Prior Audit Research Articles

The impact of non-timely 10-Q filings and audit firm size on audit fees

PurposePrior studies suggest that non-timely 10-Q filings indicate higher potential risks than non-timely 10-K filings. Furthermore, larger audit firms tend to be more risk-averse and conservative about reporting. Inspired by these research streams, this paper aims to investigate the influence of non-timely 10-Q filings on audit fees and the impact of audit firm size on this association.Design/methodology/approachThe cross-sectional audit fee regression model used in this study is similar to that used in prior audit fee research (Simunic, 1980; Francis et al., 2005; Hay et al., 2006; Wang et al., 2013). The model includes the following five major characteristics that would influence auditors’ fee decisions: auditee size (LNAT), complexity (REIVAT, FOREIGN, SEG), financial condition (LOSS, ROA, GROWTH, ZSCORE), special events (ICW, RESTATE, INITIAL, GC) and auditor type (BIG4). To examine the effect of non-timely 10-Q filings on audit fees, the variable NT10Q is included in the audit fee model.FindingsThe results indicate that when both non-timely 10-K and non-timely 10-Q filings are included in the regression model, only non-timely 10-Q filings are significantly associated with higher audit fees, suggesting that the presence of non-timely 10-Q filings signals more serious underlying problem than non-timely 10-K filings in the audit fees decision processes. In addition, we find that audit fees for firms audited by Big 4 auditors are 26.4 per cent higher when those firms file non-timely 10-Q reports, whereas there is no significant association between non-timely 10-Q filings and audit fees for firms audited by non-Big 4 auditors.Practical implicationsAs no attention has been paid to the investigation of the impact of non-timely 10-Q filings on audit fees, with the aim of filling the gap of this specific research area, this study examines the association between non-timely 10-Q filings and audit fees and the influence of audit firm size on this association.Originality/valueThe contribution of this paper is threefold: first, it is the first study to examine the association between non-timely 10-Q filings and audit fees. The results show that non-timely 10-Q filings are a better and earlier indicator of audit risk than non-timely 10-K filings. Second, the results reveal that the relationship between non-timely 10-Q filings and audit fees is affected by audit firm size. Specifically, Big 4 auditors tend to charge higher audit fees in the presence of non-timely 10-Q filings, reflecting that they are more sensitive to audit risk than smaller audit firms are. Third, an examination of the quarterly effect of non-timely 10-Q filings on audit fees indicates a stronger effect from the first quarter’s non-timely 10-Q filings, compared to the second or third quarter.

FAKTOR-FAKTOR YANG MEMPENGARUHI PENERIMAAN OPINI AUDIT GOING CONCERN PADA PERUSAHAAN PUBLIK SEKTOR MANUFAKTUR

The purpose of the study is to investigate over the acceptance of going concern audit opinion which can be performed by observing company’s financial condition, current ratio, quick ratio, cash flow from operations, return on assets, debt to equity, long term debt to total assets, debt to total assets, audit quality, prior audit opinion, debt default and opinion shopping. Samples are obtained by sampling pur-posive method. Data for this study comprises of the information from the financial statement of the public manufacturing companies in Indonesia over the four year period 2005 until 2008, and the result obtained 260 observations. The logistic regression used to examine the factors that are predicted to affect the probability of acceptance of going concern audit opinion. The result of this research is that com-pany’s financial condition (Revised Altman Model), return on assets, debt to total assets and prior audit opinion are significantly affect the probability of acceptance of going concern audit opinion. On the other hand, current ratio, quick ratio, cash flow from operations, debt to equity, long term debt to total assets, audit quality, debt default and opinion shopping, do not so.

Abstract 180: Some Like it Hot; Radiation Safety in the Catheterization Lab

Objective: Ionizing radiation is an unseen and often unappreciated safety concern for patients and cath lab staff. Radiation exposure has both deterministic and stochastic effects, with patient risk estimated by peak Skin Dose and Air kerma Area product. In our lab exposure guidelines have been set for radiation safety (fluoro time < 60 min, 4,000 mGray and 20,000 cGray cm 2 ). A prior audit of practice 2011-2013 found that 17.1% (758/4,439) of patients undergoing interventional procedures exceeded these limits. Safer radiation practices were implemented including: intra procedure operator feedback, decrease in cine frame rate and run length, promote mapping and less angled views. However changing patient characteristics (increased obesity, prior CABG) and an increase in structural procedures warrant reexamination of practice. Procedure: The frequency of guideline excessive radiation exposure for cardiac cath lab patients was tracked over a 12 month period from 11/2016-11/2017. The frequency of radiation exposure exceeding our guidelines was tracked overall and by operator (16), and by specific intervention. Results: Over the one year period 10.2% of interventions [174/1,702] received excessive skin or total body radiation. Rates exceeding guidelines by operator ranged from 4% to 26% with operators performing structural or peripheral procedures having the highest patient radiation exposures. Structural procedures resulted in exposures as high as 123 min fluoro time, TAD of 226,385 cGray cm2, 11,129 mGray skin dose [patient had post procedure skin damage]. Factors associated with high radiation exposures included: increasing obesity, prior surgical revascularization, coronary anomalies, multivessel procedure or high complexity procedure, difficulties in imaging requiring highly angled or multiple views, procedural complications. Interventions associated with limiting exposure included: limiting fellow participation, decrease in frame rate, interim stills with limited cine runs. The default settings of X-Ray equipment have been modified to encourage safe and appropriate use of radiation in the cardiac catheterization lab (however, physician overide of settings is still possible). Conclusions: The changes made in imaging equipment and procedures 5 years ago have been largely sustained and have resulted in less frequent radiation outliers. Patient factors (e.g. obesity, prior CABG) complex and multivessel interventions, structural and vascular procedures are potentially frequently associated with excess radiation. Changing default settings and implementing radiation safety practices, including staging where appropriate, can significantly decrease radiation exposure to patients and staff. Cumulative and target organ specific patient doses of radiation should be tracked and more readily accessible in the patient’s medical record.

The Information Content of Going Concern Conclusions: Do Interim Reviews Provide an Early Warning?

We investigate whether going concern conclusions in the interim (half-yearly) review (IGCC) provide investors with a timely source of useful information. Using the Australian setting, with mandatory interim assurance and disclosure, we find a strong negative market reaction surrounding the release of an IGCC. Additionally we show that auditors can signal both good and bad news regarding the firm in their interim review conclusion via changes in their judgement from the prior annual report audit opinion. Furthermore, despite containing different levels of assurance, there is no significant difference between the market reaction to IGCCs and going concern opinions received in the annual report audit (AGCO). The market reaction to the AGCO is also related to the prior interim review conclusion. Last, IGCCs are significant predictors of the following AGCO, beyond the previous annual report audit opinion. Overall, we conclude that going concern conclusions in interim financial statements provide an early warning to investors.

Going-concern opinion decisions on bankrupt clients: Evidence of long-lasting auditor conservatism?

Geiger, Raghunandan, and Rama (2005) examine auditor going-concern decisions prior to client bankruptcy in the periods surrounding the enactment of the Sarbanes-Oxley Act (2002) at the start of this century and find evidence of improved conservatism. Feldmann and Read (2010) replicate and extend Geiger et al. (2005) and find that the proportion of going-concern opinions (GCOs) increases sharply in the post-SOX period (2002−2003) relative to the pre-SOX period (2000−2001). They show, however, that the improvement in conservatism is largely transitory and that the GCO ratio quickly declines over time, ultimately returning to its pre-SOX level by 2006. In this paper, we examine the prior audit opinions that auditors issued for a sample of 340 U.S. public companies that filed for bankruptcy during the years 2006–2015, a period that includes the recent Great Recession (hereafter, GR). Our analysis sheds light on whether the enormity of the GR resulted in a long-lasting change toward conservatism in auditor going-concern decisions on bankrupt clients. Controlling for confounding factors, we find that auditors were significantly more likely to issue GCOs to subsequently bankrupt clients following the onset of the GR. Finally, controlling for confounding factors, we find no significant change in the propensity of auditors to issue a GCO during the two post-GR recovery periods compared to going-concern decisions during the GR.

Public Accounting Firm Switching on the Companies Listed in IDX

The purpose of this study is to determine the probability of the changes of upgrade, downgrade, and same grade public accounting firms predicted by prior audit opinion, growth rate of the client, public ownership and financial distress. The population in this study is manufacturing companies listed in Indonesia Stock Exchange for year of 2010-2015 which consist of 144 companies. The sampling technique is a purposive sampling method which results for 24 companies. Analysis method uses descriptive statistics and multinomial logistic regression analysis. The results of this study showed that the variables of prior audit opinion, growth rate of client, and financial distress could predict the probability of the changes of upgrade, downgrade and same grade public accounting firms. Meanwhile, public ownership variable could not predict the probability of the changes of upgrade, downgrade and same grade public accounting firms. It can be concluded that to predict the change of public accountant office can be performed by paying attention to prior audit opinion, clients growth rate, and financial distress.

Direct and mediated associations among earnings quality, book-tax differences and the audit quality

PurposeThe purpose of this paper is to investigate the direct and indirect links between book-tax differences (BTDs) and audit quality using accounting conservatism (proxy of earnings quality). Hence, this paper seeks to extend prior audit quality research.Design/methodology/approachThis study uses a sample of Tunisian listed firms on the Tunis Stock Exchange and operating in the industrial and commercial sectors during 2005-2012. This investigation is motivated by structural equations system models that specify both a direct link and an indirect link that is mediated by information reflected in BTDs.FindingsThe results show that for the Tunisians companies, firms with large BTDs are associated with higher audit quality implies that such BTDs represent an observable proxy for earnings quality that affects auditor decisions. The authors find statistically an indirect link between abnormal BTDs and audit quality that is mediated by earnings quality. The current study also provides evidence that information reflected in BTDs can improve audit quality.Practical implicationsThe findings may be of interest to the academic researchers, practitioners and regulators who are interested in discovering the informational value of BTDs in the audit process.Originality/valueThis paper extends the existing literature by examining the mediation effect of information reflected in BTDs on relationship between BTDs and audit quality.

PERTIMBANGAN AUDITOR DALAM MEMBERIKAN OPINI AUDIT GOING CONCERN

Going concern audit opinion will cause a decline in public trust and may even accelerate the company went bankrupt, as in the hypothesis of a self-fulfilling prophecy. This study examines the financial and non-financial faktors that can be obtained comprehensive model that can be considered by the auditor in assessing business continuity auditee. The purpose of this study was to test the effect of financial distress, debt default, prior audit opinion, auditor’s reputation and auditor client tenure to the possibility of receiving going concern audit opinion. The population of this study is a manufacturing company listed in the Indonesia Stock Exchange in the year 2008-2010. The samples of 28 companies were selected based on criteria that the companies are scored negative net profit after tax. Secondary data obtained is processed by using Logistic Regression analysis. The results revealed that the debt default and prior audit opinion affect on going concern audit opinion. As stated in the PSA 30, that debt default be an important indicator before the auditor issued a going concern opinion. The financial distress, auditor reputation and auditor client tenure had no effect on the possibility of receiving going concern audit opinion.

The Relationship between Internal Audit Assurance Frequency and Earnings Manipulation Intent and Behavior: A Theory of Planned Behavior Approach

This study uses Ajzen’s (1991) theory of planned behavior (TPB) to examine whether the internal audit function’s use of continuous auditing affects managers intent and actual behavior related to earnings manipulation. I conduct an experiment where 265 corporate managers assume the role of a divisional vice president incentivized by an annual bonus based on divisional performance. At midyear, participants signal their intent and actual earnings manipulation behavior in a setting where the division is on target to miss the annualized earnings target if the manager does nothing. Consistent with theory, univariate analyses suggest that managers who indicate higher perceptions on each of the three TPB elements were more likely to manipulate earnings. Multivariate analyses support a positive relationship between each measure and earnings manipulation intent, however, the attitudes measure is statistically insignificant. Related to actual behavior, I predict and find that managers who intend to manipulate earnings actually do so. Further, I find that participants who intend to manipulate earnings prefer to use accounting estimates relative to accounting expenditures as their earnings manipulation mechanism in this setting. In additional analyses, I find managers with current or prior audit committee experience were less likely to manipulate earnings. Lastly, I find that managers are indeed less likely to manipulate earnings when the internal audit function uses continuous auditing. This study contributes to knowledge by disentangling earnings manipulation intent from actual behavior. Results of the study should be of interest to auditors, academics, and financial statement preparers.

Unexpected Fees and the Prediction of Material Weaknesses in Internal Control Over Financial Reporting

We investigate whether prior year unexpected audit fees help predict new material weaknesses in internal control over financial reporting reported under Section 404 of the Sarbanes–Oxley Act (SOX). Predicting material weaknesses may be useful to investors and other financial statement users because these disclosures have adverse economic impacts on disclosing firms. Unexpected fees are significantly associated with material weaknesses reported under Section 404, even after controlling for Section 302 disclosures and other factors associated with internal control weaknesses. Unexpected fees are associated with company-level weaknesses but are not significantly associated with account-specific weaknesses, consistent with differences in the nature and severity of the two types of material weaknesses. Our results are consistent with unexpected audit fees containing information on unobserved audit costs and client control risks, which help predict future internal control weaknesses.

Securities Class Actions in the United States and Canada Against Chinese Companies and Their Auditors: An Empirical Investigation

Chinese companies have accessed the public capital markets of the US and Canada more frequently in recent years. This paper provides for the first time empirical evidence documenting the characteristics of private securities class action lawsuits (filed in the US and Canada) against Chinese companies and their auditors.Analysis of lawsuits worldwide shows that Chinese companies are positively associated with auditors being named defendants and experiencing a negative outcome (for example, related government enforcement actions and/or settlement payments to terminate class actions). A group of companies from countries outside the US and Canada was compared to the Chinese companies. For the comparison group, the factors that were associated with auditors being named defendants and experiencing a negative outcome are consistent with those that have been found in prior auditor litigation research. Conversely, the Chinese companies are characterized by a different pattern of litigation. Among the traditional factors, only fraud is associated with auditor litigation. In addition, the use of a small CPA firm auditor with the local audit engagement team office physically located in the US or Canada (as opposed to the local audit engagement team office being physically located in the People’s Republic of China (“PRC”)) is associated with auditor litigation. We find limited evidence that the use of a reverse merger to go public is positively associated with auditor litigation.We analyzed the Chinese lawsuits’ settlements. Aggregate settlement amounts are positively associated with the occurrence of an auditor settlement and with the class period length. Auditor settlement amounts are positively associated with the use of a large CPA firm auditor with the local audit engagement team office physically located in the US or Canada (as opposed to the local audit engagement team office being physically located in the PRC), class period length, and fraud. These findings suggest that the amount of litigation settlements of large CPA firms with the local audit engagement team office physically located in the PRC may have been reduced by their refusal to provide audit documentation requested by the Securities and Exchange Commission.

Effect of Financially Punished Audit and Feedback in a Pediatric Setting in China, within an Antimicrobial Stewardship Program, and as Part of an International Accreditation Process.

Prior authorization, audit and feedback, and pay for performance are the three core "active" strategies of antimicrobial stewardship program (ASP), yet little is known about the individual or combined benefits of such programs, particularly in a pediatric setting. The aim of this study was to compare these core ASP strategies and determine the incremental effect of financially punished audit and feedback. During the journey to the Joint Commission International accreditation, a tertiary pediatric medical center performed two different hospital-wide stewardship interventions in succession. The first stage without formalized ASPs served as pre-intervention period, January 2011 to April 2011. The ASP used prior authorization alone during the first-intervention period, May 2011 to September 2011. In October 2011, financially punished audit and feedback was introduced, marking the start of the second-intervention period, October 2011 to November 2012. We compared the differences of the change in monthly average use of antibiotics and expenditure on antibiotics before and after the ASP changes by using interrupted time series via dynamic regression. The main end points included the proportions of antibiotic prescriptions and expenditure on antibacterial relative to all medications. Before the second-intervention period, neither the proportion of antibiotic prescriptions nor the proportion of expenditure on antibiotics declined significantly in both ambulatory and inpatient settings. However, after the introduction of financially punished audit and feedback, the proportion of both antibiotic prescriptions (β = -6.269, P < 0.001, and reduction = 59.4% for outpatients; β = -1.235, P < 0.001, and reduction = 19.8% for inpatients) and expenditure on antibiotics (β = -7.777, P < 0.001, and reduction = 46.7% for outpatients; β = -4.933, P = 0.001, and reduction = 16.3% for inpatients) dropped immediately. The combination of more than one core strategies (prior authorization, audit and feedback, and pay for performance) will be more effective than one strategy alone.

Tax Controversy Corner - A Limit on the IRS's Prerogative to Change its Mind: Reliance on a Prior No-Change Letter as a Defense to Penalties

This article discusses when a result in a prior IRS audit can be a defense to penalties in a later year. This article reviews the recent decision of Brinks Gilson & Lione v. Comm’r, T.C. Memo. 2016-20, and J.J. Powell, Inc. v. United States, 125 Fed. Cl. 73 (2016), and provides some practice tips for successfully defending against penalties based on a favorable result in a prior audit.

The Role of Account Subjectivity and Risk of Material Misstatement on Auditors' Internal Audit Reliance Judgments

SYNOPSIS Using a field-based questionnaire, we examine how auditors simultaneously use client-level misstatement risk (inherent risk and control risk) with account subjectivity when utilizing internal audit. We contend that auditor use of internal audit will reflect a balance of the costs and benefits of using internal audit. Prior audit research has primarily focused on lower and higher risk conditions, with relatively few studies examining the implications of moderate risk on internal audit use. Data on actual audits from an instrument administered to external auditors reveal significant differences in reliance decisions across lower, moderate, and higher misstatement risk levels. Results reveal that increases in account subjectivity have no effect on auditors' internal audit reliance when risk of material misstatement is at lower levels. However, auditors increase their internal audit reliance when account subjectivity increases across moderate misstatement risk. Finally, our results suggest that auditors decrease their internal audit reliance when account subjectivity increases across higher misstatement risk. By examining these risk variables in combination, we provide insight into the complexities associated with external auditors' internal audit usage. This research could be of interest to practitioners and academics by providing insight into how multiple risk factors may be combined when utilizing internal audit.

Auditor Tenure and Going Concern Opinions for Bankrupt Clients: Additional Evidence

SUMMARYRegulators and lawmakers in the U.S. periodically express concerns about a possible association between auditor tenure length and audit failure (SEC 1994; U.S. House of Representatives 2002). In this study, where we define audit failure as a bankrupt company not receiving a going concern modified audit opinion prior to bankruptcy (a Type II reporting error), we examine prior audit reports for a sample of 401 U.S. publicly held companies that filed for bankruptcy during the period 2002–2008. Using a quadratic model to control for potential nonlinearity in the relationship between auditor tenure and audit reporting, we find no significant association between auditor tenure and Type II errors for Big 4 audit firms. In contrast, for non-Big 4 audit firms we find evidence of a significant association that is nonlinear. Specifically, auditor tenure appears to adversely influence non-Big 4 firms' audit reporting for bankrupt clients in the initial years of an audit engagement and has no discernible effect in the later years. Thus, we provide evidence that long auditor tenure, of itself, is not associated with Type II reporting errors. In this respect, our findings may help to inform the continuing debate regarding the possible adverse effects of long auditor tenure. Overall, our results are robust to controlling for any extant endogeneity with respect to going concern opinions and choice of the length of audit firm tenure.

European Market Reaction to Audit Reforms

On October 13, 2010, the European Commission initiated an extensive consultation with the launch of the ‘Green Paper on Audit Policy: Lessons from the Crisis’, which included a set of proposals, intended to reform the European audit market. We identify 15 events between 2010 and 2014 that increase or decrease the probability of adoption of the proposed audit reforms. Overall we find that investors reacted positively to the proposals, suggesting that investors in European firms perceived net benefits associated with the reforms. We also find that investors’ reactions are dependent on the firms’ prior audit regulation, audit quality and audit cost characteristics. For instance, the market reaction is less positive for firms that prior to the proposals, were already under, or had been under, an audit firm rotation regime (or a joint-audit regime), and whose audit firms already had a ban on non-audit services - consistent with investors expecting less of a net benefit from these EU audit reforms. We also find a positive reaction to the adoption events for firms whose audit firm has a lengthy tenure, receives higher audit fees, or who is in a country with high audit firm concentration, all consistent with investors expecting net benefits from the audit reform proposals. Finally, our results indicate that this regulatory change has implication for US firms whose subsidiaries are listed in Europe.

Public Expenditure and Effective Financial Management in Developing Countries, Case Study: Rwanda (2009-2012)

The research done which has the topic entitled "Public expenditure and effective financial management, case of Rwanda" from 2009-2012. The study had the purpose of to identify why the effective financial management of public expenditure is not reached for the period of the study.In this research, the following questions are used: Why the audits’ reports continue to show that Government Business Enterprises (GBEs) are the least performing entities? Why there are still many accounting errors in the books of account.As hypothesis of the research, the following intervened in: Some of them have significant weaknesses in financial management and reporting aspects. In some of them, there are no adequate internal control systems or where they exist, they are not effective. In others, there are corporate governance gaps which undermine proper functioning of these entities. Lack of proper understanding of the IFMIS system by most users has made this problem worse. Many entities recorded expenditure on inappropriate budget lines.The sample population consisted of 30 budget officers and 30 public accountants in hole country. This sample has choose randomly because are the first to give an effective information. Also an interview with the head of department in office of auditor general had done.The research was qualitative and quantitative in design. The research instruments included closed-ended questions and open-ended questions. The responses were tabulated based on the effectives and percentages of responses incurred by 43 entities during the 30 June 2010). Public entities (31 institutions) incurred wasteful expenditure amounting to Frw 1,612,460,075 (2010: Frw 1,054,529,243 in 34 institutions) that could have been avoided had they complied with laws, regulations and procedures in force. There are cases where bonuses and other staff benefits like communication, transport and overtime allowances were paid to staff in public entities without appropriate approval.For the fiscal year 2011-2012: Total expenditure of Frw 2,927,029,213 was this year either not supported at all or did not have sufficient support documents when compared to the Frw 10,668,450,282 identified during audits of last year. Further, wasteful expenditure has reduced from Frw 1,612,460,075 in last year’s report to Frw 849,510,992 this year. 68.33% of respondents said that internal control system in Government Business Enterprises (GBEs) exists in average; 23.33% said that the internal control system is good; 6.67% of respondents said that the internal control system very good and 1.67% of respondents said that there is a poor internal control system. 65% respondents said that the financial management and reporting in Government Business Enterprises (GBEs) is average; 26.67% said that the financial management and reporting is good; 3.33% of respondents said that the financial management and reporting is very good and 1.67% of respondents said that there is a poor financial management and reporting. The % of 65 of respondents show that there is a weakness in financial management and reporting in government business enterprises. 75% respondents said that the Corporate Governance in Government Business Enterprises (GBEs) is average; 6.67% said that the Corporate Governance is good; 3.33% of respondents said that the Corporate Governance is very good and 5% of respondents said that there is a poor Corporate Governance. The % of 75 of respondents show that there is Corporate Governance gaps in government business enterprises. 65% respondents said that the understanding of the IFMIS system is good; 23.33% said that the understanding of the IFMIS system is very good; 6.67% of respondents said that the understanding of the IFMIS system financial is average; 3.33% of respondents said that there is a poor understanding of the IFMIS system and 1.67 of respondents said that there is a very poor understanding of the IFMIS system. 83.33% respondents said that the recording expenditure on inappropriate budget lines is average; 5% said that the recording expenditure on inappropriate budget lines is ranked good; 5% of respondents said that Recording expenditure on inappropriate budget lines is poor; 3.33% of respondents said that there is a very poor Recording expenditure on inappropriate budget lines. Data above show that the first and the second hypothesis are confirmed and verified. It is recommended to the Government to pay closer attention to Corporate Governance issues in these institutions and to enhance supervision of the GBEs to facilitate desired improvements. It recommended also to MINECOFIN to enhance the training programmes for users of IFMIS to better their understanding of the system and improve on the quality of accounting records. There is also need to improve the budgeting process to ensure that realistic amounts are allocated to budget lines. The issue of record keeping needs urgent attention to facilitate proper management of public funds to enhance accountability and transparency. Recommended also to all public entities to implement prior year audit recommendations.

When the world isn't always flat: The impact of psychological distance on auditors' reliance on specialists

This study addresses recent calls for research on the conditions influencing auditor decisions related to PCAOB-encouraged reliance on third-party experts. To this end, the present study explores the effect of psychological distance on external auditors' reliance when induced through physical distance in a telework relationship between an auditee and a specialist. The reliance decision focuses on the auditee's contracting with a computer audit specialist who works remotely through a telework arrangement. The psychological distance associated with this telework arrangement is examined both in the context of variance in the physical distance of the computer audit specialist and the interactive effect of a contextual factor — the historical experience with an auditee's internal audit function. A 2×2 experiment with a total of 121 experienced Big 4 auditors is conducted in which psychological distance (physically proximate or remote specialist) and historical experience with an auditee's internal audit function (presence or absence of a prior year material weakness in internal controls) are manipulated. Consistent with predictions based on construal level theory, we find that psychological distance affects auditors' reliance judgment such that increased distance leads to lower reliance. Furthermore, the historical experience with the auditee's internal audit function creates a halo effect which moderates the effect of psychological distance such that the differential effect of a present vs. absent prior year material weakness on auditors' confidence and associated willingness to reduce budgeted audit hours is larger for a psychologically distant specialist. The results of this study suggest that an auditee's choice of a more proximate specialist may garner greater reliance by the external auditor, particularly when there is a material weakness in the prior year audit that the specialist is intended to help ameliorate.

Information in Financial Statement Misstatements at the Engagement Partner Level: A Case for Engagement Partner Name Disclosure?

Using data from Taiwan where engagement partner names are disclosed and misstatements of clients’ annual financial statements to proxy for audit quality, we examine whether audit quality at the engagement partner level persists, and whether an engagement partner’s reputation for prior audit quality is informative about current audit quality. We find that at the engagement partner level, year t-1 misstatements made by other audit clients predict year t misstatements for clients without a history of misstatements in the preceding three years, but this effect is mitigated by engagement partner experience. In addition, we find a positive association between the incidence of restatements made by an engagement partner’s clients in the previous two or three years and the likelihood that a different client misstates in the current year, suggesting that partner-level restatements provide information about future audit quality. Finally, we find that an engagement partner’s reputation for past client misstatements (as disclosed in restatements) is associated with a higher likelihood of that partner losing existing clients and a lower likelihood of that partner attracting new audit clients. Collectively, our results suggest that engagement partner identification can reveal information that is informative about audit quality and affects stakeholder perceptions of audit quality, providing some support for the Public Company Accounting Oversight Board’s proposal to disclose the names of engagement partners in the U.S.

Audit Committee Characteristics and Audit Report Lag

This study seeks to determine whether audit committee compositional features are associated with the timeliness of financial reporting by Australian firms. Timeliness of financial reporting by firms, of which the length of an audit is a fundamental component, adds information content and impacts firm value, making an examination of audit report lag determinants important. Results indicate that audit committee members with financial expertise, prior audit committee experience and those who are independent are associated with shorter audit report lag. Results suggest that legislation mandating audit committee financial expertise and independence are effective also in improving the timeliness of financial reporting. More importantly, our results suggest that there may be benefits in constituting audit committees with other compositional features such as prior committee experience in overall efforts to improve the timeliness, and therefore quality, of financial reporting by firms.