Auditing Section Research Summaries Space

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  • The Auditing Section
    An Analysis of Forced Auditor Change: The Case of Former...1
    research summary posted May 7, 2012 by The Auditing Section, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications, 04.0 Independence and Ethics, 04.07 Audit Firm Rotation 
    Title:
    An Analysis of Forced Auditor Change: The Case of Former Arthur Andersen Clients
    Practical Implications:

    The results of this study suggest that the auditor changes resulting from the demise of Andersen did not result in improved financial reporting quality and transparency for the former Andersen clients that parted ways with their former audit practice.  This implies that the mandatory rotation of auditors may not yield an increase in financial statement quality.  This result should be of interest to audit regulators and standard setters, as well as practitioners seeking to comment on proposed mandatory rotation regulations. 

    Additionally, the results indicate that switching costs in non-forced auditor change settings likely outweigh agency benefits of changing auditors in many cases.  This result may be of interest to shareholders, managers, and audit committees in their respective roles related to auditor selection.

    Citation:

    Blouin, J., B. M. Grein, and B. R. Rountree. 2007. An Analysis of Forced Auditor Change: The Case of Former Arthur Andersen Clients. The Accounting Review 82 (3): 621-650.

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  • The Auditing Section
    Are the Reputations of the Large Accounting Firms Really...
    research summary posted April 23, 2012 by The Auditing Section, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications, 06.0 Risk and Risk Management, Including Fraud Risk, 06.09 Litigation Risk 
    Title:
    Are the Reputations of the Large Accounting Firms Really International?
    Practical Implications:

    This study provides an important implication for audit firms in maintaining their worldwide brand name reputation. The results suggest that, for global audit firms, the damage to auditor reputation in one country may spill over and cause concern among investors about the quality of their services in other countries. Further, the damage to reputation is greater where the demand for auditing and assurance is higher.

    Citation:

    Cahan, S. F., D. Emanuel, and J. Sun. 2009. Are the Reputations of the Large Accounting Firms Really International? Evidence from the Andersen-Enron Affair.  Auditing: A Journal of Practice and Theory 28 (2):  199-226. 

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  • The Auditing Section
    Auditor Change and Auditor Choice in Nonprofit Organizations
    research summary posted April 16, 2012 by The Auditing Section, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications 
    Title:
    Auditor Change and Auditor Choice in Nonprofit Organizations
    Practical Implications:

    The results of this study confirm the importance of management reputation issues in auditor change decisions, while also extending our understanding of nonprofit organizations.  For nonprofits, a change in auditor is more likely when the organization’s operational structure changes.  As the organization grows and becomes more reliant on federal funding, the likelihood of changing auditors, particularly to bigger audit firms, increases.

    Citation:

    Tate, S. L., 2007. Auditor changes and auditor choice in nonprofit organizations.  Auditing:  A Journal of Practice & Theory 26 (1): 47-70.

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  • Jennifer M Mueller-Phillips
    Auditor industry expertise and cost of equity
    research summary posted March 10, 2015 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications 
    Title:
    Auditor industry expertise and cost of equity
    Practical Implications:

    The results of this study should be of interest to policymakers. An August 2011 Public Company Accounting Oversight Board (PCAOB 2011) concept release asked for comments on the advisability of using mandatory auditor rotation to enhance auditor independence. It aroused concerns from commenters that such rotation could adversely affect clients benefiting from auditor industry specialization. Although these comments did not elaborate on the nature of the benefits from industry specialization, this study’s evidence that equity investors value industry-expert auditors is relevant to the debate about the desirability of mandatory auditor rotation

    For more information on this study, please contact Jagan Krishnan.

    Citation:

    Krishnan, J., C. Li, and Q. Wang. 2013. Auditor industry expertise and cost of equity. Accounting Horizons 27(4): 667-691.

  • Jennifer M Mueller-Phillips
    Auditor Ratification: Can’t Get No &...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications 
    Title:
    Auditor Ratification: Can’t Get No (Dis)Satisfaction
    Practical Implications:

    The results of this study are important for audit firms to consider given interest from regulators on the role of shareholder ratification on auditor selection.  The evidence indicates that proxy advisor recommendations significantly influence the number of dissenting auditor ratification votes.  Unfavorable recommendations are more likely when there are concerns regarding auditor independence rather than audit quality.

    Citation:

    Lauren M. Cunningham (2017) Auditor Ratification: Can't Get No (Dis)Satisfaction. Accounting Horizons: March 2017, Vol. 31, No. 1, pp. 159-175.

  • The Auditing Section
    Auditor Specialization, Auditor Dominance, and Audit Fees:...
    research summary posted May 7, 2012 by The Auditing Section, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications 
    Title:
    Auditor Specialization, Auditor Dominance, and Audit Fees: The Role of Investment Opportunities
    Practical Implications:

    The results may be useful to practitioners in developing a client portfolio and in determining bids for audit fees, as they provide empirical evidence on the consequences of investing in industry expertise under certain conditions.  For example, these results show that high industry IOS and high IOS homogeneity are associated with higher audit fees, which implies that auditors can benefit from investments to develop industry expertise in industries with such conditions.  However, these results also imply that it is more difficult to dominate industries with high IOS homogeneity, since companies in these industries have high incentives to protect proprietary information from other auditor clients. 

    The results of this study may also be relevant for company managers and audit committees in that they provide evidence on the determinants of audit fees and the possible within-industry transfer of proprietary knowledge to competitor firms through the firms' auditor.

    Citation:

    Cahan, S. F., J. M. Godfrey, J. Hamilton, and D. C. Jeter. 2008. Auditor Specialization, Auditor Dominance, and Audit Fees: The Role of Investment Opportunities. The Accounting Review 83 (6): 1393-1423.

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  • Jennifer M Mueller-Phillips
    Does Audit Fee Homogeneity Exist? Premiums and Discounts...
    research summary posted October 29, 2013 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications, 05.0 Audit Team Composition, 05.03 Partner Rotation 
    Title:
    Does Audit Fee Homogeneity Exist? Premiums and Discounts Attributable to Individual Partners
    Practical Implications:

    The results of this study point to further complications that could arise from mandatory partner rotation policies. Because the assumption underlying this policy is that all partners from any given firm are interchangeable and that the benefits of enhanced auditor independence are not expected to lead to negative consequences for the client, this study creates a conflict. The author found that different partners from the same firm do provide different levels of quality in the eyes of the client which lead to discounts and premiums in audit fees. As a result, partner rotations could lead to unforeseen costs including clients having to switch audit firms to find the preferred level of quality as well as audit firms trying to poach partners from competitors in order to satisfy clients. These added costs should be considered when assessing the value of partner rotation policies.

    For more information on this study, please contact Stuart D. Taylor.
     

    Citation:

    Taylor, S. 2011. Does audit fee homogeneity exist? Premiums and discounts attributable to individual partners. Auditing: A Journal of Practice and Theory 30 (4): 249-272.

  • The Auditing Section
    Does Auditor Industry Specialization Matter? Evidence from...
    research summary posted April 16, 2012 by The Auditing Section, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications, 05.02 Industry Expertise – Firm and Individual 
    Title:
    Does Auditor Industry Specialization Matter? Evidence from Market Reaction to Auditor Switches
    Practical Implications:

    This study offers an important implication for audit firms that industry specialization, in addition to brand name, is perceived as valuable by investors. The results are also useful for regulators when examining auditor switching by firms. Finally, the results are useful to investors in that they show significant market reactions to various types of auditor switching.

    Citation:

    :  Knechel, R. W., V. Naiker, and G. Pacheco. 2007. Does Auditor Industry Specialization Matter? Evidence from Market Reaction to Auditor Switches.  Auditing: A Journal of Practice and Theory 26 (1):  19-45. 

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  • Jennifer M Mueller-Phillips
    Market Reaction to Auditor Switching from Big 4 to...
    research summary posted November 10, 2014 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications, 11.0 Audit Quality and Quality Control, 11.04 Industry Experience, 11.08 Proxies for Audit Quality 
    Title:
    Market Reaction to Auditor Switching from Big 4 to Third-Tier Small Accounting Firms
    Practical Implications:
    • Our results suggest that the market has confidence in companies choosing third-tier audit firms to enhance the economic benefit in terms of better audit services.
    • The results confirm the regulator’s encouragement of selecting smaller audit firms to improve competition, and the results will ease the reluctance that companies have in choosing a smaller audit firm.
    • The results confirm that the market viewed the regulatory changes in 2004 as an improvement to audit quality of the small audit firms, which included SOX 404 audits of internal controls over financial reporting, PCAOB inspections of audit firms, and a shorter filing deadline for Form 8-K.

    For more information on this study, please contact Kenneth J. Reichelt.

    Citation:

    Chang, H, C. S. A. Cheng, and K. J. Reichelt. 2010. Market reaction to auditor switching from big 4 to third-tier small accounting firms. Auditing: A Journal of Practice and Theory 29 (2): 83-114.

  • Jennifer M Mueller-Phillips
    National Level, City Level Auditor Industry Specialization...
    research summary posted February 24, 2015 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications, 11.0 Audit Quality and Quality Control, 11.04 Industry Experience 
    Title:
    National Level, City Level Auditor Industry Specialization and Cost of Debt
    Practical Implications:

    The results of this study are important for public companies to consider when choosing auditors.  The results clearly show that city-level industry specialist auditors are associated with lower cost of debt. Public companies which are thinking about engaging debt financing should seriously consider hiring city-level industry specialist auditors. The results of this study are also important for auditors. City-level industry specialist auditors can use this finding to promote themselves to existing and potential clients. Non city-level industry specialist auditors can consider the benefit of becoming city-level industry specialist auditors.

    For more information on this study, please contact Xie.

    Citation:

    Li, C., Y. Xie and J. Zhou. 2010. National level, city level auditor industry specialization and cost of debt. Accounting Horizons 24 (3): 395-417.

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