Large Audit Firms Research Articles

Branch Networks, Client Networks, and Knowledge Sharing in Audit Firms

SYNOPSIS In large audit firms, interoffice knowledge sharing is embedded in two networks: the branch network, comprising all branch offices, and the client network, formed by similar engagements. Proximity between branch offices may enhance knowledge accessibility, whereas similarity between engagements could impact the relevance of that knowledge. I investigate how the two networks jointly influence the effectiveness of knowledge sharing. I construct client networks based on the similarity of clients’ product offerings and find that clients with greater centrality in the neighboring client network benefit more from knowledge sharing in terms of improved audit quality. I further show that this effect only exists when similar clients in neighboring offices are larger in size and is more salient when there is a gap in expertise between the current auditing office and neighboring offices. By enriching our understanding of interoffice knowledge sharing, these results offer practical insights to auditors, regulators, and audit-report users. Data Availability: Data are available from the data sources indicated in the paper. JEL Classifications: M42.

Competitive Strategies for Small Audit Firms

Synopsis The research problem We examine whether small audit firms adopt niche strategies to compete in the public company audit market. To that end, we focus on auditors servicing clients from one industry only (which we label as a nationwide single-industry focus) and test its association with audit quality and pricing. Motivation Prior research on auditor competition has mainly focused on the large (mainly Big Four) audit firms. While large and small audit firm markets are two distinct markets, little is known about competitive strategies of small audit firms in the public company audit market. The test hypotheses Our first hypothesis is that small audit firms adopting a single-industry focused strategy supply higher audit quality compared with audit firms that do not adopt a single-industry focused strategy or a simple industry specialization strategy, ceteris paribus. Our second hypothesis is that small audit firms adopting a single-industry focused strategy engage in discount pricing compared with audit firms that do not adopt a single-industry focused strategy or a simple industry specialization strategy, ceteris paribus. Target population The U.S. commercial banking sector covering the period 2004–2020. Adopted methodology Multivariate analyses adopting linear and probit models. Analyses To test our first hypothesis, we run a bank audit quality model using loan loss provisions as the dependent variable for our main analyses. Subsequent analyses adopt restatement, going concern, and internal control weaknesses models. To test our second hypothesis, we rely on a bank audit fee model. All models include relevant controls established in previous research and those for self-selection. Findings The evidence suggests that small audit firms adopting a nationwide single-industry focus are able to provide higher audit quality (compared with other rivals, even industry specialists) while at the same time charging lower audit fees implying cost efficiencies that are passed on to the client due to their focused expertise.

Strength of Audit Firms’ Human Resource Systems and Client-Level Audit Outcomes: Evidence from a Multiple Source Study

SYNOPSIS We examine whether differences in HR systems among audit firms can affect client-level audit outcomes. Based on the audit quality framework of Knechel, Krishnan, Pevzner, Shefchik, and Velury (2013b) and the strategic HRM literature, we posit that audit firms with stronger HR systems are likely to deliver more desired audit outcomes, ceteris paribus. Building on systems theory, we outline and capture a wholistic picture of the audit firm HR system as consisting of three dimensions: competency-, motivation-, and opportunity-enhancing practices. We draw on two distinct data sources for our analyses: a survey allowing us to tap into the HR systems of large audit firms servicing PIE clients in The Netherlands and corresponding client-level archival data to measure audit outcomes. Our results suggest that HR systems are an internal context factor affecting client-level audit outcomes. Supplemental analyses indicate that competency- and opportunity-enhancing HR practices are associated with more desirable audit outcomes. Data Availability: Part of the data are available from the sources cited in text. JEL Classifications: M42; O15.

Hedge accounting, IFRS 9, and audit fees: Evidence from China

AbstractUsing data for 2016–2021 on a sample of Chinese non‐financial firms, this study documents a positive association between the use of hedge accounting and audit fees and finds that the new requirements under International Financial Reporting Standards 9 (IFRS 9) help mitigate this positive relationship. Channel analyses show that the new hedge accounting requirements mitigate earnings volatility and accruals management, which results in audit fee reductions. Further, the post‐IFRS 9 audit fee decrease is greater among large audit firms, firms in regions with higher marketisation levels and firms with better corporate governance.

Measuring an audit quality climate among employees

The International Standard on Quality Management requires, among other things, that audit firm leadership promotes a quality‐oriented culture in firms. We add a novel contribution to the audit quality literature by developing an instrument to measure the audit quality climate in audit firms. Our data consisted of perceptions of non‐executive employees at large South African audit firms and the Auditor‐General of South Africa. Instrument development followed a rigorous scale development process, beginning with the adaptation of a widely used organizational climate measure to explore audit quality at employee level. Exploratory factor analysis determined six audit quality climate dimensions. Confirmatory factor analysis provided evidence of construct validity. The six dimensions of our audit quality climate measurement instrument fit into the three types of culture currently identified in audit firms. The findings of our study are a starting point to develop an acceptable audit quality climate scale for employees in audit firms.

Labor supply and M&A in the audit market

Using labor supply shocks from the 150-Hour Rule, I find that a reduction in the labor supply of accountants increases audit firms' mergers and acquisitions (M&A) and the audit market concentration. These M&A deals connect audit firms serving clients in the same states and lead to greater industry specialization of the merging firms. Although both small and large auditors generally engage in labor supply–driven M&A deals, large audit firms’ engagement in M&A is restricted to markets with a tight supply of accounting labor. Attenuations of the labor supply restrictions tend to limit the heightened M&A activities and mitigate the rise in the audit-market concentration from the 150-Hour Rule. I conclude that labor supply reductions affect the boundaries of audit firms, potentially changing the structure of the entire audit market.

Do auditors care about what retail investors say? Evidence from China

Using China's stock forum postings from 2008 to 2020, we document that when client firms exhibit pessimistic investor sentiment, auditors exert greater effort and charge higher fees from those clients. This increase in audit fees is attributed to the downward pressure on stock prices and the elevated litigation risk of the clients. We also reveal that the impact of pessimism on audit fees is stronger for firms with more widespread pessimism, those audited by larger audit firms and auditors with higher rankings, and those with a greater retail investor influence.

Superstition, Risk Aversion, and Audit Quality: Evidence from China

SUMMARY We examine whether signing auditors’ perceptions of bad luck related to the Chinese zodiac-year superstition affect audit quality. We argue that these perceptions of bad luck heighten signing auditors’ sense of risk and lead them to act more cautiously in their zodiac years, leading to improved audit quality. We find that clients audited by lead engagement auditors in their zodiac years exhibit lower discretionary accruals and lower propensity to restate. The effects of zodiac-year superstition are evident among lead engagement auditors who are older and hold the partner title. The effects are also evident in large audit firms, which face greater reputation risk, and in provinces with a strong influence of traditional culture. In addition, we find some suggestive evidence that lead engagement auditors may increase audit effort during their zodiac years. Overall, our results support the contention that lead engagement auditors’ zodiac year beliefs positively affect audit quality. JEL Classifications: D81; M40; M42; Z10.

ETHICAL ISSUES IN CORPORATE FINANCIAL REPORTING AND LIABILITIES OF STATUTORY AUDITORS IN LISTED COMPANIES

: People do business with nameless, faceless organizations on a regular basis in market cultures. Auditors and external auditing are marketed in these cultures as a trust-building watchdog with the power to develop a specific social structure. Investors and depositors in numerous Nigerian banks and corporations lost several billions of Naira as a result of unethical accounting and auditing practices, causing problems for a number of organizations and businesses. The study looked into the relationship between ethical difficulties in corporate reporting and statutory auditor liability. The survey Research Design was used in the study. A intentional sampling technique was used to choose the five largest audit firms and five medium-sized audit firms in Nigeria. Data was analysed using descriptive and inferential statistic. Findings reveal that Ethical issues in Corporate Reporting had a significant effect on Audit fee of Auditors (Adj R2= 0.28, F(3, 9)= 9.156, p <0.005); Ethical issues in Corporate Reporting had a significant effect on Audit Tenure of Auditors (Adj R2= 0.220, F(3, 9)= 11.399, p <0.005) and Ethical issues in Corporate Reporting had a significant effect on Non Audit Service of Auditors (Adj R2= 0.457, F(3, 9)= 8.756, p <0.005). The study revealed that there is a significant relationship between ethical concerns in corporate financial reporting and statutory auditor liability. It was suggested that statutory auditors ensure that a modest percentage of their overall income came from a single client company in order to prevent being harassed or intimidated while conducting their audit obligations.

Understanding the Transformative Potential of Computer-Assisted Audit Tools and Techniques (CAATTs) in the Accounting Profession

The transformative CAATTs enhance auditing with technology-driven approaches and data analytics. While widely used in large audit firms, their benefits and future impact on accounting remain uncertain for smaller firms. This study aims to provide a theoretical overview of CAATTs, examining their concept, benefits, and significance compared to traditional audit methods. It also explores the challenges associated with CAATTs' adoption. Through up-to-date insights from previous studies, the research sheds light on the potential impact of CAATTs on the auditing sector. Additionally, this study reviews the existing literature that addresses the obstacles hindering CAATTs' adoption in small and medium-sized firms and offers strategies to overcome these adoption challenges. The aim is to provide a better understanding of these innovative tools and their role in shaping the accounting profession. By leveraging CAATTs' capabilities, auditors can enhance their efficiency, accuracy, and effectiveness in conducting audits, paving the way for a more promising future of accounting endeavours.

감사인 특성과 계속감사기간의 감사보수

[Purpose]This paper examines the change of audit fee after the introduction of ‘International Financial Reporting Standards’. Specifically, this paper examines wheter the audit fee after initial audit changes according to the characteristics of auditors.
 [Methodology]Using listed firms in KOSPI market from 2011 to 2018 to examine the relationship between auditor characteristics and audit fee after initial audit engagement. The information of auditors are collected manually from the Financial Supervisory Service’s accounting portal and KIND system.
 [Findings]This paper shows that the audit fee increased even in the case of initial audit engagements since the introduction of the ｢International Financial Reporting Standards｣. Meanwhile, the audit fee in the second and third year after initial audit engagements showed that the audit fee of large audit firms increased, but the higher the average audit experience of their certified public accountants, the lower the audit fee was.
 [Implications]This paper provides the policy implication to the supervisory authorities by presenting the changed audit fee behavior.

How auditors identify and report key audit matters - An organizational routines perspective

Despite the volume of auditing research over the last decade, relatively little is known about how auditors apply specific codified requirements. We use organisational routines as a schematic and Power's (2003) distinction between the front and backstage of an audit to explore the link between the broad prescriptions in ISA 701 and the micro-level performances of individual auditors to report key audit matters (KAMs). Interviews with 42 senior staff from large and mid-tier audit firms reveal how the ostensive elements of auditing routines result in coercive, normative and mimetic forces. These forces regulate and coordinate how audit procedures are executed to yield a frontstage representation of technical and procedural rigour. Yet, at the performative level experience, professional judgement and dynamic operating environments counter isomorphic forces. The messier backstage of activities provides an opportunity for minor modifications to audit procedures which can accumulate and impact the routine at the ostensive level. That the responsibility for the reporting KAMs vests with engagement leaders increases the opportunity for variability as they exercise professional judgement to modify the routine. Overall, our paper adds to the literature on how auditing is socially constructed and reveals how technical concepts are “transmitted” among individual practitioners to illuminate an understudied aspect of auditing. The study provides an original action-orientated perspective of how routines work in professional settings. It complements the largely inferential work on KAM determinants and should be relevant for standard-setters conducting a post-implementation review of ISA 701 and regulators monitoring KAM reporting.

The Effect of Audit Firm Internal Inspections on Auditor Effort and Financial Reporting Quality

ABSTRACT We examine the effect of large audit firms’ internal inspection programs, an important monitoring mechanism, on auditor effort and financial reporting quality. Internal inspections are often predictable, and engagement teams concentrate their effort on audits ultimately selected for inspections. The extra effort increases the likelihood of a favorable inspection rating. We find some evidence of improvement in financial reporting quality in the inspection year, suggesting that internal inspections are effective in deterring auditor shirking. Upon receiving a favorable rating, the engagement team reverts audit effort back to the preinspection level. However, if the rating is unfavorable, the team increases effort on future engagements of the client. This higher effort improves the client’s financial reporting quality if the internal inspection program is not deemed deficient by the PCAOB. Collectively, the results highlight the importance of an effective internal inspection program in improving financial reporting quality. JEL Classifications: M41; M42.

Blockchain in accounting and auditing: unveiling challenges and unleashing opportunities for digital transformation in Egypt

PurposeThis paper aims to examine the role of Blockchain in the accounting and auditing literature and profession. Specifically, the paper investigates auditors' perceptions about the role of blockchain in accounting and auditing and the perceived potential benefits and challenges of blockchain-based accounting systems in Egypt. Moreover, what are the capabilities required for successfully implementing blockchain-based accounting systems?Design/methodology/approachA mixed-method approach was adopted to achieve the research objectives. The qualitative study included 11 in-depth interviews with external auditors, and the results of the interviews and the literature review helped develop a survey collected from 58 auditors.FindingsThe findings revealed low-to-moderate awareness of Blockchain-based accounting systems. Also, there were significant differences between auditors from large audit firms and small-and-medium audit firms regarding the benefits and challenges associated with Blockchain-based accounting systems.Practical implicationsThe results provide valuable insights for practitioners, researchers and policymakers.Originality/valueUnderstanding blockchain-based accounting systems and the benefits and challenges associated with their application is crucial for developing effective strategies and frameworks to overcome barriers and realize the transformative potential of blockchain in the accounting and audit market.

Blockchain technology adoption and accounting information quality

AbstractThe study investigates the implications of companies' adoption of blockchain technology on accounting information quality. Based on a sample of 33,242 firm‐year observations from A‐share companies listed on China's stock exchanges in 2007–2019, we find evidence that blockchain technology adoption significantly improves accounting information quality. Further, additional tests demonstrate that the mechanism of blockchain exerting its positive effect include strengthening corporate governance and realising synergies with large audit firms, while cross‐sectional tests show that its positive effect on accounting information quality is attenuated if the company is in an industry with high IT development or has experienced an audit firm change. Economic consequence tests show that the adoption of blockchain is conducive to companies' financing behaviour, as well as to overall firm value. Consequently, our results suggest the positive effect of blockchain technology on accounting information quality.

Employing string similarity metrics of partners to estimate audit team continuity: determinant and its effects on audit outcomes and pricing

PurposePartners are responsible for allocating audit tasks and facilitating knowledge sharing among team members. This study considers changes in the composition of partners to proxy for the continuity of the audit team. This study examines the effect of audit team continuity on audit outcomes (audit quality and report lags), pricing and its determinant (lead partner experience), which have not been thoroughly examined in previous studies.Design/methodology/approachThis study employs string similarity metrics to measure audit team continuity. The study employs multivariate panel data regression empirical models to estimate a sample of 26,007 firm-years of listed Japanese companies from 2008 to 2019.FindingsThe study reveals that audit team continuity is negatively associated with audit fees, regardless of the auditor’s size. This finding contributes to the existing literature by showing that audit team continuity represents one of the determinant factors of audit fee. For clients of large audit firms, companies with higher (lower) audit team continuity issue audit reports in less (more) time. The experience of lead partners is a strong predictor of audit team continuity, irrespective of audit firm size. Audit quality is not associated with audit team continuity for either large or small audit firms.Originality/valueThis study proposes and examines audit team continuity measures that employ string similarity metrics to quantify changes in the composition of partners in consecutive audit engagements. Audit team continuity expands upon the tenure of individual audit partners, which is commonly used in prior literature as a measure of client–partner relationships.

Does the auditor’s size influence the going concern assesment?

From the beginning of the new millennium, a number of accounting scandals involving audit firms have occurred. The accounting scandals involving well known Big Four audit firms have particularly been echoing in the media, which puts pressure on them and can make them more conservative in their judgements. One of the significant assumptions that auditors must assess is that of going concern of the audited entity. Existing studies from different countries and conducted for different time periods on whether the size of the auditor affects going concern uncertainty statement, do not show unique results, which implies that there are time and location specifics. Since, to the best of our knowledge, there is no such research for Croatia, the purpose of this article is to analyse on a sample of Croatian companies whether there is a significant difference between the propensity of Big Four and non-Big Four auditors to express going concern uncertainty. A sample of large financially troubled, but not bankrupt manufacturing companies, is used. The findings of our study show that there is no significant difference in stating going concern uncertainty between large international audit firms (Big Four) and smaller auditors.

THE IMPORTANCE OF THE PLACE AND ROLE OF PROFESSIONAL ORGANIZATIONS IN THE PROCESS OF AUDITING ACTIVITY REGULATION IN GEORGIA

Regulation of audit activities and quality control of these activities in Georgia gradually developed from the second half of the 90s of the last century and ended with the fact that for this purpose the state created the accounting, reporting and audit supervision service (SARAS) in the Ministry of Finance as a structural unit of the Ministry. Before that, the state could not effectively and strictly control the audit activities and this role was entrusted to the professional organization - the Georgian Federation of Professional Accountants and Auditors (GFPAA), and earlier there was the Council of Audit Activities under the Parliament of Georgia. But this positive event also led to negative events, which, in my specific opinion, I can consider: 1. Strong monopolistic role of the state and weakening of the role of professional organizations; 2. Serious threat of liquidation of small and medium audit firms and oligopolization of audit services in the hands of large audit firms; Real prospective threat of unemployment of auditors employed in small and medium audit firms. The subject of the research of this topic is the role of professional organizations in the process of auditing activity regulation.

Corporate governance and performance in the UK insurance industry pre, during and post the global financial crisis

PurposeDue to stakeholders’ concerns on the contribution of corporate governance in monitoring insurance companies during financial crisis, this study aims to investigate whether and how various corporate governance practices would have affected firm performance of listed and non-listed insurance firms in the UK during financial crisis.Design/methodology/approachThis study uses a unique manually collected data set from listed and non-listed insurance firms in the UK and applies different regressions models to test the hypotheses and to address the endogeneity problem.FindingsThe findings show that board non-duality and the presence of a majority shareholder improve firm performance in insurance companies. Furthermore, the findings for the sub-samples indicate a stronger positive association between board of directors and firm performance in listed insurance companies after the financial crisis, while a positive impact has been found between large shareholders and external audit firms in non-listed insurance companies before and during the crisis.Practical implicationsThe results offer important practical implications for the government, management, shareholders and policymakers. For example, regulators and policymakers should benefit from these results to revise the recommendations for corporate governance mechanisms that prove to be effective on firm performance, as well as those mechanisms that have different or unexpected effects among listed or non-listed firms and/or during the turbulent periods. Investors should be aware of those specific corporate governance mechanisms that would have higher effect on performance of UK insurance firms in which they are considering to invest in.Originality/valueThis study contributes to the current literature by exploring the effect of corporate governance on financial performance by comparing between listed and non-listed insurance companies during financial crisis. Further, to the best of the authors’ knowledge, this is the first study to use two new insurance-related performance measures, the revenue growth ratio and the adjusted combined ratio, as performance proxies to explore whether these new variables create any insights.

Audit Characteristics and Financial Reporting Timeliness of Nigerian Listed Non-Financial Institution

The management is accused of opportunistic behavior and financial report delays following the global financial scandal. Consequently, studies examine the effect of client-specific characteristics on financial report timeliness, and Nigeria is not an exemption. Recent studies focus on the effect of auditor's attributes in mitigating or explaining the rationale for the financial reporting delay. However, limited studies exist in Nigeria on the effect of audit characteristics on financial reporting timeliness in non-financial institutions. Our study contributes to knowledge by examining the effect of audit characteristics on the financial reporting timeliness in the Nigerian listed non-financial institution. We select 450 firm-year observations from 2011 to 2020 using a purposive sampling technique and estimate the model using the Ordinary Least Square Method (OLS). The result reveals that audit price and audit firm size positively affect financial reporting timeliness, while audit tenure is negative but insignificantly related to financial reporting timeliness. Our study concludes that delivering the financial report to the users takes longer when the auditors charge higher fees, reflecting an increase in auditors' workload resulting from additional audit risk and procedure. Also, large audit firms take a long time to communicate financial reports taking due care in forming audit opinions to ensure audit independence and reduce the litigation risk arising from the audit assignment