Showing papers on "Audit published in 2013"
TL;DR: A review of academic research on audit quality can be found in this paper, where the authors present a review of existing definitions of audit quality and describe general frameworks for establishing audit quality.
Abstract: This study presents a review of academic research on audit quality. We begin with a review of existing definitions of audit quality and describe general frameworks for establishing audit quality. Next, we summarize research on indicators of audit quality, such as inputs, process, and outcomes. Finally, we offer some suggestions for future research. The study should be useful to academics interested in audit quality as well as to the Public Company Accounting Oversight Board (PCAOB) and other regulators.
445 citations
TL;DR: Wang et al. as discussed by the authors examined whether and how individual auditors affect audit outcomes using a large set of archival Chinese data and found that the effects of individual auditor characteristics on audit quality are both economically and statistically significant, and are pronounced in both large and small audit firms.
Abstract: We examine whether and how individual auditors affect audit outcomes using a large set of archival Chinese data. We analyze about 800 individual auditors and find that they exhibit significant variation in audit quality. The effects that individual auditors have on audit quality are both economically and statistically significant, and are pronounced in both large and small audit firms. We also find that the individual auditor effects on audit quality can be partially explained by auditor characteristics, such as educational background, Big N audit firm experience, rank in the audit firm, and political affiliation. Our findings highlight the importance of scrutinizing and understanding audit quality at the individual auditor level.
404 citations
TL;DR: In this article, an integrative review of meta-standards is presented, focusing on the two main metastandards which have been adopted by more than 1.3 million organizations worldwide: ISO 14001 and ISO 9001.
Abstract: Management system standards, also called meta-standards, have been adopted by an increasing number of organizations across the world. Although these management system standards are based on the same type of management principles and institutional arrangements, the literature remains scattered, with diverse studies focused on specific standards and published in various journals. The main objective of this paper is to analyse the academic research on meta-standards through an integrative review intended to shed light on the main conclusions and substantial advances made in this area. This integrative review focuses more specifically on the two main meta-standards which have been adopted by more than 1.3 million organizations worldwide: ISO 14001 and ISO 9001. The paper contributes insights into the main streams of the literature and current knowledge gaps to be addressed in future research on the various issues related to meta-standards: global governance, diffusion processes, motivations, benefits of adoption and impacts on performance, internalization, integration, consultancy and auditing.
400 citations
TL;DR: Wang et al. as discussed by the authors examined whether and how individual auditors affect audit outcomes using a large set of archival Chinese data, and found that the effects of individual auditor characteristics on audit quality are both economically and statistically significant, and are pronounced in both large and small audit firms.
Abstract: We examine whether and how individual auditors affect audit outcomes using a large set of archival Chinese data. We analyze approximately 800 individual auditors and find that they exhibit significant variation in audit quality. The effects that individual auditors have on audit quality are both economically and statistically significant, and are pronounced in both large and small audit firms. We also find that the individual auditor effects on audit quality can be partially explained by auditor characteristics, such as educational background, Big N audit firm experience, rank in the audit firm, and political affiliation. Our findings highlight the importance of scrutinizing and understanding audit quality at the individual auditor level. Data Availability: Data used in this study are publicly available from the sources described herein.
336 citations
TL;DR: A review of academic research on audit quality can be found in this article, where the authors begin with a review of existing definitions of audit quality and describe general frameworks for establishing audit quality.
Abstract: SUMMARY: This study presents a review of academic research on audit quality. We begin with a review of existing definitions of audit quality and describe general frameworks for establishing audit ...
335 citations
TL;DR: Key elements of the DSCA include a leading role of the professional association with integration of the audit in the national quality assurance policy; web-based registration by medical specialists; weekly updated online feedback to participants; annual external data verification with other data sources; improvement projects.
Abstract: Introduction In 2009, the nationwide Dutch Surgical Colorectal Audit (DSCA) was initiated by the Association of Surgeons of the Netherlands (ASN) to monitor, evaluate and improve colorectal cancer care. The DSCA is currently widely used as a blueprint for the initiation of other audits, coordinated by the Dutch Institute for Clinical Auditing (DICA). This article illustrates key elements of the DSCA and results of three years of auditing. Methods Key elements include: a leading role of the professional association with integration of the audit in the national quality assurance policy; web-based registration by medical specialists; weekly updated online feedback to participants; annual external data verification with other data sources; improvement projects. Results In two years, all Dutch hospitals participated in the audit. Case-ascertainment was 92% in 2010 and 95% in 2011. External data verification by comparison with the Netherlands Cancer Registry (NCR) showed high concordance of data items. Within three years, guideline compliance for diagnostics, preoperative multidisciplinary meetings and standardised reporting increased; complication-, re-intervention and postoperative mortality rates decreased significantly. Discussion The success of the DSCA is the result of effective surgical collaboration. The leading role of the ASN in conducting the audit resulted in full participation of all colorectal surgeons in the Netherlands. By integrating the audit into the ASNs' quality assurance policy, it could be used to set national quality standards. Future challenges include reduction of administrative burden; expansion to a multidisciplinary registration; and addition of financial information and patient reported outcomes to the audit data.
286 citations
TL;DR: Experimental results not only validate the effectiveness of the approaches, but also show the audit system verifies the integrity with lower computation overhead and requiring less extra storage for audit metadata.
Abstract: In this paper, we propose a dynamic audit service for verifying the integrity of an untrusted and outsourced storage. Our audit service is constructed based on the techniques, fragment structure, random sampling, and index-hash table, supporting provable updates to outsourced data and timely anomaly detection. In addition, we propose a method based on probabilistic query and periodic verification for improving the performance of audit services. Our experimental results not only validate the effectiveness of our approaches, but also show our audit system verifies the integrity with lower computation overhead and requiring less extra storage for audit metadata.
285 citations
TL;DR: In this article, the authors use the organizational strategy theory of Miles and Snow to develop a comprehensive measure of business strategy using publicly available data and find that MSS's Prospector strategy is more likely to be involved in financial reporting irregularities and generally requires greater audit effort.
Abstract: This study examines whether clients' business strategies are a factor in determining the occurrence of financial reporting irregularities and the level of audit effort. We use the organizational strategy theory of Miles and Snow to develop a comprehensive measure of business strategy using publicly available data. We find that Miles and Snow's Prospector strategy is more likely to be involved in financial reporting irregularities and generally requires greater audit effort. The business strategy measure also appears to capture client business risk and provides incremental explanatory power beyond the individual measures of client complexity or risk used in traditional audit fee models. We contribute to the literature by constructing a replicable business strategy measure and identifying organizational business strategy as an important ex ante determinant of financial reporting irregularities and levels of audit effort. Our results suggest that investigating how audits can be improved to reduce financial reporting irregularities among Prospector clients is an important area for audit practice and future research.
272 citations
Posted Content•
TL;DR: In this article, the authors identify two design issues that explain the inconsistency between the theoretically predicted negative relation between audit effort and misstatements (measured using restatements) and empirical findings.
Abstract: We identify two research design issues that explain the inconsistency between the theoretically predicted negative relation between audit effort and misstatements (measured using restatements) and empirical findings. First, auditor risk adjustment behavior induces an upward bias in the association between audit effort and restatements. Second, the theoretical prediction applies only to audited financial reports (i.e., annual reports) and not to unaudited reports (i.e., interim quarterly reports). Comingling restatements of audited with unaudited reports introduces an additional upward bias in the association between audit effort and restatements. After correcting for these two sources of bias, we find a robust negative association between audit effort and annual report restatements.
255 citations
TL;DR: In this article, the authors analyse compliance for a large sample of European companies mandatorily applying International Financial Reporting Standards (IFRS), focusing on disclosures required by IFRS 3 Business Combinations and International Accounting Standard 36 Impairment of Assets, and find substantial non-compliance.
Abstract: In this study, we analyse compliance for a large sample of European companies mandatorily applying International Financial Reporting Standards (IFRS). Focusing on disclosures required by IFRS 3 Business Combinations and International Accounting Standard 36 Impairment of Assets, we find substantial non-compliance. Compliance levels are determined jointly by company- and country-level variables, indicating that accounting traditions and other country-specific factors continue to play a role despite the use of common reporting standards under IFRS. At the company level, we identify the importance of goodwill positions, prior experience with IFRS, type of auditor, the existence of audit committees, the issuance of equity shares or bonds in the reporting period or in the subsequent period, ownership structure and the financial services industry as influential factors. At the country level, the strength of the enforcement system and the size of the national stock market are associated with compliance. Both fact...
253 citations
TL;DR: This article found that firms whose audit committees have "friendship" ties to the CEO purchase fewer audit services and engage more in earnings management, and that auditors are also less likely to issue going-concern opinions or to report internal control weaknesses when friendship ties are present.
Abstract: To ensure that audit committees provide sufficient oversight over the auditing process and quality of financial reporting, legislators have imposed stricter requirements on the independence of audit committee members. Although many audit committees appear to be “fully” independent, anecdotal evidence suggests that CEOs often appoint directors from their social networks. Based on a 2004 to 2008 sample of U.S.-listed companies after the Sarbanes-Oxley Act we find that these social ties have a negative effect on variables that proxy for oversight quality. In particular, we find that firms whose audit committees have “friendship” ties to the CEO purchase fewer audit services and engage more in earnings management. Auditors are also less likely to issue going-concern opinions or to report internal control weaknesses when friendship ties are present. On the other hand, social ties formed through “advice networks” do not seem to hamper the quality of audit committee oversight.
TL;DR: In this article, the authors examine two measures of financial reporting quality (financial restatements and discretionary accruals) and two external auditor oversight (audit and non-audit fees) and find that audit committee members who are both accounting and industry experts perform better than those with only accounting expertise.
Abstract: Calls from practice suggest that audit committee members with industry expertise can improve audit committee effectiveness. Nevertheless, regulators and extant literature have focused on the financial expertise of the audit committee. We posit that audit committee industry knowledge is valuable because accounting guidance, estimates, and oversight of the external auditor are often linked to a company’s operations within a particular industry. Taking a holistic view, we examine two measures of financial reporting quality (financial restatements and discretionary accruals) and two measures of external auditor oversight (audit and non-audit fees). As predicted, we find that audit committee members who are both accounting and industry experts perform better than those with only accounting expertise. We also find that in certain instances, supervisory experts who are also industry experts perform better than supervisory experts alone. Overall, these results suggest that industry expertise, when combined with accounting expertise, can improve the effectiveness of the audit committee in monitoring the financial reporting process.
TL;DR: This paper found that auditors overwhelmingly choose to audit the details of management's estimate rather than use other allowable approaches, resulting in over-reliance on management's process, rather than engaging in a critical analysis of the overall estimate.
Abstract: We interview 24 very experienced auditors about how they audit complex accounting estimates such as fair values and impairments and what problems they experience in the process. We find that auditors overwhelmingly choose to audit the details of management’s estimate rather than use other allowable approaches. The steps auditors describe and the language they use to describe the steps indicate that they follow a process of verifying individual elements of management’s assertions on a piecemeal basis, resulting in over-reliance on management’s process, rather than engaging in a critical analysis of the overall estimate. The problems that auditors identify are consistent with this view, and include failures to notice inconsistencies among the estimate and other internal data or external conditions and over-reliance on specialists to identify, evaluate, and challenge critical assumptions. We interpret these processes and problems using institutional theory and identify two root causes: standards’ and firms’ emphasis on verifying management’s model and audit firms’ chosen division of knowledge between auditors and specialists. Institutional theory predicts these conventions arise from firms extending use of procedures that are legitimate in one area (i.e., auditing accounts without uncertainty) to a new area (i.e., auditing complex estimates), even though they are less effective in the new area. They are reinforced by regulators’ method of inspection and by firms’ reluctance to change methods without a prompt to change to a clearly better method. We argue that these conventions thwart auditors’ good-faith attempts to engage in skeptical analysis of estimates.
TL;DR: In this paper, the authors developed a contingency approach to explain how firm ownership influences the monitoring function of the board, measured as the magnitude of external audit fees contracted by the board.
Abstract: We develop a contingency approach to explain how firm ownership influences the monitoring function of the board—measured as the magnitude of external audit fees contracted by the board—by extending agency theory to incorporate the resource dependence notion that boards have distinct incentives and abilities to monitor management. Analyses of data on Continental European companies reveal that while board independence and audit services are complementary when ownership is dispersed, this is not the case when ownership is concentrated—suggesting that ownership concentration and board composition become substitutes in terms of monitoring management. Additional analysis shows that the relationship between board composition and external audit fees is also contingent upon the type of the controlling shareholder. Copyright © 2013 John Wiley & Sons, Ltd.
TL;DR: In this article, the importance of exercising the appropriate level of professional skepticism when conducting an audiobook audiobook was emphasized, and both researchers (e.g., Nelson 2009) and regulators (e., the PCAOB) have emphasized the need to exercise the appropriate levels of professional scepticism when conducting audiobook audiovisual research.
Abstract: SUMMARY: Both researchers (e.g., Nelson 2009) and regulators (e.g., the PCAOB) have emphasized the importance of exercising the appropriate level of professional skepticism when conducting an audi...
TL;DR: In this paper, the authors identify two design issues that explain the inconsistency between the theoretically predicted negative relation between audit effort and misstatements (measured using restatements) and empirical findings.
Abstract: : We identify two research design issues that explain the inconsistency between the theoretically predicted negative relation between audit effort and misstatements (measured using restatements) and empirical findings. First, auditor risk adjustment behavior induces an upward bias in the association between audit effort and restatements. Second, the theoretical prediction applies only to audited financial reports (i.e., annual reports) and not to unaudited reports (i.e., interim quarterly reports). Comingling restatements of audited with unaudited reports introduces an additional upward bias in the association between audit effort and restatements. After correcting for these two sources of bias, we find a robust negative association between audit effort and annual report restatements. JEL Classification: M49. Data Availability: Data used in this study are available from public sources.
TL;DR: In this article, the authors present a review of the research in the area of modified audit opinions (GCOs) and develop a framework to categorize this research into three major areas of research: (1) determinants of GCOs that include client factors, auditor factors and auditor-client relationships, and other environmental factors; (2) accuracy of the GCO; and (3) consequences arising from GCO.
Abstract: SUMMARY: In this synthesis we review research on going-concern modified audit opinions (GCOs) and develop a framework to categorize this research. We identify three major areas of research: (1) determinants of GCOs that include client factors, auditor factors, auditor-client relationships, and other environmental factors; (2) accuracy of GCOs; and (3) consequences arising from GCOs. We identify method-related considerations for researchers working in the area and identify future research opportunities.
TL;DR: In this article, the authors examined the association between accruals quality and the gender of the audit engagement partner and found that firms with female audit engagement partners are associated with smaller abnormal accruality, thereby implying that female auditors may have a constraining effect on earnings management.
Abstract: SYNOPSIS: This paper examines the association between accruals quality and the gender of the firm's audit engagement partner. In particular, given the documented gender-based differences in diligence, conservatism, and risk tolerance, we postulate that female auditors may improve accruals quality. Using a sample of Finnish and Swedish NASDAQ OMX-listed firms, we run several alternative panel regressions of abnormal accruals on female auditor variables and firm-specific controls. The results suggest that firms with female audit engagement partners are associated with smaller abnormal accruals, thereby implying that female auditors may have a constraining effect on earnings management. In general, our findings indicate that the behavioral differences between women and men may have important implications for the quality of auditing and financial reporting. Data Availability: The data used in this paper are derived from public sources.
TL;DR: In this paper, the authors analyzed 2,557 firm-year restatements in a sample of 23,190 financial statements originally issued by U.S. firms from 2003 to 2008.
Abstract: Francis and Yu (2009) and Choi, Kim, Kim, and Zang (2010) report evidence that Big 4 audits are of higher quality when the engagement office is of larger size. Specifically, client earnings quality is higher and auditors in larger offices are more likely to issue going-concern audit reports. We extend this line of research to test if larger Big 4 offices have fewer client restatements. A client restatement provides more direct evidence of a low-quality audit than earnings quality metrics or going-concern reports, because a restatement indicates the client's auditor did not effectively enforce the correct application of GAAP at the time the original financial statements were issued. We analyze 2,557 firm-year restatements in a sample of 23,190 financial statements originally issued by U.S. firms from 2003 to 2008. We find that Big 4 office size is associated with fewer client restatements after controlling for innate client characteristics that may affect restatements (client size, financial performance, industry membership, nonfinancial measures, off-balance sheet activities, and market-related measures), and a set of controls for other auditor factors such as fees and industry expertise. The study raises important questions about the ability of smaller offices to deliver high-quality audits for SEC registrants.
TL;DR: In this paper, the authors investigate factors that affect the probability of receiving a 10-K comment letter, the extent of comments received, and the cost of remediation, and find that low profitability, high complexity, engaging a small audit firm, and weaknesses in governance are positively associated with the receipt of a comment letter.
Abstract: Securities and Exchange Commission (SEC) comment letters provide independent and timely feedback on the clarity of disclosures and on the extent to which filings comply with Generally Accepted Accounting Principles and SEC reporting regulations. We investigate factors that affect the probability of receiving a 10-K comment letter, the extent of comments received, and the cost of remediation. We find that in addition to factors explicitly stated to increase SEC scrutiny in Section 408 of the Sarbanes-Oxley Act, low profitability, high complexity, engaging a small audit firm, and weaknesses in governance are positively associated with the receipt of a comment letter, the extent of comments, and the cost of remediation. The probability that the comment letter results in a restatement is higher for smaller companies and for companies engaging a small audit firm. We also provide evidence that comments relating to accounting issues result in higher remediation costs, largely due to the additional time required to resolve comments relating to classification issues and fair value issues. Our findings should be of interest to stakeholders who use SEC comment letters to assess disclosure quality and reporting compliance, and to managers and other stakeholders impacted by costs associated with the SEC’s review process.
TL;DR: Using Google Street View imagery to audit the built environment and the prevalence-adjusted bias-adjusted kappa statistic is a reliable method for assessing characteristics of theBuilt environment.
Abstract: Background
Observational field audits are recommended for public health research to collect data on built environment characteristics. A reliable, standardized alternative to field audits that uses publicly available information could provide the ability to efficiently compare results across different study sites and time.
TL;DR: The authors synthesize academic literature related to fraudulent financial reporting with dual purposes: (1) to better understand the nature and extent of the existing literature on financial repo reporting, and (2) to understand the extent of fraudulent reporting.
Abstract: SUMMARY: We synthesize academic literature related to fraudulent financial reporting with dual purposes: (1) to better understand the nature and extent of the existing literature on financial repo...
TL;DR: In this paper, the authors investigate the effects of requiring the engagement partner to sign the audit report in the United Kingdom (U.K.). And they find a significant decline in abnormal accruals and the propensity to meet an earnings threshold, and an increase in the incidence of qualified audit reports and in earnings informativeness.
Abstract: This paper investigates the effects on audit quality and audit fees of requiring the engagement partner to sign the audit report in the United Kingdom (U.K.). The effect of requiring the engagement partner to sign the audit report is timely since the Public Company Accounting Oversight Board (PCAOB) is considering mandating a similar requirement in the United States (U.S.). In the first year after the introduction of the signature requirement, we find a significant decline in abnormal accruals and the propensity to meet an earnings threshold, and we find a significant increase in the incidence of qualified audit reports and in earnings informativeness. In addition, audit fees are significantly higher in the post-signature period than in the pre-signature period. Moreover, we compare U.K. firms with a matched sample of U.S. firms and firms in other European countries in periods both before and after the U.K. adopted a signature requirement. Our results are generally consistent with the argument o...
TL;DR: In this article, the authors find evidence consistent with audit style increasing the comparability of reported earnings within a Big 4 auditor's clientele, for a sample of U.S. companies for the period 1987 to 2011.
Abstract: The term “audit style” is used to characterize the unique set of internal working rules of each Big 4 audit firm for the implementation of auditing standards, and the enforcement of GAAP within their clienteles. Audit style implies that two companies audited by the same Big 4 auditor, subject to the same audit style, are more likely to have comparable earnings than two firms audited by two different Big 4 firms with different styles. By comparable we mean that two firms in the same industry and year will have a more similar accruals and earnings structure. For a sample of U.S. companies for the period 1987 to 2011, we find evidence consistent with audit style increasing the comparability of reported earnings within a Big 4 auditor’s clientele.
TL;DR: In this paper, the authors proposed an index to measure the quality of CSR assurance reports and found that the value of the quality index is significantly higher if the assurance services are provided by an auditor (as opposed to a consultant) and if the CSR reporting company is larger.
Abstract: There is a rising trend among companies to publish their sustainability or corporate social responsibility (CSR) reports. Assurance of these reports is a valuable voluntary tool to provide them with higher credibility. Nonetheless, the quality of assurance reports differs in practice and the objective of this paper is to provide evidence in this new area of research. Indeed, we are pioneers in developing an index to measure the quality of assurance reports. We choose the Spanish setting because it is the worldwide leading country as regards CSR reporting (KPMG, 2011; Sierra et al., 2012). We have found evidence on the determinants for CSR reporting posited by existing literature that have an impact on (a) the decision of companies to publish their CSR reports, (b) the decision to assure the CSR report or not and (c) the decision to hire the assurance services from an auditor or a consultant and the subsequent quality of the assurance report. Last but not least, our results from a sample of 161 CSR assurance reports evidence that assurance reports are of fairly acceptable quality, according to the index proposed. Furthermore, the value of the quality index is significantly higher if the assurance services are provided by an auditor (as opposed to a consultant) and if the CSR reporting company is larger. Copyright © 2012 John Wiley & Sons, Ltd and ERP Environment.
TL;DR: In this article, the authors present an index designed to capture differences between countries in relation to the institutional setting for financial reporting, specifically the auditing of financial statements and the enforcement of compliance with each country's accounting standards.
Abstract: In this paper we present an index designed to capture differences between countries in relation to the institutional setting for financial reporting, specifically the auditing of financial statements and the enforcement of compliance with each country’s accounting standards. The adoption of International Financial Reporting Standards (IFRS) aims, in broad terms, to promote the comparability and transparency of financial statements and to improve the quality of financial reporting. However, the effectiveness of IFRS adoption is believed to be hampered by differences, across countries, in the institutional setting in which financial reporting occurs. Studies of the impact of IFRS have used a range of proxies to capture these country differences, but the proxies seldom focus explicitly on factors that affect how compliance with accounting standards is promoted through external audit and the activities of independent enforcement bodies. To address this deficiency, we calculate measures of the quality of public company audits (AUDIT) and the degree of accounting enforcement activity (ENFORCE) for 51 countries for each of the years 2002, 2005 and 2008, using publicly available data provided by the International Federation of Accountants (IFAC), the World Bank and the national securities regulators. Our aim in constructing and publishing our index is to make available, to researchers and other interested parties, country-level enforcement measures that are more obviously focused on financial reporting practices.
TL;DR: In this article, the authors investigated the relationship between auditors' ex ante litigation risk and going concern reporting, and found a significant negative association between going-corp reporting and auditor litigation.
Abstract: Audit researchers have a long-standing interest in understanding whether issuing a going concern report to financially stressed clients protects auditors from litigation. An endogeneity issue arises, in that litigation risk affects the going concern decision and the going concern decision impacts auditor litigation risk. Using a simultaneous equations approach, we find a significant positive association between auditors' ex ante litigation risk and going concern reporting. By applying simultaneous equations, we also find a significant negative association between going concern reporting and auditor litigation, suggesting that auditors deter lawsuits by issuing going concern reports to their financially stressed clients. Our research further provides a more rigorous analysis of the relation between going concern reporting and lawsuit outcomes in the form of auditor litigation dismissals, small settlement amounts, and large settlement amounts. Our results indicate that when auditors are named in ...
TL;DR: In this paper, the existence of low-quality audits in an auditor office indicates the presence of a "contagion effect" on the quality of other (concurrent) audits conducted by the auditor office.
Abstract: : We investigate if the existence of low-quality audits in an auditor office indicates the presence of a “contagion effect” on the quality of other (concurrent) audits conducted by the off...
TL;DR: In this paper, the authors investigate factors that affect the probability of receiving a 10-K comment letter, the extent of comments received, and the cost of remediation, and find that low profitability, high complexity, engaging a small audit firm, and weaknesses in governance are positively associated with the receipt of a comment letter.
Abstract: Securities and Exchange Commission (SEC) comment letters provide independent and timely feedback on the clarity of disclosures and on the extent to which filings comply with Generally Accepted Accounting Principles and SEC reporting regulations. We investigate factors that affect the probability of receiving a 10-K comment letter, the extent of comments received, and the cost of remediation. We find that in addition to factors explicitly stated to increase SEC scrutiny in Section 408 of the Sarbanes-Oxley Act, low profitability, high complexity, engaging a small audit firm, and weaknesses in governance are positively associated with the receipt of a comment letter, the extent of comments, and the cost of remediation. The probability that the comment letter results in a restatement is higher for smaller companies and for companies engaging a small audit firm. We also provide evidence that comments relating to accounting issues result in higher remediation costs, largely due to the additional time...
TL;DR: In this article, the authors use cross-country variation in the audit market structure of 42 countries to examine two separate aspects of Big 4 dominance: (1) Big 4 market concentration as a group relative to non-Big 4 auditors; and (2) concentration within the Big 4 group in which one or more of the big 4 firms is dominant relative to the other Big 4 firms.
Abstract: Audit regulators around the world have expressed concern over market dominance by Big 4 accounting firms and the potential adverse effect it may have on the quality of audited financial statements. We use cross-country variation in the audit market structure of 42 countries to examine two separate aspects of Big 4 dominance: (1) Big 4 market concentration as a group relative to non–Big 4 auditors; and (2) concentration within the Big 4 group in which one or more of the Big 4 firms is dominant relative to the other Big 4 firms. We find that in countries where the Big 4 (as a group) conduct more listed company audits, both Big 4 and non–Big 4 clients have higher quality audited earnings compared to clients in countries with smaller Big 4 market shares. In contrast, in countries where there is a greater concentration within the Big 4 group, we find that Big 4 clients have lower quality audited earnings compared to countries with more evenly distributed market shares among the Big 4. Thus concentration within the Big 4 group appears to be detrimental to audit quality in a country and of legitimate concern to regulators and policymakers. However, Big 4 dominance per se does not appear to harm audit quality and is in fact associated with higher earnings quality, after controlling for other country characteristics that potentially affect earnings quality.