Large Accounting Firms Research Articles

Accounting Firm Investment in Diverse Talent: Evidence from Charitable Giving to Historically Black Colleges and Universities (HBCUs)

SYNOPSIS The accounting profession suffers from diversity, equity, inclusion, and belonging (DEIB) deficiencies. Although the largest accounting firms have touted their investments in diversity efforts, the extent to which firms have invested in recruiting diverse talent is unclear. Using accounting firms’ charitable giving data, we show that, although firm giving to historically Black colleges and universities (HBCUs) has increased over time, the total allocation percentage to HBCUs has remained relatively stagnant. Further, monetary giving to HBCUs is concentrated among a few HBCUs with higher prestige, and all HBCUs receive relatively little overall compared with predominantly white institutions (PWIs). Discussions with HBCU accounting faculty and accounting firm professionals support our main findings and suggest additional forms of investment that accounting firms can leverage to help address DEIB deficiencies. Overall, our study provides actionable recommendations that can inform public accounting firms’ efforts as they seek to develop a more diverse workforce. Data Availability: Data are available upon request. JEL Classifications: M41.

The effect of CEO's compensation in driving corporate ESG greenwashing: Evidence from China.

This study examines the relationship between CEO compensation schemes and ESG greenwashing behavior in Chinese listed firms during the period 2013-2022. We find that a CEO's cash (equity) compensation has a significantly positive (negative) correlation with corporate ESG greenwashing behavior. From mechanism analysis, consistent with the agency problem view, firms engage in more severe ESG greenwashing behavior under a higher proportion of cash in the CEO compensation structure. Such distortion behavior is mitigated by higher internal control quality in firms having an equity incentive for their CEO under the convergence of interest viewpoint. Additional analysis reveals that corporates audited by large accounting firms and those with more media coverage exacerbate the positive correlation between CEO cash compensation and ESG greenwashing behavior, while government environmental regulations reinforce the inhibitory effect of CEO equity compensation on ESG greenwashing. Our results imply that different CEO compensation schemes can have opposite effects on limiting firms' ESG greenwashing behavior in the Chinese context. Furthermore, we highlight that the question of form over substance principle to certain external governance mechanisms, leading CEO to exacerbate impression management of ESG disclosure.

SMEs tax minimization as shared responsibility

Prevailing criticism of tax minimization strategies is impacting contemporary business decisions. While extant research has focused on an alleged ‘moral’ shift among large accounting firms and corporates, little is known about tax responsibilities in the context of small and medium-sized enterprises (SMEs). Thus, we examine the following research question: How do SMEs and tax accountants perceive responsibility within the context of taxation? Our empirical investigation involves semi-structured interviews with accountants and their SME clients in Italy. Our findings point to an entanglement of legal, economic, ethical, and philanthropic responsibilities enacted in mundane tax strategy work. We propose a model of ‘shared responsibility’, aiming to clarify the complementary role of SMEs, tax accountants, and state actions in the curtailment of public funding, ultimately affecting the survival of all actors involved. Our work contributes to growing scholarship on business taxation as a form of social responsibility by emphasizing the shared nature of such responsibility, as well as showing how a current reliance on reputational risks to incentivise more responsible tax behaviour is ill suited to the SME context.

감사품질이 ESG 수준에 미친 영향

[Purpose] As the societal demand for ESG has increased recently, auditors are facing a situation where non－financial factors need to be considered along with financial factors. This study empirically examines whether the audit quality affects the level of ESG within companies.
 [Methodology] This study measures audit quality using variables such as audit fees, audit hours, and the status of large accounting firms. The ESG level of companies is measured using ESG information from the KCGS. We perform empirical analyses while controlling for various factors that may affect both audit quality and the ESG level.
 [Findings] Our empirical results reveals a significant positive correlation between audit quality and the ESG level of companies. We also perform robustness analysis to address cause issues by adjusting the time difference between audit quality and the ESG level. The results of robustness analysis support our hypothesis.
 [Implications] The findings of this study suggest that audit quality plays an important role in ESG, which is considered a crucial element for corporate sustainability. Our results provide empirical evidence for the need for auditor certification related to non－financial indicators.

Auditors’ search for meaningfulness in sustainability assurance work

PurposeThis study aims to examine auditors’ search for meaningfulness in sustainability assurance (SA) work.Design/methodology/approachThe authors collected ethnographic data over a nine-month period from two small firms offering SA services in France between 2018 and 2019.FindingsAuditors’ experiences of meaningfulness are facilitated by shared sustainability values among colleagues, social acknowledgement of like-minded profiles and the feeling that working in a “small firm” provides a more fulfilling and committed-to-sustainability environment than conventional assurance work in large accounting firms. The search for meaningfulness collapses when auditors realize not only the limits of their agentic and transformative capacities but also their unintended complicity in certifying the reports of companies with poor sustainability performance. Because they struggle to reconcile the assessment of their professional practice with their value system, the participants are tempted to disengage from their work by giving up a sustainability career and/or by reframing SA work as an advisory rather than a control function.Originality/valueThe authors approach SA not as an organizational project of professional expansion, through which accounting firms attempt to expand their scope of practice, but as an individual and reflexive search of aligning assurance work to their value system. Auditors’ search for meaningfulness is a strong counterpoint to the financial auditing literature, which portrays auditors as professionals with a low sense of purpose at work, but also to the literature criticizing accounting firms’ discursive processes of “depoliticization” (Malsch, 2013) and “de-emotionalization” (Rodrigue et al., 2022) of socio-environmental issues.

Whistleblowing in small and large accounting firms in Brazil

Organizations must constantly try to prevent losses resulting from unforeseen events and fraud. Whistleblowing has emerged as the most efficient mechanism for detecting such risks, but this phenomenon has not yet been studied in SMEs. This research seeks to analyze the relationships between attitudinal, normative, and control beliefs on the whistleblowing of accounting professionals, contrasting the behavior between small and large accounting firms from the perspective of the Theory of Planned Behavior. By using the structural equation modeling (PLS-SEM) method on a sample of 559 Brazilian accounting professionals, the analysis shows that an individual’s perceptions and characteristics influence their whistleblowing practices depending on firm size. SME accountants are directly and negatively influenced by family management and control beliefs, but are positively influenced by the moderation of attitudinal beliefs and by the risks of the scenario.

How Firms' Quality Experts Shape Canadian Public Accountability Board Inspections and Their Outcomes: An Analysis of Intraprofessional Conflicts, Third‐Party Influences, and Relational Strategies†

ABSTRACTIn this study, we examine auditors' claims of professional disempowerment and strategic responses to Canadian Public Accountability Board (CPAB) inspections. Our research is based primarily on 27 semistructured interviews with audit partners (23) and managers (4) of large accounting firms. Drawing on key insights from institutional theory, we show that the tensions between inspectors and auditors reflect an intraprofessional tug‐of‐war between two competing but legitimate logics of professionalism. More specifically, our findings indicate that CPAB inspections have given rise to a mechanical logic of audit professionalism that is driven by the efforts of inspectors to promote a generalizable theoretical ideal of auditing that revolves around best practices and attention to technical minutiae. This mechanical logic competes with a clinical logic of audit professionalism that is driven by the efforts of audit partners and managers to promote a more relativistic, applied form of expert knowledge. To manage this dynamic of intra‐institutional complexity, quality experts (QEs) have emerged in firms' organizational structures as ambidextrous third parties—that is, professionals who master both logics and are capable of bridging the institutional divide by influencing the relationships between inspectors and auditors through a variety of brokering strategies. By considering inspectors as insiders rather than outsiders to the profession, we argue that auditors' claims of professional disempowerment should be interpreted carefully and critically. We also suggest that the professional autonomy and judgment of engagement partners and managers has been displaced significantly within firm boundaries into the hands of QEs. Our analysis offers a richer conceptualization of institutional ambidexterity by examining it as a relational process of social influence rather than as a set of individual characteristics.

Individual Decisions and Public Trust: The PCAOB and KPMG

What might seem like a small ethical transgression by an individual can lead to a series of subsequent decisions, and result in serious fraud. This can not only impact the individuals involved and their organizations, but also erode public trust in firms and institutions. When Brian Sweet left a position with the Public Company Accounting Oversight Board (PCAOB), an organization that oversees the inspection of audits, and went to work for KPMG, one of the large accounting firms whose audits he had inspected, he took with him confidential information that he thought could prove useful in his new position. Sweet subsequently shared confidential information with his new employer, and over the next two years acquired additional confidential information through contacts at PCAOB. Debra Kaufmann, a KPMG audit partner, was faced with a decision about how to react when Sweet shared confidential information that she believed neither she nor KPMG should have.

Networks of interpretation: An ethnography of the quest for IFRS consistency in a global accounting firm

Because of their complexity and principle-based nature, the creation of International Financial Reporting Standards (IFRS) engendered significant uncertainty that modified the order of things within large accounting firms. This motivated them to establish Professional Practice Function (PPF) units to try to ensure a credible degree of consistency in applying IFRS across a wide range of financial reports at the international level. We study backstage dynamics surrounding a PPF national unit in one of the Big Four firms. We focus on the rise of the PPF as an expert-based control device within the firm, and the role PPF members play as knowledge brokers to interpret IFRS. Our investigation is carried out through ethnographic fieldwork supplemented by interviews with PPF members and field auditors. The analysis brings forward some of the organizational dynamics surrounding PPF members' efforts to establish their credibility as intermediaries both hierarchically, between administrative partners and field auditors, and epistemically, between the unifying logic of IFRS and auditees' financial reporting specifics. Ultimately, our analysis points to the role of the PPF as a gatekeeping or internal control device that mediates between different pools of knowledge to monitor the firm's reputation risk against IFRS implementation challenges. From a legal perspective, our ethnography documents how accounting “law” is made at the firm level and how PPF members strive for consistency – in spite of significant epistemological and organizational challenges. Our ethnography also shows that complex IFRS interpretation issues are not resolved through one person's judgment; instead, the firm's structure surrounding the PPF allows for the constitution of inter-individual judgment that transcends national, sectoral, and (sometimes) organizational boundaries. Finally, we see one important contribution of our work as helping reveal the limits of large conceptual categories such as “auditors”, which tend to downplay the dynamics of convoluted practice relationships.

Beyond the top seven firms: Gender diversity of audit firm partners and their undergraduate accounting faculty

For the past few decades, the American Institute of Certified Public Accountants (AICPA) trend data show that women comprise the majority of accounting graduates from universities, yet the partner levels in accounting firms do not reflect this trend. In this paper, the authors leverage the disclosure of the engagement partner names for each public company audit on Form AP filed with the Public Company Accounting Oversight Board (PCAOB) to explore the gender diversity and educational roots of the audit partners associated with audit firms that generated less than $1 billion revenue in 2019. Using role model theory, the paper explores whether there is a relation between the number of female professors in a school and the number of female students from that school who progress to the partner level. The results show that smaller audit firms have, on par, similar levels of gender diversity among audit partners as the largest accounting firms. The results further show a positive relation between females holding chair positions in accounting departments over extended time periods and female graduates progressing to partner on audit engagements. However, there is no association evident between the number of tenured female full professors and the female graduates who subsequently become audit partners at smaller accounting firms. These results highlight that female faculty holding power positions and female partners in the audit profession remain more rare than common. The need to increase gender diversity for both accounting faculty and professionals suggests that professional networking across academe and industry remains critical.

Tax-motivated profit shifting in big 4 networks: Evidence from Europe

Accounting research on tax has primarily focused on documenting the income shifting strategies of multinational corporations. However, no studies, as far as we are aware, have hitherto explored how large accountancy firms manage their own tax affairs despite being huge economic entities in their own right. Using a unique private firm dataset of Big 4 affiliated firms from 30 European countries we examine whether the Big 4 shift income among their separate legal entities. Despite apparent disincentives to doing so, we find archival evidence consistent with tax-motivated income shifting. Difference-in-difference specifications around the incorporation of Deloitte EMEA in the U.K. and PwC Europe in Germany provide further evidence consistent with income shifting increasing among Deloitte and PwC affiliates subsequent to the incorporation of their respective regional coordinating entities. In cross-sectional analyses we find evidence consistent with incentives to engage in outbound income shifting being weaker for unprofitable affiliates. We also provide evidence consistent with the Big 4 engaging in income shifting only in countries with favourable tax conditions/weak tax enforcement. Finally, we find evidence in line with debt allocation and intangible asset placement being important channels through which the Big 4 achieve their income shifting objectives. Our study contributes to the literature by being the first to open the black box of the Big 4's own tax planning practices.

The Impact of the Amendment of Taiwan’s Certified Public Accountant Act in 2007 on Large Accounting Firms

Taiwan’s Financial Supervisory Commission of the Executive Yuan promulgated the fully amended Certified Public Accountant Act in 2007, which directly led to significant changes in accounting law. From the perspective of the economic theory of law, this study investigates the amendment of the Certified Public Accountant Act resulting in an increase or decrease in the overall revenue and different revenue shares of accounting firms, and puts forward measures that should be taken by accounting firms and stakeholders. We focus on large accounting firms and divide the sample period into before and after 2008. This study uses the translog revenue function and revenue share functions of the public accounting industry, and based on the 1989–2017 Survey Report of Audit Firms in Taiwan, and we find that the amendment of the Certified Public Accountant Act has had a positive effect on overall revenue, increasing overall revenue and the overall management advisory services shares, and in reducing the overall accounting and auditing shares and tax services shares of large accounting firms. Additional analyses provide regulators with public policy implications and provide accounting firms with managerial information.

Potential market redistribution following a big four accounting firm failure

This work investigates potential market effects of the hypothetical failure of a big four accounting firm, emphasising how audit and accounting services would be redistributed among the remaining firms. Using graph-theoretic techniques and historical data based upon the failure of Arthur Andersen in 2002, three models of a post-failure redistribution of services are considered. The first model assumes that no mergers/acquisitions occur post-failure amongst the largest accounting firms, besides the redistribution of the failed firm's employees and clients. The second and third models assume that several non-big four firms merge together to create 'the merger', which becomes the approximate size of the pre-failure firm. The results indicate that at least two of the remaining 'big' firms would switch ranks in terms of global revenues, and that the merger becomes as comparatively efficient as the continuing 'big' firms when measured by average revenues generated per employee.

Public accounting profession and fraud detection responsibility

PurposeThe study aims to examine the influence of auditor personal factors, such as goal orientation, self-efficacy and professional commitment to auditor’s responsibility to detect the fraudulent, particularly in small accounting firms.Design/methodology/approachThe authors surveyed 86 auditors working in small accounting firms in Bali Province, Indonesia.FindingsThe results prove the role of self-efficacy as a mediating variable in the relationship of goal orientation and auditor responsibility. This result at once confirms that self-efficacy can improve individual performance even in complex tasks. This study also proves the role of professional commitment as a mediator variable.Research limitations/implicationsGiven that the respondents came from small accounting firms, these findings are not intended to be generalized with auditors in large accounting firms.Practical implicationsThese findings highlight essential efforts to reduce audit expectation gaps between auditors and the public. The small accounting firms’ leaders must to alignment workplace organizational goals and organization professional goals. A dualism of purpose causes the auditor to fail to fulfill the responsibility of fraud detection.Social implicationsThere is a severe audit expectation gap related to the auditor’s role in detecting fraud. This finding expected to answer public questions related to auditors’ ability and responsibility in small accounting firms in detecting fraud.Originality/valueThere is limited research on auditor responsibility, particularly in small audit firms in developing countries. Also, there is still debate scientific about the influence of goal orientation, self-efficacy and professional commitment to auditor performance.

Between contestation and collaboration: The internal dynamics of multidisciplinary accounting firm responses to institutional pressures

AbstractThe colonization of adjacent professional fields has been considered as crucial to understand the success and influence of large accounting firms, such as the Big 4. Yet, given the complexities of managing different professional groups, remarkably little is known about the internal dynamics behind large multidisciplinary accounting firms’ external responses to institutional pressures. In this article, we show how exogenous coercive pressure, such as regulation (in this case Dutch accountancy regulations), not only affect the day-to-day work of accountants, but also that of non-accountants such as tax advisors. From the perception of the tax advisors who confront regulations which are not ‘theirs’, we show how their internal responses evolve and tread a fine line between contestation and collaboration with their colleague accountants/auditors. Using a boundary work perspective, we examine this shift in responses and explain how tensions between professional groups may be reduced. Overall, our study not only furthers our insights into the internal dynamics behind professional service firms’ external responses, but also sheds light on why professional groups stay on board despite unfavorable internal conditions.

Implicit Attitudes and U.S. Tax Professionals’ Reliance on Offshore Tax Professionals’ Recommendations

Large accounting firms offshore a significant amount of tax work to professionals in India. Prior research suggests that individuals can have negative implicit attitudes toward people from different nationalities and that negative implicit attitudes can have undesired consequences. In this study, we measure a sample of U.S. tax professionals’ implicit attitudes toward Indian persons using an implicit association test (IAT) and assess whether the U.S. tax professionals respond differently to work produced by Indian versus U.S. tax professionals and whether implicit attitudes affect the U.S. professionals’ assessments of Indian tax professionals’ work product. We document that participants in our study have strong negative implicit attitudes toward Indian persons relative to U.S. persons. Conversely, we find similar reliance on and evaluation of U.S. and Indian work products, suggesting that the negative implicit attitudes observed have no relation to any of the variable measures we collect. Participants appear able to rise above their negative implicit attitudes and perform their tax work without bias in our experiment. However, it is important to acknowledge that negative implicit attitudes may result in biased behavior towards others in contexts outside of our experiment.

When the Client Is a Former Auditor: Auditees' Expert Knowledge and Social Capital as Threats to Staff Auditors' Operational Independence

ABSTRACTAuditees can play an active role in influencing staff auditors' professional judgment and skepticism. Yet, although it constitutes one of the main threats to auditor independence, very little is known about the means and extent of auditees' power during the audit engagement. To address this knowledge gap, our study focuses on a specific category of auditees, namely, auditees who have worked as auditors in large accounting firms. We interviewed 36 of these auditees and triangulated our findings with 11 interviews conducted with auditors. At the theoretical level, we conceptualize auditees' influence over auditors as intentional and active through the notion of “social power.” Overall, our analysis shows that the efficacy of auditees' power during the engagement materializes through the mobilization of two main power resources developed during their time at the firms: (i) expert knowledge of auditing techniques and (ii) social capital. On the one hand, relying on their cognitive authority, auditees' employ three different power strategies to constrain staff auditors' operational independence: stage‐setting, teaching, and questioning. On the other hand, auditees' social capital can support the use of two additional strategies: attracting and monitoring. Our triangulation analysis confirms our findings and suggests that auditors may be aware of the threats to independence that auditee expertise and social capital pose. By focusing on auditees' agentic capabilities—that is, individuals' capabilities to consciously exert influence over the course of events—we reinterpret the pressures exerted by clients on auditors as the product of strategic actions and discuss substantive consequences for independence risk.

Social media is so easy to share

ABSTRACT Although accounting students are well trained in the field of ethical behaviour, recent technological developments have created challenges in the workplace. Having focused on the concept of virtue ethics and the fundamental principles of ethical conduct imposed by professional accounting bodies, the findings of this study revealed the need to find new ways of engaging students in ethics education in the modern world. Semi-structured interviews were conducted at 22 large, medium-sized and small accounting firms in South Africa, to obtain insight into graduates’ understanding of the concepts of professional and ethical conduct in the workplace. The findings suggest, inter alia, that graduates often fail to realise that there is a fine line between sharing personal and workplace information on social media. Proposed here are practical considerations for academia, professional bodies and employers, towards managing professional and ethical conduct associated with the use of social media in the ever-changing work environments.

Drivers Contributing to the Implementation of Generalized Audit Software (GAS) within Audit Firms in Malaysia

Many businesses are moving towards the usage of information technology to be in line with their daily operations. Traditional audit methods are no longer relevant these days. Generalized Audit Software (GAS) is a type of software that is suitable for auditors to perform audit tasks. GAS can assist auditors to improve the effectiveness and efficiency of audit. To date, the development of GAS in audit firms is still low, although many practitioners had argued that auditors can receive greater benefits by using GAS. This research is motivated by an interest in understanding drivers contributing to the implementation of GAS within audit firms located in the central region of Malaysia. Prior studies had placed more focus on internal auditors in large accounting firms, or auditors in other countries. However, there were not many researches being conducted on small and medium-sized audit firms in Malaysia. This study is therefore intended to fill in this gap. Data were collected using questionnaire survey on small and medium-sized audit firms registered with the Malaysian Institute of Accountants (MIA) in the central region of Malaysia. A total of 96 responses were analysed using multiple regression analysis. It was found that performance expectation, effort expectation and facilitating conditions had significantly influenced the implementation of GAS among small and medium-sized audit firms. However, social influence was found to have no significant relationship. The outcome of this study might help audit firms, software developers and academia to increase the usage of GAS to perform audit tasks. Future research should further explore on the influence of gender, age, voluntariness, experience, and other drivers contributing to the implementation of GAS within audit firms.

Non-CPAs and Office Audit Quality

SYNOPSIS During the time surrounding the Sarbanes-Oxley Act of 2002, the Big 4 firms either spun-off or downsized their consulting practices. However, in recent years, consulting service lines of the large accounting firms have seen a dramatic resurgence and growth. Regulators have taken notice of, and expressed concern over, this renewed focus on consulting. The accounting firms claim that such services enhance audit quality, mainly due to the prominent role of non-accounting specialists in today's external audit function. This study examines whether the availability of non-CPAs in U.S. Big 4 firm offices is associated with audit quality. We find that greater access to non-CPAs in the office is associated with higher audit quality and conclude that office audit quality is not just a function of audit-specific human resources but also the availability of non-CPAs to support audit engagement teams. JEL Classifications: M41; M42. Data Availability: All data are publicly available from sources identified in the study.