Implementing shared service centres in Big 4 audit firms: an exploratory study guided by institutional theory

This paper examines whether ethical violations committed by an audit partner and the public release of the resulting PCAOB disciplinary order affects the associated audit firms’ switching risk, audit fees and audit quality relative to other comparable audit firms. I examine the effects of ethical violations on audit firms affiliated with a sanctioned auditor (also referred to as affiliated audit firm or sanctioned auditor) at the city (office), MSA, state, regional, and national (firm) level in order to determine if there is a spill-over effect. My findings suggest that at no level in my analysis did the public disclosure of the PCAOB sanction have a significant effect on sanctioned auditors losing or gaining clients. Furthermore, results indicate that there is no significant association between having a certified public accountant (CPA) serve on the audit committee and an affiliated audit firm’s ability to retain clients or attract new clients. In regards to audit fees, findings suggest that audit fees were affected by the PCAOB sanction in that sanctioned auditors experienced audit fee growth after the sanction was made public. This result is consistent across all samples for all tests with the exception of the state and national (firm) samples. Again, there appears to be no significant association between having a CPA serve on the audit committee and audit fee growth rates. Finally, in the audit quality tests of discretionary accruals, there is no evidence to suggest that the sanctioned auditor’s audit quality was different from that of other non-sanctioned audit firms during the three-year window either before or after the sanction. However, the results of the audit quality test using restatements indicate that after the sanction was made public, restatements increased at the regional and national (firm) level for sanctioned firms vs. non-sanctioned firms. At the city (office), MSA and state level there appears to be no effect on restatements as a result of the public disclosure of the PCAOB sanction. Consequently, it is difficult to infer that higher restatements at the regional and national (firm) levels are associated with the PCAOB sanction.

Does International Accounting Network Membership Affect Audit Fees and Audit Quality? Evidence From China

Mandatory audit firm rotation sets a limit on the number of years a public accounting firm may audit a company’s financial statements. After a predetermined period, an accounting firm is no longer eligible to serve as the company’s auditor for a set time interval and a rotation of firms is required. The objectives of this study are: (1) to explore current audit appointment practices by audit firms in Bahrain; (2) to look into the opinions of audit firms in Bahrain on potential effects provided by implementing mandatory audit firm rotation (audit quality); and (3) to investigate audit firms’ views in implementing mandatory audit firm rotation in Bahrain. To achieve these objectives, a questionnaire was developed and distributed to respondents that consist of all auditors working in audit firms in Bahrain. The findings indicated that there is a significant relationship between mandatory audit firm rotation and quality of audit. The study also indicated that longer partner tenure makes the auditor’s performance lack the quality in the auditing process. The average mean for all questions of the hypothesis together is 2.73 with average standard deviation of 0.94 which is less than half of the mean. This means that there is no dispersion among respondents about the questions of the hypothesis. Also, the analysis shows that the t-value is 29.922, which is greater than the table critical value of t (1.66), and the p-value obtained is 0.000 which is less than the value of significance at p < 0.05. These results confirm statistically that there is a significant relationship, so the null hypothesis is rejected and the alternative hypothesis is accepted. this study focused on the impact of MAR on audit quality in Bahrain, further research may be directed towards examining the impact of MAR upon auditor independence and the cost of audit rotation. However, variables other than those included in the questionnaire of the study may affect the MAR.

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.

Audit firm informatization and audit quality during COVID-19

Purpose: The aim of this research is to analyze the influence of internal control on audit quality, examine the impact of integrity on internal control, investigate the effect of time budget pressure on internal control, assess the influence of integrity on audit quality through internal control, and explore the impact of time budget pressure on audit quality through internal control Methodology/approach: This study adopts an explanatory research approach, which aims to explain the relationships between the variables under investigation. The research sample consists of 72 auditors working in Public Accounting Firms in Surabaya, selected through purposive sampling based on predefined criteria. Primary data was collected using questionnaires distributed through the Google Form platform. After data collection, the analysis was conducted using the Smart PLS method, a statistical analysis approach used to test the structural model and relationships between research variables. Findings: The results of this study confirm that internal control has a significant impact on audit quality. Integrity significantly influences internal control, and time budget pressure also has a significant impact on internal control. Internal control acts as a mediator, explaining the influence of integrity on audit quality, as well as the effect of time budget pressure on audit quality Practical implications: The practical implications of this research encompass auditor training, audit planning, enhancement of internal controls, risk assessment, communication, continuous improvement, reporting, and future research directions in the field of auditing. These implications can be utilized by practitioners, audit firms, organizations, and researchers to elevate audit quality and foster ethical and effective audit practices. Originality/value: The originality and value of this research lies in a comprehensive examination of various factors in the context of auditing, particularly focusing on integrity, time budget pressures, internal controls, and their collective impact on audit quality. This in-depth analysis provides valuable insights for practitioners and researchers in the auditing field, offering practical implications for improving audit quality and promoting ethical auditing practices. In addition, this study introduces a mediation model that illustrates how internal control mediates the influence of integrity and time budget pressure on audit quality, contributing to a deeper understanding of the mechanisms underlying this relationship. Overall, the study's comprehensive approach, methodological rigor, and insightful findings contribute to advancing knowledge in auditing and providing actionable recommendations to improve auditing practice and results.

The significance to prepare reliable information discloses the need to fall back on an external auditor and a quality auditing process that can caution against the management of earnings. In line with the business practice, auditing does not provide sufficient coverage for some earnings management (EM) activities that result in financial statement fraud. Over the years, capital markets around the globe have witnessed numerous corporate financial scandals largely because of financial and accounting figures' manipulation. This has led to casting doubt on the quality of published financial reports and questioning the ability of the audit process. Against this background, this study examined the relationship between audit quality and real earnings management of listed manufacturing companies in Nigeria. Specifically, this study evaluated the effect of audit firm size, audit firm industry specialization, audit firm tenure, and audit firm independence on real earnings management. The study sampled 38 out of 55 listed manufacturing companies that cut-across different sectors from 2013 to 2020. From the multivariate analysis, the findings revealed a significant relationship between audit quality (audit firm size and audit firm independence) with a p-value of 0.014 and 0.003 respectively. It was concluded that firms audited by Big-4 firms with independence attract greater publicity and tighter scrutiny; hence, companies tend to desist from managing their earnings. The study, therefore, recommended that the management of manufacturing firms in Nigeria should persist in engaging experience audit firms with international affiliations, and they should work strictly with the CAMA, 2020 as amended by rotating audit firms after every three years as this will promote the reliability of financial statement prepared by management, and finally reduce manipulation of earnings.

Audits play a critical role in satisfying the public interest in strengthening accountability and supporting confidence in financial reporting. Conventionally, audit quality is defined as a probability that financial statements are free from material misstatements. The existence of a positive relationship between audit firm size and audit quality has long been accepted in previous literature. This has resulted in numerous studies collecting evidence of differential audit quality relative to the size of audit firms, both large and small. Consequently, the conclusion has been asserted that larger audit firms produce a higher and more homogenous audit quality. The collapse of Arthur Andersen, however, has undermined the premise that large audit firms provide higher audit quality than smaller firms. This research investigates audit quality based on the extent of compliance levels with disclosure requirements pertaining to goodwill impairment of large listed Hong Kong firms in the third year transition to International Financial Reporting Standards (IFRS). The result found that audit firm identity appears to be a significant proportion of cross-sectional variation, in which compliance levels and disclosure quality varied considerably among auditors.

Audit is getting more and more importance in assuring the reliability of financial information including financial statements for all parties. Commonly, quality of an audit is viewed as probability that financial reports are free from material irregularities. In the previous literature, there is a positive relationship between size of audit firm and audit quality that has long been understood. This has resulted in many publications to gather evidence of differential audit quality relating to audit firm size. In consequence, the conclusion has been focused that bigger audit firms produce higher audit quality than smaller ones. However, the collapse of many big international audit firms, typically Arthur Andersen has reduced the statement that large audit firms have higher audit quality than small ones. Therefore, this study looks into audit quality basing on the extent of compliance with disclosure requirements pertaining to goodwill impairment of large listed firms in Hong Kong context in the second year transition to IFRS. We found that audit firm identity appears to be a substantial variation, in which compliance levels changed significantly among auditors in the context of Hong Kong.

Previous research on the private sector shows that auditors and auditing firms are important actors in ensuring high-quality reporting based on accrual accounting. The aim of this study is to explore whether audit firms and audit costs/fees influence municipalities’ probability of applying earnings management in their annual accounts. The empirical data, which covered the financial years 2011–13, were handpicked from annual reports or retrieved from other sources. In general, our study shows that the probability of earnings management increased if audit costs/fees increased. However, there were differences regarding the probability of earnings management relating to which audit firm was engaged. This implies that audit quality is a factor that affects the probability of earnings management in Swedish municipalities. The study also indicates that different audit firms make different trade-offs between professional versus commercial logics, and that this is reflected in the clients’ propensity to engage in earnings management. Points for practitioners Today a majority of developed countries have adopted accrual-based accounting for municipalities. Along with accrual-based accounting follows the risk of earnings management. Problems regarding accounting quality imply an increased importance of the financial audit. However, our study shows that there is no obvious positive relationship between audit cost/fees and audit quality. The ability to constrain earnings management seems to vary between audit firms. The important implication for practitioners is that auditing must have quality standards that are subject to follow-up and control, which applies both on a system level and also when municipalities procure and contract audit firms for audit assignments.

We examine how audit firms changed their policies regarding audit partner performance measurement, career development, and compensation during a period of heightened public scrutiny of audit quality (2007 to 2017). We theorize how implementing policy changes requires a delicate transition in the organizational design and internal processes of the firms and may not effectively translate into their day-to-day practices. Our access to proprietary performance management policies and individual partner performance and compensation data from the eight largest Dutch audit firms allows us to gain an in-depth understanding of the evolution of performance management for audit partners. We find that most of the policy changes have real consequences. For example, audit quality becomes more consequential to career development, whereas profit sharing becomes better linked to quality and long-term performance. We conclude that audit firms appear effectively responsive to public scrutiny, increasingly aligning partner incentives with societal expectations of audit quality.

The purpose of the research program reported in this thesis, is to investigate some personal and organisational attributes that underlie ethical decision-making necessary for auditor independence judgments in the Big Six audit firms. Supported by Etzioni (1988), this thesis views auditors as social human beings with a full range of emotions, and prejudices, influenced by powerful social and cultural forces. Hence, this research program extends Ponemon's and Gabhart's (1990) cognitive-developmental model of auditor independence judgments by introducing the influence of subconscious personal in the context of auditor-client management conflict. Schein's (1984) concept of organisational culture is further proposed as a collective factor that underlies ethical decision-making as suggested by Etzioni (1988). This research program was motivated by two concerns. The first concerns the crisis of credibility facing the auditing profession in light of well publicised audit failures and accusations of poor ethical performance. The second concerns the lack of recognition of the complex interrelationship between auditors' social and cultural learning, auditor independence and ethical decision-making in current behavioural auditing research. This interdisciplinary research program, therefore, develops an overall theoretical model of auditors' individual complex decision-making and organisational culture. To achieve a more holistic approach to ethical decision-making, an individual decision-making model synthesizes the moral cognitions central to Trevino's (1986) conceptual model of ethical decision making in organisations and socially learnt personal presented by Ashkanasy's (1989) hierachial three level model. This model then introduces Schein's (1984) concept of organisational culture as an influence on individual decision-making. To investigate the complex nature of auditors' ethical decision-making, a multi-method approach is used. The program comprises two triangulations and a replication involving four inductive and three deductive studies. Data for the triangulations and replication were collected from six first tier auditing firms in three different large city locations. In all, subjects from eighteen Big Six firm offices participated in this research program. Level 1 is examined first. This level posits that the client firm's situational factors give client management the bargaining power in an audit conflict. As the first part of a triangulation, an action research study clarified that client factors: financial condition, size of fees, and tendering affected independence during an audit conflict. Results also indicated that disputes over materiality judgments between auditors and client management occur more frequently than is commonly known. The second component of the triangulation was an ANOVA repeated measures field study using a materiality dispute and client economic factors to test auditor acquiescence in location 1. Results indicated that auditors were more likely to succumb to management pressure when the client was economically strong. A replication in location 2 supported these results. The third part of the triangulation was laboratory study which found that auditing students were not affected by management pressure, suggesting that the difference between auditing students and practitioners may be a result of acculturation in the audit firms. Building on the overall theoretical model, levels 2 and 3 introduce personal characteristics of moral reasoning development (Kohlberg, 1969) and personal in justice (Lerner, 1980) with the independence dilemma over a materiality judgment involving client economic situational variables at level 1. This independence dilemma was the basis for initiating interactive decisional processes of levels 2 and 3. A replication using the same population samples for the level 1 studies (location 1 and 2), show that these decisional processes resulted in an interaction between Kohlberg's (1969) levels of moral cognitions and Lerner's (1980) beliefs in justice. A mixed factorial ANOVA design demonstrated the processes of complex decision-making model and how subconscious personal (from a lifetime of learning), influence ethical decision outcomes. Three styles of auditor decision-making emerged in the studies: autonomous, and pragmatic. Auditors with an autonomous decision-making style and who have strong just beliefs, were found to be the least acquiescent to client management demands of all the groups in the two studies. Similarly, auditors with accommodating decision-making style and belief in an unjust world were found to be the most acquiescent group to client management. These findings indicate that personal affect moral cognitions. As the first part of the second triangulation, an action research study reports findings from a series of interviews with audit partners in location 3, designed to inductively explore the organisational values of Big Six audit firms. The results showed that the Big Six audit firms tended to focus on audit as a business servicing clients rather than their social responsibility to audit independently. These results suggest that the culture of Big Six audit firms focus on personal economic gain or I of Etzioni's (1988) paradigm rather than the We of community responsiveness. As the second component of the triangulation, a quantitative study examined the role of organisational culture on the underlying constructs of ethical decision-making. Using a modified scale of O'Reilly, Chatman and Caldwell's (1991) dimensions of organisational culture, a factor analysis provided a stable measure of organisational culture of Big Six audit firms. A MANOVA analysed orgarusational cultural dimensions across the Big Six firms and found cultural homogeneity across the Big Six firms. Importantly, the results of a multiple regression analysis show that auditors' moral reasoning development and personal are related to the organisational culture. These relationships did not separate the three groups of auditors identified earlier. Instead, the dimensions of, outcome orientation (composed of: competitiveness, high expectations, achievement oriented, results oriented, and analytical value items) and being aggressive emerged as the values that influenced auditors' ethical decision-making. The value dimension of a for people (comprising fairness, respect for individual rights, social responsibility, and tolerance items) which was hypothesized to characterise the autonomous decision-making style, did not emerge. This suggests that auditors' individual ethical decision-making was stifled by the up and out culture of the firms similar to Ponemon's (1992) findings. The homogenous culture of Big Six firms also indicates a lack of diversity in values and beliefs.

Auditor Size, Auditor Quality, and Auditor Fee Premiums: Further Evidence from the Public Accounting Profession

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.

Audit quality has been addressed and is being discussed globally, throughout the years. The Enron Corporation and WorldCom cases have affected the reputation of the audit profession. The credibility of auditors also has become more questionable as the auditors' function in identifying mistakes and fraud is being debated by the public. However, the issue of audit quality has only focused on big firms only. There is shortage of studies that focussed on audit quality in small and medium audit firms. In line with this issue, this study aimed to investigate the relationship between top management support, auditor’s experience and auditor’s accountability on audit quality amongst small-medium audit firms in Malaysia. By employing the Attribution Theory, the study utilised purposive sampling. The data used in this study was primary data obtained through questionnaires from external auditors in small and medium sized audit firms around Klang Valley. A total of 100 questionnaires were distributed and the number of usable questionnaires was 81. Findings indicate that auditor’s experience and auditor’s accountability have a significant effect on audit quality. This research thus contributes to standard setters, regulators, policymakers and other audit firms by providing evidence with regard to the determinants of audit quality judgment in Malaysian small and medium audit firms. Keywords: audit quality, small and medium audit firms, audit judgments, accountability, audit experience