Auditing Section Research Summaries Space
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research summary posted June 26, 2017 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor ChangesTitle:Auditor Changes and the Cost of Bank DebtPractical Implications:Currently, bank loans account for more than half of the total debt financing in the United States. The results from this study indicate that there is an increase in loan costs for companies within the following year of an auditor change. This is a factor companies should consider when applying for loans after a switch.
Citation:Francis, Bill B., D. M. Hunter, D. M. Robinson, Michael N. Robinson, and X. Yuan. 2017. “Auditor Changes and the Cost of Bank Debt”. The Accounting Review. 92.3 (2017): 155.
Home:http://commons.aaahq.org/groups/e5075f0eec/summary
- research summary posted May 30, 2017 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 03.0 Auditor Selection and Auditor Changes, 11.0 Audit Quality and Quality Control, 11.11 Impact of Firm and External Inspection ProgramsTitle:Spatial Competition in Local Audit Markets and the Fallout on Deloitte from the 2007 PCAOB CensurePractical Implications:
The results from this study demonstrate that product differentiation in the form of market leadership and industry specialization may not provide a firm the power to mitigate the adverse consequences of a PCAOB censure.
Citation:Boone, J. P., I. K. Khurana, and K. K. Raman. 2017. Spatial Competition in Local Audit Markets and the Fallout on Deloitte from the 2007 PCAOB Censure. Auditing, A Journal of Practice and Theory 36 (21): 1-19.
- research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergersTitle:Shareholder Votes on Auditor Ratification and Subsequent Auditor DismissalsPractical 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 while shareholders, through auditor ratification voting, are not responsible for the acceptance or dismissal of a firm’s auditor, subsequent auditor dismissals do appear to be influenced by increased shareholder resistance. A one percent increase in shareholder votes against auditor ratification is associated with a four percent increase in the likelihood of auditor dismissal within the following year.
Citation:Abhijit Barua, K. Raghunandan, and Dasaratha V. Rama (2017) Shareholder Votes on Auditor Ratification and Subsequent Auditor Dismissals. Accounting Horizons: March 2017, Vol. 31, No. 1, pp. 129-139.
- research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor QualificationsTitle:Auditor Ratification: Can’t Get No (Dis)SatisfactionPractical 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.
- research summary posted August 30, 2016 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern DecisionsTitle:Audit Report Restrictions in Debt CovenantsPractical Implications:
Private debt lenders are more likely to include a covenant that prohibits the borrower from receiving an audit report with going-concern modifications (GCAR) when the borrower has poor creditworthiness and the loan term is long. The auditor choice is more likely to be specified in the loan agreement when a GCAR covenant is included. The borrower with a GCAR covenant experiences both increased audit fees and higher probability of getting a GCAR when financial distress occurs. The results imply the GCAR covenant may complement traditional financial covenants in protecting the lenders but comes with a cost borne by the borrowers. It also shows the lenders’ use of audit reports can influence the auditors’ behavior.
Citation:Menon, K., and D. D. Williams. 2016. Audit Report Restrictions in Debt Covenants. Contemporary Accounting Research 33 (2): 682–717.
- research summary posted May 31, 2016 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 11.0 Audit Quality and Quality ControlTitle:Investor Heterogeneity, Auditor Choice, and Information SignalingPractical Implications:
This study is directly related to research on institutional factors that affect firms’ auditor choice and the overall audit quality in the market. It also stresses how investors’ knowledge in auditor quality could potentially affect firms’ auditor choice when investors are not allowed to choose auditors directly, which is currently an under-researched area. The paper also suggests that it is necessary to control for investor heterogeneity in archival studies on the market reactions to auditor choice and auditor switch; furthermore, this paper adds to the discussion on limitations of regulations.
Citation:Wei, X., X. Xiao, and Y. Zhou. 2015. Investor Heterogeneity, Auditor Choice, and Information Signaling. Auditing: A Journal of Practice and Theory 34 (3): 113-138
- research summary posted May 31, 2016 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor Qualifications, 05.0 Audit Team Composition, 05.08 Impact of Office SizeTitle:Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit FeesPractical Implications:
The results of this study are important for regulators concerned about the lack of competition in the audit market for large publicly-traded companies. These data indicate that audit firm associations can increase competition in this sector of the market by providing small firms with the necessary resources to adequately audit large, global, and complex audit clients. These findings should also be of interest to small audit firms interested in better serving larger audit clients. Lastly, these results should be of interest to corporate governance bodies and investors interested in the relationship between audit firm type and audit quality.
Citation:Bills, K. L., L. M. Cunningham, and L. A. Byers. 2016. Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees. The Accounting Review 91 (3): 767-792.
- research summary posted May 31, 2016 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.01 Auditor QualificationsTitle:Non-Big 4 Local Market Leadership and its Effect on CompetitionPractical Implications:
The results of this study are important to audit policymakers, academics, and practitioners. Though Non-Big 4 firms audit fewer publicly traded companies, the results indicate that they are still able to develop a reputation on their full book of business that enables them to become market leaders. In addition, policymakers’ efforts to increase Non-Big 4 market share may not work nationwide. The authors show that certain local characteristics impact the likelihood of Non-Big 4 local leadership, which suggests that targeted efforts may be more beneficial than nationwide efforts. Finally, the results imply that though the presence of a Non-Big 4 local market leader creates downward fee pressure on audit firms, Big 4 and Non-Big 4 firms are not substitutes as Big 4 firms still earn a fee premium in these markets.
Citation:Keune, M.B., B.W. Mayhew, and J.J. Schmidt. 2016. Non-Big 4 local market leadership and its effect on competition. The Accounting Review. 91(3): 907-931.
- research summary posted March 31, 2016 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 07.0 Internal Control, 07.03 Reporting Material Weaknesses, 12.0 Accountants’ Reports and Reporting, 12.06 Consequences of Adverse 404 OpinionsTitle:Internal Control Opinion Shopping and Audit Market Competition.Practical Implications:
The study results are important to regulators, practitioners, and academics. The findings show that internal controls opinion shopping appears to occur among firms that have clean internal control opinions prior to a restatement. In addition, clients have the incentive to manipulate the audit process, via internal control opinion shopping, due to the increased focus and oversight on internal controls reporting. Finally, auditor dismissals that occur late in the fiscal period are more likely to be associated with internal control opinion shopping.
Citation:Newton, N. J., J. S. Persellin, D. Wang, and M. S. Wilkins. 2016. Internal Control Opinion Shopping and Audit Market Competition. The Accounting Review 91 (2): 603–623.
- research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergers, 11.0 Audit Quality and Quality Control, 12.0 Accountants’ Reports and Reporting, 12.03 RestatementsTitle:Restatements: Do They Affect Auditor Reputation for Quality.Practical Implications:
This study offers insights into how restatements by one client may impact an auditor’s other clients. The authors find evidence suggesting that when an auditor’s clients restate their financial statements, the auditor’s reputation for audit quality suffers. Non-restating clients experience a small negative market reaction around the restatement date and a higher likelihood of dismissing that auditor. These findings may inform audit firms and their clients about the potential negative consequences of restatements by other clients.
Citation:Irani, A.J., S.L. Tate, and L. Xu. 2015. Restatements: Do They Affect Auditor Reputation for Quality. Accounting Horizons 29 (4): 829-851.
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- 01.0 Standard Setting
- 01.01 Changes in Reporting Formats
- 01.02 Changes in Audit Standards
- 01.03 Impact of New Accounting Pronouncements
- 01.04 Impact of 404
- 01.05 Impact of SOX
- 01.06 Impact of PCAOB
- 01.07 Impact of SEC Actions
- 02.0 Client Acceptance and Continuance
- 02.01 Audit Fee Decisions
- 02.02 Client Risk Assessment
- 02.03 Management Integrity Assessments
- 02.04 Predecessor Auditor Factors
- 02.05 Business Risk Assessment - e.g., industry, IPO, complexity
- 02.06 Resignation Decisions
- 03.0 Auditor Selection and Auditor Changes
- 03.01 Auditor Qualifications
- 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergers
- 04.0 Independence and Ethics
- 04.01 Scope of Services
- 04.02 Impact of Fees on Decisions by Auditors & Management
- 04.03 Non-Audit Services
- 04.04 Moral Development and Individual Ethics Decisions
- 04.05 Ethics and Consultation
- 04.06 Reporting Ethics Breaches – Self & Others
- 04.07 Audit Firm Rotation
- 04.08 Impact of SEC Rules Changes/SarbOx
- 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours
- 05.0 Audit Team Composition
- 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation
- 05.02 Industry Expertise – Firm and Individual
- 05.03 Partner Rotation
- 05.04 Staff Hiring, Turnover and Morale
- 05.05 Diversity of Skill Sets e.g., Tenure and Experience
- 05.06 Qualifications of Engagement Quality Reviewers
- 05.07 Impact of 150-hour requirement
- 05.08 Impact of Office Size
- 05.09 Group Decision-Making
- 05.10 Impact of Diversity - e.g., gender - on Group Decision Making
- 06.0 Risk and Risk Management, Including Fraud Risk
- 06.01 Fraud Risk Assessment
- 06.02 Fraud Risk Models
- 06.03 Failure Risk Models
- 06.04 Management Integrity
- 06.05 Assessing Risk of Material Misstatement
- 06.06 Earnings Management
- 06.07 SAS No. 99 Brainstorming – process
- 06.08 SAS No. 99 Brainstorming – effectiveness
- 06.09 Litigation Risk
- 06.10 Impact of office size
- 07.0 Internal Control
- 07.01 Scope of Testing
- 07.02 Assessing Material Weaknesses
- 07.03 Reporting Material Weaknesses
- 07.04 Assessing Remediation of Weaknesses
- 07.05 Impact of 404 on Fees and Financial Reporting Quality
- 08.0 Auditing Procedures – Nature, Timing and Extent
- 08.01 Substantive Analytical Review – Effectiveness
- 08.02 Sample Selection – use of statistical sampling
- 08.03 Conclusions Based on Samples
- 08.04 Auditors’ Professional Skepticism
- 08.05 Evaluating Accruals/Detection of Abnormal Accruals
- 08.06 Earnings Management – Detection and Response
- 08.07 Interim Testing Procedures – Nature, Timing and Extent
- 08.08 Projecting Interim Testing Conclusions Year End
- 08.09 Impact of Technology on Audit Procedures
- 08.10 Confirmation – Process and Evaluation of Responses
- 08.11 Reliance on Internal Auditors
- 09.0 Auditor Judgment
- 09.01 Audit Scope and Materiality Judgments
- 09.02 Documentation Specificity
- 09.03 Adequacy of Evidence
- 09.04 Going Concern Decisions
- 09.05 Failure Risk Models
- 09.06 Adequacy of Disclosure
- 09.07 GAAP Departures
- 09.08 Evaluation of Errors – Statistical and Non-statistical
- 09.09 Impact of Consultation on Judgments
- 09.10 Prior Dispositions/Biases/Auditor state of mind
- 09.11 Auditor judgment in the workpaper review process
- 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections
- 09.13 Recognition vs. Disclosure
- 10.0 Engagement Management
- 10.01 Budgeting and Audit Time Management
- 10.02 Materiality and Scope Decisions
- 10.03 Interaction among Team Members
- 10.04 Interactions with Client Management
- 10.05 Interactions with Audit Committee Members
- 10.06 Audit Fees and Fee Negotiations
- 11.0 Audit Quality and Quality Control
- 11.01 Supervision and Review – Effectiveness
- 11.02 Engagement Quality Review – Processes and Effectiveness
- 11.03 Management/Staff Interaction
- 11.04 Industry Experience
- 11.05 Training and General Experience
- 11.06 Working Paper Review – Conduct, Biases and Predispositions
- 11.07 Attempts to Measure Audit Quality
- 11.08 Proxies for Audit Quality
- 11.09 Evaluation of Evidence
- 11.10 Impact of Quality Reviewers
- 11.11 Impact of Firm and External Inspection Programs
- 11.12 Impact of National Office on Auditor Decisions
- 11.13 Partner incentive schemes
- 12.0 Accountants’ Reports and Reporting
- 12.01 Going Concern Decisions
- 12.02 Quarterly Reviews
- 12.03 Restatements
- 12.04 Investigations
- 12.05 Changes in Reporting Formats
- 12.06 Consequences of Adverse 404 Opinions
- 12.07 Attestation Services
- 13.0 Governance
- 13.01 Board/Audit Committee Composition
- 13.02 Board/Financial Experts
- 13.03 Board/Audit Committee Tenure
- 13.04 Board/Audit Committee Compensation
- 13.05 Board/Audit Committee Oversight
- 13.06 Board/Audit Committee Processes
- 13.07 Internal auditor role and involvement in controls and reporting
- 14.0 Corporate Matters
- 14.01 Earnings Management
- 14.02 Corporate Whistle Blowers
- 14.03 Interim Reporting
- 14.04 MD and A Language/Signaling
- 14.05 Earnings Targets and Management Behavior
- 14.06 CFO Tenure and Experience
- 14.07 Executive Compensation
- 14.08 Press Release Language and Signaling
- 14.09 CEO Tenure and Experience
- 14.10 CEO Compensation
- 14.11 Audit Committee Effectiveness
- 15.0 International Matters
- 15.01 Audit Partner Identification by Name
- 15.02 IFRS Changes – Impacts
- 15.03 Audit Partner Rotation
- 15.04 Audit Firm Rotation
- 15.05 Sustainability Services