External Auditor Independence Research Articles

Audit committee characteristics as determinants of non-audit fees in UK FTSE 350 companies

Purpose This study aims to examine trends in audit committee characteristics of companies and associates characteristics subject to major change with a fee-based proxy for audit committee effectiveness. Design/methodology/approach The research adopts an empirical approach. Using descriptive and inferential statistics, observations for 253 Financial Times Stock Exchange 350 companies’ audit committee characteristics gathered from annual reports at the beginning and end of a five-year period are evaluated against averaged non-audit fees (NAF) as a proportion of total audit fees. Findings Audit committee composition shows an increased incidence of female membership and of members with previous audit experience. The increase in members with previous audit experience is more marked where this is gained with the incumbent auditor. An increase is also shown in chief financial officers with previous audit experience. Previous audit experience is associated with reduced NAF as a proportion of total fees. This is marked where audit experience has been gained with the incumbent auditor. These results suggest that the benefits of financial expertise gained from audit experience outweigh impairments to independence due to social ties. Nevertheless, other studies indicate concerns about independence are still well-founded. Originality/value This paper’s original contribution is to evaluate the potential effect of previous audit experience on those involved in audit committees in light of concerns raised in the literature and by regulators that external auditor independence should be maintained. The innovative fee-based proxy for audit committee effectiveness facilitates an evaluation as to which influence prevails.

Analysis of the Impact of External Auditors’ Autonomy on Financial Accounting Information Quality Case Study Commercial Banks in Northern Iraq

The purpose of this research is to determine how independent auditors affect the integrity of financial accounting data at commercial banks in northern Iraq. A total of 342 employees from commercial banks in Northern Iraq were surveyed using a quantitative research technique. The research uses structural equation modelling (SEM) to examine the hypothesis that the independence of external auditors improves the integrity of financial accounting information. The study’s findings indicate that financial accounting information quality in commercial banks in Northern Iraq is significantly affected by the independence of external auditors. This suggests that giving external auditors more leeway to do their jobs could boost the quality of financial accounting information at these institutions. Policymakers, auditors, and managers at commercial banks in northern Iraq can learn a lot from these results. In sum, this research adds to the existing body of work on the independence of external auditors and the accuracy of financial accounting information, with a focus on commercial banks in Northern Iraq. This research shows that increasing the independence and autonomy of external auditors in commercial banks could have positive effects on the quality of financial accounting information.

Impact Evaluation of Factors of Internal Audit on Intrnal Audit Effectiveness: The Moderating and Mediating Effect of Ethical Culture and Internal Controls

The objective of this paper is to investigate the impact of independence, management support and external auditors’ cooperation on Effectiveness of Internal Audit. It also investigates the moderating effect of ethical culture and mediating effect of internal controls, between major factors of internal audit (independence, management support and external auditors’ cooperation) and Effectiveness of Internal Audit in private sector of Pakistan. Cross-sectional design was used in this study. Four hundred and eighty (480) questionnaires were distributed among the auditors in the chartered accountants’ firms of Pakistan situated in Lahore on convenience basis. Sixty-one (61) indicators were measured on five-point Linkert scale from one which refers to strongly disagree to five which denotes strongly agree. PLS-SEM is used for the analysis of the data. The results show that there is positive relationship between two factors of internal audit (independence and external auditors’ cooperation) and internal controls while the third factor, management support has no relationship. Moreover, the findings show that ethical culture has no moderating effect on the association between internal control system and internal audit effectiveness. Similarly, internal controls positively mediate the relationship between two factors of internal audit (independence and external auditors’ cooperation) and Effectiveness of Internal Audit. Moreover, it demonstrates the value of independence and the collaboration of external auditors in enhancing the efficiency of internal auditing and business performance. The results of this study will direct business entities and other organizations to improve the internal controls for enhancing the effectiveness of internal audit and focus on independence of IAD and external auditors’ cooperation with internal auditors as these factors are very important for getting results from internal audit department in order to achieve goals.

Internal audit: A case study of impact and quality of an internal control audit

Traditionally, when companies needed assistance regarding internal controls, they turned to an external auditor (EA). However, now, due to an ongoing tightening of legal requirements and practices regarding the independence of EAs, this assistance has been restricted. As an alternative, companies are increasingly requesting internal audits to deliver this support. Even though internal audit function (IAF) are an important player in internal control, however, there is little academic knowledge about their impact. Based on a single‐case study in a large financial institution, this paper explores to what extent and how IAF affect internal controls. Furthermore, it assesses whether IAF add value to the company. The results suggest that the management letter process, including a step‐by‐step settlement of interactions, leads to a joint problem solving, an acceptance of all IAF's recommendations and a value‐adding outcome improving the level of internal controls.

Female directors, audit effort and financial reporting quality

ABSTRACT This paper analyses the influence of female directors on the demand for audit effort and on financial reporting quality for a sample of Australian non-financial listed firms over the period 2004–2018. Our results suggest that gender diversity at the Board and the audit committee have a beneficial impact both on the demand of audit effort and on the outcomes of the audit process. This beneficial effect of female directors is attributable to non-executive directors. Long tenured and busy female directors and women chairing the board or the audit committee are revealed as especially influential at improving audit efforts and outcomes. We obtain further indication that audit effort and reporting quality improve from the first women added to the board not being necessary to attain a certain critical mass to generate these effects. Also, gender diversity improves the external auditor independence though the presence of lower of non-audit fees. The results are robust to endogeneity corrections. Evidence from the Australian market provides a positive argument for small and mid-cap Australian listed firms to follow the path of large Australian listed firms towards gender diversity.

НЕЗАЛЕЖНІСТЬ ЯК ОБОВ’ЯЗКОВИЙ ПРИНЦИП РОБОТИ ЗОВНІШНІХ ТА ВНУТРІШНІХ АУДИТОРІВ: ВИМОГИ ТА МЕХАНІЗМ ДОТРИМАННЯ

The purpose of this study is to determine the requirements for the observance of the principle of independence by external and internal auditors, given their relationship in the performance of audit engagements. Research methodology. The methodological and theoretical basis of the study is the scientific and creative understanding of the developments of foreign and national scientists in the field of auditing in general, and internal audit in particular. The information base of the study was the official documents, standards and codes of ethics of international professional associations and organizations of accountants and auditors. To achieve this goal, a set of general scientific methods (analysis, synthesis, induction, deduction, abstraction) and methodological techniques (systematization, generalization, review, comparison) to study the principle of independence in the practice of external and internal audit as a professional activity have been used. Results. The necessity of developing a detailed Code of Ethics for Internal Auditors and specific regulations for internal audit services, which would combine the requirements of official standards and codes, and identify clear measures to assess conflicts of interest and precautionary measures, has been substantiated. The main stages of development of appropriate precautionary measures at such levels as level of auditor, level of engagement, functional level, and organizational level have been determined. It has been proved that the independence of thought and behavior as components of the independence of both external and internal auditors should be formed in view of all parties involved in the process of performing the audit engagement, taking into account the content of three party relationships. The practical significance of the research results. The practical use of the proposed theoretical approaches and practical recommendations will improve the quality of engagements performed by both external and internal auditors.

The Impact of Board Directors, Audit Committee and Ownership on Financial Performance and Firms Value

The purpose of this study is to gather and analyze recent research publications on the relationship between governance (board, audit, and ownership) and financial and corporate value. A rigorous literature review of current international articles is used in this paper. The meta-analysis method was utilized to examine papers published in high-evaluation scientific publications indexed in Scopus. The tool (WordStat 8) was utilized to study articles and summarize descriptive statistics, correlation, and keyword cloud during the analysis process. According to the study, the board of directors works to protect investments from misappropriation by actively participating in the development of the company's strategy, giving appropriate incentives to management, and monitoring and evaluating its performance, thus maximizing the company's value. The audit committee can be used as a governance mechanism to improve financial information confidence and openness. Through their participation in the financial statement preparation process as well as improving the independence of both internal and external auditors, the audit committee can help prevent future financial disasters. The study discovered that the emphasis on a company's ownership is critical, and that focusing on the largest shareholder can considerably boost the company's long-term profitability. As a result, it is obvious that the current shifts in ownership focus will diminish performance, but that the negative effects will fade with time and may even have a beneficial impact on the organization's performance. The study will benefit a variety of stakeholders, including investors, stakeholders, company CEOs, board of directors, and other connected groups. Furthermore, guiding shareholders, investors, and stakeholders to make decisions based on reasonable and objective foundations follows a true assessment of the company's market value. This study offers both academics and professionals a written review of the study as well as an updated reference index to measure the relationship between governance and financial success from 2017 to 2020.

The perceptions of loan officers and auditors of factors affecting auditor independence: Evidence from Palestine

The study investigates the perceptions of external auditors and loan officers regarding external auditor's independence in Palestine. Data were gathered using a questionnaire developed by the author and include 5 main issues related to the perception of external auditor’s independence. The sampling population identified for this study consists of external auditors working in domestic and international audit firms and financial statement users mainly loan officers in Palestine. The sample included 79 auditors and 76 loan officers. The findings revealed that there are significant differences in the perceptions of external auditors and loan officers in relation to provision of non-audit services, auditor’s economic dependence on a single audit client, and long relationship between an auditor and a client. The results revealed mixed results about the effect of presence of active audit committee on independence of the external auditors. Furthermore, acceptance of significant gifts from the client was considered an important factor that may influence auditor independence by loan officers and external auditor and thus significant differences between the two respondent groups were found in relation to acceptance of significant gifts from the client. These findings can be useful to policy makers and professional auditing bodies in Palestine on setting new regulations or strengthening existing ones to enforce auditor’s independence in Palestine.

Analysing corporate governance and accountability practices from an African neo-patrimonialism perspective: Insights from Kenya

• We critically examine corporate governance and accountability practices in Kenya. • We investigate how corporate sector reforms are constrained by neo-patrimonialism. • Data includes 29 semi-structured interviews, field observations and documents. • Neo-patrimonialism influences director appointments and board composition. • Neo-patrimonial systems supplant formal institutions leaving them as facades. This paper examines corporate governance (CG) and corporate accountability practices in the African context, by focusing on the case of Kenya. Our data comprises a combination of 29 semi-structured interviews, field observations and archival evidence. We reveal how western-originated CG and accountability reforms are constrained or subverted by a vigorous neo-patrimonial regime. The Kenyan corporate sector has well defined legal-rational structures, including an elaborate corporate sector regulatory framework, professionals (i.e. accountants and auditors) and corporate boards. In contrast, however, informal networks and patronage interfere with the nomination and work of non-executive board members, thereby hindering the possibility of an independent monitoring of executive management. A conflictual and inadequately resourced regulatory framework plays a more symbolic than an effective regulative role in enforcing CG and accountability practices. We also find a widespread rent-seeking culture that significantly hinders the exercise of corporate accountability. Furthermore, external auditor independence is problematic due to conflicts of interest and the auditors’ dependence on advisory fees, thereby favouring a clientelist association with auditee firms. Overall, our findings reveal that CG and accountability practices, while ostensibly present in Kenya, are largely ineffective due to the influence of neo-patrimonial realities on the mind-set and actions of corporate actors.

Audit Committee’s Role in Moderating the Effect of Financial Distress Towards Going Concern Audit Opinion

Auditors are required to provide services in auditing financial statements presented by management and provide audit opinions on the fairness of the presentation of financial statements. Sometimes, in reality, management and auditors have their interests so that each party can achieve the goals. The conflict of interest appears on the independence of the auditor in issuing audit opinions, especially the audit opinion with the going concern explanatory paragraph. The audit committee, as a supervisory board, will continue to maintain the independence of the auditor in issuing audit opinions with the going concern explanatory paragraph. This study aims to examine the effectiveness of the audit committee in maintaining the independence of external auditors issuing audit opinions, especially the audit opinion with the going concern explanatory paragraph. Based on the purposive sampling method obtained a sample of 168 companies. Testing the hypothesis in this study using logistic regression and moderated regression analysis. The results showed that financial distress had a significant negative effect for the audit opinion with going concern explanatory paragraph. Furthermore, the audit committee was not able to strenghten the relationship of financial distress on the audit opinion with a going-concern explanatory paragraph.

NON-AUDIT SERVICES AND THE CORPORATE GOVERNANCE OF AUDIT CLIENTS

This paper investigates the relationship between corporate governance qualities and the purchase of non-audit services among Malaysian Listed Companies. The sample consists of 709 companies listed on Bursa Malaysia during the year 2014. The study posits that CEO duality, board independence, audit comitte independence, big 4 auditors, the audit committee size, and the frequency of audit committee meetings are associated with the amount of non-audit services. This is basically based on the argument that weaker governance allows the company to jeopardise the independence of external auditor, hence higher level of non-audit services. Company size, profitability, leverage, growth and industry are also included in the study as the control variables. Using the ordinary least square regression model and relevant diagnostic tests, findings shows that only board independence, audit committee independence, audit committee size and big 4 auditors are associated with the level of non-audit services. The results of this study contribute to the present literature on the determinants of non-audit services, especially in emerging market. The result would also be informative to regulators worldwide when considering to apply new policies related to non-audit services.

AirAsia Berhad’s accounting in the spotlight

Learning outcomes The case is appropriate for courses in financial accounting and reporting, audit and assurance, forensic accounting, accounting practice and regulations and corporate governance. After studying the case, students should be able to explain the concept of control and power under IFRS; explain the concept of economic; discuss audit committee and external auditor independence issues and ways to strengthen auditor’s independence; assess the usefulness of the new extended audit report; and evaluate the role of gatekeepers such as financial analysts, audit committee, external auditor, institutional investors and regulators in enhancing the quality of financial reporting. Case overview/synopsis This case focuses on the accounting policy choices of the foreign associates of AirAsia Berhad. AirAsia Berhad is a phenomenal success, from a debt laden company to having been voted as World’s Best Low-Cost Airline in the annual World Airline Survey by Skytrax for eight consecutive years from 2009 to 2016 and the World’s Leading Low-Cost Airline in the annual World Travel Awards for four consecutive years from 2013 to 2016. In June 2015, an analyst report was leaked, and it led to heated discussion and exchanges in the market. The report questioned the non-consolidation of AirAsia Berhad associates. The share market also reacted. Various players in the market came into foray with their statements and opinions on the merit of the accounting policy choice by AirAsia Berhad. Whose views actually reflect the nature of accounting policy choice that is true and fair? Are these gatekeepers attesting to the accounting crux of substance over form? Complexity academic level Senior undergraduates; MBA; EMBA Supplementary materials Teaching Notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes. Subject code CSS: 1: Accounting and Finance

Factors Affecting the Effectiveness of Assurance Services and Corporate Reporting

The study examines the issues affecting the effectiveness of assurance services and corporate reporting in Nigeria. The study uses a simple random technique, collection of primary data with questionnaire and testing of the hypotheses are done using percentage and Spearman’s Rank correlation coefficient. The results from the tests with the help of SPSS show positive and weighty relationship between integrity and honesty of external auditors and quality of assurance services and corporate reporting. The findings reveal that there is a significant correlation between impaired external auditor’s independence and quality of assurance services and corporate reporting. The more the independence of external auditors is impaired; the more ineffective the reliability of assurance services and corporate reporting. The study also reveals that there is a strong positive correlation between external auditor’s skills on the use of ICT facility such as computer and effective assurance services and corporate reporting. Hence, for effective assurance services and corporate reporting on the financial statement to be achieved, integrity and honesty of the auditor must be given preference. In addition to ensuring the independence of external auditors, they should be ICT compliant in order to embrace automated accounting system in line with digitalization developments in assurance services and corporate reporting. Thus, the study recommends that auditors should be meant to possess integrity and honesty, assume a high degree of independence and acquire proficiency in relation to ICT, based on computer based-auditing in order to achieve effectiveness, reliability and validity of assurance and corporate reporting services.

The American National System of Corporate Governance

Introduction Corporate governance (CG) has recently been extensively discussed, intensely debated and variously defined in the United States. For the purposes of this chapter, CG shall mean the internal arrangements within a corporation intended to provide reasonable assurances that corporate directors and officers make and implement decisions in accordance with their duties of care and loyalty to their corporations. CG in the United States is often associated with the recent initiatives taken in the wake of corporate scandals such as Enron and MCI. While the recent initiatives are undoubtedly important, their significance can best be understood in the context of the existing frameworks under corporate and securities law. The current initiatives in the United States (i.e. the recently adopted CG provisions in the listing requirements for the New York Stock Exchange (NYSE) – and the provisions of the Sarbanes–Oxley Act of 2002 – often called “Sarbanes– Oxley”) in important ways simply add to the governance measures already in place pursuant to corporate law and securities regulation in the United States. Only after understanding foundations in corporate law and securities regulation in the United States is it possible to understand the significance, and the limitations, of the recently adopted NYSE listing requirements and of Sarbanes–Oxley. In general, the recent NYSE initiatives attempt to improve the degree of independence among directors of corporations listed there so that they are better able – and more likely – to meet the performance standards currently applicable to directors under corporate law (i.e. duties of care and loyalty), but the NYSE does not change those standards. Unfortunately, the NYSE listing requirements do not have the force of law. Sarbanes–Oxley, on the other hand, in general, attempts to improve the independence of external auditors and corporate directors so that they are better able – and more likely – to prepare public disclosures in form and substance required by US securities regulations. There are also provisions intended to enhance the care with which corporate officers prepare required public disclosures. Unfortunately, Sarbanes–Oxley applies only to disclosure requirements under US securities regulations. With limited exceptions, Sarbanes–Oxley is not specifically intended to apply to directors’ or officers’ broader obligations to their corporations or the standards applicable to their performance of those obligations.

English

This study examines the effect of audit quality on share prices of Nigerian oil and gas firms using the regression and covariance analyses. Findings from the regression anlysis suggests that the composition of the audit committee and auditor type has significant effect on the market prices of quoted firms. There is a positive and significant relationship between audit committee composition and share prices. The covariance analysis suggests that while auditor type (BIG4/NONBIG4), auditor independence, and composition of the audit committee have a positive and significant relationship with market price of shares, tenure of external auditors has a negative relationship with the market price of shares. The implication of the findings is that audit quality will enhance reported earnings and hence the share market prices. The study recommends that firms should strive to associate with the BIG4 external auditors in Nigeria as such an association could enhance the credibility of the audit process and by extension their share prices; regulatory authorities should discourage joint audit and non-audit services to firms because it could threaten the independence of external auditors. Regulatory agencies should also present distinct statements on the tenure of the external auditors to be clearly stated in annual reports. This is because a long attachment between the external auditors and a client may threaten the independence of the external auditors. Key words: Share-prices, audit-quality, auditor-independence, auditor-type.

The Relationship between Auditor's Independence and Financial Reporting Fraud Risk Assessment: Evidence from Yemeni Context

The purpose of this study is to examine external auditor's independence related factors (IRF) associated with financial reporting fraud risk assessment (FRFRA). A quantitative instrument was used to measure FRFRA and IRF. In total, 254 external auditors participated in this study. Results found that social relations, and hiring and changing of the auditor are positively and significantly associated with FRFRA. Otherwise economic relations and audit fees are insignificant. This study serves to inform external auditors on how to improve their consideration of FRFRA. It also contributes to the limited body of research on FRFRA within IRF in the emerging economy. New variables were included for external auditors’ independence related factors. These variables consist of social relations, economic relations, and hiring and changing of the auditor. By including these new variables, more contributions are made to the extant literature and more evidence is provided on the results of external auditors in the Republic of Yemen.
 Keywords: Independence related factors, External auditor, Fraud risk assessment, Financial reporting, Yemen.

The pattern of fraudulent accounting : Ethics, external auditing and internal whistle-blowing process

The ongoing debate in the literature centres on the compromised auditor’s independence in consequence of the relevant provisions perceived for non-audit services provided to the audited clients. The accounting scandals that have occurred over the past two decades show the lack of competence and independence of external auditors, who kept quite in the face of attempted frauds. The case of Tesco represents an undeniable example of the loss of auditor’s independence, who failed to detect accounting manipulation confirming the importance of whistle-blowing procedures in disclosing concerns before they become serious problems. When turnover occurs in CEOs it is more likely that a rotation in external auditors occurs as well. Finally, changes in top management enable whistle-blowing actions to be successful, interrupting the organization’s dependence on serious wrongdoings and preventing a disastrous ending. The success of whistle-blowing in preventing company failure makes it an effective instrument of сorporate пovernance.

NON-AUDIT SERVICES AND AUDITOR INDEPENDENCE IN AN ENVIRONMENT OF LOW INVESTOR PROTECTION

This paper aims to evaluate whether the provision of non-audit services (NASs) affects external auditor independence in an environment characterised by low legal protection of minority investors and a high concentration of ownership and control. Audit reports and costs of services are analysed over 3 years for 154 Brazilian companies. The binary variable proxy for independence indicates a qualified auditor's report and, as an alternative specification, the issuing of a going concern opinion. Logit models were employed with control variables to identify aspects related to other sources of threats to independence, management influence, and the effort and risk of auditing services. The results indicate that the provision of NASs does not affect auditor independence. This evidence is robust in terms of the alternative specification of the independence proxy and the observation of a subset of companies considered qualifiable. Only when summed to audit fees is there evidence of a negative impact on independence, signalling that the client’s economic dependence might be more relevant than NAS with respect to auditor independence. This result is robust to both independence proxies and the subset of qualifiable companies. In general, other sources of threats do not seem related to independence. This study provides evidence of a market in which auditor independence is expected to be compromised, given controlling shareholders’ influence on company management.

Audit firm tenure and independence: A comprehensive investigation of audit qualifications in Spain

The European Commission's Green Paper on Audit Policy has raised serious concerns about external auditor independence and also encouraged further research about the implications of long audit firm tenures. We examine the effects of audit firm tenure on independence, while measuring independence using the audit report opinion with a sample of Spanish public companies for the period 2002–2009. Generally, prior research has limited to the examination of modified going-concern opinions to financially distressed firms. This approach limits the generalization of results as well as the ability to address the traditional auditor role in the classical corporate governance scheme. To address these issues, we propose a multinomial approach which not only includes all types of audit qualifications in the analysis, but also considers the implications of going-concern opinions for the auditor–client relationship. Our results show that auditors seem willing to sacrifice independence in lengthy engagements, but only for non-going-concern modified opinions. This finding is robust to various proxies of accounting quality.

Mandatory Audit Firm Rotation: A Review of Stakeholder Perspectives and Prior Research

The global financial crisis brought to the fore questions surrounding the scope and quality of the external audit, market concentration and auditor independence. One of the issues currently being considered by the European Commission and European Parliament is mandatory audit firm rotation. The aim of this review is to identify, consider and evaluate stakeholder views and research evidence on mandatory audit firm rotation to highlight deficiencies in the existing research literature, identify opportunities for further research and make recommendations for policy-makers. As demonstrated, stakeholder views vary widely. We find that the research evidence on the impact of mandatory audit firm rotation on audit quality and auditor independence is inconclusive. Whilst there is some evidence that rotation may have a positive impact on ‘independence in appearance’, most research fails to generalise these findings to measures of audit quality associated with ‘independence in fact’ and there is even evidence of potentially adverse effects of rotation. Given the lack of evidence associating mandatory audit firm rotation with an improvement on audit quality, regulators need to determine carefully the long-term objectives of a mandatory rotation requirement before implementing a costly measure. We further highlight the need for future research looking at the implications of measures designed to improve audit quality.