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1
Che, Limei, Ole-Kristian Hope, and John Christian Langli. "How Big-4 Firms Improve Audit Quality." Management Science 66, no. 10 (October 2020): 4552–72. http://dx.doi.org/10.1287/mnsc.2019.3370.
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This paper studies whether and how Big-4 firms provide higher-quality audits than non-Big-4 firms. Specifically, we first examine a Big-4 effect and then explore three sources of the Big-4 effect. To test the Big-4 effect, we use a unique data set of individual audit partners for a large sample of private companies and a novel research design exploiting the fact that auditees may follow the auditor who switches affiliation from a non-Big-4 firm to a Big-4 firm. Thus, we compare audit quality and audit fees of the same partner–auditee pairs before and after the switch. The results show that the Big-4 effect exists in the private-firm segment. More important, we find evidence for three sources of the Big-4 effect. First, Big-4 firms are able to recruit non-Big-4 partners who deliver higher audit quality than other non-Big-4 partners in the preswitch period. Second, enhanced learning has taken place after the switch. Third, the increased audit quality can also be attributed to stronger incentives/monitoring. These are new findings to the literature. This paper was accepted by Suraj Srinivasan, accounting.
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Ghosh, Aloke (Al), and Subprasiri (Jackie) Siriviriyakul. "Quasi Rents to Audit Firms from Longer Tenure." Accounting Horizons 32, no. 2 (February 1, 2018): 81–102. http://dx.doi.org/10.2308/acch-52035.
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SYNOPSIS We offer an economic explanation for why audit firms oppose mandatory firm rotation. Using an innovative sample that overcomes sample selection biases, we find that fees for Big 4 audit firms increase noticeably over the audit firm's tenure. In contrast, fees for non-Big 4 audit firms decline as tenure lengthens. Using audit report lag as a proxy for audit cost, we find that audit cost declines over the audit firm's tenure, and this decline is even larger for Big 4 auditors. Our results indicate that Big 4 engagements become more profitable or earn “quasi rents” over time, which may explain why Big 4 audit firms are so opposed to firm- but not partner-rotation. Whether non-Big 4 auditors earn any quasi rents remains doubtful. Our findings suggest a need to better monitor auditor independence and audit judgments when tenure is long, especially for Big 4 auditors, because economic bonding between the audit firm and client tends to increase over time. JEL Classifications: M40; M42.
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Bills, Kenneth L., and Lauren M. Cunningham. "How Small Audit Firm Membership in Associations, Networks, and Alliances Can Impact Audit Quality and Audit Fees." Current Issues in Auditing 9, no. 2 (December 1, 2015): P29—P35. http://dx.doi.org/10.2308/ciia-51278.
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SUMMARY This article summarizes “Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees” (Bills, Cunningham, Myers 2015), which examines the association between small audit firm membership in an association, network, or alliance (collectively referred to as an “association”), audit quality, and audit fees. We find that small audit firm association members provide higher-quality audits and charge higher fees than small audit firms that are not members of an association. When compared to similarly sized clients audited by the Big 4, we find that member firms provide audit quality similar to the Big 4 firms, but member firms charge lower fees than their Big 4 counterparts. We caution that these results may not be generalizable to the largest Big 4 clients for which there is not a similarly sized client audited by our sample of small audit firms. We infer audit quality from Public Company Accounting Oversight Board inspections, restatement announcements, and discretionary accruals. Our findings should be of interest to audit committees in charge of auditor selection and to small audit firms interested in the benefits of association membership.
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Kutum, Imad, Ian Fraser, and Khaled Hussainey. "The application of business risk audit methodology within non-Big-4 firms." Journal of Financial Reporting and Accounting 13, no. 2 (October 5, 2015): 226–46. http://dx.doi.org/10.1108/jfra-03-2014-0015.
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Purpose – This paper aims to explore the application of the business risk audit (BRA) approach within non-Big-4 audit firms in the USA, the UK and Canada. This paper focuses on the motivation for adopting this approach for non-Big-4 audit firms in the three countries, and the advantages, disadvantages and aftermath of applying this method. Design/methodology/approach – A combination of qualitative and quantitative methods to obtain the data necessary to address the research questions was used. Findings – It is found that non-Big-4 audit firms in the three countries have adopted BRA; their motivation was primarily to follow the standards in each country, and the general trend in the industry. The advantages identified are consistent with previous research; a direct benefit was noted for audit effectiveness and risk management for both clients and auditors. One major disadvantage of applying BRA is the cost burden to both the audit firm and their clients. Some of the interviewees claimed that this method is better suited to large firms and large audits. Originality/value – This is an innovative study that addresses a contemporary auditing issue. The majority of the audit research studies concentrate on the big audit firm practices; this study is the first to examine the application of audit practices within smaller audit firms.
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Alfraih, Mishari M. "The role of audit quality in firm valuation." International Journal of Law and Management 58, no. 5 (September 12, 2016): 575–98. http://dx.doi.org/10.1108/ijlma-09-2015-0049.
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Purpose The purpose of this paper is to examine the effect of audit quality on the value relevance of earnings and book value. Because joint audit is mandated for all Kuwait Stock Exchange-listed firms, it is hypothesized that the higher the quality of the audit team (as measured by the number of Big 4 audit firms in the joint audit team), the higher the value relevance of earnings and book values for equity valuation. Design/methodology/approach Consistent with prior research, the value relevance of earnings and book value is measured by the adjusted R2 derived from the Ohlson’s 1995 regression model. The number of Big 4 audit firms represented on the firm’s audit team is used as a proxy for audit quality. Three tiers of audit quality exist, namely, two non-Big 4 audit firms, one Big 4 and one non-Big 4 audit firms or two Big 4 audit firms. To address this paper’s objective, the association between audit quality and the value relevance of earnings and book value were examined using four approaches. The final sample consists of 1,836 firm-year observations and covers fiscal years from a 12-year period (2002-2013). Findings Taken together, the four approaches used collectively provide empirical evidence that audit quality positively and significantly affects the value relevance of accounting measures to market participants. Importantly, the results reveal significant variations in the value relevance of earnings and book value jointly across the three possible auditor combinations. Research limitations/implications Although using auditor size as a proxy for audit quality is well established in the auditing literature, a limitation of that proxy is that it measures audit quality dichotomously, which implicitly assumes a homogeneous level of audit quality within each group. Practical implications The findings show the importance of high-quality and rigorous external audits in improving the value relevance of accounting information. Originality/value This study contributes to the extent literature on audit quality by exploring the role of audit quality in a unique institutional setting that imposes mandatory joint audits. Although prior studies have investigated the effect of joint audit pair choice on earnings management and audit fee premium, this study is the first to investigate the effect of joint audit pair choice on the value relevance of accounting information.
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Bills, Kenneth L., Lauren M. Cunningham, and Linda A. Myers. "Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees." Accounting Review 91, no. 3 (July 1, 2015): 767–92. http://dx.doi.org/10.2308/accr-51228.
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ABSTRACT In this study, we examine the benefits of membership in an accounting firm association, network, or alliance (collectively referred to as “an association”). Associations provide member accounting firms with numerous benefits, including access to the expertise of professionals from other independent member firms, joint conferences and technical trainings, assistance in dealing with staffing and geographic limitations, and the ability to use the association name in marketing materials. We expect these benefits to result in higher-quality audits and higher audit fees (or audit fee premiums). Using hand-collected data on association membership, we find that association member firms conduct higher-quality audits than nonmember firms, where audit quality is proxied for by fewer Public Company Accounting Oversight Board (PCAOB) inspection deficiencies and fewer financial statement misstatements, as well as less extreme absolute discretionary accruals and lower positive discretionary accruals. We also find that audit fees are higher for clients of member firms than for clients of nonmember firms, suggesting that clients are willing to pay an audit fee premium to engage association member audit firms. Finally, we find that member firm audits are of similar quality to a size-matched sample of Big 4 audits, but member firm clients pay lower fee premiums than do Big 4 clients. Our inferences are robust to the use of company size-matched control samples, audit firm size-matched control samples, propensity score matching, two-stage least squares regression, and to analyses that consider changes in association membership. Our findings should be of interest to regulators because they suggest that association membership assists small audit firms in overcoming barriers to auditing larger audit clients. In addition, our findings should be informative to audit committees when making auditor selection decisions, and to investors and accounting researchers interested in the relation between audit firm type and audit quality.
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Dee, Carol Callaway, Ayalew Lulseged, and Tianming Zhang. "Should PCAOB Disciplinary Proceedings Be Made Public? Evidence from Sanctions against a Big 4 Auditor." Current Issues in Auditing 6, no. 2 (August 1, 2012): P18—P24. http://dx.doi.org/10.2308/ciia-50269.
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SUMMARY: In our paper “Client Stock Market Reaction to PCAOB Sanctions against a Big 4 Auditor” (Dee et al. 2011), we examine stock price effects for clients of a Big 4 audit firm when news of sanctions imposed by the PCAOB against the audit firm was made public. These PCAOB penalties were the first against a Big 4 auditor, and they revealed information about quality-control problems at the audit firm that were not publicly known until the sanctions were announced. Our analysis of stock prices suggests that investors in clients of the penalized Big 4 firm reevaluated their perceptions of the quality of the firm's audit work after learning of the sanctions. The negative stock price effects for the firm's clients were consistent with investors inferring that the financial statements were of lower quality. In the paper, we conclude that investors find information about PCAOB sanctions against audit firms to be relevant in assessing audit quality and use that information in setting stock prices for audit firms' clients. This finding has relevance for the debate on the proposed legislation in Congress (H.R. 3503), which would allow the PCAOB to disclose proceedings against auditors before the investigations are concluded. Our results suggest that, although investors may find early disclosure of this information useful, public disclosure of Board disciplinary proceedings before they are completed could unfairly harm an audit firm's reputation if the firm is ultimately vindicated of wrongdoing.
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Rahman, Md Jahidur, Mo Lai Lan Phllis, and Lam Mo. "The Impact of the Prohibition of Non–Audit Services on the Profitability of Big-4-affiliated Audit Firms in Bangladesh." Asian Journal of Accounting Research 1, no. 1 (February 29, 2016): 1–7. http://dx.doi.org/10.1108/ajar-2016-01-01-b001.
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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.
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Geiger, Marshall A., and Dasaratha V. Rama. "Audit Firm Size and Going-Concern Reporting Accuracy." Accounting Horizons 20, no. 1 (March 1, 2006): 1–17. http://dx.doi.org/10.2308/acch.2006.20.1.1.
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Prior research suggests that the Big 4 audit firms are of higher quality than are non-Big 4 firms. However, existing tests for an association between audit firm size and reporting accuracy are indirect and provide mixed results. Our study extends this line of research by examining whether the Big 4 audit firms exhibit higher quality reporting by having fewer “audit-reporting errors” in the context of issuing going-concern modified reports. Our analyses examine both types of going-concern reporting errors (i.e., type I errors—modified opinions rendered to subsequently viable clients; and type II errors—unmodified opinions rendered to subsequently bankrupt clients) over an 11-year period. We also examine reporting error rate differences between the national second-tier firms and regional/local third-tier firms. Our findings indicate that both type I and type II error rates for Big 4 audit firms are significantly lower compared to non-Big 4 firms. In contrast, we find no significant differences between the national second-tier and regional/local third-tier audit firms with respect to either type of reporting error. Our results provide evidence about a Big 4 audit quality difference in reporting on client's going-concern problems.
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Singh, Harjinder, Rick Newby, and Inderpal Singh. "Should the 4 big replace the big 4? An examination of audit quality using internal audit." Corporate Ownership and Control 9, no. 2 (2012): 41–55. http://dx.doi.org/10.22495/cocv9i2art3.
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Prior research has linked audit quality with large audit firms. Consequently, a dichotomous variable, Big N/non-Big N has traditionally proxied for audit quality. Applying a different measure of audit quality than audit fee, this study investigates whether a single dummy variable for Big N is an appropriate proxy for audit quality in explaining differences in the existence of clients’ internal audit (IA) function. Results indicate that the existence of clients’ IA function is not consistent among Big 4 firms. This has important research implications for the universal use of a Big N dummy variable as a measure for audit quality.
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Gong, Qihui, Oliver Zhen Li, Yupeng Lin, and Liansheng Wu. "On the Benefits of Audit Market Consolidation: Evidence from Merged Audit Firms." Accounting Review 91, no. 2 (July 1, 2015): 463–88. http://dx.doi.org/10.2308/accr-51236.
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ABSTRACT We examine efficiency improvement associated with audit firm mergers. Our analysis is made possible by a unique dataset of audit hours in China. We find a significant reduction in audit hours, unaccompanied by a deterioration in audit quality, of merged audit firms. Further, we find a larger reduction in audit hours when acquirers are Chinese domestic Big 10 audit firms and when client firms are more complex. These results are consistent with the notion of economies of scale arising from horizontal mergers. However, enhanced efficiency does not necessarily reduce audit fees. Instead, we find an increase in audit fees when acquirers are international Big 4 audit firms even when we control for possible changes in market power. This premium is at least partially due to the certification effect of international Big 4 audit firms.
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Pham, Ngoc Kim, Hung Nguyen Duong, Tin Quang Pham, and Nga Thi Thuy Ho. "Audit Firm Size, Audit Fee, Audit Reputation and Audit Quality: The Case of Listed Companies in Vietnam." Asian Journal of Finance & Accounting 9, no. 1 (June 29, 2017): 429. http://dx.doi.org/10.5296/ajfa.v9i1.10074.
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Audit quality is considered as an essential factor affecting the reliability of financial information. The aim of this study is to assess the effects of audit firm characteristics, including audit reputation, audit fees and audit firm size, on audit quality. A sample of 192 companies listed on Hanoi and Ho Chi Minh Stock Exchange for the period of 2006-2014 was selected. Multiple regression was used to analyze the data. The findings show that Big 4 auditors in Vietnam provide high audit quality than non-Big 4 auditors. Interestingly, in Vietnam context, except for the audit firms in the Big 4 group, the findings suggest that smaller audit firms provide better audit quality. Additionally, the results reveal that the more audit fees the auditors receive, the lower audit quality they provide. The critical role of audit quality has attracted significantly scholarly attention, however, prior studies have mainly focused on firms in developed countries. Little is known about audit quality in an emerging economy context such as Vietnam. This study adds to the limited number of studies on audit quality of listed companies in emerging economies.
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Niskanen, Mervi, Jukka Karjalainen, and Jyrki Niskanen. "The Role of Auditing in Small, Private Family Firms: Is It About Quality and Credibility?" Family Business Review 23, no. 3 (June 7, 2010): 230–45. http://dx.doi.org/10.1177/0894486510374456.
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The authors present empirical evidence of how family ownership and control affect the demand for audit quality measured by audit firm size in a sample of small private firms. The results indicate that family-held or -controlled firms are less likely to use Big 4 auditors than nonfamily firms and that an increase in family ownership decreases the likelihood of a Big 4 audit. The results imply that the less concentrated family ownership is, the more need there is for outside control mechanisms because of higher agency costs. The results imply that family influence increases firms’ incentives to employ Big 4 audit firms, thereby increasing the credibility of their financial statements vis-à-vis outside stakeholders.
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Blokdijk, Hans, Fred Drieenhuizen, Dan A. Simunic, and Michael T. Stein. "An Analysis of Cross-Sectional Differences in Big and Non-Big Public Accounting Firms' Audit Programs." AUDITING: A Journal of Practice & Theory 25, no. 1 (May 1, 2006): 27–48. http://dx.doi.org/10.2308/aud.2006.25.1.27.
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A significant body of prior research has shown that audits by the Big 5 (now Big 4) public accounting firms are quality differentiated relative to non-Big 5 audits. This result can be derived analytically by assuming that Big 5 and non-Big 5 firms face different loss functions for “audit failures” and is consistent with a variety of empirical evidence from studies of audit fees, auditor changes, and the stock price reaction to audited earnings. However, there is no existing evidence (of which we are aware) concerning the underlying production differences between Big 5 and non-Big 5 audits. As a result, existing empirical evidence cannot distinguish between the possibility that Big 5 audits are simply perceived to be different (e.g., by investors) or actually differ in how they are produced. Our research objective is to identify the production characteristics of audit engagements that may explain the differences in expected audit quality between Big 5 and non-Big 5 firms. In this archival study, we examine the total audit effort and the allocation of effort to four audit phases—planning, (control) risk assessment, substantive testing, and completion—for a cross-section sample of 113 audits of Dutch companies in 1998/99 by 14 public accounting firms. We find that, after controlling for client characteristics: (1) both types of auditors exert about the same amount of total audit effort; (2) Big 5 auditors allocate relatively more effort to planning and (control) risk assessment, and relatively less to substantive testing and completion; and (3) client size, use of the business-risk-based audit approach, and reliance on client internal controls affect audit hours differently for the two auditor types. We conclude that the Big 5 firms actually produce a higher audit quality level, and that this quality difference is related to how audit hours are deployed in a more contextual and less procedural audit approach.
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Lowe, D. Jordan, James L. Bierstaker, Diane J. Janvrin, and J. Gregory Jenkins. "Information Technology in an Audit Context: Have the Big 4 Lost Their Advantage?" Journal of Information Systems 32, no. 1 (May 1, 2017): 87–107. http://dx.doi.org/10.2308/isys-51794.
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ABSTRACT Audit firms use information technology (IT) to improve audit quality, effectiveness, and efficiency. While audit IT has evolved over the past decade, limited guidance is available to assist practitioners in determining how IT can be used. Our research objectives are fourfold. First, we examine to what extent auditors use and assess the perceived importance of IT in their audits. Second, we look at different-sized firms to determine whether IT adoption and implementation decisions differ by firm size. Third, we investigate changes in auditors' use and perceived importance of IT over the past decade. Fourth, we examine whether IT has impacted the communication modes used by auditors when reviewing workpapers and fraud brainstorming. Overall, Big 4 auditors were not significantly more likely to use IT than non-Big 4 auditors, suggesting that the dominance of the Big 4 firms' use of IT has lessened. In fact, there are a few applications where non-Big 4 auditors appear to have taken the lead. In addition, our findings indicate that auditors have increased the use of all the IT applications we examined ten years ago. However, we find evidence that auditors may prefer to use even more IT in their audits than they are currently using. Data Availability: Data used in this study are available for download, see Appendix B.
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Ke, Bin, Clive S. Lennox, and Qingquan Xin. "The Effect of China's Weak Institutional Environment on the Quality of Big 4 Audits." Accounting Review 90, no. 4 (October 1, 2014): 1591–619. http://dx.doi.org/10.2308/accr-50943.
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ABSTRACT This study examines whether China's weak institutional environment results in lower-quality audits by the Big 4 firms. We find that the Big 4 assign their less experienced partners to companies that are listed only in China compared with clients cross-listed in Hong Kong. The Big 4 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 4 firms providing lower-quality audits to companies that are listed only in China.
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Francis, Jere R., Chrystelle Richard, and Ann Vanstraelen. "Assessing France's Joint Audit Requirement: Are Two Heads Better than One?" AUDITING: A Journal of Practice & Theory 28, no. 2 (November 1, 2009): 35–63. http://dx.doi.org/10.2308/aud.2009.28.2.35.
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SUMMARY: We examine auditor choice for listed companies in France where two (joint) auditors are required by law. This unique setting creates more complex auditor choice than the typical Big 4/non-Big 4 dichotomy in other countries, and we study if a firm's ownership structure affects its auditor-pair choice as well the consequences on earning quality. The findings are consistent with agency theory and indicate that a Big 4 auditor (paired with a non-Big 4 auditor) is more likely to be used when there is greater information asymmetry (less family control and more diversified ownership structures), and that these associations are even stronger for firms with two Big 4 auditors conducting the joint audit. We also test if a firm's auditor-pair choice affects earnings quality and find that firms using one Big 4 auditor (paired with a non-Big 4 auditor) have smaller income-increasing abnormal accruals compared to firms that use no Big 4 auditors and, once again, find that this effect is even stronger for firms that use two Big 4 auditors.
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Christensen, Brant E., Randal J. Elder, and Steven M. Glover. "Insights into Large Audit Firm Sampling Policies." Current Issues in Auditing 9, no. 2 (July 1, 2015): P7—P18. http://dx.doi.org/10.2308/ciia-51223.
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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.
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Francis, Jere R., Matthew L. Pinnuck, and Olena Watanabe. "Auditor Style and Financial Statement Comparability." Accounting Review 89, no. 2 (October 1, 2013): 605–33. http://dx.doi.org/10.2308/accr-50642.
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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 within their clienteles. Audit style implies that two companies audited by the same Big 4 auditor, subject to the same audit style, are more likely to have comparable earnings than two firms audited by two different Big 4 firms with different styles. By comparable we mean that two firms in the same industry and year will have a more similar accruals and earnings structure. For a sample of U.S. companies for the period 1987 to 2011, we find evidence consistent with audit style increasing the comparability of reported earnings within a Big 4 auditor's clientele. Data Availability: All data are publicly available from the sources identified in the text.
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Alfraih, Mishari M. "Does ownership structure affect the quality of auditor pair composition?" Journal of Financial Reporting and Accounting 15, no. 2 (July 3, 2017): 245–63. http://dx.doi.org/10.1108/jfra-08-2015-0076.
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Purpose This study examines the effects of institutional and government ownership on audit quality in Kuwait. Kuwait provides an interesting regulatory context as listed firms are legally required to appoint two external auditors from different auditing firms. This offers a unique opportunity to examine differentiation in demand for audit quality when there are three potential combinations of auditors: two non-Big 4, one Big 4 and one non-Big 4 and two Big 4. Design/methodology/approach The sample consists of all firms listed on the Kuwait Stock Exchange in 2013. Multinomial logistic regression examines the influence of ownership structure on audit quality. Analyses are controlled for the effect of company characteristics. Control variables are: firm size, complexity, growth, leverage, profitability and industry category. Findings The results show that institutional ownership is positively related to the number of Big 4 auditing firms that audit a company’s financial statements. This reflects the powerful and influential role institutional investors play in discouraging management from choosing lower-quality providers. In contrast, government ownership has a negative impact on audit quality. These findings are consistent with the hypothesis that audit quality is a function of, among other factors, the structure of equity ownership. Practical implications Given the importance of audits, knowledge of the determinants of audit quality is of particular interest to regulators, enforcement agencies and investors. The findings imply that different ownership structures have different effects on the demand for audit quality; some structures strengthen it, while others weaken it. The negative relation between government ownership and audit quality raises serious questions about the effectiveness of government in monitoring its investments. Originality/value This paper extends the literature by investigating the determinants of the choice of auditors in an emerging market where there is a joint audit requirement. It highlights the important role played by ownership structure in shaping demand for audit quality. A distinguishing feature in previous research is the classification of the audit quality proxy into two choices (Big 4 vs non-Big 4 auditors). However, the regulatory context in Kuwait means that there are three choices. Thus, unusually, a multinomial logistic regression is used for the analysis.
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Lyubimov, Alexey. "How do audit fees change? Effects of firm size and section 404(b) compliance." Managerial Auditing Journal 34, no. 4 (April 1, 2019): 393–437. http://dx.doi.org/10.1108/maj-07-2018-1938.
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Purpose The purpose of this paper is to investigate the effect of the size of the audit firm and compliance with Section 404(b) on how audit fees change over time. Design/methodology/approach This study uses panel data and an OLS regression to examine the relationship between audit fee changes, firms’ size and Section 404(b) compliance. Findings Section 404(b)-compliant companies experience a larger change in audit fees if they are audited by Big 4 firms than second-tier firms. Second-tier audit firms increase the fees primarily for the companies which do not comply with Section 404(b). Practical implications Regulators have been concerned with the Big 4 fee premium for four decades. This study informs regulators that the Big 4 continue increasing their fees at a higher rate than second-tier firms for their Section 404(b)-compliant clients (even though recent research shows that second-tier firms have increased quality to match the Big 4). This suggests that the Big 4 fee premium increases for this subset of clients, adding to the regulatory concerns. Originality/value While prior research has established the existence of the Big 4 fee premium, little is known about how this premium changes over time. Prior research shows that audit fees increase when internal controls are weak; however, little is known about how Section 404(b) compliance (once control effectiveness is controlled) affects fee changes. This paper addresses these voids in research.
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Al-Dhamari, Redhwan Ahmed Ali, and Sitraselvi Chandren. "Audit Partners Gender, Auditor Quality and Clients Value Relevance." Global Business Review 19, no. 4 (March 27, 2017): 952–67. http://dx.doi.org/10.1177/0972150917697747.
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Several corporate scandals around the world have aggravated the investors’ need for reliable and relevant accounting information. In fact, the study is inspired by prior research which suggests women audit partner or auditor possess a higher level of preparation, risk aversion and ethical behaviour in audit process. Thus, we investigated the possible effect of women audit partner on the client value relevance of accounting information on 2,478 firm-year observations from year 2012 to 2014 for Malaysian listed firms. This article uses time series cross-sectional ordinary least squares (OLS) regressions upon a large sample of the Malaysian listed firms. Basically, the regression results indicate that the signing women audit partner from Big-4 audit firms improves the reliability and value relevance of earnings. Furthermore, our additional analysis shows that firms that engaged the women audit partner from Big-4 audit firms report high relevant equity book values. This study provides a valuable contribution on the positive effect of signing women audit partner from Big-4 audit firms on client value relevance of accounting information to researchers, regulators, investors and all other interested parties in financial information.
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Harindahyani, Senny, and Celine Widjaja. "Family Firms, Audit Fee, and Auditor Choice: Evidence From Indonesia." JOURNAL OF AUDITING, FINANCE, AND FORENSIC ACCOUNTING 6, no. 2 (February 8, 2019): 83–96. http://dx.doi.org/10.21107/jaffa.v6i2.4936.
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Family firms in Indonesia have an important role in the Indonesian economy. However, agency problems might happen inside family firms where it will lead to conflict of interest and information asymmetry, along with the entrenchment effect where it leads firms to produce lower quality earnings report. Research from 305 firms in Indonesia shows that the agency problems and the entrenchment effect has not affected the family firms in Indonesia, reflected from the firm‟s decision making in their amount of audit fee and auditor choice. This study will contribute by providing an empirical evidence of the effect of family control on the audit fee and auditor choice in a developing country. The result shows that the type of firms has no correlation on the amount of audit fee paid to the auditor and both firms‟ demands the same level of audit quality where it is shown by their choices of audit firms, which is Big 4 audit firm or Non-Big 4 audit firm. In conclusion, the level of agency problems and entrenchment effect tends to be lower in the family firms of Indonesia.
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Pratoomsuwan, Thanyawee. "Audit prices and Big 4 fee premiums: further evidence from Thailand." Journal of Accounting in Emerging Economies 7, no. 1 (February 6, 2017): 2–15. http://dx.doi.org/10.1108/jaee-07-2014-0039.
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Purpose Because there is mixed evidence regarding Big N fee premiums across countries, the purpose of this paper is to re-examine the phenomenon of audit price differentiations in the market for auditing services in Thailand. Although Hay et al. (2006) and Hay (2013) reviewed over 80 audit fee papers from 20 countries over 25 years, 13 of which were based in emerging economies, the understanding of the market for auditing services in Thailand remains limited. Because the Thai auditing market is also classified as a segmented market – i.e., a market that is less competitive for large-client firms and more competitive for small-client firms – this study tests audit price competition in an emerging audit market using Thailand as an example. Design/methodology/approach The traditional audit fee model is used to estimate audit fee premiums for a sample of over 300 non-financial companies listed on the Stock Exchange of Thailand in 2011. Findings Although the market for auditing services in Thailand is consistent with that described in Ferguson et al. (2013) – in which Big N audit firms dominate only the large-client segment – the results show that Big N auditors charge higher audit fees and earn higher fee premiums compared with non-Big N auditors in both the small- and large-client segments of the audit market. Research limitations/implications The evidence from this study reveals the existence of Big N fee premiums across market segmentations. Audit price differentials between Big N and non-Big N firms in both small- and large-client market segments might concern regulators regarding competition in the audit market with respect to whether the Big N firms are charging uncompetitive audit fees. These findings also imply that audit pricing varies across countries and the Big N price deferential is typically larger in emerging markets than in more developed audit markets and that it might be inadequate to study single-country audit pricing. However, the question whether the Big N fee premium results from Big N product differentiation is not directly investigated in this study. Originality/value Because earlier studies focusing on audit fee premiums have been conducted using data from the USA and Australia, the findings add to the limited evidence regarding audit fee premiums in an emerging country such as Thailand.
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Bills, Kenneth L., and Nathaniel M. Stephens. "Spatial Competition at the Intersection of the Large and Small Audit Firm Markets." AUDITING: A Journal of Practice & Theory 35, no. 1 (May 1, 2015): 23–45. http://dx.doi.org/10.2308/ajpt-51159.
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SUMMARY In this paper, we study spatial competition in the U.S. audit market while accounting for its two-tiered nature. We provide evidence on the differential impact that market share distances within and between the players in the large and small audit markets have on competition. We find that the market share distance from small audit firm competitors has a greater effect on the Big 4's audit fees than distances from other Big 4 competitors. This finding suggests that small audit firms play a significant part in the competitive landscape in local markets. Further, we find that audit fees are increasing with the distance between a small audit firm and its closest competing small audit firm while audit fees are decreasing with the distance between a small audit firm and its closest competing large audit firm. This suggests that while obtaining separation in market space from competing small audit firms reduces competitive pressure from other small audit firms, as a small audit firm gets closer to the market space of a large audit firm it is perceived as being more like the larger audit firm and is able to obtain a fee premium like that attained by the larger audit firms. JEL Classifications: M4; M40; M41; M42; M49.
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Brivot, Marion, Mélanie Roussy, and Maryse Mayer. "Conventions of Audit Quality: The Perspective of Public and Private Company Audit Partners." AUDITING: A Journal of Practice & Theory 37, no. 2 (May 1, 2018): 51–71. http://dx.doi.org/10.2308/ajpt-51772.
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SUMMARY This research is based on an in-depth analysis of 34 interviews with partners in Big 4, medium-sized, and small audit firms that specialize in private and/or public company audits, to explore how they understand the concept of audit quality. Two contrasting conventions—i.e., shared judgment norms—of audit quality emerge from the analysis. Public company audit partners in Big 4 firms espouse what we call the “model” audit quality convention, which considers that audit quality results from a technically flawless audit, where professional judgment is highly formalized, and quality is attested by a perfectly documented audit file that passes Canadian Public Accountability Board (CPAB) and PCAOB inspections. In contrast, partners working primarily on private company audits, regardless of their firm's size, endorse what we call the “value-added” audit quality convention, which considers that audit quality results from tailoring the audit to meet the client's unique needs, where professional judgment is unconstrained, and where quality is attested by the client's perception that the audit has given a better understanding of their financial situation and the associated risks and opportunities. Our analysis also reveals significant tensions within each of these two conventions, and a fear that the current regulatory framework for quality control might end up severely hurting audit quality.
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Chan, Kam C., Barbara Farrell, and Patricia Healy. "Audit Firm Rotation Concerns And Considerations." Journal of Applied Business Research (JABR) 30, no. 1 (December 30, 2013): 227. http://dx.doi.org/10.19030/jabr.v30i1.8297.
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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.
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Zorio-Grima, Ana, and Pedro Carmona. "Narratives of the Big-4 transparency reports: country effects or firm strategy?" Managerial Auditing Journal 34, no. 8 (September 2, 2019): 951–85. http://dx.doi.org/10.1108/maj-09-2018-1994.
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Purpose The purpose of this paper is to examine whether audit firms use transparency reports (TRs) as a tool to standardize their brand image or whether the semantic and content analysis in these reports indicates a higher importance of country effects. Design/methodology/approach The sample includes 28 TRs published in English by the Big-4 audit firms from five EU countries (the UK, Ireland, Luxemburg, Hungary and Malta), as well as in the USA and Australia. Findings Using content analysis, this research finds that there is variation in the language used in TRs both across audit firms and jurisdictions. Most TRs from different countries of the same firm tend to be clustered, suggesting that audit firms use transparency reporting as a strategy to differentiate themselves from their competitors. In fact, EY and KPMG seem to have more standardized internal procedures and standardized information. Regarding country effects, the results indicate that TRs in the UK are longer and show more detailed information. Originality/value Overall, this research is innovative in the sense that it applies a new methodological approach to an emerging topic such as audit transparency reporting. It identifies emerging topics of voluntary disclosure, such as financial data of the firm, gender and ethnic origin of employees, community involvement or sanctions, among other topics of interest which might be explored in detail by future research to understand the construction of the profession.
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Rama, Dasaratha V., and William J. Read. "Resignations by the Big 4 and the Market for Audit Services." Accounting Horizons 20, no. 2 (June 1, 2006): 97–109. http://dx.doi.org/10.2308/acch.2006.20.2.97.
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Following enactment of the Sarbanes-Oxley Act (SOX) of 2002, Big 4 auditors claimed to have a more conservative policy regarding client retention and acceptance decisions. In this paper, we examine the resignations of Big 4 audit firms in periods before and after SOX. We find that Big 4 audit firms resigned from more audit clients in 2003 than in 2001, and that the 2003 group of clients had significantly lower measures of financial stress. Our results are robust to adjustments for differences in bankruptcy probability between 2003 and 2001. We also find that the relative increases in fees charged by the Big 4 successor following the resignation of a Big 4 predecessor are higher in 2003 than in 2001; for clients with a non-Big 4 successor firm following a Big 4 resignation, we find a significant fee discount in 2001 but not in 2003. Overall, the results support the view that auditors are much more conservative in the post-Enron/SOX period than in the immediately preceding period.
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Ferguson, Andrew, Gabriel Pündrich, and Adrian Raftery. "Auditor Industry Specialization, Service Bundling, and Partner Effects in a Mining-Dominated City." AUDITING: A Journal of Practice & Theory 33, no. 3 (August 1, 2014): 153–80. http://dx.doi.org/10.2308/ajpt-50728.
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SUMMARY: This study examines auditor industry specialization effects in Perth, a remote mining town in Australia characterized by a large number of small, homogeneous firms. We consider the impact of leadership by the non-Big 4 auditor BDO Kendalls (BDO) for a sample of 371 mining development stage entities (MDSEs). After controlling for factors known to determine audit fees, we find no evidence of auditor industry leadership fee premiums accruing to BDO, a result robust to a range of sensitivity tests including the broadening of tests Australia-wide. However, when the dependent variable is redefined to the total “bundle” of services provided by the audit firm (including audit and non-audit fees), the industry leader is shown to earn a fee premium suggesting BDO uses audits as a conduit to supply higher-margin non-audit services. Our findings suggest that strategic pricing by industry leaders may not be confined to Big 4 firms.
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Hardies, Kris, Marie-Laure Vandenhaute, and Diane Breesch. "An Analysis of Auditors' Going-Concern Reporting Accuracy in Private Firms." Accounting Horizons 32, no. 4 (October 1, 2018): 117–32. http://dx.doi.org/10.2308/acch-52297.
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SYNOPSIS The accuracy of audit reports is often viewed as a signal for audit quality. Prior research shows that in the context of going-concern reporting in audit markets dominated by public firms, some auditors are more accurate than others (e.g., Big N firms). This study is the first large-scale study that investigates going-concern reporting accuracy in an audit market dominated by private firms. The threat of reputation and litigation costs incentivizes auditors to report accurately in markets dominated by public firms, but such incentives are largely absent in markets dominated by private firms. Hence, reporting accuracy in such markets might not vary across auditors. Our main analysis is based on a sample of 1,375 Belgian firms that ceased to exist within one year from the financial statement date. Our results show that the frequency of Type II misclassification does not vary across auditor types (Big 4 versus non-Big 4, audit firm and partner industry specialists versus non-specialists, more experienced versus less experienced, and female versus male auditors). Overall, these results cast doubt on the existence of quality differences among auditors in audit markets dominated by private firms.
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Knechel, W. Robert, Vic Naiker, and Gail Pacheco. "Does Auditor Industry Specialization Matter? Evidence from Market Reaction to Auditor Switches." AUDITING: A Journal of Practice & Theory 26, no. 1 (May 1, 2007): 19–45. http://dx.doi.org/10.2308/aud.2007.26.1.19.
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Numerous capital market studies have investigated the stock market's reaction to firms switching to and from brand name auditors (Big 8/6/5/4 auditors). However, audit firm brand name is only one possible indication of the quality of an auditor. This study contributes to the existing literature on auditor switching, by examining how the market reacts to auditor switches to or from audit firms that are considered to be industry specialists. Consistent with our hypotheses, we find that firms switching between Big 4 auditors experience significant positive abnormal returns when the successor auditor is an industry specialist, and they experience significant negative abnormal returns when the successor auditor is not a specialist. We also find that these market reactions are more likely to be due to changes in perceived audit quality rather than differential costs of using specialist auditors. In supplemental analysis of switches involving non-Big 4 auditors, we find that firms that switch from a specialist Big 4 auditor to a non-Big 4 auditor suffer the largest negative market reaction. Surprisingly, we also observe that the market reacts most positively when a company switches from a non-Big 4 auditor to a Big 4 auditor who is not a specialist. These results suggest that the market does perceive audit quality differences based on industry specialization to be relevant to the valuation of a company's market value.
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Basioudis, Ilias G., and Jere R. Francis. "Big 4 Audit Fee Premiums for National and Office-Level Industry Leadership in the United Kingdom." AUDITING: A Journal of Practice & Theory 26, no. 2 (November 1, 2007): 143–66. http://dx.doi.org/10.2308/aud.2007.26.2.143.
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The pricing of Big 4 industry leadership is examined for a sample of U.K. publicly-listed companies, and adds to the evidence from the Australian and U.S. audit markets that city-specific industry leadership commands a fee premium. There is a significant fee premium for city-specific industry leaders relative to other Big 4 auditors, but no evidence that either the top-ranked or second-ranked firm nationally commands a fee premium relative to other Big 4 auditors, after controlling for city-level industry leadership. We also test for Big 4 fee premiums relative to non-Big 4 auditors and the U.K. data suggest a three-level hierarchy based on audit fee differentials: (1) Big 4 city-specific industry leaders have the largest fees; (2) other Big 4 auditors (noncity leaders) and second-tier national firms have comparable fees that are lower than Big 4 city leaders but larger than third-tier firms; and (3) third-tier accounting firms have the lowest fees.
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Semba, Hu Dan, and Ryo Kato. "Does Big N matter for audit quality? Evidence from Japan." Asian Review of Accounting 27, no. 1 (February 4, 2019): 2–28. http://dx.doi.org/10.1108/ara-01-2015-0008.
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Purpose There has been growing concern worldwide regarding audit quality in Japan after the Kanebo and Olympus accounting scandals. The purpose of this paper is to examine the Japanese audit market from 2001 to 2011 to determine whether audit quality differs between Big N and Non-Big N audit firms and whether this difference, if existed, changed during 2007 when the number of big audit firms declined from four to three and the requirements of audit quality became more rigorous. Design/methodology/approach This study employs a sample of Japanese listed firms from fiscal year 2001 to 2011. Five proxy variables for audit quality are used and the data are analyzed using the propensity score matching method. Findings The authors show that irrespective of their size, all audit firms in Japan provide the same quality of service, when controlling for client characteristics including keiretsu, foreign sales ratio and bankruptcy risk measured in Japan. Additionally, the results suggest that although only three major audit firms remain in the Japanese audit market after the dissolution of PricewaterhouseCooper’s Chuo-Aoyama firm in 2007, the audit quality difference between Big N and Non-Big N remained unchanged before and after 2007. Originality/value The study contributes to the lack of existing empirical evidence on audit quality in Japan, a country characterized with low audit litigation risk and more emphasis on auditor reputation, given the influence of the notable change in Japanese audit market competition from Big 4 to Big 3. The study’s research design contributes to the extant literature by using multiple proxies of audit quality.
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Hegazy, Karim, and Mohamed Hegazy. "Audit firms and industry specialization in an emerging economy." Journal of Accounting & Organizational Change 14, no. 3 (September 3, 2018): 338–62. http://dx.doi.org/10.1108/jaoc-03-2017-0024.
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PurposeThis study aims to investigate the implications of audit industry specialization on auditor’s retention and growth within an emerging economy. Factors such as whether the firm is a Big 4, a firm with international affiliation, a local firm and the type of industry were studied to analyse the reasons behind audit firm retention and growth.Design/methodology/approachThis research is based on a field study related to audit firms providing services to listed companies in an emerging economy. The sample includes the top 100 publicly held companies’ in the Egyptian stock market during 2006-2011 for which their annual reports are analysed to determine the audit firms’ retention and growth. An assessment of the continuity of the auditors and the increase in the number of audit clients were also measured.FindingsThe results confirm that industry specialization has an important effect on the auditor’s retention, especially for industries where capital investment is significant such as buildings, construction, financial services, housing and real estate. Big 4 audit firms retained their clients because of their industry specialization and brand name. Evidence was found that good knowledge of accounting and auditing standards resulted in audit firms with international affiliation competing with the Big 4 for clients’ retention and growth.Originality/valueThis study contributes to the existing literature, as it is among the first to provide empirical evidence on auditor retention, growth and auditor’s dominance in an emerging economy such as Egypt.
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Broberg, Pernilla, Timurs Umans, Peter Skog, and Emily Theodorsson. "Auditors’ professional and organizational identities and commercialization in audit firms." Accounting, Auditing & Accountability Journal 31, no. 2 (February 19, 2018): 374–99. http://dx.doi.org/10.1108/aaaj-02-2014-1607.
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Purpose The purpose of this paper is to explain how auditors’ professional and organizational identities are associated with commercialization in audit firms. Unlike previous studies exploring the consequences of commercialization in the firms, the study directs its attention toward the potential driver of commercialization, which the authors argue to be the identities of the auditors. Design/methodology/approach The paper is based on 374 responses to a survey distributed to 3,588 members of FAR, the professional association of accountants, auditors and advisors in Sweden. The study used established measures of organizational and professional identity and introduced market, customer and firm process orientation as aspects of commercialization. The study explored the data through descriptive statistics, principle component analysis and correlation analysis and tested the hypotheses with multiple linear regression analysis. Findings The findings indicated that the organizational identity of auditors has a positive association with three aspects of commercialization: market orientation, customer orientation and firm process orientation. Contrary to the arguments based on prior literature, the study has found that the professional identity of auditors is also a positively associated with commercialization. This indicates a change of the role of professional identity vis-à-vis commercialization of audit firms. The positive association between professional identity and commercial orientation could indicate the development of “organizational professionalism.” The study also found differences between the association between professional identity and commercialization in Big 4 and non-Big 4 firms. While in Big 4 firms, professional identity is positively associated only with the firm’s process orientation, in non-Big 4 firms, professional identity has a positive association with all three aspects of commercialization. Originality/value The paper provides insight into how auditors’ identities have influenced commercialization of audit firms and into the normalizing of commercialization within auditing. The study also developed a new instrument for measuring commercialization, one based on market, customer and firm process orientation concepts. This paper suggests that this instrument is an alternative to the observation through proxies.
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Chen, Charles J. P., Xijia Su, and Xi Wu. "Auditor Changes Following a Big 4 Merger with a Local Chinese Firm: A Case Study." AUDITING: A Journal of Practice & Theory 29, no. 1 (May 1, 2010): 41–72. http://dx.doi.org/10.2308/aud.2010.29.1.41.
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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.
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Tran, Manh Dung, Khairil Faizal Khairi, and Nur Hidayah Laili. "A longitudinal study of audit quality differences among independent auditors." Journal of Economics and Development 21, no. 2 (October 7, 2019): 234–46. http://dx.doi.org/10.1108/jed-10-2019-0040.
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Purpose The purpose of this paper is to investigate the differences of audit quality of financial statements among auditors, including Big 4 and non-Big 4 auditors. Design/methodology/approach By employing cross-sectional analysis of compliance (a proxy of audit quality) of goodwill impairment testing of listed firms in the context of Hong Kong, the variation of audit quality of financial statements of auditees has been shown. Findings Audit quality of Big 4 auditors is viewed to be higher than that of non-Big 4 audit firms and the homogeneity of audit quality among Big 4 auditors is not long accepted, but variation. Practical implications Even though unqualified opinions have been given on the auditors’ reports, the quality of financial statements audit is a skeptical issue because of the high level of non-compliance of goodwill impairment testing under International Financial Reporting Standards. Originality/value This study does emphasize the higher audit quality of financial statements of Big 4 auditors than that of non-Big 4 auditors and stresses the variation of audit quality among Big 4 auditors.
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Tagesson, Torbjörn, and Peter Öhman. "To be or not to be – auditors’ ability to signal going concern problems." Journal of Accounting & Organizational Change 11, no. 2 (June 1, 2015): 175–92. http://dx.doi.org/10.1108/jaoc-04-2013-0034.
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Purpose – This paper aims to chart Swedish auditors’ likelihood of issuing going concern warnings (GCWs), and to investigate the relationship between formal auditor competence, audit fees and audit firm, respectively, and the likelihood of issuing GCWs. Design/methodology/approach – The empirical data are based on annual reports and audit reports for 2,547 limited companies that went bankrupt in 2010 in the wake of the financial crisis and had filed a financial statement in the year before the bankruptcy. Findings – The findings indicate that Swedish auditors seldom issue GCWs. Moreover, there is a positive relationship between audit fee level and the likelihood of issuing GCWs, and Big 4 auditors being more likely to issue such warnings than other auditors. However, the analyses identify differences between audit firms (within the group of Big 4 firms and within the group of other audit firms) in terms of their predictions of client bankruptcies. This suggests a need for further investigation of firm-specific differences. Contrary to what was predicted, authorized auditors are not more likely to issue GCWs than approved auditors. Research limitations/implications – This paper did not investigate the impact of audit experience and tenure or the possibility that auditors may signal survival problems by resigning. Practical implications – Levying appropriate audit fees creates opportunities for thorough audits, but auditors’ formal competence based on training and qualification is not a factor that enforces audit quality. Based on the findings, the authors also suggest some clarifications of existing standards to reduce ambiguity regarding the reporting of survival problems. Originality/value – The Swedish setting is a context in which most companies are small, creditor interest in accounting and auditing is strong and auditors must issue a modified audit opinion if half of the shareholders’ equity is spent. This setting offers a unique research opportunity because the formal competence differs between Sweden’s two categories of certified auditors, and it allows exploration beyond the dichotomy of Big 4 versus other audit firms.
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Carlin, Tyrone M., Nigel Finch, and Nur Hidayah Laili. "Investigating audit quality among Big 4 Malaysian firms." Asian Review of Accounting 17, no. 2 (July 17, 2009): 96–114. http://dx.doi.org/10.1108/13217340910975251.
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Liu, Chenyong, and Chunhao Xu. "The effect of audit engagement partner professional experience on audit quality and audit fees: early evidence from Form AP disclosure." Asian Review of Accounting 29, no. 2 (February 8, 2021): 128–49. http://dx.doi.org/10.1108/ara-08-2020-0121.
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PurposeThe purpose of this study is to examine the effect of audit engagement partner's professional experience on audit quality. The authors also investigate the relationship between the audit partner's experience and audit fees in both Big 4 and non-Big 4 accounting firms.Design/methodology/approachSince the Public Company Accounting Oversight Board (PCAOB) officially enacted Rule 3211 in 2017, US accounting firms are required to disclose detailed information of engagement partners in Form AP (PCAOB, 2015b). The authors obtained a sample of 2,283 audit partners from Form AP and hand collected their individual professional experience data through Certified Public Accountant (CPA) database, corporate disclosure and social media sites (e.g. Linkedin). Econometric models with fixed effects are used in this study to test our hypotheses. Two-stage least square (2SLS) model is used in the robustness test.FindingsThe authors find that the relationship between audit engagement partner's professional experience and audit quality is concave. It indicates that audit quality is increasing during the early stage of engagement partners' career and then decreases as the partners approaching the late-career phase. Further, the authors find that partner's professional experience is positively associated with audit fees in non-Big 4 accounting firms but not significantly associated with audit fees in Big 4 accounting firms.Practical implicationsThe finding of how auditor experience impacts audit quality can be useful for accounting firms to better plan their staffing in auditing engagements. This study’s results are also helpful for small accounting firms to optimize their pricing strategy.Originality/valueThis study provides new empirical evidence about the relation between auditor professional experience and audit quality. Furthermore, the authors extend the literature of audit fee determinants by testing the joint effects of audit firm-level factors and auditor individual-level professional experience on audit fees.
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Al-Najjar, Basil. "Corporate governance and audit features: SMEs evidence." Journal of Small Business and Enterprise Development 25, no. 1 (February 12, 2018): 163–79. http://dx.doi.org/10.1108/jsbed-08-2017-0243.
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Purpose The purpose of this paper is to investigate the effect of corporate governance factors on audit features, namely, audit fees and the selection of Big 4 audit firms within the UK SMEs context. Design/methodology/approach The author uses different regression models to investigate the impact of corporate governance characteristics on audit features, and employs cross-sectional time series models as well as two-stage least squares technique. In addition, the author has used logit analysis to examine the effect of corporate governance factors on the selection of Big 4 audit firms. Findings The author provides new evidence that governance mechanisms in SMEs affect different audit features. The results show that corporate governance mechanisms are important in determining audit fees. The author detects a positive impact of board independence, audit meeting and board size on audit fees. The author also reports evidence that governance factors determine the selection of Big 4 audit firms. In particular, the author reports that independent directors and audit diligence positively affect the decision to select Big 4 audit firms. Originality/value This paper investigates the under-researched relationship between audit features and corporate governance using UK SMEs. In so doing, the author aims to provide new insights into this relationship within the SMEs context.
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Janvrin, Diane, James Bierstaker, and D. Jordan Lowe. "An Investigation of Factors Influencing the Use of Computer-Related Audit Procedures." Journal of Information Systems 23, no. 1 (March 1, 2009): 97–118. http://dx.doi.org/10.2308/jis.2009.23.1.97.
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ABSTRACT: We provide data on the extent to which computer-related audit procedures are used and whether two factors, control risk assessment and audit firm size, influence computer-related audit procedures use. We used a field-based questionnaire to collect data from 181 auditors representing Big 4, national, regional, and local firms. Results indicate that computer-related audit procedures are generally used when obtaining an understanding of the client system and business processes and testing computer controls. Furthermore, 42.9 percent of participants indicate that they relied on internal controls; however, this percentage increases significantly for auditors at Big 4 firms. Finally, our results raise questions for future research regarding computer-related audit procedure use.
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Bhattacharya, Arnab, and Pradip Banerjee. "An empirical analysis of audit pricing and auditor selection: evidence from India." Managerial Auditing Journal 35, no. 1 (January 6, 2019): 111–51. http://dx.doi.org/10.1108/maj-11-2018-2101.
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Purpose This paper aims to examine various factors affecting the pricing of audit services and the selection of auditors in the Indian audit market. This paper also aims to investigate the impact of financial distress conditions on the audit pricing and auditor choice decisions of a firm, particularly in the context of a developing economy. Design/methodology/approach The sample comprises 22,644 firm-years for 1,366 Indian firms from 1990 to 2015. The authors adopt ordinary least squares regression technique to model audit fee, and logistic regression technique to model auditor choice as a function of various factors relating to firm attributes and auditor characteristics. Findings This paper finds that auditors tend to charge an audit fee premium when they are affiliated to a Big 4 auditor, have industry specialization or jointly provide auditing and non-auditing services. Additionally, firms with larger boards, higher proportion of independent board of directors and CEO–Chairman separation are more likely to choose a Big 4-affiliated auditor. The results also suggest that financially distressed firms tend to pay significantly lower audit fees and are more likely to choose non-Big 4 auditors. Originality/value This paper is among the few studies which investigate how financial distress impacts the audit pricing and auditor choice decisions of a firm in the context of emerging economies. The findings of this paper raises serious concerns about the credibility of the audited financial statements and corporate governance mechanisms of firms undergoing financial distress. The empirical results of this paper have strong implications for practitioners, regulators and investors.
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Cannon, Nathan H., David N. Herda, and Thomas M. Puffer. "Big 4 Alumni's Attitudes and Behavior Toward their Former Firm." Current Issues in Auditing 14, no. 1 (October 22, 2019): P10—P15. http://dx.doi.org/10.2308/ciia-52642.
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SUMMARY This article summarizes a recently published academic study (Cannon, Herda, and Puffer 2019) that examines factors associated with Big 4 alumni's proclivity to benefit their former firm by recommending the firm to others as a potential service provider or employer (i.e., post-employment citizenship). Based on social exchange theory, our study predicts and finds that alumni who perceive their firm treated them fairly and supported them during their time with the firm are more committed to the firm, and therefore more likely to engage in post-employment citizenship. Although we find that firm commitment decreases after individuals exit the firm, our results suggest that the firm's alumni outreach efforts (both formal and informal) can help soften this decline. Practical implications for audit firms are discussed.
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Bepari, Md Khokan, and Abu Taher Mollik. "Effect of audit quality and accounting and finance backgrounds of audit committee members on firms’ compliance with IFRS for goodwill impairment testing." Journal of Applied Accounting Research 16, no. 2 (September 14, 2015): 196–220. http://dx.doi.org/10.1108/jaar-05-2013-0038.
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Purpose – The purpose of this paper is to examine the effect of audit quality on firms’ compliance with IFRS for goodwill impairment testing and disclosure. Differences in the compliance among the clients of Big-4 auditors and between the clients of Big-4 and non-Big-4 auditors are examined. This study also examines the effect of audit committee (AC) members’ accounting and finance backgrounds on firms’ compliance with IFRS for goodwill impairment testing and disclosure. Design/methodology/approach – Different univariate tests, multivariate regressions and fixed effect panel regressions have been used to examine the hypotheses. The sample includes 911 firm-year observations for the period of 2006-2009. Findings – A statistically significant difference in compliance levels has been found between the clients of Big-4 and non-Big-4 auditors. The compliance levels of the clients of Big-4 auditors have also been found to be significantly different. The findings also suggest that AC members’ accounting and finance backgrounds are positively associated with firms’ compliance with IFRS for goodwill impairment testing and disclosure. Research limitations/implications – The single country context and the single standard context limit the generalizability of the findings. Practical implications – The findings of this study have important implications for researches in accounting, finance and corporate governance that usually consider Big-4 auditors vs non-Big-4 auditors as a proxy for audit quality. The results also reinforce the importance of developing institutional mechanisms such as high-quality auditing or corporate governance (AC members’ expertise) to encourage firms’ compliance with IFRS. Originality/value – Firms’ compliance with IFRS for goodwill impairment testing is not essentially the same for the clients of all Big-4 auditors in Australia, suggesting that the quality of services provided by Big-4 auditors significantly differ from one another in enforcing their clients to compliance with IFRS. The lax enforcement on the part of auditors and the regulatory inaction in this regard may point to teething difficulties and systematic deficiencies in the move towards the impairment regime and fair value accounting. The findings also bear an important message for the move towards the harmonization of accounting practices.
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Habib, Ahsan, Haiyan Jiang, and Donghua Zhou. "Audit quality and market pricing of earnings and earnings components in China." Asian Review of Accounting 22, no. 1 (April 29, 2014): 20–34. http://dx.doi.org/10.1108/ara-05-2013-0034.
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Purpose – The purpose of this paper is to investigate the effect of audit quality on the market pricing of earnings and earnings components in China. Design/methodology/approach – The paper measures audit quality using three tiers of audit firm designation, namely International Big 4 audit firms, local Top 10 audit firms and, finally, the local second-tier audit firms. Earnings are decomposed into accruals and cash flow components and accruals are further decomposed into discretionary and non-discretionary accruals. Findings – The paper finds that, although earnings and its components are priced positively by the Chinese stock market, Big 4 audit does not provide any incremental benefit to clients in terms of market pricing of clients’ financial numbers. The paper finds a negative impact of local Top10 audit on the pricing of earnings in China. However, the paper finds no incremental effect of local Top 10 audit on the market pricing of earnings components. Originality/value – Although prior research in China has used modified audit opinion as the audit quality matrix, the paper considers market valuation of earnings and earnings components for firms audited by different categories of auditors.
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Sherwood, Matthew G., Albert L. Nagy, and Aleksandra B. Zimmerman. "Non-CPAs and Office Audit Quality." Accounting Horizons 34, no. 3 (February 1, 2020): 169–91. http://dx.doi.org/10.2308/horizons-18-072.
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SYNOPSIS During the time surrounding the Sarbanes-Oxley Act of 2002, the Big 4 firms either spun-off or downsized their consulting practices. However, in recent years, consulting service lines of the large accounting firms have seen a dramatic resurgence and growth. Regulators have taken notice of, and expressed concern over, this renewed focus on consulting. The accounting firms claim that such services enhance audit quality, mainly due to the prominent role of non-accounting specialists in today's external audit function. This study examines whether the availability of non-CPAs in U.S. Big 4 firm offices is associated with audit quality. We find that greater access to non-CPAs in the office is associated with higher audit quality and conclude that office audit quality is not just a function of audit-specific human resources but also the availability of non-CPAs to support audit engagement teams. JEL Classifications: M41; M42. Data Availability: All data are publicly available from sources identified in the study.
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Campa, Domenico. "“Big 4 fee premium” and audit quality: latest evidence from UK listed companies." Managerial Auditing Journal 28, no. 8 (August 30, 2013): 680–707. http://dx.doi.org/10.1108/maj-11-2012-0784.
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PurposeUsing the most recent observations (2005‐2011) from a sample of UK listed companies, This paper aims to investigate whether Big 4 audit firms exhibit a “fee premium” and, if this is the case, whether the premium is related to the delivery of a better audit service.Design/methodology/approachUnivariate tests, multivariate regressions and two methodologies that control for self‐selection bias are used to answer the proposed research questions. Data are collected from DataStream.FindingsFindings provide consistent evidence about the existence of an “audit fee premium” charged by Big 4 firms while they do not highlight any significant relationship between audit quality and type of auditor with respect to the audit quality proxies investigated.Research limitations/implicationsEvidence from this paper might signal the need for legislative intervention to improve the competitiveness of the audit market on the basis that its concentrated structure is leading to “excessive” fees for Big 4 clients. Findings might also enhance Big 4 client bargaining power. However, as the paper analyses only one country, generalizability of the results might be a limitation.Originality/valueThis study joins two streams of the extant literature that investigate the existence of a “Big 4 audit fee premium” and different levels of audit quality among Big 4 and non‐Big 4 clients. Evidence supports the concerns raised by the UK House of Lords in 2010 that the concentrated structure of the audit market could be the driver of “excessive” fees for Big 4 clients as it does not find differences in audit quality between Big 4 and non‐Big 4 clients.
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Fuerman, Ross D. "Comparing the Auditor Quality of Arthur Andersen to that of the Big 4." Accounting and the Public Interest 6, no. 1 (January 1, 2006): 135–61. http://dx.doi.org/10.2308/api.2006.6.1.135.
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This study compares the audit quality of Arthur Andersen with that of the Big 4 accounting firms. An expanded indicator of audit quality is developed based on the law of business misconduct literature and the legal process literature. A representation of audit quality is derived from an analysis of the legal actions initiated against these five large public accounting firms from 1996 to 2004. The legal action was partitioned into three year periods. In the first period, Arthur Andersen and the Big 4 evidenced no quality differential. In the second and third periods, the Big 4, in aggregate, rated higher on the audit quality indicator than did Andersen. The robustness of these findings is substantiated using multiple logistic regression and sensitivity analysis. When the individual firms are compared with Andersen, all four evidenced higher audit quality; three of the firms are significantly higher. This suggests that Andersen represents an outlier within the audit population. However, the analysis also indicates that overall audit quality declined in the period immediately following the passage of the Private Securities Litigation Reform Act of 1995. This suggests that the Sarbanes-Oxley Act provisions directed toward remedying auditing deficiencies is justified and not an overreaction to a “few bad apples.”