Audit Firms' Client Acceptance Decisions: Does Partner-Level Industry Expertise Matter?

2015 ◽  
Vol 35 (2) ◽  
pp. 97-120 ◽  
Author(s):  
Yu-Ting Hsieh ◽  
Chan-Jane Lin
Keyword(s):  
Financial Risk ◽  
Audit Quality ◽  
Litigation Risk ◽  
Firm Level ◽  
Audit Risk ◽  
Listed Firms ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Client Acceptance ◽  
Industry Expertise

SUMMARY This study examines whether auditor industry expertise affects firms' client acceptance decisions. Analyzing listed firms in Taiwan, where audit partners' signatures are disclosed on the audit report, we find that partner-level industry specialists, rather than firm-level industry specialists, are less likely to accept clients with higher audit risk. We also provide weak evidence that partner-level industry specialists are less likely to accept clients with higher financial risk. This is consistent with the notion that partner-level industry specialists have an incentive to protect their reputation when making client acceptance decisions. In 2002, following the spirit of the Sarbanes-Oxley Act (SOX), the Securities and Futures Commission in Taiwan adopted a series of new rules to improve audit quality. We examine the effect of SOX on client acceptance decisions and the results indicate that partner-level industry specialists manage risk by accepting clients with less audit risk since litigation risk increased after SOX.

Firm versus Partner Measures of Auditor Industry Expertise and Effects on Auditor Quality

2011 ◽  
Vol 30 (2) ◽  
pp. 201-229 ◽  
Author(s):  
Hsin-Yi Chi ◽  
Chen-Lung Chin
Keyword(s):  
Audit Quality ◽  
Data Availability ◽  
Firm Level ◽  
Audit Opinion ◽  
Audit Firm ◽  
Listed Firms ◽  
Big 4 ◽  
Audit Reports ◽  
Auditor Industry Expertise ◽  
Industry Expertise

SUMMARY This paper first examines whether the Big 4 audit quality is associated with auditor industry expertise, measured as both individual partner- and audit firm-level leadership. We focus on a sample of listed firms in Taiwan, where audit reports must be audited and signed by the two signing auditors as well as by an audit firm. For accruals analyses, we find that differential discretionary accruals due to industry expertise are driven by a combination of firm and partner expertise. For audit opinion analyses, we find that differential likelihood of a modified audit opinion (hereafter, MAO) is primarily attributable to signing auditor specialists. We also find that firm-level specialists alone are not associated with a higher likelihood of issuing a MAO. However, firm-level specialists, in combination with signing auditor specialists, can add something over and above the effects of the signing auditor specialists alone. Second, we further examine whether there is differential audit quality between signing auditors (i.e., lead and concurring auditors). We find that clients of lead signing auditor specialists, either alone or in conjunction with concurring auditor specialists, have smaller accruals and are more likely to receive a MAO compared to those of nonspecialists. However, concurring auditor specialists alone are not associated with higher audit quality, in terms of either smaller accruals or a higher MAO likelihood. Thus, we conclude that industry expertise is not homogeneous across individual auditors within the same audit firm in Taiwan. Data Availability: Data are available from the sources identified in the text.

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.

Does the Disclosure of PCAOB Inspection Findings Increase Audit Firms' Litigation Exposure?

2020 ◽  
Author(s):  
Brant E. Christensen ◽  
Nathan G. Lundstrom ◽  
Nathan J. Newton
Keyword(s):  
Audit Quality ◽  
Legal Action ◽  
Litigation Risk ◽  
Audit Firms ◽  
Auditing Standards ◽  
Triggering Events ◽  
Public Signal

We examine whether PCAOB inspection reports increase auditors' litigation risk. We find that inspection reports with audit deficiencies are positively associated with the number of lawsuits subsequently filed against the inspected auditor. These results are strongest when client-level lawsuit triggering events have already occurred and when PCAOB inspection content is arguably more persuasive. Importantly, these results pertain exclusively to triennially inspected audit firms for which the set of other publicly available signals of audit quality is limited. Furthermore, we do not argue that inspection reports in isolation trigger lawsuits. Instead, once events such as restatement announcements or bankruptcies create the potential for legal action against the auditor, inspection reports provide a public signal about past noncompliance with auditing standards. This signal likely increases lawyers' perceived strength of case against the auditor before the lawsuit is filed and before lawyers have access to the audit workpapers.

Auditor rotations and audit quality

2019 ◽  
Vol 27 (4) ◽  
pp. 639-660 ◽  
Author(s):  
Devi Sulistyo Kalanjati ◽  
Damai Nasution ◽  
Karin Jonnergård ◽  
Soegeng Sutedjo
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Stock Exchange ◽  
Multivariate Regression Analysis ◽  
Cumulative Number ◽  
Firm Level ◽  
Content Type ◽  
Audit Firm ◽  
Audit Firms ◽  
Using Data

Purpose The purpose of this paper is to investigate the association between audit rotation – at the audit partner and audit firm level – and audit quality. As mentioned in the literature, audit rotation has several benefits, and one of them is it can bring a fresh look to audit tasks and subsequently improve audit quality. Moreover, audit itself can help a client to improve its financial reporting. However, ineffective communication between predecessor and successor audit partners or audit firms, and pseudo-rotation can hamper that benefit. Design/methodology/approach This study uses multivariate regression analysis to test its hypotheses. Using data from companies listed on the Indonesia Stock Exchange, the sample consists of 688 company-year observations covering the period 2003–2016. Findings This study finds that the cumulative number of audit partner rotations is positively associated with audit quality, indicating that rotations at the audit partner level will enhance audit quality. Conversely, it finds that the cumulative number of audit firm rotations is negatively associated with audit quality. Practical implications The study’s findings may assist regulators in crafting standards regarding audit rotation. As the findings show, audit partner rotation will improve audit quality, but the audit firm rotation will decrease audit quality. As this study tries to explain the decreasing audit quality from audit firm rotation could be a consequence of ineffective communication or pseudo audit firm rotation. Regulators should try to tackle these problems. Originality/value Instead of using tenure as a proxy for a rotation, this study creates a new proxy named the cumulative number of audit partner and audit firm rotations to provide evidence on the benefits of audit rotation.

The Relative Importance of Auditor Characteristics Versus Client Factors in Explaining Audit Quality

2020 ◽  
pp. 0148558X2095305 ◽  
Author(s):  
Mara Cameran ◽  
Domenico Campa ◽  
Jere R. Francis
Keyword(s):  
Fixed Effects ◽  
Audit Quality ◽  
Linear Models ◽  
Demographic Data ◽  
Accounting Firm ◽  
Listed Firms ◽  
Audit Firms ◽  
Client Factors ◽  
Selection Operator ◽  
Related Characteristic

The U.K. listed firms are used to investigate whether auditor attributes (fixed effects for audit firms, audit offices, and audit partners) add incrementally to baseline models with client controls in explaining audit quality. We document that accounting firm fixed effects add significantly to baseline models. To the extent an accounting firm can standardize its audits, there should be no differences across engagements. However, we find significant interoffice differences, and also significant inter-partner differences within offices. R2 analyses, hierarchical linear models, LASSO (least absolute shrinkage and selection operator) regressions, and R2 decomposition analyses all show that partners are the most important auditor-related characteristic. To better understand the cause of partner variation, we test a set of partner demographic variables (in lieu of partner fixed effects), but we find that they explain little variation, once we control for firm and office differences. We conclude that partner variation is important in explaining audit quality, but understanding the causes requires going beyond existing publicly available demographic data.

The association between PCAOB-identified audit deficiencies and small audit firms’ characteristics

2014 ◽  
Vol 29 (8) ◽  
pp. 717-735 ◽  
Author(s):  
Fei Kang ◽  
Magdy Farag ◽  
Robert Hurt ◽  
Cheryl Wyrick
Keyword(s):  
Human Capital ◽  
Audit Quality ◽  
Limited Liability ◽  
Organization Structure ◽  
Firm Characteristics ◽  
Firm Level ◽  
Content Type ◽  
Negatively Associated ◽  
Audit Firm ◽  
Audit Firms

Purpose – The purpose of this study is to examine the association between certain audit firm characteristics and the number of Public Company Accounting Oversight Board (PCAOB)-identified audit deficiencies. Design/methodology/approach – Using a hand-collected sample of PCAOB inspection reports for small audit firms with 100 or less issuer clients from 2007 through 2010, an ordinary least squares model is applied by regressing the number of deficiencies on a set of audit firm characteristics. Findings – Results show that the number of PCAOB-identified audit deficiencies is positively associated with the number of issuer clients and negatively associated with the number of branch offices, the human capital leverage and the organization structure as Limited Liability Partnership firms. Additional analysis also shows that the PCAOB inspection length is positively associated with the number of deficiencies, the number of branch offices and the number of issuer clients, but negatively associated with the organization structure as limited liability company firms. Moreover, the PCAOB inspection lag is positively associated with the number of deficiencies and the number of issuer clients. Research limitations/implications – Results of this study cannot be generalized beyond public accounting firms with 100 or fewer issuer clients. In addition, there is a possibility that other measurements of firm-level characteristics that impact the number of PCAOB-identified audit deficiencies were not captured in the study. Practical implications – This study explains the association between audit firm characteristics and PCAOB-identified audit deficiencies. Our results caution small audit firms about not having enough professional staff, low human capital leverage and serving too many issuer clients, as those factors may potentially impair audit quality. Originality/value – This study helps to explain the relationship between audit deficiencies and controllable, measurable firm-level characteristics. It is, therefore, differentiated from previous studies, most of which were focused on PCAOB-identified audit deficiencies as measures of audit quality and stakeholder reactions to PCAOB reports.

scholarly journals Can Auditors Pursue Firm-Level Goals Nonconsciously on Audits of Complex Estimates? An Examination of the Joint Effects of Tone at the Top and Management's Specialist

2020 ◽  
Vol 95 (6) ◽  
pp. 367-394 ◽  
Author(s):  
Jonathan S. Pyzoha ◽  
Mark H. Taylor ◽  
Yi-Jing Wu
Keyword(s):  
Audit Quality ◽  
Data Availability ◽  
Complex Task ◽  
Firm Level ◽  
Joint Effects ◽  
Tone At The Top ◽  
Balanced Approach ◽  
Audit Firms ◽  
Level Tone ◽  
Quality Approach

ABSTRACT We examine whether tone at the top emphasizing firm-level commercial, audit quality, or both goals (balanced) can nonconsciously affect auditors' engagement-level tendency to accept management's estimates, and whether the effects differ if management engages a specialist. This study is motivated by academics' and regulators' increasing attention on firm-level tone at the top and concerns about management bias in audited estimates, especially when the evidence is prepared by management's specialist. We find firm-level goals can be pursued nonconsciously by auditors when performing a complex task. When management's specialist is absent, a balanced approach reduces auditors' tendency to agree with management's estimate compared to a commercial approach; however, it is less effective when management's specialist is present. We find an audit quality approach reduces auditors' tendency to accept management's estimate compared to a commercial approach, regardless of the absence/presence of a specialist. Our results have important implications for regulators and audit firms. Data Availability: Data are available from the authors upon request.

scholarly journals If auditors are like Belgian beers, which style would you prefer?

2016 ◽  
Vol 90 (9) ◽  
pp. 341-347
Author(s):  
Herman van Brenk ◽  
Liesbeth Bruynseels
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Black Box ◽  
Firm Level ◽  
Audit Firm ◽  
Internal Working ◽  
Audit Firms ◽  
Auditing Standards ◽  
Zoom In ◽  
Audit Team

Recent research by Francis, Pinnuck, and Watanabe (2014) has shown that financial reporting outcomes are influenced by the audit firm’s unique audit style. They argue that audit firm styles are driven by their “unique set of internal working rules that guide the auditor’s application of accounting and auditing standards” (Francis, Pinnuck & Watanabe, 2014). In our discussion, we zoom in on this study and call for further research on the factors that determine audit styles. Specifically, we emphasize the importance of extending this research from the audit firm level to the level of the audit office, audit team, and individual auditor. We conclude with the notion that intense collaboration between audit firms and academia is instrumental in opening the black box of audit styles to extend our knowledge on the root causes and drivers of audit quality.

Does Increased Audit Partner Tenure Reduce Audit Quality?

2008 ◽  
Vol 23 (4) ◽  
pp. 553-572 ◽  
Author(s):  
David L. Manry ◽  
Theodore J. Mock ◽  
Jerry L. Turner
Keyword(s):  
Audit Quality ◽  
Discretionary Accruals ◽  
Financial Statement ◽  
Risk Level ◽  
Negatively Associated ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Using Data ◽  
International Audit

The Sarbanes-Oxley Act of 2002 requires the lead audit or coordinating partner and the reviewing partner to rotate off the audit every five years so the engagement can be viewed “with fresh and skeptical eyes.” Using data obtained from actual audits by multiple U.S. offices of three large international audit firms, we examine whether there is a relationship between evidence of reduced audit quality, measured by estimated discretionary accruals, and audit partner tenure with a specific client. We find that estimated discretionary accruals are significantly and negatively associated with the lead audit partner's tenure with a specific client. Thus, audit quality appears to increase with increased partner tenure. After controlling for client size and engagement risk, we find audit partner tenure significantly and negatively associated with estimated discretionary accruals only for small clients with partner tenure of greater than seven years, regardless of risk level. We also find that tenure is not significantly associated with estimated discretionary accruals for large clients. This suggests that as partner tenure increases, auditors of small client firms become less willing to accept more aggressive financial statement assertions by managers, and that partner tenure does not affect audit quality for large clients or for shorter-tenure smaller clients. Our results relating to audit partner tenure are consistent with the conclusions about audit firm tenure by Geiger and Raghunandan (2002); Johnson, Khurana, and Reynolds (2002);Myers, Myers, and Omer (2003); and Nagy (2005) and extend their findings by focusing on individual audit partners rather than on audit firms.

Insurance claims and audit quality: evidence from trade credit insurance in Chinese listed firms

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Songsheng Chen ◽  
Jun Guo ◽  
Yingying Tian ◽  
Lijuan Yan
Keyword(s):  
Audit Quality ◽  
Trade Credit ◽  
Audit Fees ◽  
Agency Cost ◽  
Insurance Claims ◽  
Content Type ◽  
Listed Firms ◽  
Credit Insurance ◽  
Audit Firms ◽  
Insurance Data

PurposeUsing unique trade credit insurance data from China, we examine whether trade insurance claims are associated with audit efforts and audit quality.Design/methodology/approachThe paper is based on a sample of Chinese firms to study insurance claims of trade credit insurance that affects abnormal audit fees.FindingsIn this study, we find that firms with high insurance claims pay higher abnormal audit fees. Further, our findings indicate that firms with high insurance claims have a short audit report lag and tend to select local audit firms.Originality/valueTo the best of our knowledge, this is the first study to investigate the association between trade credit insurance claims and audit efforts. In addition, we contribute to the literature on the agency cost of abnormal audit fees.

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