auditor characteristics and audit quality

Chi, H.Y. DiMaggio and Powell (1983) found that firms usually follow a corporate strategy similar to that of their industry peers because strategy deviation reduces shareholder confidence and corporate legitimacy. 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. and Smith, A. Higher residual values represent a lower quality of financial reporting. If the null hypothesis of the F-Limer test is not rejected, the panel data method is accepted. A higher strategy deviation (SD) number means that the company's resource allocation pattern has a significant deviation from the industry strategy norms. Does industry expertise improve the efficiency of audit judgment? 25 No. It also provides an understanding of the effect of the COVID-19 pandemic on different audit reporting decisions and audit quality in specific industries. Thus, the first hypothesis of this study is as follows: The positive association of auditor industry specialization on the financial reporting quality increases when companies deviate from their business strategy. 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. 4, pp. For more than 10 years, auditors at PwC have been creating new solutions to simplify the audit through innovation. Abstract: Purpose - Using a sample of US nonprofit organizations, where the identity of the auditor in charge of the audit is revealed, I investigate whether individual auditor . The influence of auditor characteristics on audit quality | IEEE Palmrose, Z.V. Ilaboya and Ohiokha (2014), this study empirically examines the impact of audit firms' characteristics on audit quality. Section 2 presents the related theory, develops the research hypothesis, and reviews previous studies. 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.". "We have high standards for accountability and transparency in Washington, and our Office works to uphold those expectations, including in our own operations," State Auditor Pat McCarthy said. Ittonen, K., Vhmaa, E. and Vhmaa, S. (2013), Female auditors and accruals quality, Accounting Horizons, Vol. Firm conformity allows companies to adopt similar strategies in the industry. auditor tenure). 51 No. 2, pp. 48 No. Keywords: Audit Quality, Qualified Audit Opinions, Individual Auditor Characteristics, Internal Control Deficiency, Nonprofit Audit, Suggested Citation: Farhangdoust, S. and Sayadi, L. (2020), Capturing differences in conservatism following earnings restatements: further evidence from Tehran stock exchange, Asian Journal of Accounting Research, Vol. The research hypotheses were analyzed using a multivariate regression model and panel data. 27-40. https://doi.org/10.1108/AJAR-01-2022-0020, Published in Asian Journal of Accounting Research. 22 No. 1-16. (2020) focusing on industrial organization (IO), resource-based view (RBV), and competitive dynamics, have proposed that a firm strategically different from others in the same industry can outperform its peers. To test the hypotheses, the coefficients of the interaction variables were examined. 315, requires auditors to have sufficient knowledge of the company's strategies and business risks when planning the audit. That opinion is the culmination of all the hard work completed during the review period, and clients need it to hold weight with their own customers. Carcello and Nagy (2004) find that the longer the auditor tenure, the lower the likelihood of fraudulent financial reporting. 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. strategy deviation) moderates the relationship between auditor characteristics and financial reporting quality. Based on this, cash flow-adjusted Jones model (CFADA) was created. One caveat of this study is that self-selection bias may be present when a client chooses an audit firm, the audit firm selects a client, and the audit firm assigns a partner to the engagement. The findings of this study provide important evidence for investors, firm management, and auditing firms. However, some companies use different strategies to take higher risks and create wealth for stakeholders (Chen, 2021). Their research showed an association between business strategy and information asymmetry. This study examines how the client business strategy (i.e. In their research focuses on (1) advertising intensity (ratio of sales expenses to sales), (2) intensity of R&D expenses (ratio of intangible assets to sales), (3) intensity of capital (ratio of fixed assets to the number of employees), (4) plant and equipment newness (ratio of net plant and equipment to gross plant and equipment), (5) overhead efficiency (administrative expenses to sales), and (6) financial leverage (debt-to-equity ratio). Business strategy refers to how companies compete in an industry or competitive market (Olson etal., 2005). 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. The second tradition is based on 3, pp. Auditors should maintain objectivity and should be free from conflicts of interest in fulfilling professional obligations. Published by Emerald Publishing Limited. (PDF) Moderating Effect of Audit Quality on the Relationship Between Almutairi, A.R., Dunn, K.A. and Hult, G.T.M. 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. Does auditor industry specialization improve audit quality? Yuan etal. Habib, A. and Hasan, M.M. The previous studies have identified audit quality attributes which can contribute in assessments of audit quality in the PSOs. Gaynor, L.M., Kelton, A.S., Mercer, M. and Yohn, T.L. This relationship improves when the client's business strategy deviates from the industrynormal strategy. 69 No. The companies' annual reports are available on the comprehensive database of all listed companies (CODAL) website. In previous studies, the strategic deviance variable been used to measure client strategy (Tang etal., 2011; Yuan etal., 2016; Sari, 2018). 36 No. random effects panel data method). An audit can apply to an entire organization or might be specific to a function, process, or production step. 72-87. (2013) showed that the firm business strategy affects the quality of financial reporting and auditor fees. Before the Iranian Revolution, international auditing firms (i.e. EconPapers: Individual auditor characteristics and audit quality 205-228. SD=0.592) in China based on research by Yuan etal. Auditors are the most important of the quality professionals. Miles, R.E. 77 s-1, pp. With the change in economic conditions, the Ministry of Economy passed the Law on the Use of Certified Public Accountants in 1993. Previous empirical evidence shows that the auditor's expertise in the early years of the audit is lacking in the client business, which can lead to failure in detecting material errors and misstatements (Ghosh and Moon, 2005). 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. Therefore, the purpose of this study is to investigate the association strategy deviation with the relationship between auditor characteristics and financial reporting quality in companies listed on the TSE from 2011 to 2020. 34 No. Yuan etal. 60 No. (2015), Are there adverse consequences of mandatory auditor rotation? This section examines the method for measuring research variables. (2023), "Auditor characteristics and the financial reporting quality: the moderating role of the client business strategy", Asian Journal of Accounting Research, Vol. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode. A review of the auditor industry specialization literature shows that auditor specialization in the relevant industry has a high level of knowledge, and therefore, the quality of financial statements is higher. (2012), Auditor industry specialization, political economy and earnings quality: some cross-country evidence, Journal of International Financial Management and Accounting, Vol. 2, pp. This result shows that auditor tenure in the sample companies was approximately two years. 3, pp. Qualities Of An Auditor | Top 10 Characteristics & Traits - Rated Near Me 9, pp. In addition, Iranian Auditing Standard (IAS) No. Higher residual values represent a lower quality of financial reporting. Compared to the strategy deviation (i.e. 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. (2004), Client size, auditor specialization and fraudulent financial reporting, Managerial Auditing Journal, Vol. 88 No. and Lin, Y.C. The PLS-SEM result reveals that the traits of agreeableness . Table7 (available online at: https://drive.google.com/file/d/1T12O4yDzGMQyOn52PyjC-lb_BSo-w5Rk/view?usp=sharing) presents the results of the interaction association between auditor tenure and deviation of the business strategy with financial reporting quality. 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. 5 No. 1, pp. In summary, the results indicate that auditor characteristics affect the financial reporting quality in the Iranian capital market and that this relationship can be improved through the client's business strategy. . Sunhwa Choi, Sun Young Kim, Yoonseok Zang, Research output: Contribution to journal Article Research peer-review. 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. Auditor conservatism, audit quality, and real consequences - Springer According to the research hypothesis, the results showed that auditor industry specialization has a positive association with financial reporting quality, and this relationship is strengthened by deviation from the firm's business strategy. This result shows that approximately 48% of companies have been audited by auditor industry specialist (AIS). Lime etal. the pooled data method). Auditors are tech savvy. In additional analyses, I use subsamples partitioned by client risk and audit firm size, and find that individual auditor characteristics generally play a more significant role in the issuance of ICDs and QAOs for riskier clients than for less risky clients. However, there is little empirical evidence on the moderating role of client characteristics in the relationship between auditor characteristics and financial reporting quality (Carcello and Nagy, 2004; Yuan etal., 2016). The issue of financial reporting quality has always been of interest to researchers, accounting standards-setting bodies, and the accounting profession (Gaynor etal., 2016; Hassan and Bello, 2013). (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press, New York. 415-445. Accordingly, the F-Limer test was performed. (2010). 10 No. ABSTRACT This paper discusses the foregoing literature on the various characteristics of audit partners that may lead to an enhanced quality of audit. First, the mean and standard deviation of each of the above variables were calculated separately for each industry-year. The mean and standard deviation of the auditor industry specialists (AIS) are 0.479 and 0.359, respectively. title = "The effects of auditor characteristics on audit quality before and after the enforcement of Sarbanes-Oxley Act". 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. Journal of Accounting, Auditing and Finance, Transparency, financial accounting information, and corporate governance, Are there adverse consequences of mandatory auditor rotation? For example, in Iranian Auditing Standard (IAS) 315, the auditor is required to have sufficient knowledge of the firm's business strategy. This result is consistent with Yuan etal. 265-287. The audit preparation Auditor training Supplier selection & audit schedule Plan your preparation General audit preparation General opening meeting presentation Audit specific preparation They proxy the dependent variable (audit quality) using the usual dichotomous variable of 1 if big 4 audit firm and 0 if otherwise. The strategic deviance variable is calculated as follows. This paper discusses main issues of the environment of the PSOs as follow: the nature and the types of the PSOs, financial reporting system, the laws and regulations, the governance method, the auditing, and the internal control through discussing these factors: the . Auditor tenure and audit quality: the role of the demand for unique client specific knowledge. 1-22. Welcome Quality Auditor Types of audits COMPATIBILITY VERSUS COMPLIANCE Auditor characteristics Threats to objectivity Have no impact, manipulate or inspire? The Arellano-Bond test was used to detect autocorrelation. 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). Also, the results of the present study show that the characteristics of the client (such as business strategy) can affect the relationship between the characteristics of the auditor and financial reporting quality. 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. Recent research has also documented that financial reporting quality can be enhanced by an auditor's long tenure (Cameran etal., 2015; Patterson etal., 2019). In additional analyses, I use subsamples partitioned by client risk and audit firm size, and find that individual auditor characteristics generally play a more significant role in the issuance of ICDs and QAOs for riskier clients than for less risky clients. 193-228. https://doi.org/10.1108/JPBAFM-10-2019-0157. Quality auditors (internal or external auditing services) form an integral part of any company's structure. Auditor industry specialization refers to the accumulated specialized knowledge the auditor has gained from providing audit services to many clients in the same industry (Gul etal., 2009). Second, the mean strategy indicator for each industry-year was subtracted from the calculated strategy indicator for each company and then divided by the standard deviation of the strategy indicator for each industry-year and then, the absolute value of the standardized score was calculated. In this study, the moderator variable is the client strategy. Balsam, S., Krishnan, J. and Yang, J.S. 36 No. (2011) point out that ambiguity or overconfidence in managers leads to the non-acceptance of industry norms and strategy deviation chosen to achieve extreme performance. The influence of the auditor's personality in audit quality You may be able to access teaching notes by logging in via your Emerald profile. If the interaction variable (i.e. They see what works, what does not work, strengths, weaknesses of standards, codes, procedures and systems. Audit firms should evaluate their business strategies in audit planning to increase the quality of financial reporting. We use the level of discretionary accruals and audit fees as a output-based and input-based proxy for audit quality, respectively. Srinidhi etal. However, to increase the comparability and homogeneity of companies during the research period, companies whose end of the fiscal year was not a solar year were excluded from the research sample. 2, pp. Therefore, these rules regarding the acceptance and evaluation of trusted audit firms can increase auditor's willingness to perform specialized tasks and lead to a change in the quality of financial reporting. Sari, D.K. In addition, auditor tenure is negatively associated with the likelihood of issuing an ICD report, suggesting that auditors become complacent as the length of the auditor-client relationship lengthens or, alternatively, that they are better able to assist their clients in correcting ICDs and in maintaining stronger internal control environments as they gain client-specific knowledge over time. Thus, a suitable model for estimating research models is the fixed effects method. The performance implications of fit among business strategy, marketing organization structure, and strategic behavior, Audit fees and auditor size: further evidence, The effects of auditor tenure on fraud and its detection, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Debt maturity structure, institutional ownership and accounting conservatism: evidence from Iranian listed companies, The effect of auditor characteristics on tax avoidance of Iranian companies, Journal of Asian Business and Economic Studies, Audit Specialization and Audit Quality: The Role of Client's Business Strategy, Auditor tenure and audit quality: the role of the demand for unique client specific knowledge, Auditor industry specialization, board governance, and earnings management, The relation of business strategy with earnings quality and stock return in firms listed in TSE, Dominant CEO, deviant strategy, and extreme performance: the moderating role of a powerful board, Auditor industry specialization and discretionary accruals: the role of client strategy, Business strategy and corporate social responsibility, https://doi.org/10.1108/AJAR-01-2022-0020, http://creativecommons.org/licences/by/4.0/legalcode, https://drive.google.com/file/d/1h3ceirKUdfsm4DZMxxqWzn1M3k_qLG7L/view?usp=sharing, https://drive.google.com/file/d/131FiwYachSylUrJMFCXC9ycElxt-wk9v/view?usp=sharing, https://drive.google.com/file/d/19-bdefCi6cWOOhGa_OLV4ncCBd2zYjQG/view?usp=sharing, https://drive.google.com/file/d/1dKUreAe1G7h_U6YCBwqxDjv0HLqbxEM_/view?usp=sharing, https://drive.google.com/file/d/1MSOZQQTmdlrtoQL0ERuErvCsysu021sq/view?usp=sharing, https://drive.google.com/file/d/1hhFddO7oCMvnwPkOlC0jVYRTLND-qJal/view?usp=sharing, https://drive.google.com/file/d/1T12O4yDzGMQyOn52PyjC-lb_BSo-w5Rk/view?usp=sharing, https://drive.google.com/file/d/17hTopgHc5I_ZotWWiGCWzOIgTaYbRt1p/view?usp=sharing. SSRN 1590811. The effects of auditor characteristics on audit quality before and after the enforcement of Sarbanes-Oxley Act. The remainder of this paper is recognized as follows. 2, pp. What Auditors Think about Audit Quality - ResearchGate Yuan etal. (2011) and Fitzgerald et al. 2.2 Definition of audit quality There is no consensus definition of audit quality in accounting literature. Also, in previous studies, only the relationship of auditor industry specialization has been examined and auditor tenure has been ignored (Yuan etal., 2016; Sari, 2018; Mashaykhi etal., 2018). 6, pp. 315 emphasizes recognizing a clients' strategy and business risks in their audit planning. The effect of auditor features on audit quality | Tkhne - Review of If you think you should have access to this content, click to contact our support team. Lim, M.S., Kim, C.Y. The quick ratio (QR) variable, which is a measure of a company's liquidity, is calculated by dividing current assets minus inventory by non-current debt (Ittonen etal., 2013). @article{75df938f60c84144ad0065b5e8232105. 8 No. 69-94. Thus, the auditor work will be better and audit quality will increase. (2011) and Fitzgerald et al. (2017), Business strategy and auditor reporting, Auditing: A Journal of Practice and Theory, Vol. 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. 24 No. 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). Finally, Section 5 presents our conclusions. Li, C., Xie, Y. and Zhou, J. Additional analysis suggests tenure and engagement load results are sensitive to the sample specification employed. 2, pp. Chen etal. The knowledge gap hypothesis is used to investigate strategy deviations in the relationship between auditor industry expertise and financial reporting quality (Yuan etal., 2016; Sari, 2018). 1 INTRODUCTION. ADA and CFADA). Cameran, M., Francis, J.R., Marra, A. and Pettinicchio, A. Section 3 describes the research design and data collection. Numerous factors, such as a firm's strategy deviation, can affect this relationship. Therefore, the aim of this paper is to empirically examine whether the effect of audit fees on audit quality, measured by the level of earnings management, is affected by the type of audit (voluntary vs mandatory), as well as whether the effect of audit fees on audit quality is different depending on the type of audit. 1993-2023. (2016) and Sari (2018) research. (2017) state that a company's business strategy is associated with the type of auditor reporting (i.e. An expert auditor is a person who has acquired knowledge and experience of the audit process in a particular industry. Bentley-Goode, K.A., Omer, T.C. 's (2018) study. Abstract. 654-681. This is in line with research of Ardini (2010), Ilamiyati and Suhardjo (2012) and Saripudin, Herawaty, and Rahayu (2012). Poner, 1980; Miles and Snow, 1978) have been used to measure business strategies. (2016), the strategy deviation is less in Iranian companies. and Twedt, B.J. This study contributes to the literature in several ways. The results of this study contribute to the growing literature of auditor characteristics and financial reporting quality. We use the level of discretionary accruals and audit fees as a output-based and input-based proxy for audit quality, respectively. 484-503. Auditor size and audit quality, Journal of Accounting and Economics, 3 (3 . This page was processed by aws-apollo-l100 in 0.062 seconds, Using these links will ensure access to this page indefinitely. 29 No. 5 No. Auditor tenure (ATE) has a positive and significant correlation with financial reporting quality variables (i.e. Does Big 6 auditor industry expertise constrain earnings management? This page was processed by aws-apollo-l100 in. 144-172. 162 No. 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. 4, pp. Nancy Chun Feng. 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. 780-817. Tanani, M. and Mohebkhah, M. (2014), The relation of business strategy with earnings quality and stock return in firms listed in TSE, Empirical Research in Accounting, Vol. 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. Investors concerned about the quality of financial reporting are advised to consider the auditor's characteristics when making a decision. This study contributes to regulators, practitioners, investors, and academics by examining the effect of SOX on audit quality in a comprehensive way. SD *AIS=0.017 and 0.006; p-value < 5% and < 5%). This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Chen, C. (2021), 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), March, Atlantis Press, pp. Another caveat of this study is that the tenure variable is truncated compared to prior literature (e.g. 551-575. https://doi.org/10.1108/JPBAFM-10-2019-0157, Copyright 2020, Emerald Publishing Limited, Visit emeraldpublishing.com/platformupdate to discover the latest news and updates, Answers to the most commonly asked questions here. This study contributes to the literature in three ways: First, Iranian Auditing Standard (IAS) No. It is also noteworthy that the research sample represents 47% of firms each year and does not indicate any bias regarding missing data and compared to research conducted in Iran, it is a higher percentage (Farhangdoust and Sayadi, 2020; Salehi and Sehat, 2018). The financial leverage (LEV) variable is obtained by dividing debts by assets (Ittonen etal., 2013; Gul etal., 2013). Effects of audit committee chair characteristics on auditor choice At the end of an audit, the opinion is rendered and provided to current and potential clients, stakeholders, and investors. Previous empirical evidence suggests that client characteristics (e.g. 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. (2013), Do individual auditors affect audit quality? Strengthening the audit committee is an increasingly important element in the agenda of academics, practitioners and policy-makers in their effort to improve the quality of financial information and to promote audit quality. DeFond, M. and Zhang, J. First, a review of previous research shows that the role of client characteristics such as business strategy, which is also emphasized in audit standards, has received very little attention. Using a sample of US nonprofit organizations, where the identity of the auditor in charge of the audit is revealed, I investigate whether individual auditor characteristics (gender, engagement size and tenure) are associated with audit quality. The mean and standard deviation for strategy deviation (SD) variable is 0.468 and 0.439, respectively. I gratefully acknowledge data collection assistance from graduate assistants Ryan Antonucci, Hieu Pham, and Steven Ross. 97-110. 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). Firm size (Size) is calculated using the natural logarithm of a company's assets (Gul etal., 2013; Ittonen etal., 2013). McNichols (2002) adds the revenue and gross property plant and equipment variables to Dechow and Dichev (2002) to measure earnings quality. Financial statement data and information related to the auditor characteristics were collected from the annual reports of companies listed on the TSE. (2020), 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, Vol. Also, the client strategy variable was used as a moderator variable.
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