Audit committee perspectives on mandatory audit firm rotation: evidence from Canada

This study examines audit committee (AC) members’ perspectives on mandatory audit firm rotation (MAFR), mandatory audit partner rotation, ways in which ACs monitor auditor independence and objectivity, and the costs associated with switching audit firms. In-person interviews with AC members in Canada were conducted to improve our understanding of the reasons underlying AC members’ positions on MAFR. All AC members interviewed in this study were adamantly opposed to MAFR. MAFR was perceived as a threat to their shareholder-granted authority to make audit firm appointment decisions. Participants believe that their professional judgment and observations are the most effective means of ensuring auditor independence and view MAFR as an unnecessary intervention. We explain these results using self-determination theory. Our findings were also used to develop a conceptual model of AC relationships with external auditors and financial management.     

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.     

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。     

Zum Einfluss der Mandatsdauer des Abschlusspr��fers auf die Pr��fungsqualit?t

This study provides evidence on the relation between auditor tenure and audit quality. It is motivated by calls for mandatory auditor rotation, which are based on concerns that longer auditor tenure reduces auditor independence and thus audit quality. Earnings management is used as proxy for audit quality and is measured by absolute and signed performance-adjusted-Jones-model discretionary accruals. Multivariate analyses, controlling for additional firm and auditor characteristics indicate lower earnings management with longer auditor tenure. This result suggests that, in the current environment, mandatory limitations on the length of auditor-client-relationship would result in lower audit quality.     

Fuzzy quality-team formation for value added auditing: A case study

Value-added (quality) auditing is emerging as one of the most powerful tools for continuous quality improvement, with the introduction of the ISO 9001:2000 and ISO 19011 standards that focus team-based audits, proper auditor skills, process auditing, and effectiveness, etc. Formation of an effective quality audit team (QAT) based on the required auditor skills is therefore the initial stage of the value added auditing. QATs audit organizations at different locations with varying auditing requirements in order to evaluate an organization's own quality system (first party part audits according to IEC9001 Clause 8.2.2). The QAT consists of a lead auditor and one or more auditors that have the required skills in varying levels for the execution of an audit. For a successful audit, the formation of a QAT is vital since each audit team must at least fulfill the minimum requirements and skills needed for a specific audit. In this case study, a fuzzy mathematical-programming model and a solution algorithm based on “simulated annealing” is proposed for the formation of QATs. This is one of the first attempts in the literature to form this kind of teams analytically. Example problems are also solved in the paper to present the application of the proposed approach.     

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.     

?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.     

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.     

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.     

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.     

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.     

Setting Tolerable Misstatements When Auditing Aggregated Accounts*

Generally accepted auditing standards require auditors to plan audits of clients' account balances. If accounts are to be sampled, then part of this planning must include setting the tolerable misstatement for each account or class of transactions to be sampled. Although classical sampling approaches provide certain advantages, they have not been widely used because they are viewed as complex and difficult to implement. We present a remedy to these difficulties in an efficient, easily implemented optimal solution method for the problem of setting tolerable misstatements given constraints on tolerable misstatements for individual account balances as well as the overall audit. Further, our method suggests when the materialities of certain accounts or the materiality of the overall audit are irrelevant to the problem. Several example auditing problems demonstrate both our solution approach and the settings in which our approach provides a more effective or more efficient sampling plan than that provided by monetary unit sampling.     

An inspection game of internal audit and the influence of whistle-blowing

In this paper we analyse how whistle-blowing affects fraudulent behaviour of managers while the company instigates imperfect internal audit to detect the fraud. To do so, we employ in a first step a non-cooperative inspection game to analyse fraudulent behaviour of a manager controlled by an internal auditor. In a second step we introduce exogenous whistle-blowing of a manager’s employee to aid the auditor to reveal the fraud. In a third step, the two-person inspection game is extended to a three-person approach with endogenous whistle-blowing. Our novel results are that the intensity of internal audit is always lower with whistle-blowing than without and that whistle-blowing renders the manager to act less fraudulently than compared to the basic inspection game if and only if she is unaware of the whistle-blower’s expected pay-off and the efficacy of internal audit is sufficiently low.     

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 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.     

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.     

供应链质量管理中抽样检验决策的非合作博弈分析

保证产品质量是建立与维护供应链企业间长期稳定合作关系的重要基础.本文提出一种供应链质量管理中抽样检验决策的非合作博弈模型,以分析供应链的下游制造商应如何根据供应商产品的质量水平确定其抽检方案.仿真结果表明,供应链背景下抽检方案不同于单个企业各自优化的制造商抽检方案.考虑供应链企业间互动关系的抽检方案与不考虑这种关系的独立抽检方案相比,能有效降低抽样成本,并使供应商和制造商获得更大的期望收益.     

Prüfungshonorare in Deutschland – Determinanten und Implikationen

The audit fees available since 2005 as a consequence of the Bilanzrechtsreformgesetz (commercial code reform act) show an extremely high supplier concentration on the German audit market of publicly listed companies. This justifies the assumption of audit fees above perfect market equilibrium prices. However, the complete collection and multivariate regression analysis of all relevant audit fee and client data document a 24 % decrease in audit fees in 2005 and an average 15 % decrease in the two subsequent years due to auditor changes. This can be interpreted as an indicator for price competition. In addition, the audit fee data shows that the audit fee decreases are only partially compensated by subsequent increases. As a consequence, there is no evidence for lowballing at present. Further time series are necessary to show if the current trend is sustainable.     

External audit and goodwill write-off

Building on agency theory, we investigate whether and how salient external auditor characteristics (size, audit fees, non-audit fees, tenure) impact on the reported goodwill write-off. We use a sample of US firms applying SFAS 142. We find that Big-4 auditors are more prone to limit underestimated write-offs rather than overestimated write-offs and that auditors require higher fees from companies underestimating the write-offs. The findings are consistent with the auditors’ preference for more conservative goodwill and earnings values, which reduce their litigation and reputation costs. This preference can converge with the managerial interest to use unnecessary overestimated goodwill write-offs for earnings management purposes (e.g. to smooth the income or take big baths). Our findings do not support the hypotheses that non-audit fees and tenure affect the goodwill write-off. Our paper contributes to prior literature on external audit and financial accounting choices. Our study suggests that leniently audited discretional fair value estimates are likely to compromise the role of auditing (and of financial reporting) as an external control mechanism. Our study can contribute to the current policy debate around goodwill accounting.     

The social auditor

The auditor is essentially a social animal. However, beyond this lies a type of audit called social audit which tries to strike a balance between an organization's social and more traditional business objectives. After the polar contrasting views of monetarist Friedman amd Marxism have been outlined, we concentrate on considering social audit in the more common mixed economy. With no statutory or other requirement for external social audit, the onus is on organizations to take their own initiatives. Internal resistance often needs to progress through five distinct phases to reach acceptance. Some organizations appoint consumer advocates, such as Esther Peterson. There is an underlying statutory basis to social audits, but if this is extended we enter the domain of external pressure groups, such as the private independent Social Audit and the statutory National Consumer Council. Finally, the scope and motivation for internalizing social audit is discussed.