Large Audit Firms Research Articles

Financial Characteristics of Companies Audited by Large Audit Firms

Purpose – The purpose of this paper is to examine how financial characteristics associated with the choice of a big audit firm with further investigation on the agency costs of free cash flows.Design/methodology/approach – The sample used for this work includes industrial listed companies from Germany and France. To test our hypothesis, we used a number of logit models, extending the standard model selection audit firm, to include the variables of interest. Following previous work, our dependent dummy variable is Big4 or non-Big4.Findings – We observed that most independent variables in the German companies show similar results to previous work, but we did not have the same results for the French industry. Moreover, our findings suggest that the total debt and dividends can be an important reason for determining the choice of a large audit firm, reducing agency costs of free cash flows.Research limitations/implications – This study has some limitations on the measurements of the cost of the audit fees and also generates opportunities for additional searching.Originality/value – The paper provides only one aspect to explain the relationship between the problems of agency costs of free cash flow and influence in choosing a large auditing firm, which stems from investors’ demand for higher quality audits.

Client Management’s Perceptions of Audit Offshoring and the Related Audit Quality Tradeoff

Although large audit firms in the U.S. and the U.K. have begun offshoring audit work, there is limited research on this expanding practice. We survey senior-level client management regarding their perceptions of audit offshoring and its impact on audit quality and the audit process. In addition, we use audit offshoring as the context for our experiment to examine clients’ willingness to privately trade off audit quality for lower audit fees. Consistent with prior research on familiarity and country-of-origin, we predict and find that audit clients who are more familiar with audit offshoring are less concerned about its potential negative effects on audit quality than those who are less familiar. However, we find that even many familiar clients are nevertheless concerned about data security and confidentiality and want more transparency regarding audit firms’ offshoring practices. Our experiment provides novel evidence that clients are willing to trade off audit quality for lower audit fees when they know that investors are unaware that they are making this tradeoff. We discuss the implications of our findings for audit firms, clients, regulators, and investors.

AUDIT COMMITTEE AND INTEGRITY OF FINANCIAL STATEMENTS: A Preventive Mechanism for Corporate Failure.

Corporate governance is a phenomenon that has recently attracted local and foreign interest due to the frequent occurrences of corporate failures experienced by various organizations in both developed and developing nations around the world. Financial statements are the midpoint of this corporate disorder and auditing profession is said to responsible for the disaster. This has brought the question of how efficient is our financial system and the effectiveness of the audit infrastructure. This study investigated the effect of audit committee oversight function on integrity of financial statements as a means preventing organizational failure. The population of this study consisted of 183 public quoted companies in the Nigerian Stock Exchange, 100 medium and large audit firms and 616 investor with about 10% holding in PLC. Data was elicited using structured questionnaires. Hypotheses were confirmed using Z-test. The result shows that there is significant relationship between audit committee activities and integrity of financial statements, which enhances the quality corporate governance and prevents organizational failure. The study recommended that a committed audit committee should be established and members to be appointed should possess analytical skill with strong financial background. The will go a long way to curb the incessant corporate failure in Nigeria.

The changing relationship between audit firm size and going concern reporting

As a result of gradual shifts in the market for audit services, we expect financially stressed public companies to be increasingly audited by regional firms, who, in turn, will be increasingly likely to issue going concern reports to their financially stressed public companies. Our expectations challenge the view that larger audit firms, in order to avoid exposure to litigation, report more conservatively. To address these issues, we examine the 22years between 1989 and 2010, which we classify into four ERAs (e.g., 1989–1994, 1995–2001, 2002–2005, and 2006–2010). We initially document that over time, financially stressed public companies are shifting to regional audit firms, partly due to the actions of larger audit firms shedding these clients, which represent ex-ante conservatism. In contrast, audit firm reporting represents ex-post conservatism. We next show that over time, for their financially stressed public clients, regional audit firms are increasingly more likely to issue going concern reports, and BigN audit firms are increasingly less likely to issue going concern reports. We also show that in more recent ERAs, regional audit firms have been more likely than BigN and national audit firms to issue a going concern report to their financially stressed pubic clients. Overall, our evidence suggests that more recently, larger audit firms, relative to regional audit firms, acted more proactively to lessen their litigation risks through increasing centralization of client selection and acceptance processes. However, our evidence suggests that more recently, to lessen their litigation risks, regional audit firms, relative to BigN and national audit firms, acted more conservatively by issuing more going concern reports to their financially stressed public clients.

Audit Quality and Auditor Reputation: Evidence from Japan

ABSTRACT We study events surrounding ChuoAoyama's failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC's Japanese affiliate and one of Japan's largest audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months for its role in the Kanebo fraud. This unprecedented action followed a series of events that seriously damaged ChuoAoyama's reputation. We use these events to provide evidence on the importance of auditors' reputation for quality in a setting where litigation plays essentially no role. Around one quarter of ChuoAoyama's clients defected from the firm after its suspension, consistent with the importance of reputation. Larger firms and those with greater growth options were more likely to leave, also consistent with the reputation argument. Data Availability: All data in the paper are publicly available from the sources described in the text.

The Role of Accounting Disclosure in Explaining the Intrinsic Market Value of Corporations' Shares Trading in Amman Stock Exchange

The aim of this study was as follows: 1. To explain the requirements of accounting disclosure for corporations whose shares are traded in the stock exchange and to identify its importance for financial information users. 2. To exhibit the reliability and adequacy of financial information available for investors to support their investment decisions. 3. To show to what extent financial information users, particularly investors, depend on different mechanisms adopted in evaluating shares in their investment decisions. 4. To show the factors those affect the decline and rise of market value of the shares of shareholding companies in view of unavailability of new information about companies' performance. 5. To show the extent to which companies comply with accounting disclosure requirements. 6. To state the reasons and obstacles that impede companies compliance with accounting disclosure requirements. 7. To show the role of controlling authorities (bodies) in activating the accounting disclosure process and protecting investors' interests. 8. To show the effect of the improvement of accounting disclosure level on investors' decisions.To achieve these objectives the researcher developed a questionnaire for this purpose and distributed it on the study sample, which represents public shareholding companies sector, licensed financial brokers sector and investors sector in Amman Stock Exchange. The sample included: (35) public shareholding companies trading in Amman Stock Exchange, (23) licensed financial brokers and (27) investors in Amman Stock Exchange. As a result of analysis of questionnaire items the researcher reached the following results: 1. The importance of financial information disclosed increases with financial brokers more than with the other two sectors followed by investors and public shareholding companies. In general, all study sample groups pay much attention to accounting disclosure requirements in financial information. 2. All study sample groups consider that financial information disclosed by public shareholding companies are appropriate and adequate to highlight the intrinsic market value of shares and pay much attention to financial information, especially those published by the Securities Commission about companies' performance, followed by the financial information, which companies publish through their annual financial reports considering that the financial information published in the newspapers and magazines are the less important information sources. 3. All study sample groups depend to a large extent in their investment decisions on different mechanisms adopted in shares evaluation by gathering the large amount possible of economic and financial information and conducting some analyses for shares prices. 4. All study sample groups consider that the unavailability of information on companies' performance affects the determination of their prices and that shares are not shown with the intrinsic value and that it adversely affects their shares in the Stock Exchange. 5. Public shareholding companies comply with disclosure requirements imposed under international accounting standards, international audit standards and disclosure regulations issued by the Securities Commission. This compliance increases in case the company has a high reputation in the Stock Exchange, followed by the companies whose accounts are audited by large and renowned audit firms. 6. There are several factors that weaken the accounting disclosure process by shareholding companies. The most important of these factors are the lack of professional cadres able to meet disclosure requirements and the companies' fear of the outflow of information which might affect their competition status. 7. All study sample groups consider that different controlling authorities play a role in activating the accounting disclosure process and protecting investor's interests leaving the greater role to the Securities Commission, the Companies Controller and finally the external auditor. 8. All study sample groups consider that improvement of accounting disclosure level has an effect in showing the intrinsic value of the price of shares traded in the Stock Market and subsequently rationalizing their investment decisions.

Audit Quality and Auditor Reputation: Evidence from Japan

We study events surrounding ChuoAoyama’s failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC’s Japanese affiliate and one of Japan’s largest audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months for its role in the Kanebo fraud. This unprecedented action followed a series of events that seriously damaged ChuoAoyama’s reputation. We use these events to provide evidence on the importance of auditors’ reputation for quality in a setting where litigation plays essentially no role. Around one quarter of ChuoAoyama’s clients defected from the firm after its suspension, consistent with the importance of reputation. Larger firms and those with greater growth options were more likely to leave, also consistent with the reputation argument.

Should the 4 big replace the big 4? An examination of audit quality using internal audit

Prior research has linked audit quality with large audit firms. Consequently, a dichotomous variable, Big N/non-Big N has traditionally proxied for audit quality. Applying a different measure of audit quality than audit fee, this study investigates whether a single dummy variable for Big N is an appropriate proxy for audit quality in explaining differences in the existence of clients’ internal audit (IA) function. Results indicate that the existence of clients’ IA function is not consistent among Big 4 firms. This has important research implications for the universal use of a Big N dummy variable as a measure for audit quality.

Audit office size, audit quality and audit pricing: evidence from small- and medium-sized enterprises

Using Swedish data, we investigate how audit quality and audit pricing vary with audit firm and office size. In contrast to prior studies, we use disciplinary sanctions issued against auditors not meeting the quality requirement as the measure of audit quality. We find no significant differences in the likelihood of sanctions between Big 4 audit firms and the fifth and sixth largest audit firms in Sweden (Grant Thornton and BDO). We refer to these collectively as ‘Top 6’. However, we find that the probabilities of warnings or exclusions from the profession are much higher for non-Top 6 auditors in Sweden than for Top 6 auditors. Furthermore, we find a strong negative association between the likelihood of sanctions and audit office size for non-Top 6 auditors. This association is insignificant for Top 6 audit firms. Audit fees follow a similar pattern and indicate that larger audit firms and offices put in more effort or have greater expertise. These results suggest that audit quality is differentiated in the private segment market. However, contrary to prior studies, our results suggest that the important dimensions are Top 6 versus non-Top 6 and the office size of non-Top 6 audit firms.

SAS 58, Audit Firm Size, And The Incidence Of Uncertainties In Audit Reports: An Empirical Study

This study develops and investigates two hypotheses: (1) that adoption of SAS 58 should be associated with an increase in the incidence of uncertainties referenced in the audit reports of small audit firms and (2) that there should be no change in the incidence of uncertainties referenced by large audit firms. The empirical results support both hypotheses. The main implication is that standard-setting bodies need to begin giving consideration to the possibility of size-related differences in the effects of changes in auditing standards.

Additional Evidence On The Large Audit-Firm Fee Premium As An Indication Of Auditor Quality

<span>Several studies of the U.S. market for audit services have found evidence of a large audit-firm fee premium. This premium has been interpreted as an indication that large audit firms (typically defined as the Big Eight, now the Big Six), considered as a group, receive higher fees than non-Big Eight firms and thus are perceived to provide higher quality audit services. A common interpretation has been that there is a strong relationship between audit firms size and audit quality. That is, the observed Big Eight fee premium has been interpreted as evidence that this group of large auditors, as a whole, is perceive to provide higher quality audits. Using larger samples than previous studies, this paper decomposes the large auditor fee premium into a separate fee premium effect for each auditor. The results suggest that the observed fee premium is attributable to a subset of large auditors, and therefore it is possible that not all of this group of large audit firms are perceived as offering significantly different audit products, at least when differential audit fees and used as a measure of product differentiation. In addition, when observed audit fee premiums are related to other proxies for auditor quality, there is confirming evidence that large accounting firms are not perceived as a homogeneous group with respect to audit quality.</span>

Trait‐based conformity in reporting of selling, general and administrative expenses

PurposeThis paper aims to study conformity tendencies in selling, general and administrative (SG&A) expenses reporting of US firms through an institutional lens.Design/methodology/approachThe paper examines intra‐industry conformity in SG&A reporting over a ten‐year period among a sample of US firms. It measures conformity by comparing a firm's SG&A profile (reported SG&A relative to sales) against a reference group of industry model firms.FindingsResults suggest that a firm's conformity to large and successful firms' SG&A profiles is determined by the tendency of other industry members to imitate those reference models. Large audit firms (i.e. the BigN) are shown to provide an effective diffusion channel of shared industry‐based reporting templates. Different modes of trait imitation in SG&A reporting seem to coexist as long as the industry model firms are defined in terms of size and/or profitability.Research limitations/implicationsThe paper's results may be of interest to capital market standard‐setters and regulators by showing how regulative ambiguity created by the lack of guidance, feeds social processes that tend to fill the guidance gap.Practical implicationsThe paper's results show that intra‐industry benchmarking of SG&A reporting plays a significant role in the USA and that international auditor networks are important in establishing and promoting industry‐based reporting formats.Originality/valueThe paper shows that the behavior of firms at the industry level can be significant predictors of financial reporting practices at firm level and illustrate specific, socially based mechanisms through which the institutional environment affects financial reporting decisions.

The Differential Impact of the Force of Law Australian Auditing Standards

This qualitative study explores whether the impact of the introduction of the legally enforceable Australian Auditing Standards (ASAs) differs between audit firms based on their size. It complements and extends the Australian Government's pre-implementation April 2006 Regulation Impact Statement ( AUASB 2006 ) and Hecimovic et al.'s (2009) study exploring the perceptions of key stakeholders. The results of the current study, based on data from extensive interviews with auditors from small, medium and large audit firms, suggest that compliance with the legally enforceable ASAs does not appear to increase perceived audit quality or public confidence. The study also finds that the costs/benefits to small audit firms and their clients differ to those of medium and large firms, raising questions about the viability of smaller firms remaining in the audit market.

The riskiness of audit firm continuing clients' portfolio

PurposeThe purpose of this paper is to test whether firms audited by the same Big 4 audit firm (Big 4 continuing clients) are more/less likely to report material weaknesses (systemic material weaknesses) in internal controls over a financial reporting than those audited by the same Non‐Big 4 audit firm (Non‐Big 4 continuing clients) over the period 2005‐2008. It also investigates whether the number of material weaknesses and that of systemic material weaknesses varies among the two groups.Design/methodology/approachLogistic regression and count regression analysis for panel data tests the hypotheses using all firms that had SOX 404 filings and that were audited by the same auditor over the period 2005‐2008 (1,668 firms; 6,672 firm‐year observations).FindingsFindings document that Big 4 continuing clients are less likely to report material weaknesses and systemic material weaknesses than Non‐Big 4 continuing clients, especially during the first two years of investigation. Results also demonstrate that the number of material weaknesses and that of systemic material weaknesses reported by Big 4 continuing clients is significantly lower than that reported by Non‐Big 4 continuing clients, primarily for the years 2005 and 2006.Originality/valueFindings support the risk avoidance perspective where large audit firms avoid riskier clients due to potential litigation costs and/or due to potential sanctions by the Public Company Accounting Oversight Board (PCAOB). Results also suggest that smaller audit firms did not extensively test the quality of internal controls prior to the year 2004. They highlight that the enactment of SOX 404 and the establishment of the PCAOB heightened audit firms focus on internal controls and raised their sensitivity to audit risk arising from weaknesses in internal controls over financial reporting.

IFRS Consequences on Accounting Conservatism within Europe

We investigate the effects of mandatory IRS adoption in th EU on accounting conversation, an essential feature of earning quality, and the way large audit firms(big 4) interact with it.

Audit Pricing and Cost Strategies of Japanese Big 3 Firms

This study aims to investigate whether and how audit fee determinants examined in prior studies influence audit fees and costs in the Japanese audit market, and to examine whether audit pricing and cost strategies differ among Japanese Big 3 firms. Prior studies have not fully examined audit costs and differences in audit pricing and cost strategies among large audit firms. Based on data pertaining to the 2006 audits of publicly listed companies conducted by Japanese Big 3 firms, the present study reveals that many audit fee determinants, such as client size, complexity, risk, whether the client is an SEC registrant, the audit firm's market share in the industry, and client bargaining power, influence audit costs. Other variables, such as the client's location, fiscal year end, and the audit firm's differentiation, influence only either audit fees or costs, or affect both audit fees and costs in opposite directions. Furthermore, the relationships between audit fees/costs and the determinants vary among Big 3 firms.

Do Individual Auditors Affect Audit Quality? Evidence from Archival Data

We examine whether and how individual auditors affect audit outcomes using a large set of archival Chinese data. We analyze about 800 individual auditors and find that they exhibit significant variation in audit quality. The effects that individual auditors have on audit quality are both economically and statistically significant, and are pronounced in both large and small audit firms. We also find that the individual auditor effects on audit quality can be partially explained by auditor characteristics, such as educational background, Big N audit firm experience, rank in the audit firm, and political affiliation. Our findings highlight the importance of scrutinizing and understanding audit quality at the individual auditor level.

Putting Audit Approaches in Context: The Case of Business Risk Audits in Jordan

Large international audit firms are increasingly expanding their activities around the world and increasingly promoting the concept of a similar quality audit to be performed by all their worldwide offices and member firms. This strategy includes developing and using a similar audit approach globally. This study surveys the views of Jordanian auditors, mainly from audit firms with international affiliations, about how such an international approach, with emphasis on the currently popular business risk approach, is applied in practice by Jordanian audit firms and how appropriate and practical the application of such an international approach to auditing is in different contexts. The results of the study show that the business risk approach has been generally adopted by the larger Jordanian audit firms to varying extents, especially those which are full members of an international audit firm network. However, audit clients in Jordan face too many business risks, especially because of poor control systems, poor corporate governance structures, and unclear or non‐existent corporate strategies and objectives. These risks have to be addressed by the business risk approach under very low audit fees. Such factors have led to the business risk approach not being applied in the way that the large international audit firms intended, and not achieving the approach's main objectives, leaving the audit profession with the question of how appropriate it is to adopt an international audit approach in different contexts.

Integrating business risk into auditor judgment about the risk of material misstatement: The influence of a strategic-systems-audit approach

Auditing standards direct auditors to consider business risk and other risk factors when they evaluate the overall risk of material misstatement during the planning phase of an audit. Large audit firms generally use either a strategic-systems approach (SSA) or a transaction-focused approach (TFA) to evaluate misstatement risk. This study used data from a laboratory experiment to examine whether (1) being trained to use either SSA or TFA and (2) analyzing information organized in an SSA or TFA format influence the extent to which auditors integrate knowledge of business risk into their judgment about the likelihood of financial misstatement. Only auditors trained to use SSA who analyzed information provided in an SSA format effectively integrated business risk assessments with their assessment of the risk of material misstatement.

The global audit profession and the international financial architecture: Understanding regulatory relationships at a time of financial crisis

This paper explores how regulatory relationships in the global audit arena are being affected by the current financial crisis. Key policy initiatives and debates are analyzed, along with institutional interactions, in particular between the International Federation of Accountants (IFAC), international regulators and the large audit firms. The events are placed in the context of the new international financial architecture which has developed over the last decade. Using the illustrative lens of bank auditing, questions are asked of the nature and status of audit practice and the regulatory arrangements governing such practice. The paper shows the active nature of the regulatory responses to the crisis and the shifting and competing influences among key regulatory and professional participants in the global audit arena. Emphasis is placed on the need for audit researchers to be sensitive to the developing global financial architecture, and its potential implications for the study of audit practice in different national and international contexts.