Proxy For Audit Quality Research Articles

감사인의 기말 재고자산 실사입회의 효과에 대한 실증연구

This study investigates whether the number of due diligence about inventories on the external audit implementation details recorded since 2014 has information effect to restrain earnings management. Earnings management using inventories is based on a measure derived from real earnings management related abnormal inventories change introduced on Roychowdhury(2006) and earnings management using allowance for overvaluation of inventories introduced on Guidry et al.(1999). By using Korean firms listed on KOSPI from 2014 to 2017, this study analyses the effect of due diligence about inventories on earnings management using inventories and verifies the impact of the attendance inspection on the suppression of earnings management using regression analysis.
 Followings are the findings of this study. First, the number of due diligence about inventories is negatively correlated with real earnings management related abnormal inventories change, a proxy for earnings management using inventories. Second, the effect of restraining earnings management in the number of the attendance inspection shows that it serves as an audit quality when the number is more than three days compared to less than three days.
 The contribution of this study is as follow. This study finds a significant relationship between due diligence about inventories on the external audit implementation details and audit quality that restrains earnings management using inventories. This study os contributing to the expansion of research on earnings management by presenting empirical evidence of the impact of external auditing disclosure on earnings management as a proxy the quality of accounting information. Moreover, the number of the attendance inspection is effective as a proxy for audit quality, indicating that such detailed disclosure has an institutional effecting on improving audit quality. Therefore, it seems to be meaningful that this study has policy implications by providing a basis for judgment of decision making and policy making related to the disclosure of the external audit implementation details.

Clients’ digitalization, audit firms’ digital expertise, and audit quality: evidence from China

PurposeThis study aims to examine whether clients’ degree of digitalization and audit firms’ expertise in information technology (IT) influence audit quality (AQ).Design/methodology/approachData of Chinese A-share firms listed on the primary board of the Shanghai and Shenzhen stock exchanges from 2011 to 2019 are taken as the sample. All the data are obtained from the China Stock Market and Accounting Research. Clients’ digitalization is determined using the keywords “AI technology,” “blockchain,” “cloud computing,” “big data technology” and “digital technology.” Auditor firm’s digital expertise is determined by the proportion of higher IT expertise. As the proxy for AQ, this study uses audit fees, given that its quantum reflects the effort auditors expend that in turn affects the AQ.FindingsA fixed-effect regression model shows that clients with high digitalization attain AQ. This study also finds a significant and positive coefficient of audit fees, indicating that AQ is high in the same situation if an audit firm’s IT is mature and developed. Furthermore, results confirm the moderating effect of clients’ digitalization and auditors’ expertise and on AQ. Auditors’ expertise in IT mitigates the audit risk and increase AQ.Originality/valueFindings can enhance AQ and corporate governance literature by clarifying how external audits must evolve through digitalization and incorporating newly developed digital tools such as big data, analytics, artificial intelligence and robotic process automation. This study also provides important insights regarding how the development of new digital tools allow the audit profession to perform as a corporate governance mechanism.

The Determinants and Impact of Key Audit Matters Disclosure in the Auditor’s Report

We investigate the determinants of key audit matters (KAMs) in the auditor’s report. In particular, we examine the impact of overlapped audit committee (AC) directors on the quantity of KAMs disclosure. We also examine the consequences of KAMs disclosure. We test to see if the quantity of KAMs disclosure affects audit quality. Oman was among the early adopters of KAMs disclosure requirement. We, therefore, use the content analysis approach to count the number of KAMs disclosed in auditor reports of financial firms listed on the Muscat Stock Market for the period of 2014 to 2019. We use regression models to test our hypotheses. Overlapped audit committee directors are measured as the ratio of AC members who also serve on other committees within the same firm. We use audit fees as a proxy for audit quality. We find that overlapped AC membership positively affects KAMs disclosure due to the knowledge spillover that results from serving on multiple committees. We also find that KAMs disclosure positively affects the quality of external auditing. We make an important and novel contribution to the literature on financial reporting, auditing and corporate governance. We add to the literature by providing the first empirical evidence of the impact of overlapped AC members on KAMs disclosure and the impact of KAMs on the quality of external auditing. The findings provide important policy implications to exceedingly appoint overlapped members on AC to enhance the level of KAMs disclosure, which leads to an improvement in audit quality.

Audit Office's unused capacity and audit quality

While prior studies have linked the relationship between resources, time pressure, and audit quality, prior empirical studies generally measure the notion of audit offices' resources or capacity in relatively simplified, indirect, or context-specific ways. In this study, we use two measures of an audit office's unused capacity pertaining to normal audit tasks in Yu (2018) to examine their associations with several proxies for audit quality (discretionary accruals, earnings benchmarks, and going concern audit opinions). Empirical results show some evidence that higher (lower) unused capacity can result in better (worse) audit quality; and if any, this seems to occur only in Big 4 audit offices.

Measuring Municipal Audit Quality: Focus, Findings, Avenues

ABSTRACT It is often difficult to establish determinants of governmental audit quality. This discussion explores the motivations of municipalities to invest in auditing and for auditors to deliver quality services within this specialized market. This paper provides a review of governmental audit quality research findings, including measurement of audit quality proxies. The paper also discusses potential future research avenues and suggests several lines of audit-focused research remain open for exploration.

Fool Me Once, Shame on You; Fool Me Twice, Shame on Me: The Long‐Term Impact of Arthur Andersen's Demise on Partners' Audit Quality*

ABSTRACTAlthough recent evidence suggests that individual audit partners explain a substantial portion of the variation in audit quality proxies, much less is known about what determines an audit partner's quality. Psychology and behavioral economics theories hold that an individual's experiences can have enduring impacts on subsequent behavior. We examine whether auditors' direct exposure to Arthur Andersen's collapse has a long‐term impact on the quality of their audits. Our evidence implies that audit partners who directly experienced Andersen's demise impose stricter monitoring evident in their clients exhibiting a lower propensity for misstatements and small profits, and paying higher audit fees. Importantly, these findings reconcile with research in finance and economics implying that firsthand experiences matter more to subsequent behavior than general economic conditions or secondhand or thirdhand experiences. Collectively, the results shed light on one facet of how partners' audit quality evolves over time. Our findings suggest that major failures associated with the audit firm in which an auditor works can ultimately result in these affected individuals later delivering higher audit quality, which should benefit audit committees in partner selection decisions and audit firms in designing partner assignment policies.

Audit Tenure, Audit Fee, and Audit Quality : Evidence from India

This paper examined the relationship between the tenure of the auditor and the audit quality of Indian companies, particularly in the wake of two significant regulations in the financial reporting, the implementation of Ind AS (the IFRS compliant accounting standards) and mandatory auditor rotation. Using Discretionary Accruals as a proxy for audit quality, the study took the data of all the companies listed on the NSE for 11 financial years, from 2009 – 2019 (totaling 8,171 firm-year observations). It deployed panel data regression with a random-effects model. The results showed that audit quality improved up to specific auditors’ tenure, particularly with the IFRS compliance and Big 4 auditors. The higher audit fee is positively significantly associated with lower earnings quality. The study suggested that mandatory auditor rotation might provide the full benefit only along with other regulations on IFRS, auditor reputation, and audit fee. The study provided an impetus to the regulators, audit fraternity, and companies to improve the relevance of financial statements. This is one of the first longitudinal studies examining the interaction effects of different audit regulations. Robustness checks with other proxies of audit quality provided the same results.

The Audit Quality Effects of Small Audit Firm Mergers in the United States

SUMMARY Increased audit regulation, coupled with reports of frequent mergers among smaller audit firms, creates a dynamic environment in which to assess changes in the U.S. audit market. We examine the audit quality consequences of audit firm mergers between small audit firms that audit public clients, a topic about which little is known. Using a sample of small audit firms each involved in a single merger during 2004–2016, we find consistent evidence that post-merger audit quality decreases when PCAOB-identified audit deficiencies and audit fees are used as proxies for audit quality. In addition, we find weak evidence of lower post-merger audit quality when examining discretionary accruals, and no conclusive post-merger audit quality effect for the probability of misstatements. Overall, our findings provide evidence regarding the audit quality consequences of some small audit firm mergers in the United States. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42.

직급별 감사시간과 총감사시간이 기업신용등급 및 타인자본비용에 미치는 영향

Using audit hours by rank-specific in Korean listed firms from 2014 to 2019, we examine whether there is the effect of audits effort on the credit ratings (RATING) and the cost of debt (COD), and investigate how audit effort mediates relationship between ROA and RATING (or COD). Specifically, we analyze whether external information users (i.e., credit rating agencies and creditors) perceive increase in auditor’s effort (i.e., rank-specific audit hours, total audit hours) as a proxy for audit quality or audit risk. Overall, our results provide some evidence that the market reacts negatively to more audit hours, and the results imply that market participants perceive that more audit effort is associated to firms with the higher audit risk. We also find that the effect of more audit hours weaken the positive relation between ROA and RATING or negative relation between ROA and COD. We also find that the frequency of auditor’s communication with corporate governance is negatively (positively) associated to RATING (or COD). Thus, this study contributes to the literature on audit quality/risk by showing novel evidence that the announcement of more audit hours are perceived a proxy for audit risk rather than audit quality from rating agencies and creditors.

The impact of external auditors on firms’ financial restatements: a review of archival studies and implications for future research

A systematic literature review includes 69 archival studies on the impact of external auditors on firms’ financial restatements, based on principal agent theory. In more detail, we separate between auditor incentives and auditor competencies to supply a high audit quality. Financial restatements represent one of the most important proxies of audit quality in archival audit research, stressing an increased relevance in empirical research, business practice and regulatory initiatives. The review highlights that many studies on auditor incentives and competencies show inconclusive results on firms’ financial restatements (e.g., fee and rotation studies). But there are indications that especially auditor expertise and audit firm size significantly decrease financial restatements. In discussing potential future research, we emphasize the need for a more detailed analysis of restatements proxies, controls for audit risk, inclusion of (corporate) governance mechanisms as possible moderators or mediators, and sustainability issues of the audit team.

The Estimated Propensity to Issue Going Concern Audit Reports and Audit Quality

Auditors’ propensity to issue Going Concern Audit Reports (GCARs) is one of the proxies often used for audit quality. Although this propensity is a distinguishing characteristic of auditors, it does not indicate quality according to both theory and practice. In theory, higher quality auditors make fewer audit errors; they are more likely to issue GCARs to clients that deserve them and less likely to issue GCARs to clients that do not. Therefore, the propensity itself does not indicate quality. In practice, Public Company Accounting Oversight Board (PCAOB) inspection reports reveal that the GCAR is rarely mentioned as a deficiency, and in the few cases in which it is discussed, the deficiency is attributed to evidence gathering and estimations, rather than to the GCAR decision itself. The theory and practice motivate our study. This article investigates the empirical ability of the GCAR propensity to proxy for audit quality and finds that different samples and different models yield different determinations of auditor quality. Our findings caution against the use of the propensity to issue GCARs as a proxy for audit quality.

English

This research investigates the relationship between financial reporting quality and audit quality within the context of French listed companies. The auditor brand name (Big4) is used as a proxy for audit quality and earnings management is ascertained through real and accruals earnings management estimation. Discretionary accruals are estimated using the Jones Model and the Modified Jones Model while real earnings management is estimated through the use of models proposed by Roychowdhury (2006). The results indicate that clients of Big4 audit firms record higher levels of accruals and real earnings management. This assertion could be attributed to the low level of auditor litigation risk in France. This study contributes to the literature by investigating the case for both discretionary accruals and real earnings management in a French environment that has peculiar auditing characteristics.   Key words: Audit quality, financial reporting quality, earnings management, discretionary accruals, real earnings management.

Diversity of signing auditors and audit quality: Evidence from capital market in China

We examine whether the diversity of signing auditors affects audit quality of listed firms in China. Using the Blau's index of diversity measure based on eight characteristics of signing auditors and a series of audit quality proxies, including modified audit opinions (MAO), restatement of annual financial reports (Restate), and discretionary accruals (DA), we document a negative relationship between the diversity of signing auditors and firms' audit quality. Additional analyses show that corporate governance, signing auditor and audit firm characteristics moderate the relationship between the diversity of signing auditors and audit quality. Our findings suggest that reducing the diversity of signing auditors is an effective way to improve audit quality.

Does earnings management mediate the relationship between audit quality and company performance? Evidence from Jordan

PurposeThe purpose of this study is to look at the direct relationship between audit quality, earnings management (EM) practices and company performance, as well as the indirect influence (mediation) of EM practices in the relationship between audit quality and company performance. It offers empirical evidence from the Jordanian market, which is considered an emerging market.Design/methodology/approachThe population of this study is represented in Jordanian service companies listed on the Amman Stock Exchange (ASE), with a total of 344 company-year observations. Furthermore, panel data analysis was used in this study, and data for the study were acquired from yearly reports as well as the ASE’s database.FindingsBased on generalized method of moments model, the present findings demonstrate that the size of the audit firm and the tenure of the audit firm have a positive and negative influence on EM practices, respectively, but that industry-specialist audit firm has a negative and insignificant effect. EM practices have a negative impact on two company performance proxies (ROA and ROE), but have no effect on earnings per share (EPS). Furthermore, the size of the audit firm has a positive and significant influence on the performance proxies of the company [i.e. return on assets (ROA) and return on equity (ROE)]. The presence of an industry-specialist audit firm has a positive and significant influence on two proxies of company performance (ROE and EPS), but a negative and significant impact on ROA. An audit firm’s tenure has a negative and significant impact on two performance proxies (ROA and EPS), but a positive and significant impact on ROE. Then, EM practices either fully or partially mediate the relationship between audit quality proxies and company performance as assessed by ROA, ROE and EPS.Research limitations/implicationsThe current study’s limitation is that it only searched in Jordanian service companies listed on ASE from 2012 to 2019 to meet the study’s objectives; thus, the authors recommend that future work investigate the study model for other sectors, whether in Jordan or other emerging markets such as the Middle East and North Africa. Another limitation of this study is that the study models lack important variables, which may affect EM and company performance, such as corporate governance and ownership structure characteristics; as a result, the authors recommend that future work includes such variables in future research models to have more explanations in this context.Practical implicationsAnalysts, investors and other strategic decision makers may use the findings of this study to improve the efficiency and efficacy of Jordan’s financial market. These findings will enhance policymakers’ willingness to establish appropriate regulations, which might improve Jordan’s financial market performance and efficacy. These findings may help investors make better judgments by using audit quality proxies and EM indicators, which can forecast business success.Originality/valueFirst, this study distinguishes itself from prior studies through establishing a new research model, by investigating the mediating effect of EM in the relationship between audit quality and company performance. It provides empirical evidence from the Jordanian market; hence, it increases the body of the knowledge in this context. Second, to the best of the authors’ knowledge, this is the first study to look into the link between audit quality, EM and company performance together; hence, the model of this study is developed using agency theory and information asymmetry theory. Third, the current study adds new evidence to the role of audit quality and EM in companies, as well as how audit quality and EM practices affect company performance in emerging markets such as Jordan.

Audit quality effects of the PCAOB's 2006 tax service restrictions

In 2004 and 2005, use of aggressive tax services provided by a company's auditor had become so broadly concerning that it was the focus of a PCAOB roundtable and discussed in a Congressional subcommittee investigation report (PCAOB, 2004 and US Senate, 2005). Although auditor provision of these and other nonaudit services to issuer audit clients was restricted in 2006, research on the effectiveness of these restrictions finds that they did not impact audit quality (Notbohm, Paterson and Valencia, 2015 and Lennox, 2016). We reexamine this issue with a focus on the audit quality effects for the engagements most impacted by the restrictions-Big 4 audit clients with pre-restriction tax service fees of at least $100,000 that fell by at least 75% following the restrictions. Using a difference-in-difference framework and two proxies for audit quality, we find evidence of the effectiveness of the PCAOB's 2006 restrictions among those clients. Additionally, we find these results are sensitive to the level of pre-restriction tax service fees, with the restatement (going concern) effect of the restrictions strengthening (weakening) in the pre-restriction tax service fee level. We also find that the effects of these restrictions are concentrated among clients of Big 4 auditors rather than clients of the 2nd tier or 3rd tier auditors. Results of additional analyses indicate that audit quality, as measured by the probability of restatement, was lower in the pre-restriction period for purchasers than for non-purchasers. Our results are robust to a barrage of sensitivity tests. Our findings contribute to the continued regulator discussion about the proper level and types of allowable tax nonaudit services.

The Effect of Audit Tenure, Audit Rotation and Client's Company Size on Audit Quality with Audit Fee as Moderating Variable

Transparency of financial reports is one of the important things for decision-makers. In proving that financial statement information has been presented fairly, companies need independent parties, one of which is the audit services provided by the Public Accounting Firm (PAF). Good or bad Audit Quality for the information presented really depends on the auditor in carrying out his duties.
 This research was conducted at Financial Sector Companies listed on the Indonesia Stock Exchange (IDX) in 2015 - 2019. This research was conducted using quantitative methods and sample selection using purposive sampling method. The analysis used in this research is binary logistic regression.
 The results showed that Audit Tenure and Audit Rotation had no effect on Audit Quality, Client's Company Size had a negative effect on Audit Quality, and Audit Fees had a positive effect on Audit Quality. Audit Fee Interactions are unable to moderate the effect of Audit Tenure and Audit Rotation on Audit Quality, while Audit Fee Interactions are able to weaken the influence of Client's Company Size on Audit Quality. 
 Suggestions from this research are expected to all companies that have high complexity to choose a PAF that suits the audit needs and not too pressurize the Audit Fee given. In addition, companies need to pay attention to Audit Tenure again by considering from a cost-benefit analysis point of view. For future researchers, it is expected to extend the research period and use Audit Quality proxies, population, methods, and analysis tools outside of this study.

Relative Influences of Review and Engagement Auditor Rotation on Audit Quality: Evidence from China

Manuscript type: Research paper Research aims: This study focuses on the effects of audit partner rotation on audit quality (AQ) in China. In particular, we examine the effects of review auditors (RAs) and engagement auditors (EAs) on AQ when they voluntarily and mandatorily rotate. Design/Methodology/Approach: The data in this study are retrieved from the Chinese Stock Market and Accounting Research (CSMAR) database. We develop an OLS regression model and logit model respectively to test the hypotheses developed. Finally, we have 13,856 firm-year observations collected for the first regression model, and 16,893 firm-year observations gathered for the second logit model from 2003 to 2015. Research findings: Findings show that RAs are more likely to behave opportunistically to retain clients by weighing up the benefits and costs of compromising audit quality in the first year after a rotation. The results imply that RAs may have an incentive to acquiesce the clients’ accounting irregularities in their first year of audit engagement when they are mandatorily rotated. However, we do not find this trend in terms of EAs’ rotation, suggesting that EAs are less affected by the auditor-client relationship compared to RAs. In addition, we find that RAs are less likely to issue modified audit opinions (MOPI) as the magnitude of negative discretionary accruals (DA) increases when they are voluntarily rotated. Theoretical contribution/Originality: Previous studies have investigated the relationship between mandatory audit partner rotation and audit quality. The results are mixed and inconclusive. Our study contributes to the extant literature by considering RAs’ opportunistic behaviour after mandatory rotation, which has not been explored in previous studies. In China, only a few studies have examined the relationship between mandatory audit partner rotation and audit quality. Our study is one of the first study focusing on the RA’s influence on AQ. Practitioner/Policy implication: The findings of our study can help Chinese authorities, listed firms and academics gain more understanding on whether mandatory audit partner rotation improves audit quality in practice. Since RAs have greater incentive to retain the existing client, we propose that RAs should bear more responsibility for the audit work, instead of the equally shared responsibility with EAs. Research limitation/Implications: Our study is subject to some limitations. First, our study adopts the performance-adjusted discretionary accruals as a proxy for audit quality. However, there can be a measurement error in estimating discretionary accruals. Second, we focus on the auditor rotation and exclude the case of audit firm rotation. Since the AQ can be affected by various factors, audit firm rotation can also affect AQ. Third, although we test the relative effects of RAs and EAs in audit work, we do not examine the effect of RAs’ characteristics such as their professional experience, educational background, and years of service. AQ can be affected by RAs’ characteristics.

The impacts of interaction of audit litigation and ownership structure on audit quality

This study examines the impact of the interactions of audit litigation and ownership structure on audit quality by Big 4 and non-Big 4 audit firms in Oman. This study uses modified audit opinion as proxies for audit quality, binary variable for audit litigation and percentage of shares owned by large shareholders and minority shareholders (consisting of Arab [non-GCC] shareholders) for ownership structure. The study uses size, risk, types of activity and ages of the firms as control variables. For the analysis and explanation of results descriptive statistics, correlation, regression techniques and T-test are used. Based on a sample of 107 listed companies on Muscat Securities Market (MSM) for 2013–2017, we find that audit litigation has a significant impact on audit quality for Big 4 audit firms, but not for non-Big 4 audit firms. Also, the results indicate that there is no difference between Big 4 and non-Big 4 audit firms as far as litigation risk is concerned.

The high-speed railway opening and audit quality: Evidence from China

This study examines the effect of the high-speed railway operation on audit quality proxied by absolute abnormal accruals. Auditing is a complex activity that relies heavily on professional judgement and sufficient evidence. Auditors usually need to conduct on-the-spot investigations and face-to-face conversations to obtain auditing evidence. In this process, transportation plays an important role. From the perspective of geography, this paper examines the impact of the high-speed railway implementation on audit quality. It finds that the high-speed railway operation significantly improves audit quality. The results are robust to parallel tests and when using the Big Eight auditors to proxy for audit quality. Further analyses suggest that this effect is more pronounced in firms audited by non-local auditors and firms located in non-first-tier cities. Taken together, these results suggest that the opening of high-speed railways is effective in improving audit quality.

A Machine Learning Approach of Measuring Audit Quality: Evidence From China

This study develops machine learning models to predict audit quality by using a wide range of data describing detailed characteristics of accounting firms, individual audit partners, and public companies in China. It constructs the surprise score, a new measure of audit quality, calculated as the difference between the predicted probability and the actual value of audit quality proxies (e.g., audit adjustments and non-clean audit opinions). Unlike traditional, observable proxies that measure audit quality indirectly, the proposed measure is driven by unobservable factors directly affecting audit quality. This study also validates the proposed measure by comparing the relative explanatory ability of the surprise score and its corresponding traditional audit quality measure over audit failures proxied by penalties due to accounting violations. Results show that, for the event of non-clean audit opinion, the surprise score is more strongly associated with the occurrence of penalties than traditional audit quality measures. For events of audit adjustments, the surprise score is significantly associated with penalties for the group of companies that received extremely high/low surprise scores, whereas the traditional audit quality measures exhibit no explanatory power for those companies.