Showing papers on "Audit published in 2014"
TL;DR: In this article, the authors define higher audit quality as greater assurance of high financial reporting quality, and they provide a framework for systematically evaluating their unique strengths and weaknesses, including the role of auditor and client competency in driving audit quality.
Abstract: We define higher audit quality as greater assurance of high financial reporting quality. Researchers use many proxies for audit quality, with little guidance on choosing among them. We provide a framework for systematically evaluating their unique strengths and weaknesses. Because it is inextricably intertwined with financial reporting quality, audit quality also depends on firms’ innate characteristics and financial reporting systems. Our review of the models commonly used to disentangle these constructs suggests the need for better conceptual guidance. Finally, we urge more research on the role of auditor and client competency in driving audit quality.
1,553 citations
TL;DR: In this article, the authors define higher audit quality as greater assurance of high financial reporting quality, and they provide a framework for systematically evaluating their unique strengths and weaknesses, including the role of auditor and client competency in driving audit quality.
1,327 citations
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 use of a common set of standards such as 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 may be hampered by differences, across countries, in the institutional setting in which financial reporting occurs. Studies of outcomes from adopting IFRS use a range of legal system proxies to capture these country differences, but the proxies are deficient in that they 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 the public company auditors� working environment (AUDIT) and the degree of accounting enforcement activity (ENFORCE) by independent enforcement bodies. We do this 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. Preliminary tests suggest our indices have additional explanatory power (over more general legal proxies) for country-level measures of economic and market activity, financial transparency and earnings management. We expect they will prove useful to researchers and other interested parties who require country-level measures that focus on the degree of enforcement of financial reporting practices.
276 citations
TL;DR: In this article, the impact of partner rotation on audit quality was investigated using a unique dataset of audit adjustments in China, and the results suggest that mandatory rotation of engagement partners results in higher quality audits in the years immediately surrounding rotation.
Abstract: Opponents of mandatory rotation argue that a change of partner is bad for audit quality, as it results in a loss of client-specific knowledge. On the other hand, proponents argue that a change of partner is beneficial, as it results in a positive peer review effect and a fresh perspective on the audit. We test the impact of mandatory partner rotation on audit quality using a unique dataset of audit adjustments in China. Our results suggest that mandatory rotation of engagement partners results in higher quality audits in the years immediately surrounding rotation. Specifically, we find a significantly higher frequency of audit adjustments during the departing partner's final year of tenure prior to mandatory rotation and during the incoming partner's first year of tenure following mandatory rotation.
223 citations
TL;DR: In this article, the authors developed a measure of accounting quality based on audit fees and found that the measure of unexplained audit fees correlates positively with other empirical measures of quality, such as fraud, restatements, and SEC comment letters.
Abstract: This study develops a measure of accounting quality based on audit fees. Adopting a neoclassical view of the audit market, we argue that unexplained audit fees should contain information about accounting quality. We find that our measure of unexplained audit fees correlates positively with other empirical measures of quality. We further show that our measure of accounting quality is incrementally predictive of fraud, restatements, and SEC comment letters, controlling for other measures of quality. Overall, we believe that the information in audit fees can be used to provide an alternative measure of a firm’s accounting quality.
217 citations
TL;DR: This paper 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. Data Availability: All d...
214 citations
TL;DR: In this paper, the authors investigate whether firms and their top executives bear reputational costs from engaging in aggressive tax avoidance activities and conclude that there is little evidence of tax shelter usage leading to reputual costs at the firm level.
Abstract: We investigate whether firms and their top executives bear reputational costs from engaging in aggressive tax avoidance activities. Prior literature has posited that reputational costs partially explain why so many firms apparently forgo the benefits of tax avoidance, the so-called “under-sheltering puzzle.” We employ a database of 118 firms that were subject to public scrutiny for having engaged in tax shelters, representing the largest sample of publicly identified corporate tax shelters analyzed to date. We examine the reputational costs that prior research has shown that firms and managers face in cases of alleged misconduct: increased CEO and CFO turnover, auditor turnover, lost sales, increased advertising costs, and decreased media reputation. Across a battery of tests, we find little evidence that firms or their top executives bear significant reputational costs as a result of being accused of engaging in tax shelter activities. Moreover, we find no decrease in firms’ tax avoidance activities after being accused of tax shelter activity. Finally, in tests of the capital market reaction to news of tax shelter involvement, we find that negative event-period returns fully reverse within a few weeks of the public scrutiny, consistent with a temporary market penalty to tax shelter news. In all, we conclude that there is little evidence of tax shelter usage leading to reputational costs at the firm level.
211 citations
182 citations
TL;DR: Wang et al. as mentioned in this paper identify connected auditors as those who attended the same university as the executives of their clients and find that connected audrators are more likely to issue favorable audit opinions, especially for financially distressed clients.
Abstract: We identify connected auditors as those who attended the same university as the executives of their clients. Using manually collected data from China, we find that connected auditors are more likely to issue favorable audit opinions, especially for financially distressed clients. Moreover, companies audited by connected auditors report significantly higher discretionary accruals, are more likely to subsequently restate earnings downward, and have lower earnings response coefficients. Lastly, connected auditors earn higher audit fees. Collectively, our evidence suggests the impairment of audit quality when auditors and client executives have school ties and the presence of social reciprocity derived from school ties.
182 citations
TL;DR: In this paper, the authors developed a model for assessing the quality of risk disclosures and applied the proposed model to four companies in the food production and processing sector and found that company managers prefer providing disclosures that are symbolic rather than substantive.
Abstract: This research develops a model for assessing the quality of risk disclosures and applies the proposed model to four companies in the food production and processing sector. We contribute to the literature by extending prior work on risk disclosure quality using a longitudinal approach to assess the quality of risk reporting. While previous studies have described disclosure practices, this paper adopts a normative approach to disclosure. By suggesting a way of improving risk reporting disclosures, the paper provides guidance for current and future company managers. In line with previous research, this paper identifies certain problems with existing risk disclosures. Results suggest that company managers prefer providing disclosures that are symbolic rather than substantive. We argue that institutional factors and proprietary costs contribute towards and can explain this behaviour. In suggesting a way forward we highlight the role that stakeholders including managers, users, regulators and auditors can play in improving the quality of risk reporting. Flexibility in reporting could be maintained by adopting a properly monitored ‘comply or explain’ approach.
181 citations
TL;DR: In this paper, the authors assessed factors influencing internal audit effectiveness in Saudi Arabia and found that management support for IAE drives perceived effectiveness of the internal audit function from both management's and the internal auditors' perspective.
TL;DR: Although regulation makes audit committees responsible for determining and negotiating audit fees, researchers and practitioners express concerns that CFOs continue to control these negoti... as discussed by the authors, however, they do not have the authority to determine and negotiate audit fees.
Abstract: Although regulation makes audit committees responsible for determining and negotiating audit fees, researchers and practitioners express concerns that CFOs continue to control these negoti...
TL;DR: In this paper, the authors investigate the association of audit fee pressure with an inverse measure of audit quality, misstatements in audited data, during the recent recession and find that fee pressure is positively and significantly associated with accounting misstatement in 2008, the center of the recession.
Abstract: This study investigates the association of audit fee pressure with an inverse measure of audit quality, misstatements in audited data, during the recent recession. Fee pressure in a year is measured as the difference between benchmark “normal” audit fees and actual audit fees. We find fee pressure is positively and significantly associated with accounting misstatements in 2008, the center of the recession. Our results suggest that auditors made fee concessions to some clients in 2008, and that fee pressure was associated with reduced audit quality in that year.
TL;DR: 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 as mentioned in this paper.
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 w...
TL;DR: In this article, the authors examined the effect of auditor-in-charge characteristics on audit quality using the propensity to issue a going-concern opinion as the measure of audit quality.
Abstract: We examine the effect of auditor-in-charge characteristics on audit quality using the propensity to issue a going-concern opinion as the measure of audit quality. We extend the sparse literature on ...
28 Sep 2014
TL;DR: This book presents the most up-to-date technological advances in accounting information technology that have occurred within the last ten years.
TL;DR: In this paper, an ethnographic study conducted in the French branch of a big audit firm and using a psychodynamic perspective to interpret the collected data, it was shown that auditors' sense of comfort arises only at the end of the audit process, and that the rest of the time, public accountants are inhabited primarily by fear.
Abstract: Relying on an ethnographic study conducted in the French branch of a big audit firm and using a psychodynamic perspective to interpret the collected data, we show that auditors’ sense of comfort (Pentland, 1993) arises only at the end of the audit process, and that the rest of the time, public accountants are inhabited primarily by fear. Fear plays a crucial but ambivalent role in auditing. On one hand, auditors and audit firms cultivate this feeling through informal and formal techniques to stimulate vigilance, encourage self-surpassment, mitigate the anesthetizing effect of habit and maintain reputation. On the other hand, audit teams’ members strive to alleviate their fear in order to form and convey their conclusions with a certain degree of comfort. In the field, driven by fear, they manage to finally become comfortable either by mobilizing their ‘practical intelligence’ (an intelligence of the body which helps them handle that which, in their mission, cannot be obtained through the strict execution of standardized procedures) or by adopting defensive strategies (such as distancing themselves from work-related problems, mechanically applying audit methodologies or relaxing their conception of a job well done). Fear and risk are closely related phenomena. Michael Power (2007a, p. 180) notes that ‘the significant driver of the managerialization of risk management is an institutional fear and anxiety’. Yet the experience of fear and the role that fear plays in risk management processes is most often overlooked in the literature. In this respect, our study contributes to ‘emotionalize’ and challenge the cognitive and technical orientation adopted by most academics and regulators in their understanding of audit risks and auditors’ scepticism. We also discuss a number of avenues for future research with a view to encouraging further examination of the role that emotions play in the audit process.
TL;DR: The low mortality rate supports the safety of UK anaesthetic care and numbers of patients managed by anaesthetists and details of 'who, when, what, and where' are surveyed, which should be valuable for planning and monitoring anaesthesia services.
Abstract: Background Details of current UK anaesthetic practice are unknown and were needed for interpretation of reports of accidental awareness during general anaesthesia (GA) within the 5th National Audit Project. Methods We surveyed NHS anaesthetic activity to determine numbers of patients managed by anaesthetists and details of ‘who, when, what, and where': activity included GA, local anaesthesia, sedation, or patients managed awake. Anaesthetists in NHS hospitals collected data on all patients for 2 days. Scaling enabled estimation of annual activity. Results Hospital response rate was 100% with 20 400 returns. The median return rate within departments was 98% (inter-quartile range 0.95–1). Annual numbers (% of total) of general anaesthetics, sedation, and awake cases were 2 766 600 (76.9%), 308 800 (8.6%), and 523 100 (14.5%), respectively. A consultant or career grade anaesthetist was present in more than 87% of cases. Emergency cases accounted for 23.1% of workload, 75% of which were undertaken out of hours. Specialties with the largest workload were orthopaedics/trauma (22.1%), general surgery (16.1%), and gynaecology (9.6%): 6.2% of cases were non-surgical. The survey data describe: who anaesthetized patients according to time of day, urgency, and ASA grade; when anaesthesia took place by day and by weekday; the distribution of patient types, techniques, and monitoring; where patients were anaesthetized. Nine patients out of 15 460 receiving GA died intraoperatively. Conclusions Anaesthesia in the UK is currently predominantly a consultant-delivered service. The low mortality rate supports the safety of UK anaesthetic care. The survey data should be valuable for planning and monitoring anaesthesia services.
TL;DR: The U.S. and international standard setters have recently proposed changes to the standard audit report, including a requirement to include a critical audit matter (CAM) paragraph.
Abstract: SUMMARY: Both U.S. and international standard setters have recently proposed changes to the standard audit report, including a requirement to include a critical audit matter (CAM) paragraph. We exa...
TL;DR: In this paper, the authors investigate the association of audit fee pressure with an inverse measure of audit quality, misstatements in audited data, during the recent recession and find that fee pressure is positively and significantly associated with accounting misstatement in 2008, the center of the recession.
Abstract: This study investigates the association of audit fee pressure with an inverse measure of audit quality, misstatements in audited data, during the recent recession. Fee pressure in a year is measured as the difference between benchmark “normal” audit fees and actual audit fees. We find fee pressure is positively and significantly associated with accounting misstatements in 2008, the center of the recession. Our results suggest that auditors made fee concessions to some clients in 2008, and that fee pressure was associated with reduced audit quality in that year.
TL;DR: In this paper, the authors evaluate whether and under what circumstances, corporate tax aggressiveness influences audit pricing and find that tax aggressive firms pay higher fees for external audit services after controlling for factors related to earnings management.
Abstract: We evaluate whether, and under what circumstances, corporate tax aggressiveness influences audit pricing. Using a compound measure of two long-run effective tax rates, we find that tax aggressive firms pay higher fees for external audit services after controlling for factors related to earnings management. The fee premium increases with management’s uncertainty about the sustainability of tax positions if audited by tax authorities (i.e., disclosed tax reserves). Further, the provision of auditor-provided tax services may create knowledge spillovers that alleviate the fee premium for tax aggressiveness, unless tax uncertainty is high. Finally, an accounting firm’s industry expertise in auditing is associated with higher audit fees independent of tax aggressiveness, whereas industry expertise in taxation leads to a fee premium only for tax aggressive clients. Overall, the evidence implies firms’ aggressive tax behavior, tax services provider, and auditor-expertise interact to influence the pricing of audit engagements.
TL;DR: Using procurement data from a leading global bank, the value added in an audit setting of a new type of analytical procedure: process mining of event logs is demonstrated, establishing the benefits of using process mining to complement existing audit methods.
Abstract: There is a large body of accounting research literature examining the use of analytical procedures by auditors and proposing either new types of analytical procedures or more effective ways of implementing existing procedures. In this paper, we demonstrate—using procurement data from a leading global bank—the value added in an audit setting of a new type of analytical procedure: process mining of event logs. In particular, using process mining, we are able to identify numerous transactions that we consider to be audit-relevant information, including payments made without approval, violations of segregation of duty controls, and violations of company-specific internal procedures. Furthermore, these identified anomalies were not detected by the bank's internal auditors when they conducted their examination of that same data using conventional audit procedures, thus establishing the benefits of using process mining to complement existing audit methods. Process mining is a very different approach to...
TL;DR: In this article, the authors examine how nonprofessional investors react to an audit report's critical audit matter (CAM) paragraph that is centered on the audit of fair value estimates and find that investors who receive a CAM paragraph are more likely to change their investment decision than are investors who received a standard audit report (an information effect) or investors who receives the same CAM paragraph information in management's footnotes (a source credibility effect).
Abstract: Both U.S. and international standard setters have recently proposed changes to the standard audit report, including a requirement to include a critical audit matter (CAM) paragraph. We examine how nonprofessional investors react to an audit report’s CAM paragraph that is centered on the audit of fair value estimates. We perform an experiment with nonprofessional investors who are business school graduates who invest in individual stocks and analyze company financial data. We find that investors who receive a CAM paragraph are more likely to change their investment decision than are investors who receive a standard audit report (an information effect) or investors who receive the same CAM paragraph information in management’s footnotes (a source credibility effect). We also find that the effect of a CAM paragraph is reversed when it is followed by a paragraph offering resolution of the critical audit matter. Our findings should be of interest to regulators and standard setters as they consider the feasibility of CAM paragraphs and whether and how to convey the resolution of critical audit matters.
Posted Content•
TL;DR: Li et al. as mentioned in this paper found that the Big Four assign less experienced partners to companies that are listed only in China compared with clients cross-listed in Hong Kong, and that companies listed in China have larger signed abnormal accruals than do companies cross listed in Hong Hong Kong.
Abstract: This study examines whether China’s weak institutional environment results in lower quality audits by the Big Four firms. We find that the Big Four assign their less experienced partners to companies that are listed only in China compared with clients cross-listed in Hong Kong. The Big Four are less likely to issue modified audit reports and they charge lower audit fees for clients that are listed only in China. Finally, companies listed only in China have larger signed abnormal accruals than do companies cross-listed in Hong Kong. Overall, we conclude that the weak institutional environment in China results in the Big Four firms providing lower quality audits to companies that are listed only in China.
TL;DR: In this paper, the relationship between future financial statement restatements and audit report lags is investigated, defined as the number of days between the fiscal year-end and the audit report deadline.
Abstract: SUMMARY: We investigate the relationship between future financial statement restatements and audit report lags. Audit report lags are defined as the number of days between the fiscal year-end and t...
TL;DR: In this paper, the authors reexamine the issue on a sample of clients who have both the incentive and the ability to use discretionary accruals to meet or beat the consensus earnings forecast.
Abstract: SUMMARY: Are high audit fees a signal that the auditor exerted more effort or a signal that the auditor may be losing her independence? Prior literature offers conflicting evidence. In this paper, we reexamine the issue on a sample of clients who have both the incentive and the ability to use discretionary accruals to meet or beat the consensus earnings forecast. We find a negative relationship between the level of abnormal audit fees paid by the client and the likelihood of using discretionary accruals to meet or beat the consensus analyst forecast. The evidence is consistent with the notion that abnormal audit fees are indicative of greater effort on the engagement. In other words, the results suggest a positive relationship between abnormal audit fees and audit quality. We show that the conflicting evidence in prior research was caused by research designs that did not consider the incentives of the manager. JEL Classifications: M42; M41. Data Availability: All data are available from public sources quo...
TL;DR: In this article, the authors propose that auditors need to be able to think more broadly and incorporate information from a variety of sources in order to improve audit quality for these important accounts.
Abstract: Auditors experience significant problems auditing complex accounting estimates, and this increasingly puts financial reporting quality at risk. Based on analyses of the specific errors that auditors commit, we propose that auditors need to be able to think more broadly and incorporate information from a variety of sources in order to improve audit quality for these important accounts. We experimentally demonstrate that a deliberative mindset intervention improves auditors’ ability to identify unreasonable estimates by improving their ability to identify and incorporate into their analyses contradictory information from diverse parts of the audit and improving their ability to think critically about the evidence. We perform additional analyses to demonstrate that our intervention improves auditor performance by causing them to think differently rather than simply to work harder. We demonstrate that critical thinking can improve the identification of unreasonable estimates and, in doing so, we provide new directions for addressing audit quality issues.
Posted Content•
TL;DR: In this article, the authors compared both pre-and post-policy implementation and, after the implementation of the policy, mandatory long-tenure versus voluntary shorttenure rotation situations and found that the observed increase in audit fees and audit hours in the post-regulation period extends beyond situations where the audit firm was mandatorily rotated, suggesting that the introduction of mandatory audit firm rotation had a much broader impact than the specific instances of mandatory rotation.
Abstract: Using a unique setting in which mandatory audit firm rotation was required from 2006-2010, and in which both audit fees and audit hours were disclosed (South Korea), this study provides empirical evidence of the economic impact of this policy initiative on audit quality, and the associated implications for audit fees. This study compares both pre- and post-policy implementation and, after the implementation of the policy, mandatory long-tenure versus voluntary short-tenure rotation situations. Where audit firms were mandatorily rotated post-policy, we observe that audit quality (measured as abnormal discretionary accruals) did not significantly change compared with pre-2006 long-tenure audit situations and voluntary post-rotation situations. Audit fees in the post-regulation period for mandatorily rotated engagements are significantly larger than in the pre-regulation period, but are discounted compared to audit fees for post-regulation continuing engagements. We also find that the observed increase in audit fees and audit hours in the post-regulation period extends beyond situations where the audit firm was mandatorily rotated, suggesting that the introduction of mandatory audit firm rotation had a much broader impact than the specific instances of mandatory rotation.
TL;DR: The authors examined the determinants of voluntary audit in a large sample of companies for which they have financial statement data and found that companies are more likely to purchase voluntary audits if they have greater agency costs, are riskier, wish to raise capital, purchase non-audit services from their auditor, and exhibited greater demand for audit assurance in the mandatory audit regime.
Abstract: Although theory suggests that companies would rationally select into audit even if it were not a legal requirement, many countries impose mandatory audits. This is arguably due to an audit having elements of a public good, which may result in not enough audits being purchased without regulatory intervention. The mandatory nature of public company audit has created problems for researchers wishing to investigate the demand for voluntary audit. Recent events in the UK, however, have provided such an environment. In the UK, private companies must publicly file financial statements and, until recently, they had also to be audited. However, this requirement has now been relaxed for many private companies. We are therefore able to examine the determinants of voluntary audit in a large sample of companies for which we have financial statement data. We analyse a sample of 6274 recently exempt companies, following them for three years post-exemption. We use agency theory and prior evidence to generate our hypotheses and examine them using a more comprehensive set of explanatory variables than has previously been available in the literature. Our results indicate that companies are more likely to purchase voluntary audits if they have greater agency costs, are riskier, wish to raise capital, purchase non-audit services from their auditor, and exhibited greater demand for audit assurance in the mandatory audit regime. We also document a trend away from audit over time. Overall, our results strongly support the idea that companies choose to be audited when it is in their interests to do so.
TL;DR: In this paper, the authors suggest ways for public universities to acknowledge the need for accountability while remaining true to core academic purposes by re-thinking and reformulating approaches to university performance management.
Abstract: The audit culture which has developed in public universities has led to counter-productive outcomes. Managerial oversight of academic work has reached a critical tipping point. Extensive auditing of research output by means of performance management assessment regimes motivated by a New Public Management mentality has damaged individual scholarship and threatened academic freedom. Such assessment regimes are perverse and conducive to the development of psychotic tendencies by universities. It is important to understand the effects of a perverse audit culture when re-thinking and reforming approaches to university performance management. We suggest ways for public universities to acknowledge the need for accountability while remaining true to core academic purposes.