Mandatory Audit Research Articles

Framework for developing a new model of risk classification according to the energy usage of companies

Abstract In the last 50 years, both the authorities and the majority of the citizens have understood the need to enforce measures to both preserve energy and reduce the costs of producing it. Nowadays, every developed country has correlated the profitability and the competitiveness of its industry with the efficient and sustainable use of energy and is therefore making conscious efforts to improve these areas. Any action program deemed to enhance energy efficiency has as main component the critical analysis of the energetic resources allocated to an activity in a given perimeter, also known as energy audit. This paper aims to develop a model of risk classification to be applied in planning and performing procedures during energy audit, which can allow a common framework to be developed in this area of audit. The stakeholders of the entity will also be offered a unitary perspective regarding the risks of the respective business, which can be helpful in their decision-making process. The research methodology of this paper consists of quantitative instruments, namely the statistical analysis of a database containing energy audit conclusions of companies in Europe. The indicators used will relate to energy savings, the number of measures implemented as a result of the audit, the percentage of energy saved from total consumption (energy efficiency) and the business line of the company. The novelty this framework will bring consists of the congruence created in the energy audit procedures of different practices and of the standardization and quality improvement in energy audit opinions. The approach of energy audits will therefore evolve towards a risk based one, rather than an analytical one. Also, we will explain the importance of energy savings for the profitability and the competitiveness of companies in the economy today, while facilitating a transparent communication with the stakeholders. This analysis is relevant especially given the fact that the cycle of 4 years after the directive of mandatory energy audit has been enforced ends with 2018 and a conclusion can be drawn before the new audit period starts in 2019.

An analysis of the possible impact of mandatory audit firm rotation on the transformation and market concentration of the South African audit industry

Orientation: Consistent with global concerns regarding the quality of audits and regulatory changes in Europe, South African audit regulations will require audit firms to rotate clients periodically, in an attempt to safeguard auditor independence and audit quality. In 2017 the South African audit regulator issued a ruling requiring mandatory audit firm rotation (MAFR) every 10 years, effective April 2023, primarily intended to improve audit quality. In addition to audit quality improvement, the regulator also believes that MAFR will stimulate transformation in the audit profession by building capacity of black-owned audit firms and allowing opportunities for small- and medium-tier audit firms to compete for the audits of listed companies. Research purpose: This study explores the perceptions of auditors and audit committee chairs of Johannesburg Stock Exchange-listed companies with regard to the direct and indirect financial effects of the implementation of MAFR in South Africa with respect to black economic empowerment and market concentration. Motivation for the study: No studies have explored this controversial additional objective of MAFR in South Africa. Research approach, design and method: An exploratory mixed-methods design is employed, using questionnaires derived from a review of the academic research and professional debate concerning MAFR. Main findings: Contrary to the intentions of the regulator, MAFR may not result in improved transformation of the audit profession and could in fact reduce the capacity of audit firms to pursue transformation initiatives. In addition, MAFR may not decrease the current degree of audit domination of the Big 4 firms of the JSE, possibly even further concentrating the industry, as audit committees and shareholders may be reluctant to appoint mid-tier firms as auditors of the large listed companies. Practical/managerial implications: Industry stakeholders and the regulator should consider targeted interventions to mitigate the potential for impaired transformation and further concentration of the industry which may result from implementation of MAFR in 2023. Contribution/value-add: The findings and conclusions will contribute to addressing concerns regarding the rate of black participation in the industry, as well as mitigating the potential unintended consequences of MAFR.

Independent and joint effects of audit partner tenure and non-audit fees on audit quality

We examine the individual and joint effects of auditors’ non-audit services (NAS)/abnormal NAS fees and length of audit partner tenure on audit quality. Our results raise questions about the ‘one size fits all’ approach imposed by the current audit partner rotation requirement in Australia as a result of (1) a learning differentiation that we observe between Big 4 and non-Big 4 auditors and (2) higher discretionary accruals associated with non-Big 4 auditors. We find abnormal NAS fees to have a positive association with both absolute and positive (income-increasing) values of discretionary accruals for firms with short audit partner tenure. NAS/abnormal NAS fees are also negatively associated with the issuance of going concern opinions to financially distressed firms when partner tenure is short. In terms of policy implications, regulators are able to gauge the efficacy of the CLERP 9 reforms which currently impose a five year mandatory audit partner rotation requirement.

REGULATION OF INDEPENDENT AUDIT IN UKRAINE UNDER THE CONDITIONS OF EUROPEAN INTEGRATION

REGULATION OF INDEPENDENT AUDIT IN UKRAINE UNDER THE CONDITIONS OF EUROPEAN INTEGRATION

The Effect of Mandatory Audit Firm Rotation on Audit Quality, Audit Fees and Audit Market Concentration: Evidence from India

In India, the government introduced mandatory audit firm rotation following calls to improve audit quality and auditor independence in the wake of the Satyam accounting scandal. The absence of strong institutional mechanisms to prevent and detect audit failure in a timely manner has led the government to require periodical audit firm rotation. Evidence from firms for the years 2014 to 2017 suggests that mandatory audit firm rotation does not appear to have improved audit quality, reduced audit costs and increased audit market competition.

Pricing Strategies of Big4 and Non-Big4 Auditors in the Light of Audit Tendering

This study empirically investigates the effects of mandatory audit tendering on audit pricing. Specifically, we examine audit pricing strategies potentially applied by auditors when facing a tender for the upcoming period, also explicitly considering the type of auditor. Our study is motivated by the recent implementation of mandatory audit tendering in the European Union. Using a sample of 1,028 firm-year observations related to listed German companies, our results suggest that auditors facing a tender for the upcoming period charge higher audit fees than auditors not facing a tender for the upcoming period and that this fee effect is mainly attributable to Big4 auditors. In contrast, no significant difference in audit fees is observable for non-Big4 auditors that face a tender for the upcoming period compared to those that do not. In additional analyses, we do not find that auditors facing a tender for the upcoming period provide higher audit quality than auditors not facing a tender, irrespective of the type of auditor. Overall, our findings suggest that Big4 auditors apply strategies focusing on audit pricing, while non-Big4 auditors seem to use other approaches in order to be retained. Our study is, to the best of our knowledge, the first study that examines the effect of audit tenders for upcoming periods on audit pricing.

Towards a culture of quality assurance in optometric education in sub-Saharan Africa

Background: New optometry education programmes in sub-Saharan Africa share a responsibility for blindness prevention by virtue of producing the countries first practitioners. Programmes need to be relevant and of a high quality to ensure sustainability. A quality culture is not a single event involving an accreditation audit but an integrated continuous system across core academic areas and accepted by all concerned in the programme.Aim: The aim was to determine the extent to which quality assurance is integrated into the 11 participating optometry education programmes in sub-Saharan Africa.Setting: The study was conducted in sub-Saharan Africa.Methods: A qualitative approach, employing a phenomenological design was used in the study. Key academics in leadership were purposively selected and then consented to participate in interviews covering the core academic areas, namely, governance, recruitment and selection, teaching and learning, curriculum design, staff development, research, community-based training and student support. Transcribed data was iteratively analysed.Results: Only one sub-Saharan country undergoes the three levels of quality audits within a regulated optometric environment. Despite a few pockets of best practices in some core areas, there was a reported general lack of quality assurance initiatives, national guidelines and adequate leadership capacity.Conclusion: This study highlighted the absence of regulatory authorities and mandatory quality audits, which contribute to the general lack of a quality culture in optometry programmes. Schools should aim to embed a culture of quality that produces competent, socially relevant graduates and impactful research. It is recommended that schools at national, regional and global levels collaborate towards the development of a quality assurance culture across optometry education programmes in sub-Saharan Africa.

감사인 강제교체 기업과 조세회피－세무조정 비감사서비스 제공을 중심으로－

감사인 강제교체 기업과 조세회피－세무조정 비감사서비스 제공을 중심으로－

How Investors Perceive Mandatory Audit Firm Rotation in Korea

Credible audit quality is a precondition for a firm’s sustainability. External auditors offer assurance with regard to the uncertain factors that can jeopardize a firm’s sustainability and provide audit opinions that help investors assess risk. After the global crisis and accounting scandals, mandatory audit firm rotation has been implemented globally. However, few studies have investigated either the cost or the benefit of mandatory audit firm rotation. Prior studies provide only indirect evidence on the effects of audit firm tenure on audit quality/perceived audit quality. By discussing prior arguments, we examine how investors perceive the implementation of mandatory audit firm rotation in Korea. Using a unique and direct setting to examine our research question, we analyze the relationship between firms with mandatorily switched audit firms and the cost of equity capital from 2006 to 2008. We find that the mandatory change in the auditors has a negative association with the cost of equity capital. The results are robust to using the arithmetic mean of the cost of equity capital, lagged control variables, and the manufacturing industry effect. The results indicate that investors perceive that mandatory audit firm rotation provides an environment for qualified audits by enhancing auditor independence and skepticism, and thus decreases the cost of equity capital. This study helps to improve our understanding of the impact of mandatory audit firm rotation the information risk evaluations and provides political implications for policy makers by showing the benefit of mandatory audit firm rotation.

The resolution of audit-detected misstatements

PurposeThe value of an audit lies in its ability to detect and correct misstatements in financial statements. The purpose of this paper is to investigate the resolution of detected misstatements.Design/methodology/approachUsing data on a large sample of audit adjustments by a German Big 4 audit firm, this paper reports an analysis of the factors that influence the resolution of detected misstatements at the engagement level and at the level of the individual adjustment.FindingsThe auditor’s book-or-waive decision is influenced by client characteristics and characteristics of the audit adjustments that can be linked to client as well as auditor incentives to oppose (require) the recording of adjustments. Offsetting effects of the detected adjustments on client income play a key role in auditors’ decisions.Research limitations/implicationsThe results may not be generalizable to Non-Big 4 audit firms. The sample includes unlisted firms which are subject to mandatory audits in the European Union. Other potential factors may not have been captured in the study.Practical implicationsThe findings suggest that standard-setters and audit practice should give more attention to the offsetting effects of audit adjustments on income. The analyses at the two different levels could help practitioners to better structure their book-or-waive decisions.Originality/valueIn contrast to prior studies, the authors analyze the resolution of misstatements at the engagement level and the level of the individual adjustment. This design makes a methodological contribution by expanding the level of analysis of auditors’ book-or-waive decisions to include the engagement level. It further allows examining offsetting effects of different adjustments on client income, as well as the number and the total amount of detected adjustments.

Do companies that claim to be socially responsible adequately manage occupational safety and health?

Corporate Social Responsibility (CSR) is an increasing demand in companies around the world. We have assessed the degree of CSR in 112 Ecuadorians companies (671 participants), of which 58.9% were multinational, from all sectors and geographical country areas. This was done with the objective of knowing the degree of implementation of occupational safety and health management, and whether there is a correlation between these values and those of CSR. A validated questionnaire was used for the institutional and legitimacy part, the Global Reporting Initiative (GRI) for the social part, and mandatory audits on occupational health and safety management. An indicator was also added with perceived priorities of social aspects of CSR for the studied population obtained through DELPHI methodology. More than 90% of the studied companies have quality, occupational health and safety, and CSR management systems. 51% of the companies claim to have an adequate system, while only 6.3% of them exceeded the minimum threshold required by Ecuadorian regulations. The women in boards of directors are less than 1% and there are differences between multinational and national companies, as well as in the trading activity of organizations in the institutional context, in legitimacy, and in social aspects. We conclude that the assessment of social aspects with the Global Reporting Initiative seems to be overestimated when compared with the occupational health and safety management system audits or with an indicator created on perceived priorities of CSR social aspects.

Three-Year Nationwide Experience with Transanal Total Mesorectal Excision for Rectal Cancer in the Netherlands: A Propensity Score-Matched Comparison with Conventional Laparoscopic Total Mesorectal Excision

Transanal total mesorectal excision (TaTME) is a relatively new and demanding technique for rectal cancer treatment. Results from national datasets are absent and comparative data with laparoscopic TME (lapTME) are scarce. Therefore, this study aimed to evaluate the initial TaTME experience in the Netherlands, by comparing outcomes with conventional lapTME. Patients with rectal cancer who underwent curative TaTME or lapTME were selected from the nationwide and mandatory Dutch ColoRectal Audit (DCRA), between January 2015 and December 2017. Primary outcome was circumferential resection margin (CRM) involvement. Secondary outcomes included operative details and short-term (<30 days) clinical course. Propensity score matching was performed for 7 factors. There were 3,777 patients included for analysis (TaTME, n= 416, lapTME, n= 3361). Transanal TME was performed in 38 hospitals and lapTME in 90 hospitals. Before matching, the patient category within the TaTME group was technically more challenging in terms of tumor height and preoperative threatened margins. After 1:1 matching, 396 patients were included in each group, with comparable baseline characteristics. Circumferential resection margin involvement was 4.3% after TaTME and 4.0% after lapTME (p= 1.000). Conversion rate was significantly lower in TaTME (1.5% vs 8.6%, p < 0.001). Anastomotic leak rate was not significantly different (16.5% vs 12.2%, p= 0.116). Other postoperative outcomes were also comparable between the groups. Significant independent risk factors for CRM involvement in TaTME were preoperative threatened margin on MRI (odds ratio [OR] 5.48, 95% CI 1.33 to 22.54) and conversion (OR 30.12, 95% CI 3.70 to 245.20). This first nationwide study shows early experience with adoption of TaTME in the Netherlands. Considering that current data represent initial TaTME experience, acceptable short-term outcomes were demonstrated when compared with the well-established lapTME.

Mandatory Auditor Involvement in Bank Supervision

We study the economic consequences of mandates that require bank auditors to report to bank regulators. Based on survey responses from the European Central Bank and all 28 national bank regulators within the European Union and a review of national banking regulations, we create a novel dataset on these mandates. Exploiting the cross-sectional and time-series variation in these mandates, we find evidence that auditor reporting to bank regulators reduces bank riskiness, as measured by counterparty risk and credit spreads. We also observe a decline in problem loans and risk-weighted assets, as well as improvements in timeliness of loan loss provisions. Additional analyses suggest that mandated auditor reporting increases the effectiveness of supervisory and monitoring efforts and improves market discipline of banks. However, mandated auditor reporting comes with costs: it reduces future lending growth, risky lending, and profitability, and increases audit fees paid by shareholders.

Mandatory audit rotation and audit market concentration – evidence from Poland

The new audit regulation came into force in Poland in 2017 and imposed mandatory audit rotation. The new regulation aims to strengthen the auditor’s independence but it might also affect concentration on the audit market. The aim of this paper was to analyse whether mandatory audit rotation has a potential to reduce the audit market concentration in Poland. The sample included 198 capital groups with the parent company listed on the Warsaw Stock Exchange. The own compilation was prepared based on the audit opinions which included information about appointed audit firms in the period 2011-2017 (1,386 observations in total). The paper includes the analysis of audit tenures, their length, frequency of changing the audit firm and direction of the changes (to Big-4 or to Non-Big-4). The results showed that the biggest capital groups tend to appoint Big-4 audit firms and if they change auditor—they choose another firm from the Big-4. Additionally, the high number of short-term tenures (up to five years) suggests that Big-4 firms have strong bargaining power and they benefit more from the rotation of the clients rather than from their retention. The findings significantly contribute to the hypothesis that mandatory audit rotation will not reduce the concentration on the audit market in Poland. The findings might be valuable for the regulators and supervisory authorities responsible for the monitoring of the concentration level on the audit market.

The Introduction of Mandatory Audit Firm Rotation in the EU: the Case of Portugal

The Introduction of Mandatory Audit Firm Rotation in the EU: the Case of Portugal

Audit firm rotation and audit quality: Comparison before vs after the elimination of audit firm rotation regulations in Indonesia

This paper examines whether the changes in audit rotation policy affect the relationship between audit firm rotation and audit quality in Indonesia. This study uses 2,403 observations from 371 firms listed on the IDX for the period 2010–2017. This study uses Ordinary Least Squares regression to test the hypothesis. We find that, in the mandatory audit rotation period (pre-period), there is no significant association between audit rotation and audit quality. Interestingly, we find a positive relationship between audit rotation and audit quality in the voluntary audit rotation (post-period). Our result implies that voluntary audit rotation without any coercive regulation is more effective in improving audit quality. This research provides an insight to policy makers that eliminating the regulation of audit firm rotation is an effective decision to enhance audit quality.

THE FINANCIAL STATEMENTS AS THE BASIC SOURCE OF ASSESSMENT OF THE ENTERPRISE. LEGAL AND ECONOMIC ASPECTS

The legal basis for the preparation of the financial statements is the Accounting Act (Journal of Laws of 2016 item 1047 with later amendments).It specifies in particular when and for what period financial statements should be prepared. In what language, in which currency, what elements should be included, what scope of information should be included in each of these elements, and whether the financial statements are subject to mandatory auditing by the auditor before its approval.The complete financial statements consist of the following parts: Introduction to the financial statements; Balance; Capital structure analysis; Profit and Loss Account; Cash flow statement; Additional information and explanations.

An Evaluation of Mandatory Audit Firm Rotation in South Africa

An Evaluation of Mandatory Audit Firm Rotation in South Africa

Audit Firm Tenure, Bank Complexity, and Financial Reporting Quality

ABSTRACTTheory from organizations and economics research posits that in an inter‐organizational relationship, both parties invest in relationship‐specific knowledge, which in turn facilitates the effectiveness of the relationship while strengthening the attachment between the parties. In complex settings where there are more opportunities for knowledge creation, the investments will be larger and the attachment stronger. Because banks are complex institutions that present unique challenges to auditors, we suggest that effective audits critically depend on the accumulation of significant investments in client‐specific expertise through a long association with the client. We find a positive association between audit firm tenure and financial reporting quality, and this association is particularly strong in banks that are more complex. Also, contrary to recent research we find that benefits of audit firm tenure for complex banks accrue even for long tenure and are not limited to medium tenure. Our findings largely support the notion that a long relationship with the client reflects the underlying demand for expertise, which is critical for high‐quality audits of complex organizations. Imposing short‐term limits on audit firms would adversely affect the investments in client‐specific expertise especially in the cases where this expertise is needed the most. Our findings do not support calls for mandatory audit firm rotation for large complex institutions.

The Consequences of Mandating Auditor Rotation: Evidence from a Dynamic Structural Model

This paper estimates a dynamic model of clients' decisions to switch audit firm and misstate earnings as a function of auditor tenure. Adapting the conditional choice probability framework of Hotz and Miller (1993), which simplifies the estimation to a conditional logit, we find that dynamic considerations are important for clients' audit firm switching decisions. We then use the model to evaluate a policy counterfactual of mandatory audit firm rotation that reduces the expected horizon with an audit firm. We find that mandatory rotation reduces misstatement rates by about 1 to 3 percentage points but leads to large increases in auditor switches, even before the term limit. Estimating how mandatory rotation may alter auditor effort reveals a significant reduction in effort but does not materially change our main findings. Overall, the results call for caution when evaluating the benefits of mandatory audit firm rotation.