Competition, Auditor Independence and Audit Quality

Xie, Fujiao
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[Honolulu] : [University of Hawaii at Manoa], [December 2016]
Although regulators have severe concerns about whether the lack of competition in the audit market may reduce audit quality, existing research provides conflicting empirical results on whether competition directly reduces audit quality. In this paper, I employ a novel approach: structural equation modeling (SEM) to construct a latent variable to measure audit quality and also use SEM to simultaneously assess both the construct of audit quality and the overall (both direct and indirect) effects of audit market competition on audit quality. I find that greater audit market competition significantly increases audit quality and that it has significant moderation effects on audit quality through auditor independence, indicated by the provision of non-audit services (NAS) and auditor-client tenure. Specifically, audit market competition negatively moderates the inverse relationship between auditor-client tenure and audit quality. In contrast, competition has a positive moderation effect on the inverse association between the provision of NAS and audit quality. I also discover that audit market competition affects audit quality indirectly through enhanced auditor independence. Further, the results in the measurement model show that internal control weaknesses, going-concern opinions, restatements, and security class action filings are great proxies for audit quality, while discretionary accruals do not capture audit quality well. The findings of the study not only offer a potential explanation for the mixed results found in prior research, but also provide insightful evidence for regulatory policies on audit market competition.
Ph.D. University of Hawaii at Manoa 2016.
Includes bibliographical references.
Competition, Auditor Independence, Audit Quality, Tenure, Non-audit Service
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