The Effect of the SEC's XBRL Mandate on Audit Report Lags

2017 ◽  
Vol 32 (1) ◽  
pp. 1-27 ◽  
Author(s):  
Keval Amin ◽  
John Daniel Eshleman ◽  
Cecilia (Qian) Feng
Keyword(s):  
Internal Control ◽  
Reporting Quality ◽  
Audit Fees ◽  
Economic Consequences ◽  
Data Availability ◽  
Audit Report ◽  
Difference In Differences ◽  
Financial Report ◽  
Business Reporting ◽  
Mandatory Adoption

SYNOPSIS: There is considerable debate about whether the adoption of eXtensible Business Reporting Language (XBRL) will result in timelier SEC filings. We provide empirical evidence on this debate by investigating the effect of XBRL adoption on audit report lags. Using a hand-collected panel of S&P 1500 clients' XBRL financial report filings and both levels and difference-in-differences analyses, we show that audit report lags decrease following the mandatory adoption of XBRL. These results are robust to various subsamples and model specifications. On average, audit report lags decrease anywhere from 0.4 to 3.4 percent (0.21 to 1.93 days) in the post-adoption period, depending on the specification used. We further document that these results are concentrated among filers with strong internal control systems and no prior XBRL reporting experience. We also find that audit report lags continue to decline in the years following adoption, which is indicative of a learning curve and improvements in XBRL reporting quality. Additional tests reveal that XBRL is negatively associated with audit fees, suggesting that the XBRL effect is at least partially driven by auditor efficiency gains. Our findings are informative for assessing the economic consequences of requiring XBRL adoption, which should be of interest to regulators, managers, and researchers. JEL Classifications: M41; M42. Data Availability: All data are publicly available from sources quoted in the text.

SOX 404, Auditor Effort, and the Prevention of Financial Report Misstatements

2017 ◽  
Vol 36 (4) ◽  
pp. 151-177 ◽  
Author(s):  
Yuping Zhao ◽  
Jean C. Bedard ◽  
Rani Hoitash
Keyword(s):  
Internal Control ◽  
Lower Incidence ◽  
Audit Fees ◽  
Data Availability ◽  
Section 404 ◽  
Financial Report ◽  
Auditor Tenure ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Jel Classifications

SUMMARY Prior research shows that the Sarbanes-Oxley Act (SOX) Section 404(b) integrated audit is associated with a lower incidence of misstatements. We predict that under 404(b), the auditor's ability to detect misstatements increases relative to other internal control regimes when greater resources are exerted during the engagement. Supporting this prediction, we find that the benefits of 404(b) versus other regimes (including SOX 404(a)) in reducing misstatements increase with incremental audit effort (proxied by abnormal audit fees). We find no benefit of 404(b) in misstatement reduction when abnormal audit effort is low. This implies that the value of 404(b) testing is not uniform, but rather is greater when sufficient resources are available to thoroughly understand client controls. In contrast, we find no benefit of abnormal audit effort under other regulatory regimes. We further examine the conditions under which knowledge gained from auditor internal control testing is more valuable. We find that the benefits of increased audit effort under 404(b) do not vary across internal control regimes under AS2 versus AS5, and are more pronounced for engagements with shorter auditor tenure, non-Big 4 auditors, and industry-specialist auditors. JEL Classifications: M49. Data Availability: Data used in this study are available from public sources.

The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and Evidence

2012 ◽  
Vol 87 (6) ◽  
pp. 2061-2094 ◽  
Author(s):  
Jeong-Bon Kim ◽  
Xiaohong Liu ◽  
Liu Zheng
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Financial Reporting Quality ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Audit Fee ◽  
European Union Countries ◽  
The Impact

ABSTRACT: This study examines the impact of International Financial Reporting Standards (IFRS) adoption on audit fees. We first build an analytical audit fee model to analyze the impact on audit fees for the change in both audit complexity and financial reporting quality brought about by IFRS adoption. We then test the model's predictions using audit fee data from European Union countries that mandated IFRS adoption in 2005. We find that mandatory IFRS adoption has led to an increase in audit fees. We also find that the IFRS-related audit fee premium increases with the increase in audit complexity brought about by IFRS adoption, and decreases with the improvement in financial reporting quality arising from IFRS adoption. Finally, we find some evidence that the IFRS-related audit fee premium is lower in countries with stronger legal regimes. Our results are robust to a variety of sensitivity checks. Data availability: Data are available from public sources identified in the paper.

The Failure to Remediate Previously Disclosed Material Weaknesses in Internal Controls

2012 ◽  
Vol 31 (2) ◽  
pp. 73-111 ◽  
Author(s):  
Jacqueline S. Hammersley ◽  
Linda A. Myers ◽  
Jian Zhou
Keyword(s):  
Interest Rates ◽  
Control Systems ◽  
Internal Control ◽  
Credit Rating ◽  
Control Sample ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Committees ◽  
Annual Reports ◽  
Material Weaknesses

SUMMARY In this paper, we study a sample of companies that fail to remediate previously disclosed material weaknesses (MWs) in their internal control systems and, thus, disclose the same MWs in two consecutive annual reports. Their failure to remediate is surprising given that regulators, credit rating agencies, and academics contend that the remediation of MWs is important. We form a control sample of companies that initially disclosed MWs in their internal control systems, but subsequently remediated these weaknesses, and investigate the characteristics of the remediated and unremediated MWs, the characteristics of remediating versus non-remediating companies, and the consequences to non-remediating companies. Regarding the characteristics of companies failing to remediate, we find that companies are less likely to remediate previously disclosed MWs when the weaknesses are more pervasive (i.e., when they are described as at the entity level, when there are more individual weaknesses) and when their operations are more complex (i.e., they have more segments and have foreign operations). In addition, companies with smaller audit committees are less likely to remediate. Regarding the consequences, we find that companies failing to remediate MWs experience larger increases in audit fees and a higher likelihood of auditor resignation as the number of MWs increases. We also find that non-remediating companies are more likely to receive modified audit opinions and going-concern opinions. Finally, we find that companies failing to remediate are more likely to miss filing deadlines and experience increased cost of debt capital (i.e., they receive poorer credit ratings when entity level MWs are present, and are charged higher interest rates). Data Availability: Data are publicly available from sources identified in the text.

scholarly journals Does Control Self-Assessment Influence Financial Reporting Quality?

2020 ◽  
Vol 5 (4) ◽  
pp. 70-76
Author(s):  
Hiroshi Uemura
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Negative Relationship ◽  
Reporting Quality ◽  
Audit Fees ◽  
Internal Controls ◽  
Financial Reporting Quality ◽  
Control Environment ◽  
Self Assessment ◽  
Positive Effects

The aim of this study is to examine the effect of control self-assessment (CSA) on financial reporting quality by using CSA as a proxy of monitoring quality. CSA has an important feature that allows the employees themselves to become involved in the assessment of internal controls’ effectiveness. Moreover, CSA has two important monitoring functions. First, it can add value to internal auditing. Second, because all employees of operational units participate in the assessment of internal controls in CSA, that control environment is expected to be mature. The investigation of this study used data from 3,517 Japanese firms listed on the First Section, Second Section, Mothers, and JASDAQ of the Tokyo Stock Exchange. The result of 2SLS regression shows that CSA adoption has a negative relationship with the number of financial restatements and audit fees, and therefore, I conclude that CSA has positive consequences for financial reporting quality. This result indicates that the internal monitoring mechanism that continuously monitors internal control over financial reporting (ICFR) effectiveness and in which all employees participate has some positive effects on financial reporting quality. There are two reasons for this result. First, employees have easier access to negative information concerning ICFR effectiveness than outsiders and can share that information with the internal personnel in charge of monitoring (e.g., internal auditors). Moreover, CSA is expected raise an entity’s awareness of ICFR, that is, the control environment of ICFR components is made into an environment that prevents and detects impropriety in the accounting process. Keywords: Control

U.S. Evidence from D&O Insurance on Accounting-Related Agency Costs: Implications for Country-Specific Studies

2021 ◽  
Author(s):  
Dain C. Donelson ◽  
Brian R. Monsen ◽  
Christopher G. Yust
Keyword(s):  
Financial Reporting ◽  
Agency Costs ◽  
Reporting Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Securities Litigation ◽  
Key Issues ◽  
Research Stream ◽  
Directors And Officers ◽  
Country Specific

Many studies use country-specific evidence to investigate research questions of broad interest due to research advantages of a given country, such as data availability or to exploit an exogenous event that allows identification. One such research stream largely examines Canadian directors' and officers' (D&O) insurance and finds that more coverage (i.e., higher limits) is negatively associated with financial reporting quality and positively related to litigation (accounting-related agency costs). However, the U.S. and Canada differ on key issues relevant to securities litigation and D&O insurance. Thus, we predict and find that premiums, rather than limits, provide information about U.S. accounting-related agency costs. Nonetheless, the incremental information provided by premiums about accounting-related agency costs is limited, and audit fees provide more consistent and better information about these agency costs. Thus, although researchers argue for disclosure of U.S. D&O insurance information, the usefulness of such disclosures may be limited because audit fees are already disclosed. Our findings also suggest caution in broadly generalizing country-specific studies.

Costs and Benefits of Requiring an Engagement Partner Signature: Recent Experience in the United Kingdom

2013 ◽  
Vol 88 (5) ◽  
pp. 1511-1546 ◽  
Author(s):  
Joseph V. Carcello ◽  
Chan Li
Keyword(s):  
United Kingdom ◽  
Audit Quality ◽  
Audit Fees ◽  
The United States ◽  
Data Availability ◽  
Recent Experience ◽  
Audit Report ◽  
The United Kingdom ◽  
Before And After ◽  
Audit Reports

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 of improved audit quality in U.K. firms after the signature requirement is adopted. Data Availability: Data are available from public sources identified in the text.

The Effects of Restatements for Misreporting on Auditor Scrutiny of Peer Firms

2017 ◽  
Vol 32 (1) ◽  
pp. 65-85 ◽  
Author(s):  
Feng Guo ◽  
Thomas R. Kubick ◽  
Adi Masli
Keyword(s):  
Internal Control ◽  
Spillover Effect ◽  
Investment Decisions ◽  
Audit Fees ◽  
Shareholder Wealth ◽  
Data Availability ◽  
Market Reactions ◽  
Control Quality ◽  
Peer Firms ◽  
Financial Misreporting

SYNOPSIS Prior research contends that financial misreporting has a spillover effect on the outcomes of peer firms within the same industry through investment decisions, information risk, and shareholder wealth. We predict and confirm a higher level of audit fees for peer firms when serious misreporting by other firms is announced in the industry. We find this effect is limited to peers that exhibit poor internal control quality. In addition, we observe higher audit fees for peers of industry prominent misreporting firms and for peers of firms announcing restatements with larger negative market reactions. Overall, our results suggest that financial misreporting in the industry has a spillover effect on audit fees of non-misreporting peer firms. Data Availability: All data are from public sources identified in the manuscript.

It Is Not Only What You Know, It Is Also Who You Know: CEO Network Connections and Financial Reporting Quality

2018 ◽  
Vol 37 (2) ◽  
pp. 27-50 ◽  
Author(s):  
Avishek Bhandari ◽  
Babak Mammadov ◽  
Austin Shelton ◽  
Maya Thevenot
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Reporting Quality ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Economic Benefits ◽  
Financial Reporting Quality ◽  
Financial Restatements ◽  
External Connections

SUMMARY The study investigates whether CEOs' external connections with other executives and directors are associated with enhanced financial reporting quality. We find that CEOs with larger connections have lower discretionary accruals and are less likely to have financial restatements and material internal control weaknesses. Further results show that larger social networks are associated with higher audit quality, which translates into higher audit fees. The results are robust to a variety of alternative specifications, including controls for endogeneity, and are consistent with well-connected CEOs providing economic benefits to their firms, rather than using their position to extract rents at the expense of shareholders.

Business Strategy, Internal Control over Financial Reporting, and Audit Reporting Quality

2017 ◽  
Vol 36 (4) ◽  
pp. 49-69 ◽  
Author(s):  
Kathleen A. Bentley-Goode ◽  
Nathan J. Newton ◽  
Anne M. Thompson
Keyword(s):  
Quality Improvement ◽  
Financial Reporting ◽  
Internal Control ◽  
Business Strategy ◽  
Audit Quality ◽  
Reporting Quality ◽  
Internal Controls ◽  
Data Availability ◽  
Material Weaknesses ◽  
Jel Classifications

SUMMARY This study examines whether a company's business strategy is an underlying determinant of the strength of its internal control over financial reporting (ICFR) and auditors' internal control reporting quality. Organizational theory suggests that companies following an innovative “prospector” strategy are likely to have weaker internal controls than companies following an efficient “defender” strategy. Consistent with theory, we find that firms with greater prospector-like characteristics are more likely to report and less likely to remediate material weaknesses, incremental to known determinants of material weaknesses. We also find that auditors' internal control reporting quality is lower among clients with greater prospector-like characteristics when measured using the timeliness of reported material weaknesses. Our findings indicate that business strategy is a useful summary indicator for evaluating companies' internal control strength and suggest that internal control reporting is an important area for audit quality improvement among prospector-like clients. JEL Classifications: D21; 21; M41. Data Availability: Data are obtained from public sources as indicated in the text.

The Effect of Auditing Standard No. 5 on Audit Report Lags

2015 ◽  
Vol 29 (3) ◽  
pp. 507-527 ◽  
Author(s):  
Santanu Mitra ◽  
Hakjoon Song ◽  
Joon Sun Yang
Keyword(s):  
Internal Control ◽  
Extended Period ◽  
Data Availability ◽  
Audit Report ◽  
Audit Process ◽  
Top Down ◽  
The Public ◽  
Audit Efficiency ◽  
Public Company ◽  
The Impact

SYNOPSIS Auditing Standard No. 5 (AS5) introduced by the Public Company Accounting Oversight Board (PCAOB) in June 2007 requires a top-down risk-based approach in auditing and is expected to improve audit efficiency and make the overall auditing process timelier by reducing audit report lags. We investigate the impact of AS5 on audit report lags over an extended period from 2006 to 2011 and find that audit report lags are lower in the AS5 years (2007–2011) relative to the AS2 years (2006–2007). But this reduction is evident mostly for the firms with clean SOX 404 opinions. The presence of material internal control weaknesses (ICW) significantly increases audit report lags, but AS5 does not have any incremental moderating effect on report lags and the ICW relationship. Tests for the firms with company-level and account-specific ICWs demonstrate identical results. Additional analyses show that the learning curve effect takes place rapidly in the early part of the AS5 period and audits continue to remain efficient in terms of reduced report lags in the latter part of the AS5 period relative to the AS2 period. The year-to-year change analyses for the AS5 period further corroborate this result. Overall, our study demonstrates that the top-down, risk-based approach under AS5 makes the audit process more efficient and timelier by decreasing audit report lags. Data Availability: Data are available from public sources identified in the paper.

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