companies where they concurrently hold or have previously held directorships. However, directorship experience at companies in different industries has an insignificant effect on audit quality. These findings suggest that independent director service enables audit partners to gain industry-specific knowledge. This leads to knowledge spillovers on the audits of clients in the same industries. This study contributes to the literature by identifying an alternative channel through which auditors gain industry-specific knowledge which enhances their performance.

Audit firm operating leverage and pricing strategy: Evidence from lowballing in audit industry

Using a unique set of Korean data for the years 2004–2013, we show that audit firms’ operating leverage is related to lowballing and audit quality. To capture audit firms’ operating leverage, we estimate audit hour elasticity from a regression of changes in logged audit hours on changes in logged audit fees for all audit clients of each audit firm. We find that audit firms with higher audit hour elasticity are more likely to discount fees for new clients (i.e., more lowballing). Further, we find that the relation is more salient when benefits of lowballing is expected to be greater, i.e., in the voluntary auditor rotation regime compared with the mandatory rotation regime. However, we find no evidence suggesting that audit quality of auditors with low operating leverage is compromised due to lowballing. Overall, our findings suggest that audit firms with more flexible production structure have a greater ability to implement pricing strategy even without sacrificing production quality.

Evaluasi Kepatuhan Pajak Berdasarkan Perilaku Data Keuangan dan Non Keuangan (Studi Kasus pada KPP Jakarta)

The purpose of this research is to evaluate tax compliance based on the behavior of taxpayers' financial and non-financial data. This research is expected to be useful as material for evaluating the level of tax compliance of taxpayers. This study uses a case study method (single case) and uses a mixed method. Descriptive analysis is used to analyze data from the research object in the form of a single case unit analysis. The results of this study indicate the perceived behavior control of taxpayers that shows low tax compliance behavior. The combination of analysis of financial and non-financial data from taxpayers produces a useful evaluation in determining the level of tax compliance. Based on this, the low achievement of tax revenue realization and high tax audit performance is directly influenced by the low tax compliance behavior of taxpayers.
 Keywords: Tax Compliance; Behavior; Financial Data; Non-Financial Data.