auditor characteristics and audit quality

This page was processed by aws-apollo-l100 in. Earnings management and investor protection: an international comparison, National level, city level auditor industry specialization and cost of debt, How strategic conformity interacts with innovation: an empirical study on Korean manufacturing firms from the perspective of optimal distinctiveness, Journal of Open Innovation: Technology, Market, and Complexity, Auditor industry specialization and audit quality: the role of client strategy, Discussion of the quality of accruals and earnings: the role of accrual estimation errors, Organizational Strategy, Structure and Process, Strategy Safari: A Guided Tour through the Wilds of Strategic Management. Finally, Section 5 presents our conclusions. Specifically, we examine how five audit firm- and office-level characteristics, such as Big 4 membership, industry specialist auditor, local auditor, new auditor (i.e., anauditor on the initial audit engagement with a client), and audit office size, influence audit quality in the period before and after SOX. 10 No. 4 No. 7, pp. In this study, the moderator variable is the client strategy. They must have the best and most thorough knowledge of business, systems, developments, etc. The research hypotheses were analyzed using a multivariate regression model and panel data. Second, the experimental results of this research can contribute to literature on the strategic management and the financial reporting quality. We first find that audit fee premiums for Big 4 auditors, industry specialist auditors, local auditors, new auditors, and large office size auditors increased significantly in the post-SOX period. The adjusted R-squared, which indicates the explanatory power of the regression model for the dependent variables ADA and CFADA is 68 and 62% respectively. Chi, H.Y. In the GMM technique, the heterogeneity of variance and autocorrelation can be considered simultaneously. Jones, J. The coefficient of the interaction variable in the Model (2) was used to test the second hypothesis. 3, pp. Business strategy is very important in the development of a company and determines the direction of its progress and development over time. SD=0.592) in China based on research by Yuan etal. The effects of auditor characteristics on audit quality before and after the enforcement of Sarbanes-Oxley Act. 1, pp. Business strategy refers to how companies compete in an industry or competitive market (Olson etal., 2005). Another limitation is that my sample consists of nonprofit organizations and may not be generalizable to for-profit firms. The research results of Mashaykhi etal. https://doi.org/10.1108/JPBAFM-10-2019-0157. This is in line with research of Ardini (2010), Ilamiyati and Suhardjo (2012) and Saripudin, Herawaty, and Rahayu (2012). You may be able to access teaching notes by logging in via your Emerald profile. (2016) point out that expert auditors can better assess the deviant client accounting policies and procedures because non-specialist auditors in assessing the actual financial performance of the client try to compare the client's performance with a similar company in the industry. 29 No. strategy deviation) moderates the relationship between auditor characteristics and financial reporting quality. An important factor that can diminish this purpose is auditor tenure, because as auditor tenure increases, the auditor becomes more dependent on the client and financial reporting quality decreases. In many ways, I think auditors get the best of both worlds: we combine steadfast integrity with tech-savvy innovation. The results of previous empirical research also confirm that auditor knowledge of the industry affects the quality of financial reporting (Minutti-Meza, 2013). The client business strategy was measured using the resource allocation index method. However, as the auditor-client relationship increases, the auditor can rely less on management estimates and become more independent of management because of the special expertise the auditor has acquired from the firm. In this research, we examine the relationship between audit committee characteristics and audit and non-audit fees paid to auditors throughout the first year of the . DeFond, M. and Zhang, J. The results of the heteroscedasticity test indicate that heteroscedasticity is present in all research models. We first find that audit fee premiums for Big 4 auditors, industry specialist auditors, local auditors, new auditors, and large office size auditors increased significantly in the post-SOX period. 25 No. Overall, our study shows that the effect of SOX on audit quality is not homogeneous across different types of auditors and two proxies for audit quality. 89-103. (2018), Auditor industry specialization and audit quality: the role of client strategy, Empirical Research in Accounting, Vol. 1, pp. The results of this study indicate the association of the client's business strategy with the relationship between the auditor characteristics and the financial reporting quality. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. and Bello, A. Palmrose, Z.V. (2015), Are there adverse consequences of mandatory auditor rotation? 's (2018) study. The residuals from the following regression are used as proxies for financial reporting quality. By continuing you agree to the use of cookies. 1, pp. In other words, there is a hypothesis of a knowledge gap between auditors with a high tenure and those with a low tenure. (2008), Audit partner tenure, audit firm tenure, and discretionary accruals: does long auditor tenure impair earnings quality?, Contemporary Accounting Research, Vol. 162 No. 2, pp. (2010), National level, city level auditor industry specialization and cost of debt, Accounting Horizons, Vol. After collecting data from the comprehensive database of all listed companies (CODAL [1]), the analysis was performed using Eviews software. 92-103. (2020) examine the relationship between a firm's business strategy and its corporate social responsibility (CSR) performance. The study concludes that audit quality moderates the relationship between board characteristics and audit report lag of listed non-financial companies in Nigeria and recommended strict adherence . Journal of Public Budgeting, Accounting & Financial Management. In other words, previous studies have not examined the association of client business strategy with the relationship between auditor characteristics (i.e. 24 No. Mashayekhi, B., Omrani, H. and Akhoundi, O. Specifically, we examine how five audit firm- and office-level characteristics, such as Big 4 membership, industry specialist auditor, local auditor, new auditor (i.e., anauditor on the initial audit engagement with a client), and audit office size, influence audit quality in the period before and after SOX. Evidence from the Italian experience, Client size, auditor specialization and fraudulent financial reporting, The impact of deviant strategy on corporate innovation performance: the moderating role of equity incentives and market competition, 6th International Conference on Financial Innovation and Economic Development (ICFIED 2021). Chen etal. 7, pp. Using a sample of U.S. nonprofit organizations, where the identity of the auditor in charge of the audit is revealed, I investigate whether individual auditor characteristics (gender, engagement load, and tenure) are associated with audit quality. Soroushyar, A. Before estimating regression models and testing research hypotheses, it is necessary to determine the appropriate regression model to test research hypotheses using F-Limer and Hausman tests. Almutairi, A.R., Dunn, K.A. Poner, M.E. Thus, the auditor work will be better and audit quality will increase. 27 No. The plan, released today, sets out the areas the FMA will focus on when reviewing the quality of regulated audits, and contributing to the integrity . (2013), Firm characteristics and financial reporting quality of quoted manufacturing firms in Nigeria, International Journal of Accounting, Banking and Management, Vol. 5 No. (1978), Organizational Strategy, Structure and Process, McGraw-Hill, New York. 45-64. 71-97. (2010). Before the Iranian Revolution, international auditing firms (i.e. (2018) in the Iranian capital market show that a company's business strategy moderates the relationship between auditor industry specialization and audit quality. 934-948. Hassan, S.U. and Yoo, J.W. Alexandria Claypole 09 May 2022 Internal auditors are a crucial pillar of good governance, risk management and controls in any organisation. An expert auditor is a person who has acquired knowledge and experience of the audit process in a particular industry. Carcello, J.V. and Hambrick, D.C. (1997), The external ties of top executives: implications for strategic choice and performance, Administrative Science Quarterly, Vol. This study contributes to regulators, practitioners, investors, and academics by examining the effect of SOX on audit quality in a comprehensive way. However, ambiguity or overconfident managers cause a company to deviate from industry strategy norms (Tang etal., 2011). Auditor size and audit quality, Journal of Accounting and Economics, 3 (3 . auditor industry specialization and auditor tenure). auditor tenure). The users of accounting information can use quality accounting information to make economic decisions. Li, C., Xie, Y. and Zhou, J. Investors must consider the auditor characteristics when selecting companies listed on the TSE. From . 1 No. Audit quality refers to the extent to which an auditor's independence, integrity, and objectivity impact auditors' opinions on the quality of financial statements (Baah & Fogarty, 2018). Lim, M.S., Kim, C.Y. This study examines whether and how a client's business strategy can affect the relationship between auditor characteristics and financial reporting quality. Yuan etal. Statistical tests, such as the F-Limer test and Hausman tests, need to be used in panel data to identify the appropriate technique. (2011) and Yuan etal. 69 No. This study contributes to regulators, practitioners, investors, and academics by examining the effect of SOX on audit quality in a comprehensive way. In addition, in previous studies conducted in Iran and other countries, two dominant frameworks (i.e. Based on this, cash flow-adjusted Jones model (CFADA) was created. The results of testing the second hypothesis indicate that the positive relationship between auditor tenure and financial reporting quality is greater in companies that deviate from the strategy. However, this law was implemented in Iran in 2001 and led to the establishment of the Iranian Association of Certified Public Accountants (IACPA). Jaggi, B., Gul, F.A. 415-445. Another caveat of this study is that the tenure variable is truncated compared to prior literature (e.g. Compared to the strategy deviation (i.e. The second hypothesis as follows: The positive association of auditor tenure on the financial reporting quality increases when companies deviate from their business strategy. The client strategy deviation is based on the company-realized resource allocation model provided by Mintzberg (1978) and Mintzberg etal. We first find that audit fee premiums for Big 4 auditors, industry specialist auditors, local auditors, new auditors, and large office size auditors increased significantly in the post-SOX period. 48 No. 51 No. In the first step, it is necessary to choose between the least-squares regression (OLS) and panel data methods. Mintzberg, H., Ahlstrand, B. and Lampel, J. Tang, J.Y., Crossan, M. and Rowe, W.G. 2023 - 2 7 The Financial Markets Authority (FMA) - Te Mana Ttai Hokohoko - will conduct yearly audit quality reviews (AQR) of every licensed audit firm in a refreshed Auditor and Regulation Oversight Plan 2023-2026. The remainder of this paper is recognized as follows. Introduction 2. Accordingly, the F-Limer test was performed. Managers of companies listed on the TSE should consider the relationship of the auditor's characteristics to increase the quality of financial reporting when selecting an auditor. (2019), Does business strategy impact a firm's information environment?, Journal of Accounting, Auditing and Finance, Vol. In the first hypothesis, it was suggested that deviation from the company's business strategy can improve the positive association of auditor industry specialization and financial reporting quality. Higher residual values represent a lower quality of financial reporting. Poner, 1980; Miles and Snow, 1978) have been used to measure business strategies. (2017), Business strategy and auditor reporting, Auditing: A Journal of Practice and Theory, Vol. The mean and standard deviation for the discretionary accruals variable based on the adjusted Jones model (ADA) are 0.109 and 0.118, and for the discretionary accruals variable based on the cash-flow-adjusted Jones model (CFADA) are 0.083 and 0.100, respectively. 779-817. The empirical results show that female auditors are more likely to report internal control deficiencies (ICDs) and issue qualified audit opinions (QAOs) to nonprofits. L. E. (1981). The following regression was used. 4 Big firms) were active in Iran. However, a strategy deviant (heterogeneity) is created when the company's strategy differs from that of similar companies in the industry and deviates from the industry norm. We also highlight that increased audit fee premiums for some types of auditors do not accompany corresponding improvements in the quality of discretionary accruals by employing both audit fees and discretionary accruals as proxies for audit quality. To the best of the authors knowledge, this is the first empirical study to examine the relationship between auditor characteristics and the financial reporting quality in the emerging capital market by considering the clients' business strategy. 1, pp. Auditor characteristics and the financial reporting quality: the moderating role of the client business strategy Afsaneh Soroushyar Asian Journal of Accounting Research ISSN: 2459-9700 Article publication date: 19 July 2022 Issue publication date: 24 January 2023 Downloads 1609 pdf (163 KB) Abstract 1. and Jaggi, B. (2010) argue that with longer tenure periods, the auditor's learning of client-specific knowledge is expected to better complemented. 153-184. Managers of Iranian companies are advised to consider the auditor's characteristics when choosing an audit firm to increase financial reporting quality. We then find that the magnitude of discretionary accruals decreased in the post-SOX period for the clients of local auditors and new auditors but not for the clients of Big 4 auditors, industry specialist auditors, and large office size auditors. (2014), A review of archival auditing research$, Journal of Accounting and Economics, Vol. Does auditor industry specialization improve audit quality? Table3 (available online at: https://drive.google.com/file/d/19-bdefCi6cWOOhGa_OLV4ncCBd2zYjQG/view?usp=sharing) reports the Pearson pairwise correlation between research variables. The audit preparation Auditor training Supplier selection & audit schedule Plan your preparation General audit preparation General opening meeting presentation Audit specific preparation (2003), Auditor industry specialization and earnings quality, Auditing: A Journal of Practice and Theory, Vol. Table6 (available online at: https://drive.google.com/file/d/1hhFddO7oCMvnwPkOlC0jVYRTLND-qJal/view?usp=sharing) presents results of regression estimation of the first hypothesis. 34 No. In addition, the adjusted coefficient of determination shows that in the first and second models, 50 and 56% of the changes in the dependent variable respectively, are explained. Thus, the research results support this audit standard. In the first hypothesis of the research, it was mentioned that the positive association between auditor industry specialization and financial reporting quality will be more pronounced for clients with deviant strategies. 205-228. Finally, by applying the stated criteria, the firm-year observations of the company were reduced to 1,450 (including 145 firms). random effects panel data method). Ghosh and Moon (2005) argue that auditors can better detect errors and misstatements of financial statements by having specialized knowledge of the client's operations, accounting systems, and internal control structures. I also find that auditors with more Single Audit engagements within the same year are less likely to report ICDs. 5 No. (2019) and also, is consistent with the knowledge gap hypothesis. For both ADA and CFADA dependent variables, the coefficient of the interaction of auditor industry specialization and strategy deviation is positive and significant (i.e. Yuan etal. (2016) argue that a firm's business strategy can moderate the relationship between auditor industry specialization and discretionary accruals. The auditor validates financial reporting quality. (2020), The effect of auditor characteristics on tax avoidance of Iranian companies, Journal of Asian Business and Economic Studies, Vol. (2016) pointed out that companies with deviant strategies are more likely to have information asymmetry problems. 2513-2547. 26 No. (2002), The quality of accruals and earnings: the role of accrual estimation errors, The Accounting Review, Vol. and Sharp, N.Y. (2013), Business strategy, financial reporting irregularities, and audit effort, Contemporary Accounting Research, Vol. 119-134. Future study with more advanced econometric models is needed to mitigate self-selection bias. 8, pp. They proxy the dependent variable (audit quality) using the usual dichotomous variable of 1 if big 4 audit firm and 0 if otherwise. 5. Also, the client strategy variable was used as a moderator variable. 69 No. This study contributes to the literature in three ways: First, Iranian Auditing Standard (IAS) No. 47-63. This result is consistent with the knowledge gap hypothesis for audit firms. Miles, R.E. (2016) and Sari (2018) argue that client strategy deviation can lead to industry-specific auditors having knowledge advantages. This study contributes to regulators, practitioners, investors, and academics by examining the effect of SOX on audit quality in a comprehensive way. Geletkanycz, M.A. (2016), and Mashaykhi etal. (2005), The performance implications of fit among business strategy, marketing organization structure, and strategic behavior, Journal of Marketing, Vol. The PLS-SEM result reveals that the traits of agreeableness . and Hult, G.T.M. 201-229. Yuan etal. I thank Bill Baber, Karen Kitching, Linda Myers, Christine Petrovits, and participants at the American Accounting Association's 2013 Auditing Section and Government and Nonprofit Section midyear meetings and Suffolk University Research Workshop for helpful comments and suggestions. Some of their scores are related to client recognition and financial reporting quality. 24 No. (2003), Does Big 6 auditor industry expertise constrain earnings management?, Accounting Horizons, Vol. The sample includes all the companies listed on the TSE from 2011 to 2020. Many empirical studies on audit services show that auditor characteristics such as expertise and tenure, are positively associated with the quality of financial reporting (Carcello and Nagy, 2004; Gul etal., 2013; Yuan etal., 2016; Sari, 2018; Mashaykhi etal., 2018). Finally, the results of this study indicate that the knowledge gap hypothesis exists not only for the auditor industry specialization but also for other auditor characteristics (i.e. Some audits have special administrative purposes, such as auditing . and Smith, A. We then find that the magnitude of discretionary accruals decreased in the post-SOX period for the clients of local auditors and new auditors but not for the clients of Big 4 auditors, industry specialist auditors, and large office size auditors. Welcome Quality Auditor Types of audits COMPATIBILITY VERSUS COMPLIANCE Auditor characteristics Threats to objectivity Have no impact, manipulate or inspire? Their research showed an association between business strategy and information asymmetry. In addition, because of their high explanatory power, these models have been used in Iranian economy. This study contributes to the literature in several ways. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press, New York. In addition, in both models, auditor industry specialization has a positive association with the quality of financial reporting (AIS=0.022 and 0.008; p-values < 5% and < 5%, respectively). 2, pp. Additionally, based on agency theory, it is necessary for auditing firms to evaluate accounting information to reduce the information asymmetry between managers and users of accounting information (Bushman and Smith, 2003). Firm conformity allows companies to adopt similar strategies in the industry. going concern and material weakness). 1 INTRODUCTION. This study includes 1,450 firm-year observations and 145 companies listed on the Tehran Stock Exchange (TSE) over a ten-year period from 2011 to 2020. If the null hypothesis of the F-Limer test is not rejected, the panel data method is accepted. These results suggest that business strategy is an important determinant of CSR performance. (1998). 9, pp. 63-86. 88 No. 20 No. / Choi, Sunhwa; Kim, Sun Young; Zang, Yoonseok. According to neo-institutional theory, many companies tend to follow industry norms because doing so will gain legitimacy and resources, reduce performance uncertainty, and increase company survivability (DiMaggio and Powell, 1983; Tang etal., 2011). Abstract: Most of the literature on audit quality is at a firm and office level. It is likely that auditor characteristics influence audit outcomes and that the market can associate such characteristics when interpreting information on audited financial statements. 8 No. Thus, in addition to state-owned companies, the IAO has audited private companies. Meanwhile, work experience, competency, and audit fees have no influence on audit quality. Finally, another distinctive feature of this study is that I examine the impact of individual auditor characteristics on audit quality in a setting where Big 4 audit firms are not dominant. I also find that auditors with more Single Audit engagements within the same year are less likely to report ICDs. Using 145 companies listed on the TSE from 2011 to 2020, the results show that client strategy deviation affects the relationship between auditor characteristics (auditor industry specialization and auditor tenure) and financial reporting quality. (2019), Effects of business strategies on investment efficiency, Journal of Accounting Knowledge, Vol. Investors concerned about the quality of financial reporting are advised to consider the auditor's characteristics when making a decision. 61-69. These results are consistent with those reported by Ghorbani and Salehi (2020). Srinidhi etal. Does Big 6 auditor industry expertise constrain earnings management? 58, pp. If the client deviates from the business strategy, it is expected that auditors with high tenure will be able to better evaluate accounting policies and procedures, and thus increase the financial reporting quality. Overview Abstract This study investigates the effect of several auditor characteristics on audit quality before (i.e., pre-SOX period over 2000-2001) and after SOX (i.e., post-SOX period over 2003-2004). (2012), Auditor industry specialization, political economy and earnings quality: some cross-country evidence, Journal of International Financial Management and Accounting, Vol. quality based on auditor characteristics and previously observed . 24 No. Finally, the average of the six indicators was used to calculate the strategy deviation (SD). Chen etal. The purpose of a quality audit is to assess or examine a pro duct, the process used . Under these regulations, trusted auditing firms are evaluated annually. 563-587. Suggested Citation, 120 Tremont StBoston, MA 02108United States617-573-8719 (Phone), Corporate Finance: Governance, Corporate Control & Organization eJournal, Subscribe to this fee journal for more curated articles on this topic, Governmental & Nonprofit Accounting eJournal, Corporate Governance: Actors & Players eJournal, Organizations & Markets: Formal & Informal Structures eJournal, We use cookies to help provide and enhance our service and tailor content. 17 No. The second tradition is based on The firm age variable refers to the number of years the company (Chi and Chin, 2011). 1, pp. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode. University Liggett Athletics, Articles A