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research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction, 11.04 Industry Experience in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:The Effect of a Superior’s Perceived Expertise on the Predecisional Distortion of Evidence by AuditorsPractical Implications:Most importantly, the findings of this study educate on the audit quality implications of a subordinate making judgments with knowledge of their superior’s preference. While knowledge of a superior’s preference may negatively affect the objectivity of audit judgments, the findings suggest that is also has the potential to improve audit judgment quality. Second, possible cross-nation variation in audit judgment has important implications for the audit of multinational organizations and offshoring of audit work, among others.
Citation:Kim, S. and N. Harding. 2017. The Effect of a Superior’s Perceived Expertise on the Predecisional Distortion of Evidence by Auditors. Auditing: A Journal of Practice and Theory 36 (1): 109 – 127.
- research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.04 Industry Experience in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Auditor Tenure and Stock Price Idiosyncratic Volatility: The Moderating Role of Industry SpecializationPractical Implications:
This study shows that auditor tenure is associated with the incorporation of firm-specific information into stock prices, and it contributes to the debate on whether the mandatory rotation of audit firms is necessary, finding in favor of the learning effect of auditor tenure. In other words, this study suggests that audit firm rotation should not necessarily be mandatory. This study is also related to recent studies on the moderating effect of industry expertise on the relationship between tenure and audit quality; however, this study stands out from others because it focuses on investors’ perceptions of audit quality instead of actual financial reporting quality. Finally, the study contributes to the growing literature on the determinants of stock price idiosyncratic volatility, finding that auditor tenure is another important characteristic.
Citation:Su, L., Zhao, X., and Zhou, G. 2016. Auditor Tenure and Stock Price Idiosyncratic Volatility: The Moderating Role of Industry Specialization. Auditing: A Journal of Practice and Theory 35 (2): 147-166.
- research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.04 Industry Experience, 14.0 Corporate Matters, 14.01 Earnings Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Audit Quality and Analyst Forecast Accuracy: The Impact of Forecast Horizon and Other Modeling ChoicesPractical Implications:
This paper contributes to research examining the determinants and impacts of audit quality by identifying the limitations of aspects of metrics employed in recent research that could have been utilized by practitioners and suggesting useful alternate metrics for investigating the impact of audit quality on the properties of analysts’ forecasts, including the usefulness of audited financial information and the prediction of future performance.
Citation:Wu, Y. and Wilson, M. 2016. Audit Quality and Analyst Forecast Accuracy: The Impact of Forecast Horizon and Other Modeling Choices. Auditing: A Journal of Practice and Theory 35 (2): 167-185.
- research summary posted June 2, 2016 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 11.0 Audit Quality and Quality Control, 11.04 Industry Experience in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Audit Hours and Unit Audit Price of Industry Specialist Auditors: Evidence from KoreaPractical Implications:
The existing research is unclear about the mechanism behind the higher audit fees charged by the industry specialist auditors (ISAs). The fee premium can be explained either by higher audit hours or by higher audit fees per hour. Using Korean data, this study provides direct evidence of the source of the ISA fee premium. The results show ISAs spend more audit hours while charge lower unit price than non-ISAs, which indicates the ISA fee premium mainly comes from additional audit work performed by ISAs. One limitation of this study is the authors cannot differentiate the two potential explanations for the low unit price: cost savings arising from economies of scale or additional work performed by cheap audit labor.
Citation:Bae, G. S., S. U. Choi, and J. H. Rho. 2016. Audit Hours and Unit Audit Price of Industry Specialist Auditors: Evidence from Korea. Contemporary Accounting Research 33(1): 314-340.
- research summary posted July 30, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual, 11.0 Audit Quality and Quality Control, 11.04 Industry Experience in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Audit quality and the market value of cash holdings: the case of office-level auditor industry specialization.Practical Implications:
While theoretical literature has extensively examined the link between audit quality and firm value, very little empirical evidence has been provided as to the potential channels in which high-quality audits enhance firm value. This study extends and complements the existing line of research by providing useful insights into the role of audit quality in constraining managerial diversion or misuse of corporate cash resources. The results of this study are useful in assessing the effects of audit quality on firm value, specifically the market value of cash holdings.
Citation:Kim, J. B., J. J. Lee, and J. C. Park. 2015. Audit Quality and the Market Value of Cash Holdings: The Case of Office-Level Auditor Industry Specialization. AUDITING: A Journal of Practice & Theory 34 (2): 27-57.
- research summary posted March 2, 2015 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 11.0 Audit Quality and Quality Control, 11.04 Industry Experience in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Client-Auditor Supply Chain Relationships, Audit Quality, and Audit PricingPractical Implications:
The results of this study provide empirical evidence of an association between supply chain knowledge and improved audit quality, as well as audit efficiency when this knowledge exists at a local level. Audit firms often attempt to differentiate themselves by a certain level service and audit quality that can be provided based on specialized knowledge, such as industry experience. Supply chain knowledge can add a new dimension to auditor knowledge and specialization. By identifying an association between supply chain knowledge and audit quality and fees, this study demonstrates to audit firms an additional value-adding, quality-differentiating audit service.
For more information on this study, please contact Karla Johnstone.
Citation:Johnstone, K. M., C. Li, and S. Luo. 2014. Client-Auditor Supply Chain Relationships, Audit Quality, and Audit Pricing. Auditing: A Journal of Practice and Theory 33 (4): 119-166
- research summary posted March 2, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 11.0 Audit Quality and Quality Control, 11.04 Industry Experience in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Industry Audit Experts and Ownership Structure in the Syndicated Loan Market: At the Firm and Partner LevelsPractical Implications:
The results of this study are important for the PCAOB and other regulatory bodies tasked with considering the economic consequences of requiring an audit partner signature. The motivation behind the PCAOB’s proposal for the signature and disclosure is to increase transparency for interested parties who rely on the financial statements and accountability on the part of the audit partner. In this research, the authors focus on one important interested party, namely lenders, and find that lenders value industry audit experts at the partner level when structuring the ownership of syndicate loans. The findings add to the intense debate on the merits of the PCAOB’s proposal and can be helpful for regulators. The study also provides some evidence that industry audit expertise is viewed as a useful mechanism that mitigates information asymmetry problems faced by lenders in a syndicated loan.
For more information on this study, please contact Wei-Ren Yao.
Citation:Chin, C.L., W.R. Yao and P.Y. Liu. 2014. Industry Audit Experts and Ownership Structure in the Syndicated Loan Market: At the Firm and Partner Levels. Accounting Horizons 28(4):749-768
- research summary posted March 1, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.03 Impact of New Accounting Pronouncements, 11.0 Audit Quality and Quality Control, 11.04 Industry Experience in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Fair Value Measurements and Audit Fees: Evidence from the Banking IndustryPractical Implications:
Overall, the results support concerns expressed by some observers that greater use of fair value measurements for financial instruments will trigger increased audit fees. We believe our results validate the compliance cost concerns expressed by some preparers (i.e. higher audit fees), and provide interesting and timely evidence relevant to the ongoing debate regarding the increased use of fair value measurements for financial instruments (FASB 2010; ABA2010).
For more information on this study, please contact Michael Ettredge.
Citation:Ettredge, M. L., Xu, Y., & Yi, H. S. (2014). Fair value measurements and audit fees: evidence from the banking industry. Auditing: A Journal of Practice & Theory 33(3): 33-58.
- 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 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:National Level, City Level Auditor Industry Specialization and Cost of DebtPractical 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.
- 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 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Market Reaction to Auditor Switching from Big 4 to Third-Tier Small Accounting FirmsPractical 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.