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    Does a Lack of Choice Lead to Lower Quality? Evidence from...
    research summary posted March 11, 2015 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 11.0 Audit Quality and Quality Control 
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    Title:
    Does a Lack of Choice Lead to Lower Quality? Evidence from Auditor Competition and Client Restatements
    Practical Implications:
    • This study, “address the association between MSA-level auditor competition and audit quality” which has seldom been investigated by prior literature. Such has implications for both regulators and audit market participants.
    • This study, “significantly extends recent research dealing with MSA-level competition by investigating a more direct, ‘bright line’ measure of audit quality—financial statement restatements.”
    • This study’s results, “lend empirical support to the conclusions of the GAO (2003, 2008) studies, which indicate that audit quality does not necessarily suffer in the presence of less competitive audit markets.” In fact, as is asserted in the study’s conclusion, “audit quality, as proxied by the existence of restatements, is lower when audit competition is higher.”

    For more information on this study, please contact Nathan J. Newton.

    Citation:

    Nathan J. Newton, Dechun Wang, and Michael S. Wilkins (2013) Does a Lack of Choice Lead to Lower Quality? Evidence from Auditor Competition and Client Restatements. AUDITING: A Journal of Practice & Theory: August 2013, Vol. 32, No. 3, pp. 31-67.

    Keywords:
    auditor competition; audit markets; restatements.
    Purpose of the Study:

    This study examines the relationship between audit firm competition and the quality of audit reports. As is asserted in the study’s introduction, “Despite evidence that the dominant accounting firms tend to provide the best audits, regulators and market participants have expressed concern that audit quality may be impaired when audit markets are concentrated.” Thus, the purpose of this study, “is to address this issue empirically by investigating how competition among audit firms in local markets affects the quality of services that auditors provide to their clients.”

    Design/Method/ Approach:
    • In order to test its hypothesis, this study measures, “audit market competition from 2000 to 2009 at the metropolitan statistical area (MSA) level.”
    • Study measures, “audit quality using financial statement restatements, where the subsequent identification of misstatements resulting in a restatement indicates that the engagement auditor performed a lower-quality audit.”
    Findings:

    This study finds, “that higher auditor competition is associated with lower audit quality.”

    • Clients located in MSAs with a more competitive audit market are more likely to restate earnings because of a GAAP failure, with the association driven by a higher likelihood of restatements that have a negative net effect (NNE) on the financial statements.
    • Study does not find any association between auditor competition and the likelihood of restatements that have a positive net effect (PNE) on the financial statements.
    Category:
    Audit Quality & Quality Control, Auditor Selection and Auditor Changes