External audit quality: its meaning, representations and potential conflict in practice

This study explores the effect of audit partner specialist tenure on audit quality and the complementary effect of audit partner industry tenure and audit tenure. This study first examines audit partners’ effect on audit quality in the early period of their tenure, and we expect to see inferior audit quality during this period. Next, we investigate the moderating effect of audit partner specialist tenure on audit quality; that is, we inspect whether audit partner specialist tenure can compensate for audit partners’ insufficient professional knowledge in the early period of their tenure. This study discovers that since the second modification of the Taiwanese audit partner rotation system in 2009, audit partners’ first audit still generates negative effects on audit quality; however, after audit partners accumulate experience in the industry, they can effectively ameliorate the negative effect generated during their first audit. JEL classification numbers: M42. Keywords: Audit partner specialist tenure, Complementary effect, Audit partner tenure, Audit quality.

The purpose of this study was to investigate the determinants of audit fees at the individual auditor level. Although there are various studies on audit fees and audit partner characteristics, there is no literature using systematic literature review to provide an overview of audit fees and audit partner characteristics. This paper uses a systematic literature review approach by searching the available studies listed in Scopus-indexed journals rated Q1 and Q2 with the keywords “audit partner characteristic” and “audit fees”. Audit partner characteristics (i.e., gender, experience, education, industry specialization, busyness) are all associated with audit fees. It also documented an interesting finding that gender and industry specialization are the most influential characteristics. The findings provide insight for researchers, audit clients, and the management of audit firms to understand the auditor pricing. This is the first study to summarize the impact of audit partner characteristics on audit fees. The previous study only summarized the determinants of audit fees in general. Keywords: audit fees, audit partner, individual auditor, audit quality, audit partner characteristics. DOI: https://doi.org/10.55463/hkjss.issn.1021-3619.61.41

PurposeThis study aims to examine the Taiwan setting, where audit partners’ names are presented in the audit report and where audit committee formation is voluntary in the initial stage of audit committee reform. This paper investigates the effects of the formation of voluntary audit committees on the selection of individual audit partners, and, in turn, the audit quality. This contrasts with previous studies investigating the relationship between audit committees and auditor selection at the audit firm level.Design/methodology/approachThis paper samples all of Taiwan’s publicly listed firms for the period 2007–2012 and uses Heckman’s (1979) two-stage estimation model to achieve our objectives.FindingsUsing different characteristics of individual engagement partners as proxies for a higher quality auditor, the main empirical results show that voluntary audit committee formation is positively related to an industry specialist lead partner and a lead partner that has a larger number of clients. In addition, this paper also finds that voluntary audit committee formation has a positive impact on audit quality (proxied by discretionary accruals). The results suggest that the voluntary formation of an audit committee contributes positively to both auditor selection and audit quality. Furthermore, an additional test shows that the main empirical results are robust to a validity threat that firms that have good corporate governance prior to the formation of voluntary audit committees tend to select high-quality audit partners.Originality/valueThe paper contributes to the audit committee literature in the following ways: this paper takes advantage of Taiwan’s unique setting, where forming an audit committee is not compulsory in the initial stage of audit committee reform, to investigate the voluntary audit committee, auditor selection and audit quality; this paper expands on Abbott and Parker’s (2000) study of audit committee characteristics and auditor selection at the audit firm level by examining this relationship at the individual audit partner level; this paper responds to the call by Church et al. (2008) and DeFond and Francis (2005) who propose more studies on audit quality at the individual engagement partner level.

Research aims: The annual increase in the number of female auditors in partner positions has been particularly pronounced in Southeast Asian countries, with Thailand being a notable example. This study, thus, investigates the quality of female audit partners compared to male audit partners in terms of how clients manage earnings.Design/Methodology/Approach: The researchers hand-collected gender data of audit partners from the audit reports of all listed firms on the Stock Exchange of Thailand and obtained 424 firm-year observations. The researchers applied two models to test the hypotheses, using cross-sectional time-series OLS and logistic regression data analyses. The researchers also performed additional analyses and robustness checks to support the main tests.Research findings: The study revealed no substantial disparity in the female and male auditors’ quality at the partner levels, as measured by accrual earnings management and earnings distribution approaches. The findings indicate that female and male audit partners have similar audit quality in preventing earnings management and earnings benchmark likelihood. The study adds to the existing research in East (Southeast) Asia, showing that female partners in these countries have audit quality that is at least comparable to male partners.Theoretical contribution/Originality: The researchers extend prior studies on the behavior distinction in audit quality of the auditor gender at the partner level, which is under-researched in Southeast Asia.Practitioner/Policy implication: The study has important implications for stakeholders and standard-setters to keep strengthening female leadership in the auditing industry and promoting higher gender parity in the growing industry of the future.

In this paper, we analyze the variance in audit quality among a broad cross-section of listed firms in Chinese stock market from 1999 to 2012. The purpose of the analysis is to identify the importance of audit firm, audit client, and engagement auditor effects on the variance in audit quality. Using discretionary accruals and financial restatement to surrogate audit quality and based on simultaneous ANOVA method, we find that engagement auditor can add about 19% of incremental explanatory power to the variance in audit quality. As expected, audit firm effects and audit client effects also have significant influence on audit quality, which can add about 2% and 16% of incremental explanatory power to the variance in audit quality. In addition, we find that, relative to engagement auditors with short audit experience, engagement auditors with longer audit experience have no significant incremental power in explaining variance in audit quality. The analysis enriches previous studies by investigating audit clients role and engagement auditors role in determining audit quality. Our study highlights the importance of understanding audit quality from the perspective of individual auditor.

Partner industry specialization and audit pricing in the United Kingdom

The Sarbanes-Oxley Act of 2002 requires the lead audit or coordinating partner and the reviewing partner to rotate off the audit every five years so the engagement can be viewed “with fresh and skeptical eyes.” Using data obtained from actual audits by multiple U.S. offices of three large international audit firms, we examine whether there is a relationship between evidence of reduced audit quality, measured by estimated discretionary accruals, and audit partner tenure with a specific client. We find that estimated discretionary accruals are significantly and negatively associated with the lead audit partner's tenure with a specific client. Thus, audit quality appears to increase with increased partner tenure. After controlling for client size and engagement risk, we find audit partner tenure significantly and negatively associated with estimated discretionary accruals only for small clients with partner tenure of greater than seven years, regardless of risk level. We also find that tenure is not significantly associated with estimated discretionary accruals for large clients. This suggests that as partner tenure increases, auditors of small client firms become less willing to accept more aggressive financial statement assertions by managers, and that partner tenure does not affect audit quality for large clients or for shorter-tenure smaller clients. Our results relating to audit partner tenure are consistent with the conclusions about audit firm tenure by Geiger and Raghunandan (2002); Johnson, Khurana, and Reynolds (2002);Myers, Myers, and Omer (2003); and Nagy (2005) and extend their findings by focusing on individual audit partners rather than on audit firms.

Auditor switching is important to maintain audit quality. This study aims to find empirical evidence regarding the effect of auditor switching on the audit quality of companies listed on the LQ45 index of the Indonesia Stock Exchange. Switching Public Accounting Firm and switching audit partner is the dependent variable in this study. Audit quality as the dependent variable is measured by the value of discretionary accruals. The saturated sampling method was used with the entire population of companies listed on the LQ45 index of the Indonesia Stock Exchange with a total of 45 companies in 2019 - 2020. Multiple regression analysis techniques were used. The results of the study stated that Public Accounting Firm switching and audit partners switching does not affect audit quality. Keywords : Public Accounting Firm Switching, Audit Partners Switching, Audit Quality.

Independent and joint effects of audit partner tenure and non-audit fees on audit quality

Audit partner rotation has been a major concern in the United States since the audit failures in the early 2000s. While several international studies have examined the impact of audit partner rotation on audit quality, research in the world’s largest audit market has been limited due to the availability of partner data. However, with the passage of Rule 3211 (commonly referred to as Form AP), partner-level data for the U.S. market has recently become available. In my dissertation, I examine how audit partner rotation affects financial reporting quality in the U.S. and how office-level industry specialization impacts the transition from one audit partner to the next. My overall findings are that audit partner rotation does not have a significant impact on measures of audit quality. Furthermore, office-level industry specialization does not improve audit quality when there is a change in partner. In addition, there is some evidence that when companies change audit office locations, the change is driven by the desire for the audit office with industry-specific knowledge. Overall, this gives an alternative perspective, based on publicly available data, on the impact of audit partner change and auditor office-level industry specialists.

We investigate whether an audit partner's gender is associated with the likelihood of issuing a going‐concern opinion for a financially distressed client. Our analysis is based on data for a sample of Australian listed companies for the period 2003–2011. Our results from unrestricted and propensity score‐matched samples and a Heckman two‐stage model indicate that female audit partners are less likely to issue a going‐concern opinion for financially distressed clients. Our findings provide evidence of differential audit outcomes depending on the gender of the audit partner, thus implying that audit partner gender affects the decision‐making processes used when making the audit reporting decision. These behavioural differences have the potential to influence perceptions of financial reporting and audit quality.

Contemporaneous studies generally find a negative relationship between audit partner busyness (APB), measured as the number of clients in an audit partner's portfolio, and audit quality. Their argument is that a busy partner does not devote sufficient time to properly audit his average client. Contrary to these studies, we argue that when busyness is optimally chosen by the partner, in equilibrium, there is no causal relationship between APB and audit quality. Using Australian data for the 1999–2010 period, we show that APB is not reliably linked to audit quality, consistent with this equilibrium theory. We argue that causality can be ascribed to the APB‐audit quality relationship when accounting scandals exogenously shocked the Australian audit market during the 2002–04 period and APB likely deviated from optimum levels. Supporting this disequilibrium view, we find that higher APB reduces a partner's propensity to issue first‐time going‐concern opinions during this period. Our evidence highlights the importance of the equilibrium condition in testing empirical associations between audit outcomes and endogenous auditor attributes, and shows that the detrimental effect of APB on audit quality is not as pervasive as contemporaneous studies suggest.

We find that cultural proximity between auditors and CFOs is associated with audit quality. We use recent mandated PCAOB disclosures of engagement audit partners to construct cultural proximity between engagement audit partners and client executives. Building on an extensive literature on homophily in social connections, we hypothesize that when an engagement audit partner is culturally close to client executives, the accounting negotiation is more efficient, resulting in higher audit quality. Consistent with this prediction, we find that audited earnings are of higher quality when the engagement audit partner is culturally close to the CFO. We, however, do not find similar evidence when the engagement audit partner is culturally close to the CEO. Our findings are consistent across several alternative measures of audit quality and cultural proximity. These findings suggest that interpersonal factors from the auditor–client relationship are important for audit outcomes. Our study supports the PCAOB’s position that mandatory disclosures of engagement audit partner identity are helpful in understanding audit quality.

Auditing Multiple Public Clients and Audit Quality

The objective of this paper is to investigate whether and how the social ties between individual auditors and client chief executive officers (CEOs)/chief financial officers (CFOs) affect audit quality using a large sample of publicly traded firms in China. We define social ties between individual auditors and client CEOs/CFOs as ‘working or educational alumni.’ We find that clients with social ties are significantly and positively associated with abnormal accruals and the presence of reporting small profits, and are more likely to receive clean audit opinions compared to clients without social ties. Moreover, we find that the working-tie effect on audit quality is stronger than the school-tie effect. Furthermore, we find that socially connected clients are more likely to downward restate their audited earnings in subsequent years. In addition, we find that the social-tie effect on audit quality can be mitigated by several personal characteristics of individual auditors, such as partner, female, accounting major, auditing experience, etc. Overall, our study sheds new light on the impact of social ties between individual auditors and client executives on audit quality.