01 Auditing (AUD)
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Chair: Jian Zhou
Professor, Shidler College of Business, University of Hawai’i-Mānoa, United States
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ItemGender representation among the partnership at large CPA firms: an examination of public filers and governmental entities( 2017-08-31)This study examines whether there are systematic differences in the nature of work performed by female assurance partners at the seven largest U.S. public accounting firms in order to better understand whether female partners experience the same measures of success as their male counterparts. Using the new PCAOB Form A.P. data and the Single Audit Clearing House data we examine potential gender differences in client base among assurance partners and firms. Results indicate that female partners are more prevalent in certain lower prestige types of engagements such as single audits, investment funds and benefit plans, but that there are considerable differences among firms. Similarly certain industries that tend to be more male dominated are also less frequently assigned female audit partners. Within the most prestigious public filers, we find that the most experienced female partners actually manage a higher book of business than their similarly experienced male counterparts, which reflects favorably on the firms’ efforts to provide equal opportunities.
ItemThe Influence of Sustainability Assurance Report Level and Format on Investor Judgments( 2017-08-30)Many companies now provide integrated reports linking financial performance information with non-financial information and some investors perceive the need for assurance on these reports. This study examines whether the level (limited versus reasonable) and format (presented separately or combined with financial information assurance) of sustainability information assurance contained in integrated reports influences investor judgments. Nonprofessional investors viewed integrated financial and sustainability performance information accompanied by assurance reports and made investment judgments based on this information. Assurance level only influences investment judgments when the sustainability assurance report is presented separately, as opposed to combined with the financial assurance report. Participants made higher investment judgments when limited rather than reasonable assurance was provided on the sustainability information. Further, supplemental analyses show that contrary to what professional standards indicate, participants perceive that a limited assurance report conveys a higher degree of assurance than a reasonable assurance report. Participants also perceive combined assurance reports to be more difficult to understand and perceive sustainability information accompanied by a combined assurance report to be less credible and reliable. Results suggest a need for standard setters to carefully consider the possible influence of assurance report wording and formats on investor judgments as they proceed to develop guidelines for assurance on integrated reports.
ItemAuditors’ Response to Classification Shifting: Evidence from US Firms( 2017-08-28)The purpose of this study is to examine how external auditors react to clients’ earnings management through classification shifting. It draws on the theory that auditors perceive earnings management as a reflection of managers’ opportunism and potential litigation risk. Using audit fees, audit report lags and modified audit opinion as proxies for auditors’ responses, we find that classification shifting is positively associated with audit fees, audit report lags and the likelihood of auditors issuing a modified audit opinion. Our findings remain the same when we use a propensity score matched sample. An additional analysis shows that abnormal audit fees are also higher in firms with classification shifting. Overall, our results suggest that auditors tend to be more conservative when auditing firms with misclassification. As such, auditors charge a fee premium, make more audit effort, and report more conservatively when the clients engage in classification shifting activities.
ItemDoes considering key audit matters affect auditor judgment performance?( 2017-08-28)This paper investigates the potential impact of considering key audit matters (KAM) in line with the new IAASB International Standard on Auditing ISA 701 on auditor judgment performance related to goodwill impairment testing. Our study uses a 2x2 between-subjects experiment based on a goodwill impairment testing case. In this experiment with 157 auditors from two Big4 audit firms in Germany, we manipulated the two independent variables client pressure (high vs. low) and KAM consideration (present vs. absent). Client pressure was manipulated through two different components, client importance and client opposition to making audit adjustments. In the condition in which KAM consideration is present, participants were required to assess the likelihood that they will communicate matters regarding the estimation of the recoverable amount in a separate KAM section of the independent auditor’s report. We opposed this condition with a condition in which participants were only required to assess the likelihood that they will communicate matters regarding the estimation of the recoverable amount with those charged with governance (KAM consideration absent). As dependent variables, we captured skeptical judgment and action as two different facets of auditor judgment performance. Our results suggest that auditors’ reaction to our client pressure manipulation is rather weak (and in fact turns out to be insignificant). If at all, auditors seem to become slightly more skeptical in their judgments and actions when client pressure is high, which might suggest that a reasonableness constraint has been triggered. Furthermore, we find that auditors exhibit significantly less skeptical judgment (and at least possibly also action) when KAM consideration is present than when KAM consideration is absent. This finding suggests that, when considering KAM and due to moral licensing, auditors are more willing to acquiesce to their clients’ desired accounting treatments.
ItemAre Audit Personnel Salaries Related to Audit Effectiveness and Efficiency?( 2017-12-03)Among all the factors influencing audit input, audit personnel is one of the most important, as each factor of audit input is directly related to competent and talented people. Using auditor salary as a proxy for audit personnel quality, I hypothesize and find that higher personnel quality leads to better audit output. First, clients of auditors paying higher salaries have higher audit quality, as evidenced by a lower likelihood of a future restatement of current year’s financial statements, lower discretionary accruals, and a lower likelihood to receive a failed internal control over financial reporting (ICFR) opinion. Moreover, higher-paid auditors earn higher audit fees and are more likely to become national and city-level leaders in a specific industry. The cross-sectional analysis finds that the positive effect of personnel quality on audit outcomes is more pronounced for the audit offices having a steady growth in industry market shares. Collectively, these results are consistent with higher-cost audit inputs leading to better audit output.
ItemAudit market concentration and audit fees: an international investigation( 2017-06-30)Several large auditor consolidations in the late 1980s-early 1990s, along with Arthur Andersen’s collapse in 2001, facilitated global audit market concentration. Subsequently, regulators have expressed serious concern over the potential detrimental effects of this concentration, including cartel pricing. This study investigates the association between audit market concentration and audit fees. Using a large sample from 17 countries, our study yields three principal findings. First, consistent with regulators’ concern, a significantly positive association exists between market concentration and fees. Second, the country-level legal regime changes this association dramatically: while significant and positive in countries with a weak legal regime, the association weakens and eventually becomes negative as the legal regime strengthens. Third, these associations are more pronounced among clients of non-Big 4 auditors than those of Big 4 auditors. These findings provide regulators and other stakeholders with important insights into the effects of audit market structure on audit pricing.