Insights into Large Audit Firm Sampling Policies

2015 ◽  
Vol 9 (2) ◽  
pp. P7-P18 ◽  
Author(s):  
Brant E. Christensen ◽  
Randal J. Elder ◽  
Steven M. Glover
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Sampling Methods ◽  
Accounting Firms ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Audit Firms ◽  
Current Sampling ◽  
Audit Sampling

SUMMARY Changes in the audit profession after Sarbanes-Oxley, including mandatory audits of internal control over financial reporting and PCAOB oversight and inspection of audit work, have potentially changed the nature and extent of audit sampling in the largest accounting firms. In our study, “Behind the Numbers: Insights into Large Audit Firm Sampling Policies” (Christensen, Elder, and Glover 2015), we administered an extensive, open-ended survey to the national offices of the Big 4 and two other international accounting firms regarding their firm's audit sampling policies. We find variation among the largest firms' policies in their use of different sampling methods and in inputs used in the sampling applications that could result in different sample sizes. We also provide evidence of some of the sampling topics firms find most problematic, as well as changes to firms' policies regarding revenue testing due to PCAOB inspections. Our evidence provides important insights into current sampling policies, which may be helpful to audit firms in evaluating their sampling inputs and overall sampling approaches.

Behind the Numbers: Insights into Large Audit Firm Sampling Policies

2014 ◽  
Vol 29 (1) ◽  
pp. 61-81 ◽  
Author(s):  
Brant E. Christensen ◽  
Randal J. Elder ◽  
Steven M. Glover
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Data Availability ◽  
Future Research ◽  
Accounting Firms ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
National Office ◽  
Current Sampling ◽  
Audit Sampling

SYNOPSIS Changes in the audit industry after the Sarbanes-Oxley Act, including mandatory audits of internal control over financial reporting and PCAOB oversight and inspection of audit work, have potentially changed the nature and extent of audit sampling in the largest accounting firms. However, little academic evidence exists on these firms' current audit sampling policies (Elder, Akresh, Glover, Higgs, and Liljegren 2013). As such, we administer an extensive, open-ended survey to the national office of the Big 4 and two other international accounting firms regarding their firm's audit sampling policies. We find variation among the largest auditing firms' policies in their use of statistical and nonstatistical sampling methods and in inputs used in the sampling applications that could result in different sample sizes. Sampling experts' internal reviews indicate that projecting and resolving identified misstatements is one of the biggest difficulties that audit engagement teams face when using sampling techniques. Finally, we present evidence that some firms have significantly changed their approach to revenue testing due to PCAOB inspections. This evidence provides important insights into current sampling policies and presents opportunities for future research. Data Availability: Please contact the authors.

The Impact of Client and Misstatement Characteristics on the Disposition of Proposed Audit Adjustments

2011 ◽  
Vol 30 (2) ◽  
pp. 103-124 ◽  
Author(s):  
Jennifer Joe ◽  
Arnold Wright, and ◽  
Sally Wright
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Data Availability ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Time Period ◽  
Confidentiality Agreement ◽  
Financial Scandals ◽  
The Impact

SUMMARY We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several U.S. financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX). During this period, auditors and their clients faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB), and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments, including the effect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find that 24.2 percent of proposed adjustments were subsequently waived. The results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. Data Availability: Due to a confidentiality agreement with the participating audit firm the data are proprietary.

scholarly journals The Impact of the Prohibition of Non–Audit Services on the Profitability of Big-4-affiliated Audit Firms in Bangladesh

2016 ◽  
Vol 1 (1) ◽  
pp. 1-7
Author(s):  
Md Jahidur Rahman ◽  
Mo Lai Lan Phllis ◽  
Lam Mo
Keyword(s):  
Financial Reporting ◽  
Securities And Exchange Commission ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Depth Study ◽  
Stable Source ◽  
The Impact ◽  
Depth Interviews ◽  
Non Audit Services

The purpose of this paper is to study the impact of the prohibition of certain non-audit services by the Securities and Exchange Commission (SEC) of Bangladesh on the profitability of the audit firms which are affiliated with Big-4 international audit firms. This paper is based on personal in-depth interviews with the Big-4-affiliated audit firms. A qualitative approach, in a way which is descriptive and illustrative, is adopted in this research. This research provides evidence for the fact that audit services are the most significant and stable source of income for an audit firm. Although respondents generally admit that non-audit services might be more profitable, they all agree that audit services are indeed the core operations of an audit firm. Findings in this paper reveal a contemporary picture of the auditing profession in Bangladesh and elucidate the impact that the implementation of Corporate Governance Order 2006 has on an audit firm's profitability. This research is the first in-depth study of the impact of the prohibition of non-audit services on the profitability of the Big-4-affiliated audit firms in Bangladesh. Financial reporting regulatory authorities in Bangladesh or other developing countries may find the findings in this paper useful.

scholarly journals Audit Firm Rotation Concerns And Considerations

2013 ◽  
Vol 30 (1) ◽  
pp. 227 ◽  
Author(s):  
Kam C. Chan ◽  
Barbara Farrell ◽  
Patricia Healy
Keyword(s):  
Internal Control ◽  
Research Evidence ◽  
Accounting Restatements ◽  
Accounting Firms ◽  
Audit Firm ◽  
The Public ◽  
Big 4 ◽  
Public Company ◽  
Cast Doubt ◽  
Mandatory Audit Firm Rotation

The Public Company Accounting Oversight Board (PCAOB) issued a concept release in 2011 which proposes a mandatory audit firm rotation. However, PCAOB indicates that there is a limited amount of empirical data and research evidence on the potential costs and benefits of such mandatory audit firm rotation. This study provides some empirical evidences related to PCAOBs concerns. Specifically, we find that the largest clients audited by Big 4 accounting firms have few material internal control weaknesses and accounting restatements. In addition, accounting restatements are often reported within four years after the beginning of accounting errors and are reported by the same auditor during the restatement period. These findings cast doubt on the benefit of mandatory audit firm rotation. We also find that the largest audit clients on average represent over 20% of the audit revenues of local offices of Big 4 accounting firms. Thus, mandatory audit firm rotations could significantly disrupt the normal operations of public accounting firms if audit clients are required to change auditors periodically.

The “Big” Consequences of IFRS: How and When Does the Adoption of IFRS Benefit Global Accounting Firms?

2015 ◽  
Vol 91 (4) ◽  
pp. 1257-1283 ◽  
Author(s):  
Maria Wieczynska
Keyword(s):  
Financial Reporting ◽  
Regulatory Regime ◽  
Reporting Standards ◽  
Accounting Firms ◽  
Financial Reporting Standards ◽  
Auditor Switching ◽  
Ifrs Adoption ◽  
The United Kingdom ◽  
Big 4 ◽  
Audit Firms

ABSTRACT I investigate how the adoption of International Financial Reporting Standards (IFRS) affects audit markets. Specifically, I examine the effect of IFRS adoption on the likelihood and direction of auditor switching in a sample of firms from five European Union countries: the United Kingdom, Germany, Spain, Italy, and Poland during the period from 1998 through 2010. I hypothesize that IFRS adoption creates an expert advantage for global audit firms (i.e., Big 4 audit firms, Grant Thornton, and BDO) during a regime shift in reporting standards. I find that clients are more likely to switch from small to global audit firms in the year of IFRS adoption. I also hypothesize that the strength of a country's regulatory regime affects the likelihood of auditor replacement around IFRS adoption. I find that firms listed in countries with high-quality regulation and enforcement are significantly more likely to switch from small to global audit firms in the year of IFRS adoption (with the odds of the switch almost doubled when compared to non-adoption years). In weaker regulatory regimes, IFRS adoption is not associated with an increase in auditor switching. Additional tests provide evidence that global audit firms' advantage stems from their perceived IFRS expertise. Finally, the results confirm that not only Big 4, but also Grant Thornton and BDO, benefit from IFRS adoption.

scholarly journals Is There Transparency In Auditor Change Disclosures?

2011 ◽  
Vol 23 (3) ◽  
Author(s):  
Thomas G. Calderon ◽  
Emeka Ofobike ◽  
John J. Cheh
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Control ◽  
Primary Objective ◽  
Audit Committees ◽  
Font Size ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Auditor Change ◽  
Required Disclosures

<p class="MsoNormal" style="text-align: justify; margin: 0in 31.2pt 0pt 0.5in;"><span style="font-family: Times New Roman;"><span style="font-size: 10pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-style: italic;">In this paper, we examine the reasons disclosed in a small representative sample of Form 8-Ks for switching auditors. We classify auditor switches in terms of changes from big-4 to other big-4, big-4 to non-big-4, non-big-4 to big-4 and non-big-4 to non-big-4. Our primary objective is to assess compliance with the required disclosures for auditor changes and to reflect on the implications for corporate governance. This line of research is important in light of the requirements of SEC Regulation S-K 304 and recent calls for greater transparency in financial reporting, particularly after Sarbanes-Oxley.<span style="mso-spacerun: yes;">&nbsp; </span>Our research shows that companies use boilerplate language and adopt a check-the-box approach to compliance with Regulation S-K 304. Contrary to the spirit and intent of corporate governance, their disclosures generally lack transparency and offer little or no insight into the underlying reasons for auditor changes. One of the clearest patterns is that several auditor changes are preceded by such reportable events as going concern uncertainties and material internal control deficiencies that often lead to financial statement restatements. Even so, many companies are less than forthright in the language used to disclose such events. Thus, we conclude that the implied objective of auditor change regulations is not being fulfilled.<span style="mso-spacerun: yes;">&nbsp; </span>In general, neither auditors nor clients appear to take the auditor change disclosure requirements seriously. It is vital that the PCAOB, SEC, and the audit committees take note of this weakness in auditor change regulation.</span><strong style="mso-bidi-font-weight: normal;"><span style="font-size: 10pt; mso-bidi-font-size: 12.0pt;"> </span></strong></span></p>

Auditor Changes Following a Big 4 Merger with a Local Chinese Firm: A Case Study

2010 ◽  
Vol 29 (1) ◽  
pp. 41-72 ◽  
Author(s):  
Charles J. P. Chen ◽  
Xijia Su ◽  
Xi Wu
Keyword(s):  
Financial Reporting ◽  
Portfolio Management ◽  
Structural Characteristics ◽  
Cultural Congruence ◽  
Audit Firm ◽  
Chinese Firm ◽  
High Profile ◽  
Big 4 ◽  
Audit Firms

SUMMARY: This study examines auditor-client relationships following the high-profile merger of a local Chinese audit firm, Da-Hua CPAs, with a Big 4 firm, Ernst & Young, to create EYDH in early 2002. Of the 46 domestically listed clients Da-Hua had at the time of the merger, 30 switched to other audit firms during 2002–04. This large loss of clients could be attributed either anecdotally to a lack of post-merger managerial and cultural congruence, or to a lack of demand for high quality audits. We examine 11 (13) switching clients in 2002 (2004) as early (late) switchers. Although our archival analyses suggest that the switching decisions of early switchers are more likely to be explained by common factors such as changes in client structural characteristics, post-merger client portfolio management, and client-auditor friction over accounting treatments, late switchers do not differ from late non-switchers in terms of these factors. However, we find some time-serial evidence that late switchers follow their audit partners to a local audit firm mainly for greater discretion over financial reporting. Further, semi-structured focused interviews reveal that late switchers found it difficult to adapt to EYDH’s practices which, in their view, were less cooperative and too risk aversive. Overall, the results of our case study are consistent with the notion that clients switch from Big 4 to local firms mainly for more lenient audit treatments.

Enriching AIS Courses With SOX Compliance Activities

2010 ◽  
Vol 5 (1) ◽  
pp. 1-24 ◽  
Author(s):  
Joann Segovia ◽  
Carol M. Jessup ◽  
Marsha Weber ◽  
Sheri Erickson
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Controls ◽  
Accounting Profession ◽  
Investor Confidence ◽  
Reporting Requirements ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Significant Change

A very significant change to the accounting profession occurred in 2002 when the Sarbanes-Oxley Act of 2002 (SOX) was enacted. This legislation had a significant impact on corporations and their audit firms. The objective was to improve corporate governance and its quality of financial reporting to improve investor confidence. This paper provides instructors with a background on SOX and suggests readings and activities that reflect the requirements of SOX as it relates to the AIS environment and the analysis of internal controls. These activities can strengthen students' understandings of how corporations respond to the various reporting requirements of this Act.

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.

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