Related party transactions and audit fees: the role of the internal audit function

Related party transactions (RPTs) are viewed as genuine transactions that rationally fulfil other economic demands of a company. However, RPTs can also be used to transfer wealth from minority shareholders to controlling shareholders. The existence of such transactions may deteriorate financial reporting quality, increase audit risk, and as a result increase audit fees. This study examines the relationship between RPTs and audit fees in Malaysia, where ownership is often concentrated within a controlling family and corporate governance mechanisms are poor. It also investigates the moderating effect of the internal audit function (IAF) on this relationship. We find that external auditors base their fees on the types of RPTs undertaken. Specifically, our results show that audit fees are higher for firms that undertake RPTs involving the sale and purchase of assets, goods, and services. We also document that external auditors rely on the IAF, and thus their fees are lower for firms that undertake RPTs and that have made a large investment in an IAF. Our study is the first to provide evidence that RPTs in Malaysian firms may be abused as a channel to facilitate tunnelling and that the IAF plays a vital role in controlling such transactions.     

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。     

Internal audit function quality and financial reporting: results of a survey on German listed companies

Most prior studies on internal audit function (IAF) quality and financial reporting have focused on the US setting and have found a positive association between IAF quality proxies and both financial reporting quality and audit efficiency. In this study, we apply the German setting that is characterized by a two-tier board system of corporate governance and different prerequisites for the serving-two-masters problem. This might weaken the IAF’s ability to monitor financial reporting-related processes. To analyze this, we use survey data to measure IAF quality in the German setting and run multiple regressions to examine the association of several IAF quality characteristics and a self-developed IAF quality score with financial reporting quality and audit efficiency. The results show that also in a two-tier system, a high-quality IAF is able to contribute to both financial reporting quality and audit efficiency. Our findings support the notion that the IAF serves as an essential element of effective corporate governance and plays an important role in financial reporting. Moreover, as a practical implication of interest to regulators and managers, we identify that the external certification of the IAF and internal audit-related certifications of IAF employees may contribute to higher financial reporting quality and lower audit fees.     

基于ERM框架的商业银行内部审计机制研究

内部审计作为公司治理、风险管理和控制结构的一部分,是对其它控制进行的再控制.由原来的"独立评价职能"转变为"风险管理和公司治理",内部审计在银行业中的作用越来越重要.在风险与效益并存的时代,现代银行业倡导全面风险管理理念.本文选取了全面风险管理的研究视角,对全面风险管理体系下的商业银行内部审计角色定位及作用机制进行研究.     

A Cascaded Inference Model for Evaluation of the Internal Audit Report*

This paper provides a normative framework for how external auditors should evaluate internal audit (IA) work, with a view to assessing the risk of material misstatement. The central issue facing the external auditor when evaluating IA work is the reliability of IA work. Reliability assessments are structured using the cascaded inference framework from behavioral decision theory, in which attributes of source reliability are explicitly modeled and combined using Bayes' rule in order to determine the inferential value of IA work. Results suggest that the inferential value of an IA report is highly sensitive to internal auditor reporting bias, but relatively insensitive to reporting veracity. Veracity refers to internal auditors' propensity to report truthfully, whereas bias refers to the propensity to misreport findings. Results also indicate that this sensitivity to reporting bias is conditional on the level of internal auditor competence, thus suggesting significant interaction effects between the objectivity and competence factors. Collectively, these findings suggest that the impact of source reliability attributes may be more complex than portrayed in the auditing standards and that recognizing these subtleties may lead to greater efficiency and effectiveness.     

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.     

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。     

Ceremonies of Governance: Perspectives on the Role of the Audit Committee

The widespread establishment of auditcommittees in large UK companies cannot be explainedby evidence of their effectiveness as a mechanism ofcorporate governance, since such evidence is sparse.In this paper, participants' accounts of auditcommittee activity are explored, using conceptsdeveloped in actor-network theory. The paper suggeststhat a possible explanation for the popularity ofaudit committees may be found in their ceremonialfunction, which, through a comforting display ofconcern for corporate governance standards, validatescompany legitimacy and enables access to resources forsurvival and growth.The paper briefly reviews the literature on auditcommittee effectiveness, noting its limitations, anddescribes a qualitative study of audit committeeactivity through the perceptions of participants –audit committee chairs and members, finance directors,internal and external auditors. The actor-networkconcept of `translation' is used to frame theseperceptions, highlighting the ceremonial components ofaudit committee meetings and the performance ofquestioning. It is argued that, aside from anysubstantive audit committee activity, this ceremonialperformance plays an important part in offeringcomfort and reassurance to investors and lenders.     

The Governance Role of Audit Committees: Reviewing a Decade of Evidence

Even though audit committees have traditionally been a key component of corporate governance regulation, the last decade has witnessed a greater emphasis on audit committee regulation and a parallel intensification of academic research on the subject. This review synthesizes recent empirical research seeking to investigate various aspects of audit committees’ governance role. The review is structured around current regulatory expectations of audit committees seeking to document the extent to which specific characteristics of good practice influence various components of audit committee effectiveness. It is found that larger and more independent audit committees as well as those with financial expertise are more likely to seek a higher level of external audit coverage and assurance. There is also evidence that more independent audit committees are associated with the purchase of lower levels of non‐audit services from auditors, thereby seeking to preserve the independence of the external audit process. There seems a consensus that more independent audit committees and those with greater accounting/financial expertise have a positive impact on the quality of financial statements. Evidence on the stock market reaction to audit committee issues suggests that investors both welcome the presence of audit committees and react positively when members are appointed with relevant expertise. It is also found that internal auditors view certain audit committee characteristics, specifically independence, expertise and frequency of meetings, as leading to more effective audit committee performance. In summary, therefore, this review documents a significant amount of evidence offering support to current regulations concerning the desired characteristics of audit committees.     

公司治理强度、审计力度与审计质量

自安然事件以来,公司治理和外部审计的重要性得到了前所未有的重视.本文构建了一个公司所有者与外部审计师之间的博弈理论模型,以分析均衡状态下公司治理强度、审计力度与审计质量之间的关系,并讨论所有者和审计师赔偿责任对博弈均衡的影响.我们特别引入了公司治理成本函数和审计成本函数,并同时考虑了公司所有者和审计师的赔偿责任.在本模型中,公司所有者对公司治理强度的决策和外部审计师对审计力度的决策共同影响审计报告对外部投资者的信息有用性(即审计质量),并最终影响了公司的成交价格.研究得到的主要结论是:(1)均衡状态下公司治理强度的增加有助于提升审计力度和审计质量;(2)所有者赔偿责任的增加只会提高公司成交价格,但不会影响博弈均衡和均衡状态下的审计质量;(3)审计师赔偿责任的增加并不一定导致所有者降低公司治理强度,且只有在特定情况下才能提升审计力度和审计质量.     

非标准审计意见对上市公司投资行为的影响

文章利用沪深两市A股非金融类上市公司2007—2015年数据,检验了非标准无保留审计意见(以下简称“非标意见”)对公司投资规模和投资效率的影响。结果发现,就投资规模而言,非标意见会导致公司投资规模显著降低;就投资效率而言,非标意见可以抑制公司的过度投资行为从而提高投资效率,但其也会加剧投资不足从而降低投资效率。因此,非标意见对投资过度和投资不足的影响是不同的。进一步研究表明,非标意见对投资的影响与公司产权性质、所在地区金融环境、融资约束有关。并且,非标意见对投资的影响具有长期性;此外,不同类型的非标意见对投资的影响是有差异的。其中,无法表示意见对投资的影响最为明显。     

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 Within the Corporate Governance Paradigm: A Cornerstone Built on Shifting Sand?

This paper is a case study‐based investigation of aspects of the current paradigmatic approach to ‘good’ corporate governance, with its focus on the interlinked roles of internal control and risk management procedures, internal audit and external audit, overseen and coordinated by a formal structure of board committees, in particular the audit committee. The evidence that we adduce from the study of four high‐profile cases of perceived accounting and governance failure provides limited assurance that this approach will in fact be cost‐effective or efficient in preventing further such cases of accounting and governance failure. Specifically, issues as to remuneration and fee dependence, lack of relevant knowledge and expertise, social and psychological dependence upon executive management appear to have significantly and negatively affected the quality of decision‐making of governance gatekeepers. This suggests that further consideration of relevant economic, institutional and cognitive/behavioural factors beyond the rational choice model of traditional economics should underpin future developments in required modes and structures of governance.     

公司治理、控制权性质与审计定价

借鉴Simunic的审计定价模型,构建关于审计定价影响因素的多元线性回归方程,并以沪深两市上市公司2007年数据为研究对象,对股权结构、公司治理与审计定价之间的关系进行实证检验.研究结果表明,总体而言,公司治理因素对中国上市公司审计定价的解释力有限,说明中国会计师事务所在决定审计收费时对被审计单位的公司治理因素考虑较少.具体而言,终极控制人为政府的上市公司审计费用较低,股权集中度、管理层持股比例与审计定价之间大体上呈U型关系,即股权适度集中和管理层适度持股最有利于降低审计定价,进一步的研究发现,管理层持股比例与审计定价的U型关系仅存在于非国有控股公司样本中.研究还发现,中国会计师事务所在确定审计费用时会结合公司控制权的性质考虑风险因素时审计定价的影响.     

Australian evidence on corporate governance attributes and their association with forward-looking information in the annual report

We investigate the role played by a firm’s corporate governance framework in the decision to voluntarily disclose forward-looking information in the published financial reports of Australian companies in 2000 and 2002. With respect to the year 2000, the corporate governance category, audit quality, consisting of the presence and independence of the audit committee, its meeting frequency, the use of a big 6 auditor and the auditor’s independence, is positively associated with the disclosure of forward-looking information. The corporate governance category, board committees, consisting of the appointment and independence of a compensation committee and the creation of a nomination committee, and the overall efficacy of the corporate governance system are also positively associated with the disclosure of forward-looking information. However, corporate disclosure does not seem to be driven by the same factors in 2002 since in that year none of the governance categories is significantly associated with the firm’s decision to publish forward-looking information in financial reports.

Audit committee and internal audit and the quality of earnings: empirical evidence from Spanish companies

Corporate scandals and failures such as Enron, WorldCom, etc. were highly catastrophic and had a terrible effect on stakeholders. The pressure of globalisation and the intense competition have lead to organisations encouraging good corporate governance. Organisations have to promote transparency and accountability of financial information. As Gramling et al. (J Account Lit 23:194–244, 2004) argued there are four important mechanisms of corporate governance include boards of directors, audit committees (among others) and internal and external audit functions. However, this paper will focus on the relationship between two corporate governance mechanisms (audit committee and internal audit function). Thus, our purpose is to analyse the relation between characteristics of the audit committee and internal audit function and earnings management measured as abnormal accruals to test the quality of financial statements. We hypothesise that the association between the effectiveness of the audit committee and the presence of an internal audit function and its relationship with this committee would indicate less opportunity for management to manipulate earnings. Using a sample of 108 non-financial Spanish companies that traded on the Madrid Stock Exchange between 2003 and 2006 (432 observations), we have found that the size and number of meetings of the audit committee had a significant negative association with earnings manipulations. Also, our results suggest that a negative relation between having an internal audit function and earnings management.     

“Good” corporate governance and the quality of internal auditing departments in Italian listed firms. An exploratory investigation in Italian listed firms

One of the most important issue relating to corporate governance reports refers to their ability to provide users with a complete set of information regarding the effective ability of an entity to achieve oversight objectives by the compliance to corporate governance practices required by a specific law or industry code. In addition, other features, such as the quality of the internal auditing function or the sensitivity of top management to issues relating to corporate internal controls and risk management, can also be taken into account when formulating a judgment on the quality of corporate governance practices. Is there an association between the compliance to codes and internal controls effectiveness? We propose to assess the quality of corporate governance through a proxy that considers several characteristics of internal audit departments and combines them to determine an Internal Audit Departments global quality index—IAD Index. To define IAD global quality we consider the effectiveness of an internal audit function analysing its operational aspects. The IAD Index is based on several signalling elements that previous literature assumed as proxies for quality of IADs which are grouped into four pillars: a formal quality index; a static quality index; an activity-related quality index; and a performance-linked quality index. We then test the IAD index on a sample of Italian listed firms and conclude that there are significant associations (positive and negative) between the degree of compliance to some corporate governance regulations for listed firms and the IAD Index for the sample being considered.     

The Application of Neural Networks and a Qualitative Response Model to the Auditor's Going Concern Uncertainty Decision*

An auditor gives a going concern uncertainty opinion when the client company is at risk of failure or exhibits other signs of distress that threaten its ability to continue as a going concern. The decision to issue a going concern opinion is an unstructured task that requires the use of the auditor's judgment. In cases where judgment is required, the auditor may benefit from the use of statistical analysis or other forms of decision models to support the final decision. This study uses the generalized reduced gradient (GRG2) optimizer for neural network learning, a backpropagation neural network, and a logit model to predict which firms would receive audit reports reflecting a going concern uncertainty modification. The GRG2 optimizer has previously been used as a more efficient optimizer for solving business problems. The neural network model formulated using GRG2 has the highest prediction accuracy of 95 percent. It performs best when tested with a small number of variables on a group of data sets, each containing 70 observations. While the logit procedure fails to converge when using our eight variable model, the GRG2 based neural network analysis provides consistent results using either eight or four variable models. The GRG2 based neural network is proposed as a robust alternative model for auditors to support their assessment of going concern uncertainty affecting the client company.     

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.     

审计委员会与信息披露质量:来自中国上市公司的经验证据

本文选择深交所信息披露考评结果与证券分析师盈余预测精度作为上市公司信息披露质量的衡量指标,使用2006年深市上市公司的相关数据,实证检验了审计委员会与上市公司信息披露质量之间的关系.研究发现,与未设置审计委员会的上市公司相比,设立审计委员会的上市公司具有更高的信息披露质量,审计委员会的独立性对提高上市公司信息披露质量有着积极的促进作用.本文的政策含义是,在进一步完善资本市场的过程中应重视上市公司审计委员会建设.