Proxy For Audit Quality Research Articles

Auditor mood and audit quality: evidence from music sentiment measure

Purpose Extant studies propose music sentiment as a novel measure of individuals’ sentiment. These studies argue that individuals’ choice of music reflects their emotional condition in real time and influences their cognitive ability, making it a powerful tool for assessing their mood. This study aims to use music sentiment as a proxy for auditors’ mood and explore its impact on audit quality. Design/methodology/approach A sample of the US firms from 2017 to 2020 is used in the study. The authors apply the ordinary least squares regressions and the logit regressions to the audit quality models. The authors use absolute discretionary accruals and the propensity to meet or beat earnings forecasts as proxies for audit quality and calculate a stream-weighted average sentiment measure for Spotify’s Top-200 songs of each day during the audit period of a client firm to capture the sentiment of auditors. Findings The authors find that music sentiment is positively associated with audit quality. The result is consistent with the mood maintenance hypothesis, which suggests that a positive mood can induce auditors to be more careful in risky situations. Furthermore, the result is robust to various sensitivity analyses. Originality/value The study contributes to the scarce literature that focuses on auditors’ emotional state and highlights the importance of monitoring auditor mindset during the audit period.

A study of mediating and moderating effects on the relationship between audit quality and integrated reporting quality among Jordanian firms

PurposeThe purpose of this research is to investigate the link between external audit quality and integrated reporting (IR) quality in the Jordanian market, a developing market. Furthermore, the research model considers the mediating effect of earnings management practices and the moderating effect of board gender diversity. As a result, it intends to provide further empirical evidence in this area.Design/methodology/approachThis research investigates its model using data from Jordanian services companies listed on the Amman Stock Exchange (ASE) during the period 2013–2022. With 430 company-year observations, the current research’s sample includes all companies in the research population for which complete data were available during the period under investigation. Data relevant to the research setting were obtained from annual disclosures and the ASE's database.FindingsThe findings of this research show that audit firm size and audit firm specialty have a positive influence on IR quality, but audit firm tenure does not. External audit quality (as proxied by the size, specialty and turnover of the audit firm) had a negative impact on earnings management practices, while earnings management practices had a negative impact on IR quality. Additionally, the findings reveal that earnings management practices completely mediate the relationship between two external audit quality proxies (audit firm size and audit firm specialty) and IR quality. Furthermore, in terms of the moderating impact of board gender diversity, it is obvious that board gender diversity favorably moderates the relationships between all external audit quality proxies and IR quality.Originality/valueUsing agency theory and stakeholder theory, this investigation fills a gap in previous literature by adding scientific explanations and empirical evidence from the Jordanian market, a developing market, in the context of the impact of audit quality on IR quality, mediated by earnings management and moderated by board gender diversity.

Does the adoption of artificial intelligence by audit firms and their clients affect audit quality and efficiency? Evidence from China

PurposeThis study aims to examine whether the adoption of artificial intelligence (AI) by audit firms and their clients affects audit efficiency and audit quality.Design/methodology/approachThis study empirically examines the abovementioned research question based on data from China for the years 2011 to 2020. It uses audit report lag as a proxy for audit efficiency and the likelihood of annual report restatement as a proxy for audit quality. It adopts the propensity score matching and the two-stage OLS regression model to address the endogeneity issue led by firms’ innate complicated functions.FindingsThe findings show that when audit firms and their clients use AI separately, there's a positive link between AI use and audit report lag. However, when audit firms and clients use AI together, there's a negative link between AI use and audit report delays that enhance overall audit efficiency. Next, the authors observe a negative link between AI use and the likelihood of a restatement. Finally, the authors find that the association between AI adoption and audit quality is driven by increased audit effort lag. Results are consistent and robust to endogeneity tests and sensitivity analyses.Originality/valueFindings can complement the audit quality and corporate governance literature by clarifying that external audit must evolve through digitalization and the incorporation of newly developed digital tools, such as AI.

Partner-Level Cumulative Industry Expertise and Audit Quality

SUMMARY We employ a novel framework to evaluate the audit quality implications of cumulative industry expertise that audit partners acquire from auditing public clients across their careers. Leveraging the historical data of audit partner engagements with public clients in China, we find that the development of cumulative industry expertise is explained by various experiences of the partners in their initial year of handling public clients, as well as the growth, homogeneity, and demand for specialized knowledge in an industry. Our main results reveal a positive and significant association between partner cumulative industry expertise and different proxies of audit quality. We also find that many partners deemed specialists based on the largest market shares in a given year do not possess a high level of cumulative industry expertise and are insignificantly associated with audit quality. Our findings highlight the importance of adopting a cumulative perspective to study partners’ industry expertise.

Partnership Disparity and Audit Quality

This study explores the effects of partnership disparity within Chinese audit firms on audit quality using novel data on their partnership arrangements. The results indicate a U-shaped relationship between the partnership disparity extent and the violations assessed by regulators, including financial misstatements of clients. Audit firms with mid-level unequal partnership structures achieve superior audit quality than their counterparts with either “flat” or “high-skewed” partnership structures. Additional analyses confirm the role of client complexity as the boundary condition and indicate that the geographical remoteness of audit firms asymmetrically moderates partnership disparity. These results are robust to different audit quality proxies and alternative research designs including change analyses and after controlling for the effects of engagement partners. This study contributes to research on diversity and performance in the partnership context. This approach opens the “black box” of power-related culture in audit firms and carries managerial implications for the managing partners and audit regulators of audit firms.

Audit Quality and Earnings Management: Evidence from Sri Lanka: Food & Beverage and Hotel Sectors

The company's earnings are crucial for investors' decision-making since they provide emblems about value-creating ability. However, with the possibility of manipulating earnings, the whole purpose of financial reporting becomes valueless. External independent auditing can be identified as a control mechanism that minimises earnings management. This study examines the impact of audit quality on earnings management in the food and beverage sector and hotel companies in the Colombo Stock Exchange from 2013 to 2019. The real earnings management approach and total accruals are used to measure the earnings quality, while audit firm size, presence of the audit committee, frequency of the audit committee meetings and audit timeliness are the audit quality proxies. The study used regression analysis as the main analysis tool, and the findings reveal the existence of earnings management in the food and beverage and hotel sectors. Fascinatingly, audit quality does not significantly impact earnings management in the food and beverage sector, while it exists in the hotel sector. Moreover, companies' size and leverage significantly impact earnings management in both sectors. These findings suggest that effective regulation and monitoring are necessary to improve audit quality for both sectors, especially in the hotel sector companies in Sri Lanka. Hence, enhancing audit quality would minimise earnings management and improve earnings quality, which is instrumental to the decision-makers, especially investors and creditors. Henceforth, we suggest improving the audit quality in the food and beverage and hotel sectors and enhancing disclosure requirements such as research and development expenses, audit time, and non-audit services.

The Impact of Audit Quality on Earnings Management: Evidence from Listed Companies in Sri Lanka

Earnings Management (EM) is related to the manipulation of reported income through accounting practices and decisions. With the occurrence of numerous financial collapses and failures, the reliability of the audit function has been challenged, as auditors play a critical role in expressing an opinion on the financial statements. This study investigates the impact of Audit Quality on EM in Sri Lankan listed companies. This study employs Modified Jones model to examine earnings management practices through Discretionary Accruals (DA). The selected proxies of audit quality which are Length of Audit Tenure, Audit Firm Size and Auditor Independence are the independent variables. The data is collected from annual reports for the financial periods 2015 - 2020 and audit reports for the financial period 2012 - 2020 of listed companies on the Colombo Stock Exchange (CSE). This study employed descriptive statistics, correlation analysis, and multivariate analysis to analyze the data. Based on the quantitative analysis, the results demonstrated that the association between audit firm size and earnings management in Sri Lankan listed companies is negative and significant. It was found that the level of EM between companies using Big 4 auditors and those using non-Big 4 auditors is much lower. This study revealed that auditor independence and EM have a significant negative association. It was suggested that independent auditors have a greater ability to regulate and identify EM activities through company management. Further, this study exposed that there is an insignificant association between the length of audit tenure and earnings management. These findings are useful to shareholders in appointing or reappointing auditors. Furthermore, this study enables stakeholders, including regulatory bodies, to examine the presence of EM practices in listed companies of CSE.

Does audit quality affect firm innovation?

This paper investigates the impact of audit quality on firm innovation. We develop a theoretical intertemporal framework to model an entrepreneur's optimal behavior and find that entrepreneurs increase R&D with an increase in audit quality. Using a sample of Chinese firms listed on Shanghai Security Exchange and Shenzhen Security Exchange over the period 2011–2020, we employ “Going Concern Opinions,” an indicator gauging a firm's ability to continue operation or to avoid bankruptcy, as a proxy of audit quality. To address endogeneity concerns, we construct a Bartik shift-share instrument based on the differential impact of common shocks on firms with pre-determined exposures. Our empirical results are consistent with the proposition drawn from the theoretical model. Through a decomposition analysis with Rotermberg weights, we also identified the top ten industries and the years demonstrating the most significant impact of audit quality on firm innovation.

Auditor certification and long-run performance of IPO stocks

This study establishes a significant positive relation between high quality auditors and long-run post-IPO equity performance. IPOs associated with high-ranked auditors benefit from superior information quality irrespective of underwriter rank, manifesting in significantly better post-IPO equity performance. The auditor certification effect is robust and persists longer than the underwriter certification effect. IPOs, regardless of the underwriter rank, benefit significantly from the auditor reputation effect. Further, the auditor certification effect is more pronounced: (a) when underwriter certification is weak (‘substitution effect’), and (b) in the presence of greater information asymmetry. VC backed IPOs perform significantly better; however, VC reputation has no effect, after controlling for auditor rank and underwriter certification. Our conclusions are reinforced by a battery of robustness checks, including the use of alternative methodologies to address endogeneity, audit quality proxies, performance metrics, model specifications, and validity tests.

Borrower-Lender Cross-Ownership and Borrower Audit Quality

SUMMARY We study the effect of borrower-lender cross-ownership on the demand for a borrower’s external audit quality in syndicated loan settings. Cross-owners, which are institutional investors who hold the equities of both the borrower and the lead lender of syndicated loans, have the ability and incentive to increase the economic benefits accruing to both contracting parties. We hypothesize that cross-owners demand high-quality audits of the borrower’s financial information as a delegated monitoring device to resolve the agency cost of debt and improve contract efficiency. Our evidence shows that cross-ownership is positively associated with higher borrower audit fees, our proxy for audit quality. We also find that the effect is more pronounced for larger loans. Overall, these results suggest that cross-owners view external audits to be a viable monitoring mechanism for improving overall debt contacting efficiency. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42; M48.

Do audit attributes impact earnings quality? Evidence from India

PurposeThe present study's goal is to analyze the impact of audit quality (AQ) on earnings quality (EQ) using different audit attributes. The study shows empirical evidence from India, considered an emerging market.Design/methodology/approachThe sample selected represents the 376 non-financial firms listed on the Bombay Stock Exchange (BSE). With a 20-year time frame, the authors used the absolute value of discretionary accruals (McNichols, 2002) (DA) as a proxy for EM, which is inversely related to EQ. The authors analyzed data using OLS, fixed effect (FE), 2SLS and Panel-IV estimators.FindingsThe authors found that most audit attributes positively affect EQ. In the Indian context, joint auditor (JA), auditor size (A_SIZE), auditor fee (A_FEE) and auditor tenure (A_TENURE) have a negative association with EM indicating high EQ. In contrast, auditor rotation (A_ROTATON) positively affects EM confirming low EQ.Research limitations/implicationsThe present study uses Big-4 and its member firms as a proxy of auditor size (A_SIZE); instead, other bases may be taken for it, like the dominant audit firms in a particular industry in sample data, etc. The authors have started audit tenure from the base year, i.e. 2001, which may ignore the association of auditor and auditee just before 2001.Practical implicationsThe study findings would enhance policymakers' willingness to prepare appropriate regulations regarding JAs and auditor rotation, which might improve financial market efficiency and reduce financial fraud among Indian corporates.Originality/valueTo the best of the authors' knowledge, this is the first study to incorporate “Joint Auditor” (JA) as a proxy for audit quality in the Indian context, which might significantly contribute to the literature.

Accounting Accruals, Audit Quality, and Audit Pricing

This study examines the impact of the interaction between firms' accounting choices and auditors' audit effort choices on audit pricing. In a multi-period model, I focus on a central feature of accounting: reversing accruals. I find that initial low-balling, defined as lower audit fees than audit costs, arises independently from the direction of accruals, but increases with more conservatism in the first engagement period. The reason is that a conservative accruals strategy implies understated earnings today and overstated earnings in the future, which creates a higher investor demand for auditing services in future periods. The incumbent auditor can satisfy this future demand better than any competitor, because the first-period learning cost is sunk. Thus, conservatism enhances the competitive advantage of the incumbent and increases the future quasi-rent, which is used for a higher initial low-balling discount. I further show implications of the auditor-firm interaction for fee-cutting, a common proxy for low-balling, and the frequency of modified audit opinions, a common proxy for audit quality. Thus, my model provides a theoretical foundation for the connection between high low-balling discounts, accounting accruals, and audit quality.

The role of audit quality in waste management behavior

The entire world is facing the issue of climate change. Due to rapid industrialization, enormous waste generation is aggravating the situation. In this study, we investigate the role of audit quality in promoting sustainable waste management in firms. Using a sample of 8100 firm-year observations for the period 2002–2017 from 34 countries, we provide novel empirical evidence that good audit quality significantly reduces total corporate waste production. Further, our results are robust to alternate proxies of audit quality, and waste management, and only appear with unqualified audit reports. To alleviate the endogeneity issue, we use two different identification strategies; namely, PSM and GMM. Altogether, these findings demonstrate that Big4 auditing firms ensure the credibility and reliability of the non-financial disclosures of their auditees as apparent by their rigorous auditing processes. Moreover, the main implication of our study is that firms are subject to a decrease in their overall waste production when their external assurer is one of the BIG4 auditing firms.

Board informal hierarchy and audit quality: evidence from China

PurposeImproving audit quality is an important research area of managerial accounting. This study focuses on the informal institutions within organizations and their impact on audit quality. Specifically, this study aims to examine the impact of the informal hierarchy among directors on audit quality.Design/methodology/approachThe authors examine Chinese companies with listed shares from 2008 to 2020. The authors proxy for audit quality using discretionary accruals and small profits, and use ordinary least squares regression to test their hypotheses.FindingsThe results demonstrate that the informal hierarchy of the board improves audit quality. The results are robust to a battery of sensitivity analyses. Additionally, there is weak evidence that the effect of the board’s informal hierarchy on audit quality is weaker in state-owned enterprises. Moreover, the mechanism tests indicate that the board’s informal hierarchy improves audit quality through the improvement of internal controls. In addition, the impact of the informal hierarchy among directors on audit quality further improves firm performance. However, audit fees are not reduced further because the board’s informal hierarchy demands higher audit quality by choosing industry audit experts.Originality/valueThis study not only enriches the research on the economic consequences of the board’s informal hierarchy but also expands on studies on antecedents of audit quality.

Engagement partner identification format and audit quality

Exploiting the staggered adoption of three key regulations that implemented distinct engagement partner identification (EPI) formats for separate groups of Canadian firms over a 10‐year period, we investigate the association between eight audit quality proxies and three EPI formats: two indirect (auditor permit number in the report, Form AP) and one direct (partner name in the report). This unique setting not only enables us to examine the short‐term association between three different EPI formats and audit quality but also to investigate the long‐term association for one EPI format (auditor permit number). In the main analysis, out of 32 results of interest, only three are significant and indicate a positive association. Hence, our results show no widespread effect of EPI on audit quality, suggesting that the inconsistent results reported in prior studies may not be driven by the different formats explored or the short window investigated.

Mediating influence of earnings management in the nexus between audit quality and company value: new proof from Jordanian market

PurposeThis paper aims to recognize the direct influence of audit quality (AQ) on earnings management practices (EMP) and company value (CV), as well as the mediating role of EMP in the link between AQ and CV. It presents new factual proof from the Jordanian market, which is still in its early stages.Design/methodology/approachA pattern of 43 service firms listed on the Amman Stock Exchange (ASE) was collected for the timeframe (2012–2019), giving an amount of 344 firm-year observances. The data was collected from the annual reports extracted from the ASE’s database and tested with panel data analysis.FindingsThe results show that audit firm industry specialization positively affects EMP while its size and tenure do not, which implies that its industry specialization does not restrict earnings management but rather leads to an increase in opportunistic behaviors. Audit firm size and audit firm industry specialization positively affect CV, whilst audit firm tenure does not. Additionally, the findings indicate that EMP negatively affect CV, and EMP act as a mediator for the AQ–CV nexus.Research limitations/implicationsStakeholders can use the findings to enhance the capacity and effectiveness of Jordan’s fiscal market. For example, our results will boost policymakers’ eagerness to institute suitable statutes improving Jordan’s fiscal market performance. Besides, the results can assist existing and potential investors make sound adjudication by using AQ proxies and earnings management as signals to predict future company’s value.Originality/valueThe paper differentiates itself from previous papers through initiating a new proposed model by exploring the role of earnings management as a mediator in the nexus between AQ and CV by presenting new factual proof from the Jordanian market.

PENGARUH KARAKTERISTIK AUDITOR INDEPENDEN DAN AFILIASI KANTOR AKUNTAN PUBLIK BEREPUTASI TERHADAP KUALITAS AUDIT

This study aims to provide empirical data about the impact of workload and auditor specialty, two independent auditor characteristics, on audit quality as well as the impact of affiliation with a reputable public accounting firm. In this study, absolute discretionary accruals using the Modified Jones technique are used as a proxy for audit quality. 129 manufacturing businesses registered on the Indonesia Stock Exchange for the years 2017 through 2020 comprise the sample for this study. Data from the Public Accounting Firm's 2017–2020 audited financial reports as well as PPPK data on the number of partners and clients are utilized. Purposive sampling was used to do the sampling. The study found that while the auditor specialization variable had no effect on audit quality, the workload variable had a positive effect on audit quality. The affiliation with a reputable public accounting firm has an effect on audit quality, however this study cannot prove it.

Quando os controles importam: evidências da associação não linear entre as Deficiências de Controles Internos e a Qualidade de Auditoria

ABSTRACT This study aimed to analyze the association between Internal Control Weaknesses (or Internal Control Deficiencies - ICDs) and Audit Quality (AQ). The article fills a gap in the national literature, as it provides evidence of an association between reported ICDs and the main AQ proxies. The study is relevant because it evinces the lack of contemporary association between reported ICDs and the AQ of listed Brazilian companies, but found a lagged association between these variables. Unlike prior studies, it was observed that the ICDs reported in the previous year can function as an Audit Red Flag in the current year, thus contributing to risk assessment by accountants, auditors, members of governance and audit committees, and regulators. The study, documentary and descriptive, with a quantitative approach, analyzed data from a sample of 257 companies listed on the Brazil Stock Exchange and Over-the-Counter Market (Brasil, Bolsa, Balcão [B3]) in the period 2010-2018. Data were assessed using regression models with panel data, logistic and negative binomial. The results showed that, although there are significant differences between the AQ proxies for companies that reported ICD and those that did not, there is no contemporary and statistically significant association between ICD disclosure and AQ proxies. However, it was observed that audit delay and the probability of being involved in an Administrative Sanctioning Procedure (ASP) are associated with the number of ICDs reported in the previous year.

Does audit committee improve audit quality? The case of Saudi Arabia

This paper investigates the potential correlation between the performance of Audit Committees (AC) and Audit Quality (AQ). Data is derived from capital goods firms listed on the main stock exchange of Saudi Arabia (TASI). Logit regression analysis is used for this purpose and the dependent variable of BIG4 is used as a proxy for AQ, while AC meetings (ACMT), size (ACSZ), and AC members with a financial background (ACEX) are used as explanatory variables. The results show no statistical association between ACMT and AQ. However, the analysis indicates a positive statistical relationship between ACSZ and AQ, and a strong negative association between ACEX and AQ. These findings provide insights into the impact of AC attributes on AQ, and would be of interest to decision makers, policy-makers, investors, and senior management.

Impact of Joint Audit on Audit Quality – An Indian Scenario

Better audit quality gives stakeholders some reassurance that the auditee companies' financial statements accurately portray their current situation. This study examines the impact of joint audits on audit quality. It is inspired by the ongoing discussion where a government panel has recommended a mandatory joint audit regime for public interest companies in India. In April 2021, the Reserve Bank of India (RBI) mandated the use of joint audits for financial entities with assets size above INR 15,000 crore to improve the quality of audits. In this study, a new audit quality metric is evaluated, and it shows that joint audit enhances audit quality. Additionally, I find a negative impact of joint audits on audit quality using a common proxy for audit quality (ratio of audit fees to total fees). I, therefore, highlight those different measures of audit quality exhibit the opposite effects of a joint audit.