The role of audit technology and extension of audit procedures in strategic auditing

This article develops game-theoretic hidden action models for examining the role of noisy audit technology and the extension of audit procedures in deterring material irregularities. We model two different types of games: (1) a game in which the auditor makes the acceptlreject decision after the primary audit, by sometimes going contrary to the audit signal, and (2) a game in which the auditor makes the accept/reject decision after the primary audit or after extending the audit. Nash strategies are analyzed, and the equilibrium behavior involves mixed strategies on the part of the auditor and the auditee. The key results of this analyses are: (1) increasing precision in audit effectiveness may result in increasing material irregularities, and (2) the increase in material irregularities can be avoided if the audit technology, that is, audit effectiveness and audit efficiency, exceeds the required critical values.     

Changing bonuses and the resulting effects of employees’ incentives to an inspection game

The following paper analyses an intraorganizational conflict in materials management between a manager, a controller and the company management. By using a game theoretic approach, this paper especially seeks to answer the question: ‘Do bonuses change employees’ incentives when the focus is directed at the control level of company management?’ This analysis is based upon an application of a three-person inspection game. Within the three-person game a partial influence of a variation of penalties and bonuses is measured analytically. A simultaneous variation of the bonuses for the subordinated players, as the incentive effect to guarantee rational behaviour, is presented here as a simulation. While different intervals of bonus values, which also affect the payoff of the company management, and their influence on the equilibrium probabilities are examined, it becomes apparent that bonuses are able to neutralize each other in their effect on improved decision-making behaviours of the manager (inspectee) and the controller (inspector). But also a diverse variation leads to positive and negative effects on the manager’s behaviour.     

社会共治下的食品企业失信经营问题三方演化博弈研究

针对食品企业失信经营的问题,借鉴日常活动理论,从机会、动机和控制方法三个方面,对企业失信经营进行了分析。在监管机构传统监管与共治监管两种方式下,基于演化博弈方法,构建了食品企业、消费者、监管机构的三方演化博弈模型。依据企业失信经营获利的大小,从博弈均衡上对食品企业失信经营问题进行了研究,并运用Matlab对博弈模型进行了分析验证。通过对两种监管方式的效率和应用范围进行深入分析,研究结果表明处罚和赔偿可有效降低食品企业失信经营的动机;当企业失信经营动机较小时,传统监管方式即可有效威慑食品企业,从而使其选择诚信经营策略;当企业失信动机较大时,即便使用共治监管方式仍无法有效监管食品企业失信经营。     

External audit and bankruptcy prediction

In this paper, we investigate the relationship between external auditor characteristics and the likelihood of bankruptcy. We use a sample of US public companies to analyse whether auditor attributes are associated with default. We also test whether the inclusion of such attributes in bankruptcy prediction models improves their predictive ability. We find that firms audited by industry-expert auditors, large audit firms and long-tenured auditors are less likely to default. Firms with higher audit fees are more likely to default. Our results also show that the inclusion of auditor attributes significantly increases the predictive ability of bankruptcy prediction models. This paper contributes to the literature about auditing and bankruptcy prediction. Our results suggest that the auditor attributes can provide predictive signals concerning a default risk and that an external audit can play a relevant role in early warnings of financial distress. Our study also suggests that bankruptcy prediction models can become more effective if they are complemented with audit data. Our results are of interest to market participants, auditors, regulating authorities, banks and other financial institutions that are interested in credit risk assessment.     

Auditing,consulting, and audit market concentration

In its recently published Green Paper, the European Commission (Audit policy: lessons from the crisis. Brussels, 2010) discusses various methods to enhance the reliability of audits and to re-establish trust in the financial market. The Commission primarily focuses on increasing auditor independence and on reducing the high level of audit market concentration. Based on a model in the tradition of the circular market matching models introduced by Salop (Bell J Econ 10(1):141–156, 1979), we show that prohibiting non-audit services as a measure intended to improve auditor independence can have counter-productive secondary effects on audit market concentration. In fact, our model demonstrates that incentives for independence and the structure of the audit market are simultaneously determined. Because market shares are endogenous in our model, it is not even clear that prohibiting non-audit services indeed increases an auditor’s incentive to remain independent.     

基于信号博弈的卖方欺诈行为分析

本文主要基于信号博弈的卖方欺诈行为进行研究，假设拍卖中可能存在欺诈型和诚实型两种卖家，其中欺诈行为有概率发生在第二价格拍卖中：欺诈型卖方冒充竞拍者递交仅次于最高价的报价从而获得额外收益。两种卖家根据各自效用选择拍卖形式：第一价格或者第二价格。而竞买者将卖者的选择作为信号，更新对卖方类型的判断，然后制定报价策略。这是一个买卖方信号交叉影响的过程。考虑到拍卖过程中买方价值相关性，本文在建立模型中参考了关联价值原理。针对该模型进行分析，得出了不同情况下的买卖方策略，并且研究了买方报价、买方判断、卖方收益三者之间的关系。文中利用贝叶斯公式对双方的策略选择问题进行预测，与单纯的概率分布方法相比，更具实践价值。     

审计在基金会治理中能够有效发挥作用吗?

本文以2005年至2009年中国全国基金会为样本,研究基金会捐赠收入与外部审计师选择之间的关系,即在中国慈善市场上,外部监督机制之一的外部审计是否具有治理效应及治理职能如何有效实现。实证结果表明:当基金会选择百强事务所审计时,能够有效实现审计的治理职能,吸引更多的捐赠者进行捐赠;当基金会选择民政部中标事务所审计时,不能有效实现审计的治理职能,从而不能显著增加捐赠收入。上述结论在一定程度上验证了在慈善市场中,外部审计具有治理效应,其有效治理效应依赖于高质量的审计。     

The value of audit quality in public and private companies: evidence from Spain

This paper compares the value of audit quality, proxied by the selection of a big N auditor, to the external claimholders of private and public companies. Although the combination of a lower ownership concentration of public companies, the greater demand for financial information quality about these companies and their higher litigation risk can result in the expectation that audit quality should be more valuable for public than for private companies, the greater information asymmetry between the managers and the external stakeholders and the unavailability of alternative mechanisms for monitoring the managers can make external audit more valuable for the external claimholders of private companies. In this paper, we test these two competing views by analysing if banks and lenders take into account auditor selection in the formation of the cost of debt. Our results support the second view: we find that only private companies obtain a lower cost of debt when they are audited by a high-quality auditor. These results are robust to both endogeneity and unobserved firm-specific heterogeneity.     

The influence of mutations: an evolutionary inspection game with three strategic actors

Suboptimal business decisions lead to corporate cost increases. The basis of the following study is a game theoretical model of Fandel and Trockel (Eur J Oper Res 226:85–93, 2013a), which analyses the relationship between bonuses and financial penalties in a three-person inspection game and the measures that counteract suboptimal decisions. In the present article we investigate from evolutionary perspectives whether the strategic behaviour of the actors described in an inspection game can be invaded by mutants and what risks emerge as a result. In a first step each of the three decision variables of the players will be discussed. It will become apparent that corporate optimal behaviour is realised when the actions of the business management or the controlling department are fixed. In a second step it will be shown that in games with three strategic variables mutations can undermine the solutions. In a third step we will investigate the model in consideration of monotonic payment and monotonic positive payment functions and divide the area of the solutions into octants to which we will allocate the influence of the mutations and demonstrate the circumstances under which a solution tending towards optimal corporate behaviour can be generated.     

Das Erfordernis der Umsatzunabh?ngigkeit und die Konzentration auf dem deutschen Markt f��r Abschlusspr��ferleistungen

The German market for services provided by audit firms is characterised by a growing concentration over the last decades. Due to numerous scandals, an auditor is obliged to meet stricter independence regulations. An audit firm has to reject a client if it received more than 15% of its total income from the listed company to be audited at any time during the last five years and at the same time expects to receive more than 15% in the current period. It can be argued that this regulation accelerates the concentration process, while small and midsize accountants, which serve only a small number of clients, are suppressed. This analysis is based on the data of 442 Prime-Standard audits for the periods 2005, 2006 and 2007. The results show that the Big4-audit firm obtained an increasing market share in terms of clients (77% (2005), 83% (2007)) and total fees (96% (2005), 97% (2007)). Furthermore, it is noticeable, that in particular NonBig4-audit firms exceed the critical threshold of 15% during the periods under investigation. As a result hereof such firms must leave the market after five years. Hence, the German commercial code`s independence regulations may affect the audit market structure. The results suggest that an enhancement of auditor independence through income thresholds is in conflict with a reduction of market concentration. Furthermore, it can be observed that an increase in fees earned from a particular client does not impact auditor independence as long as the income threshold is not exceeded. In addition, internal auditor rotation, auditor engagement by supervisory boards, and the implementation of audit committees could also result in an increase of concentration.     

A game theoretical analysis of an extended manager-auditor-conflict

Horst Albach has dealt in his research very often with problems of the quality of balance auditing (Albach 1992, 2003). Sometimes his considerations show close relations to the current crisis of the financial market and its consequences. Some of his contributions were already made in times, when it was not yet expected that the dependency of auditors from clients could once become a serious deficit of auditing. Those aspects also become relevant now in connection with the crisis of the financial market.The misgivings that arise continuously in this context with regard to the correctness of submitted balance sheets have sparked off intense discussions in two directions in the Federal Republic of Germany. Whereas the USA has already realised a prohibition of this nature to a great extent through statutory provisions, a broad spectrum of additional consultancy services is still permissible in the Federal Republic of Germany in spite of similar initiatives on the part of legislators.The present paper analyses methodically in the framework of an extended manager–auditor game how the Nash equilibrium is altered in a non-cooperative two-person game through the behaviour of the players, if the supervisory board, as an exogenous party, detects with a specific probability the incorrect certification of a substantively incorrectly prepared balance sheet. At the same time, payoffs from consultancy services for both players are included in the analysis here. However, with a greater probability of detection of an incorrectly certified incorrect balance sheet, and through the reductions of consultancy payoffs, the supervisory board can work towards the product of audit and publication quality being increased.     

审计师关注客户所在地区社会信任水平吗? ——基于Pecking Order模型的研究

文章利用CGSS调查数据度量客户所在地区的社会信任水平,进而考察其对审计师决策的影响。文章首先分别考察了社会信任水平与审计定价、出具非标审计意见的倾向、审计师变更之间的关系,结果发现,公司所在地区的社会信任水平与审计定价、审计师变更均呈显著负向关系,表明审计师会对位于高社会信任地区的客户收取更低的审计费用、审计契约更为稳定,但社会信任与审计师出具非标意见的倾向之间没有显著关联。有序Logistic检验结果表明,在审计定价和审计师变更决策之间,审计师存在优先选择次序:对于低社会信任地区客户,他们会优先通过提高审计收费的手段来控制相关风险。只有在风险超出其承受力、不能通过提高审计费用来控制时,才会放弃客户。此外,文章还发现,地区法治水平能够缓解社会信任对审计师决策的影响。这一研究有助于加深社会信任与审计师决策之间关系的理解,并有助于理解审计师的风险管理策略。     

The impact of corporate governance on auditor choice: evidence from Germany

Statutory audits are only beneficial if the appropriate audit quality is both provided and perceived by the users of audited financial statements. On the one hand, Big 4 audit firms are commonly viewed as producing high quality audits. On the other hand, regulators complain about the high market share of Big 4 audit firms. In this context, it is of interest to examine the drivers of a Big 4 audit firm selection. Despite extensive prior research, there is still a lack of findings form Continental European countries and on the impact of corporate governance on auditor choice. This paper on hand is intended to fill the related research gap. Thus, our study identifies variables that determine the auditor choice of large German listed companies. Based on a sample of 432 firm-year observations for the period 2010–2014, our logistic regression analysis suggests that the corporate governance structure influences auditor choice significantly. Notably, the annual meeting frequency of the audit committee and the size of the supervisory board are positively associated with the engagement of a Big 4 audit firm. However, the meeting frequency of the supervisory board and the compliance to the German corporate governance code are negatively related to the choice of a Big 4 auditor. Additionally, the proportion of female supervisory board members does not exert a significant impact. The results remain stable when the DAX30 observations, for which statutory audits are exclusively performed by Big 4 audit firms, are excluded. The main contribution of our paper is, that it sheds light on the impact of corporate governance variables not analyzed by prior research, like supervisory board characteristics, deviations from a corporate governance code, or the female quota, in a Continental European setting, and that it mainly indicates a complementary relationship. Despite the peculiarities of the German setting, the two-tier corporate governance system and the low level of investor protection, the findings of our study are not only relevant for Germany, since many other Continental European countries are characterized by a similar environment. The study’s findings are of particular interest for regulators when addressing audit market structure problems.     

Audit quality and earnings management in less developed economies: the case of Saudi Arabia

This paper aims to determine if significant associations exist between audit quality and earnings management in less developed economies, providing their various shortcomings and differences. Five different measures of audit quality (auditor size, auditor industry specialization, auditor opinion, auditor change and timeliness of auditor report) were examined based on a sample of 337 non-financial Saudi listed firms from 2006 to 2009. The absolute value of discretionary accruals is used as a proxy for earnings management by using a cross-sectional variation of the Kothari model. The results of this research indicate that only auditor opinion indicates earnings management practice. The results support the argument that auditors are powerless in front of managerial opportunistic activities. Issues that may impair audit quality in Saudi Arabia are discussed.     

公司治理、声誉机制和上市公司违法违规行为分析

本文首先通过建模分析了公司治理结构在约束上市公司违法违规行为中的作用,然后以我国上市公司在2001-2002年间受处罚事件为样本,用Logit模型检验了公司治理和声誉机制对上市公司违法违规行为的约束作用,发现公司第一大股东集中持股有利于约束违法违规行为,但是声誉机制的作用甚微。此外,以CROA为代表的公司业绩指标与上市公司违法违规概率之间存在显著负相关关系。     

Earnings management and audit quality: stakeholders’ perceptions

This paper examines the perceptions of Libyan Commercial Banks’ (LCBs) stakeholders regarding the role of the external auditor in relation to earnings management (EM). A total of 28 semi-structured interviews were carried out with a range of LCB stakeholders comprising preparers of financial statements, users, regulators and academics. A questionnaire survey of stakeholders which yielded 102 Responses (response rate 53%) was also carried out. A variety of views were held which varied to some extent according to stakeholder group. A widely held perception amongst interviewees was that the auditor has the ability to detect EM practices but may not be able to prevent it. However questionnaire respondents were, in aggregate, more confident of the auditor’s ability to deter EM due to the influence of the audit report. The paper provides insights into stakeholders’ perceptions of the quality of bank audits. The findings are of particular relevance to regulators, and specifically, the Central Bank of Libya. Perceptions of audit quality raise questions about its guidance and regulations especially in connection with audit firm rotation. Perceptions of audit quality, and therefore, of the credibility of financial statements should be of interest to all stakeholders. The importance of the banking sector for society has been amply demonstrated in recent years. A well-functioning audit function is a key component of its regulation. To the best of our knowledge, this paper is the first to examine issues related to banks’ audit quality and audit firm rotation in Libya.     

Experimental evidence on external auditor reliance on the internal audit

With the revised version of ISA 610 (revised 2013), external auditors now face both requirements and guidance addressing their responsibilities when relying on the internal audit function (IAF). The reliance decision of an external auditor has important economic consequences and implications for the efficiency and effectiveness of the annual audit. Using an experimental design, we explore how German external auditors’ reliance decisions regarding the IAF are affected by varying levels of environmental factors, like client business risk, effectiveness of the internal control system, and quality of the corporate governance. Furthermore, the experiences of external auditors in collaborating with an IAF are taken into consideration. The results indicate main effects for each factor and a two-way interaction between the effectiveness of the internal control system and the quality of corporate governance. Specifically, a strong internal control system can compensate for weaknesses in corporate governance with respect to the confidence of external auditors in the IAF. Also, the type of audit procedure influences the willingness of auditors to rely on the IAF, and the inherent risk of the examined transaction strengthens the negative impact of client business risk on the reliance decision. Moreover, past experiences of external auditors with an IAF have a significant impact on their reliance decision. Overall, the findings suggest that organizations can foster internal–external auditor coordination by enhancing corporate governance effectiveness and strengthening the internal control system.

     

?konomie des Abschlusspr��ferwechsels

In this state-of-the-art article we survey the analytical and empirical work on the economic determinants and consequences of auditor changes. First, we define the term ??auditor change?? and touch on the legal constraints affecting auditor changes in Germany and in the USA. Additionally. we discuss the corresponding disclosure requirements associated with auditor changes in these countries. Auditor changes can be triggered by the client or by the auditor. We identify four categories under which auditor change incentives can be classified: (1) changes in contractual relationships of the client which in turn can cause a change in demand for audit quality; (2) changes of information possessed by the client or auditor concerning certain attributes of the audit; (3) changes in certain characteristics of the audit and (4) changes in regulation. We use this classification to structure our discussion of analytical models and empirical evidence. Turning to the consequences of auditor changes, we summarize the findings of the prior literature to show that capital market participants react on auditor changes and that they differentiate between both the initiator of auditor changes and the incentives to change auditor. We conclude with a discussion of some of the limitations of the current literature on auditor changes and identify some possible avenues for future research.     

Einfluss der Mandatsdauer des Abschlussprüfers auf ergebniszielgr??enorientierte Bilanzpolitik

This study examines whether the length of auditor-client-relationship affects audit quality. It is motivated by recent calls for mandatory auditor rotation in Europe which are based on concerns that a longer auditor tenure reduces audit quality. Earnings management is used as proxy for audit quality. It is measured by the firms’ success to achieve earnings benchmark targets. A situation in which an abnormal high proportion of firms just meet the benchmark and an abnormal low proportion of firms just miss the benchmark is interpreted as earnings management. Analysed benchmark targets are the reporting of small profits (loss avoidance) and the reporting of small positive earnings increases. Multivariate analyses indicate a higher success for benchmark beating with longer auditor tenure. This result suggests that, in the current environment, mandatory limitations on the length of auditor-client-relationship could result in higher audit quality.     

经理行为偏差与企业绩效激励指标的确定

股东在面对具有行为偏差的经理时,如何设计剩余收益作为激励指标,以促使双方的目标一致,一直是学界和实务界关注的一个问题。如果股东继续沿用传统的基于公司资本成本率计算得到的剩余收益,将使得损失厌恶的经理投资不足,过度自信的经理投资过度。为了改进投资决策,股东需要针对不同行为特征类型的经理设计较公司资本成本率更低或更高的激励相容资本成本率,以有效激励经理做出符合股东利益的投资决策。