Audit Firm Reputational Consequences of Alleged Non-Accounting Misconduct by Clients

2017 ◽  
Author(s):  
Dain C. Donelson ◽  
Matthew Ege ◽  
Justin Leiby
Keyword(s):  
Audit Firm ◽  
Accounting Misconduct

Audit Firm Reputational Consequences of Alleged Non-Accounting Misconduct by Clients: How Bargaining Power Temporarily Shifts Around Securities Litigation

2019 ◽  
Vol 38 (4) ◽  
pp. 77-100 ◽  
Author(s):  
Dain C. Donelson ◽  
Matthew S. Ege ◽  
Justin Leiby
Keyword(s):  
Bargaining Power ◽  
Negative Information ◽  
Securities Fraud ◽  
Securities Litigation ◽  
Audit Firm ◽  
Economic Distress ◽  
Audit Firms ◽  
Jel Classifications ◽  
Accounting Misconduct

SUMMARY This study examines how auditor-client bargaining power changes when misconduct unrelated to accounting, which we proxy for using non-accounting securities fraud lawsuits, is revealed at another client of the auditor. This type of misconduct can cause perceived reputational damage for the auditor that temporarily increases client bargaining power. In the year after suit filing, fees are lower for clients in the same city-industry office as the sued client, but are unchanged for clients of other auditors in the same city-industry, suggesting the effect is not due to economic distress. This effect is stronger (1) when suits are severe, likely because the negative information is more salient, and (2) when client bargaining power is stronger. Overall, these results provide evidence that reputation is important for U.S. audit firms. Further, the results also support the notion that reputation is susceptible to temporary damage from events beyond auditors' control. JEL Classifications: K22; M42; M49.

Leverage and Audit Firm Mergers

1999 ◽  
Author(s):  
Rajib Doogar ◽  
Robert F. Easley ◽  
David N. Ricchiute
Keyword(s):  
Audit Firm

What Determines the Duration of Accounting Misconduct?

2014 ◽  
Author(s):  
Jonathan Black ◽  
Mattias Nilsson ◽  
Roberto B. Pinheiro ◽  
Maximiliano Barbosa da Silva
Keyword(s):  
Accounting Misconduct

Does Audit Firm Tenure Matter to Audit Committee Members? Evidence from an Accounting Dispute

2018 ◽  
Vol 33 (2) ◽  
pp. 25-41 ◽  
Author(s):  
Janice E. Rummell ◽  
F. Todd DeZoort ◽  
Dana R. Hermanson
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Committee Member ◽  
Audit Firm ◽  
Big 4 ◽  
Analyst Expectations ◽  
Public Company ◽  
Management Experience ◽  
Support Relation

SYNOPSIS This study examines the effects of Big 4 audit firm tenure on audit committee member support for the auditor in an auditor/management dispute over a subjective accounting issue. One hundred eighteen U.S. public company audit committee members participated in an experiment with audit firm tenure (short/long) manipulated randomly between subjects. The results indicate that participants in the long audit firm tenure group provide more support for the auditor in the dispute than participants in the short tenure group. Audit committee support for the auditor is positively related to audit committee member experience and CPA status, as well as perceived management pressure to meet analyst expectations, but negatively related to perceived management experience in financial reporting. Finally, audit committee members' perceptions of audit firm reliability (i.e., credibility and dependability) mediate the audit firm tenure-auditor support relation. Overall, our results suggest enhanced audit committee support for longer-tenured auditors.

Fee Discounting and Audit Quality Following Audit Firm and Audit Partner Changes: Chinese Evidence

2014 ◽  
Vol 90 (4) ◽  
pp. 1517-1546 ◽  
Author(s):  
Hua-Wei Huang ◽  
K Raghunandan ◽  
Ting-Chiao Huang ◽  
Jeng-Ren Chiou
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Audit Fees ◽  
Audit Firm ◽  
Audit Fee ◽  
Significant Attention

ABSTRACT Issues related to low-balling of initial year audit fees and the resultant impact on audit quality have received significant attention from regulators in many countries. Using 9,684 observations from China during the years 2002–2011, we find that there is a significant initial year audit fee discount following an audit firm change when both of the signing audit partners are different from the prior year. The evidence is mixed if one or both of the signing partners from the prior year also moves with the client to the new audit firm. We find evidence of audit fee discounting in our analysis of fee levels, but not in our analysis of changes in audit fees from the prior year. Sanctions for problem audits and greater earnings management are more likely when there is an audit firm change that involves two new signing partners together with initial year audit fee discounting.

How a Shared Auditor Affects Firm-Pair Comparability: Implications of Both Firm and Individual Audit Styles

2020 ◽  
Vol 39 (3) ◽  
pp. 133-160
Author(s):  
Lili Jiu ◽  
Bin Liu ◽  
Yuanyuan Liu
Keyword(s):  
Accounting Standards ◽  
Financial Statement ◽  
Professional Judgment ◽  
Audit Process ◽  
Personal Style ◽  
Audit Firm ◽  
Market Participants ◽  
Audit Firms ◽  
Audit Reports ◽  
Practical Implications

SUMMARY In this study, we examine the roles of audit firms and individual auditors in improving financial statement comparability. We conduct the study in the Chinese setting, in which the identities of signing auditors are revealed in audit reports and accounting standards are principle based. After controlling for audit firm style, we find that firm pairs with shared signing auditors have incrementally greater comparability. Our results indicate that individual auditors exhibit their own personal style in implementing accounting standards and exercising professional judgment in the audit process. Overall, our study underscores the association between individual auditors and comparability, with practical implications for market participants and policymakers.

An Empirical Investigation of IPO Underpricing and the Change to the LLP Organization of Audit Firms

2004 ◽  
Vol 23 (1) ◽  
pp. 53-67 ◽  
Author(s):  
Steven R. Muzatko ◽  
Karla M. Johnstone ◽  
Brian W. Mayhew ◽  
Larry E. Rittenberg
Keyword(s):  
Initial Public Offering ◽  
Audit Quality ◽  
Limited Liability ◽  
Litigation Risk ◽  
Ipo Underpricing ◽  
Audit Firm ◽  
Legal Structure ◽  
Audit Firms ◽  
Public Offering

This paper examines the relationship between the 1994 change in audit firm legal structure from general partnerships to limited liability partnerships (LLPs) on underpricing in the initial public offering (IPO) market. The change in legal structure of audit firms reduces an audit firm's wealth at risk from litigation damages and reduces the incentives for intrafirm monitoring by partners within an audit firm. Prior research suggests that underpricing protects underwriters from litigation damages, and that the level of underpricing varies inversely with both the amount of implicit insurance provided by the audit firm and the quality of the audit services provided. We hypothesize the change in audit firm legal structure reduced the assets available from audit firms in IPO-related litigation and indirectly reduced audit quality by lowering intrafirm monitoring. As a result, underwriters have incentives as a joint and several defendant with the audit firms to increase IPO underpricing, particularly for high-litigation-risk IPOs, following audit firms' shifts to LLP status. Our findings are consistent with this hypothesis.

The Role and Perceptions of Independent Audit Partners in the Governmental Audit Market

2001 ◽  
Vol 1 (1) ◽  
pp. 17-41 ◽  
Author(s):  
Suzanne H. Lowensohn ◽  
Frank Collins
Keyword(s):  
Risk Factors ◽  
Environmental Risk ◽  
Environmental Risk Factors ◽  
Political Climate ◽  
Audit Firm ◽  
The Public ◽  
Audit Market ◽  
Primary Means ◽  
Relationship Of ◽  
Independent Audit

Audits are the primary means of monitoring that public funds are appropriately spent by governmental entities. Currently, independent auditors (rather than governmental auditors) are the primary suppliers of governmental audit services, despite the fact that many of them view governmental audits as “secondary” (AICPA 1987). Furthermore, nongovernmental auditors are believed to be less “independent” and more prone to lose sight of the programmatic demand to safeguard the public trust (Power 1997) than governmental auditors. To better understand the supply of governmental audit services, this study investigates independent audit firm partner opinions of governmental audits and their motivation to pursue these engagements. Multiple regression results of our data reveal that partners are more likely to pursue governmental audits if they believe that desirable intrinsic and extrinsic rewards are attainable through performing these audits. Furthermore, environmental risk factors—an active political climate and authoritative changes—reduce partner motivation to pursue governmental audits. It is suggested that environmental risk factors disrupt the comfortable principal/agent relationship of the auditor and auditee because the relationships have become decoupled (abstracted) from the audit's programmatic mission.

The Effect of Office Changes within Audit Firms on Clients' Audit Quality and Audit Fees

2020 ◽  
Vol 39 (1) ◽  
pp. 71-99
Author(s):  
Carl W. Hollingsworth ◽  
Terry L. Neal ◽  
Colin D. Reid
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Additional Analysis ◽  
Audit Firm ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact ◽  
Audit Partner Rotation

SUMMARY While prior research has examined audit firm and audit partner rotation, we have little evidence on the impact of within-firm engagement team disruptions on the audit. To examine these disruptions, we identify a unique sample of companies where the audit firm issuing office changed but the audit firm did not change and investigate the effect of these changes on the audit. Our results indicate that companies that have a change in their audit firm's issuing office exhibit a decrease in audit quality and an increase in audit fees. In additional analysis, we partition office changes into two groups—client driven changes and audit firm driven changes. This analysis reveals that client driven changes are more likely to result in a higher audit fee while audit quality is unchanged. Conversely, audit firm driven changes do not result in a higher audit fee but do experience a decrease in audit quality.

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