Auditor switching, lowballing and conditional conservatism: evidence from selected Asian countries

Purpose This paper aims to investigate the effect of auditor switching and lowballing on conditional conservatism, particularly how different types of auditor switching, namely, upward, downward and lateral switching to/from Big 4 and industry specialists, affect earnings quality in the following selected Asian countries: Indonesia, Malaysia, the Philippines, South Korea and Thailand. Design/methodology/approach Using conditional conservatism as a proxy for earnings quality, this study hypothesises that upward switching from non-Big 4 to Big 4 auditors, or from non-specialist to specialist auditors, would result in high conditional conservatism, while downward switching would lead to low conditional conservatism. The study further tests whether lowballing provides a viable explanation for reduced earnings conservatism in firms that switch from Big 4 to non-Big 4 auditors, or from specialist to non-specialist auditors. Findings The analysis, on a sample of 28,073 firm-year observations from 2007 to 2016, shows that the decision to downgrade auditors leads to lower conditional conservatism in the year of switching, compared with other firms and the pre-switching year. The evidence further shows that, when firms downgrade their auditors, lowballing contributes to a decrease in conditional conservatism in the first year of audit switching. Further, this research finds that switching to specialist auditors will result in increased conditional conservatism, while switching from specialist auditors to non-specialist auditors will result in reduced conditional conservatism. Practical implications The findings of this study are useful to investors who are looking to diversify their investment portfolio in developing markets, as evidence about auditor switching and quality of financial reporting may be an important factor in their investment decisions. Downward auditor switches and lowballing could act as red flags to investors in the sense that these events could signal a decrease in conditional conservatism and, hence, quality of earnings. Originality/value This research offers new evidence to support the view that management decisions to switch to lower-quality auditors will force newly appointed auditors to acquiesce to clients’ demands for reporting low-quality earnings.

Earnings Management and Corporate Governance in Family Firms

Earnings management and corporate governance relationships are examined for a sample of 49 Portuguese listed firms considering an unbalanced panel for the period 2002-2017, using panel corrected standard errors models and considering the family ownership effect. Empirical findings reveal that there is a positive relationship between corporate board independence and earnings management and that the presence of women on board decreases earnings management practices. Results are consistent with the hypothesis that earnings management practices are lower in family firms than in non-family firms. Size, being audited by the Big 4 companies, return on assets, loss, and the existence of an audit committee on board influence positively earnings management, but leverage, age, and ownership control are negatively related to earnings management. Results indicate that further auditing and control is necessary for Portuguese listed companies leading to strict recommendations to be followed by policymakers regarding control of these firms.

The impact of audit quality on earnings management and cost of equity capital: evidence from a developing market

Purpose This study aims to examine the effects of audit quality on earnings management and cost of equity capital (COE) considering the impact of two owner types: government ownership and foreign ownership. Design/methodology/approach The study uses a panel data set of 236 Vietnamese firms covering the period 2007 to 2017. Because the two main dependent variables of the COE capital and the absolute value of discretionary accruals receive fractional values between zero and one, the paper uses the generalised linear model (GLM) with a logit link and the binomial family in regression analyses. The paper uses numerous audit quality measures, including hiring Big 4 auditors or the industry-leading Big 4 auditor, changing from non-Big 4 auditors to Big 4 auditors or the industry-leading Big 4 auditor, and the length of Big 4 auditor tenure. Big 4 companies include KPMG, Deloitte, EY and PwC, whereas the non-big 4 are the other audit companies. Findings The study finds a negative relationship between audit quality and both the COE capital and income-increasing discretionary accruals. The effects of audit quality on discretionary accruals and the COE capital depend on the ownership levels of two important shareholders: the government and foreign investors. Foreign ownership is negatively associated with discretionary accruals; however, the effect is more pronounced in the sub-sample of state-owned enterprises (SOEs), the firms where the government owns 50% or more equity, than in the sub-sample of Non-SOEs. Originality/value To the best of the knowledge, no prior similar study exists that used the GLM with a logit link and the binomial family regression. Global investors may be interested in understanding how unique institutional settings and capital markets of each country impact the financial reporting quality and cost of capital. Further, policymakers of developing markets may have incentives to improve the quality of financial reporting and reduce the cost of capital which should result in attracting more foreign investments.

The Effect of Internal Corporate Governance of the Firm’s Performance and Firm Value in Five GCC Countries

A critical glance at the literature review of GCC countries, firm performance and firm value shows that the literature does not adequately consider the uniqueness of an institutional setting such as the presence of royal family members and government officials’ members on the board. Additionally, noticeable features are not accounted for in the previous literature, such as a large involvement of relatives and the presence of a female on the board of directors. It is important to understand whether these variables matter or not in this region as this then influences the firm’s performance and firm value. Thus, this study focuses on the effect of internal CG of the firm’s performance and firm value in five GCC countries. The final sample consists of 220 firms (1,096 firm-year observations) for the fiscal year 2009 to 2013. The main finding is that there is a positive significant relationship is seen between expertise factors and firm performance. The expertise factor encompasses royal family members on the board as well as hiring one of the Big 4-auditing firms. This result is in line with a theoretical claim (agency theory), the research question expectation and empirical evidence.

The going-concern opinion and the adverse credit rating: an analysis of their relationship

Purpose The purpose of this study is to examine the relationship between going-concern (GC) opinions issued by the Big 4 audit firms and adverse credit ratings from the two largest credit rating agencies (CRAs) – Standard & Poor’s (S&P) and Moody’s. This question is relevant because there have been suggestions that auditors and CRAs should become more similar to each other, and because the two largest CRAs have different ownership structures that could affect their ratings. Design/methodology/approach Univariate and multivariate analyses are performed using a sample of firms that filed for bankruptcy between January 1, 2002 and December 31, 2013 that also had an audit opinion signed during the 12 months prior to bankruptcy, along with a credit rating issued by either or both S&P and Moody’s. Both influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time. Findings Both audit reports and credit ratings influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time. Originality/value Auditors are more likely to issue GC opinions when there is a downgrade to the credit rating, and CRAs are more likely to downgrade their ratings when there is a GC opinion. The study highlights that CRAs with different ownership structures provide different credit rating outcomes.

La concentración de los servicios de auditoría financiera en México. Caso aplicado a la Bolsa Mexicana de Valores

El estudio del grado de Concentración de los Servicios de Auditoría se ha ido desarrollando frecuentemente en diversos países, sin embargo, el análisis de este importante tema no se ha llevado a cabo en México en recientes años. El objetivo de este artículo de investigación es el presentar los resultados del estudio cuantitativo respecto a la Concentración de los Servicios de Auditoría en dicho país, basándonos en la información empresarial de carácter bursátil por los años 2018 a 2020, utilizando como método la aplicación del “Índice de Concentración” y el “Índice de Herfindahl”. Los resultados indican que la Concentración de los Servicios de Auditoría por parte de las denominadas “Big 4”, si bien sigue siendo alta, ha disminuido a través de los años.

Auditor Choice and the Informativeness of 10-K Reports

This study provides new evidence on the influential role of external auditors in enhancing the informativeness of form 10-K annual reports to shareholders. Specifically, we find that the client’s choice of a Big 4 auditor (PwC, EY, KPMG, and Deloitte) versus a non-Big 4 auditor contributes to cross-sectional variations in 10-K disclosure volume. We also document that the benefit of enhanced disclosures provided by Big 4 auditors is more pronounced for audit clients with poorer accrual quality and those with higher information asymmetry. Furthermore, we introduce the portion of 10-K length unexplained by operating complexity and observable client characteristics as a new proxy for audit firm effort. Specifically, we find that abnormally long disclosures are associated with higher audit fees and longer audit report lag, which implies that an incremental level of audit effort can be inferred from the discretionary component of 10-K disclosures. As audit effort is costly, a greater volume of 10-K disclosures can be expected to be associated with an improvement in the quality of financial reporting. Overall, our findings show that auditors play more than a simple attestation role in the financial reporting process, and that the quality of financial reporting in a company’s 10-K annual report is a joint product of the effort and decisions of both a company’s managers and its auditors.

The Effect of Ownership Structure on Disclosure Quality and Credit Ratings in Family Firms: The Moderating Role of Auditor Choice

Despite the substantial degree of heterogeneity within family firms, little is known about how their heterogeneity affects firm behavior and the implication for the shareholder–debtholder agency problem. Our study contributes to the literature by examining whether family firms with a higher level of control-ownership divergence would disclose less information and whether Big 4 auditors play a moderating role in mitigating the negative impact of control-ownership divergence on disclosure quality resulting in improved credit ratings. Using data from the emerging economy of Taiwan, we provide support for our three hypotheses. Our contributions will interest family firm owners, researchers, auditors, and policymakers.

International Accounting and Auditing Standards Adoption in Non-EU Eastern European Countries: Review of Regulations and Literature

In this paper, we review the regulations and research on the adoption of international accounting and audit standards in eleven Eastern European countries outside of the European Union. We find many regulatory commonalities among these jurisdictions related to their Communist-bloc heritage. The state remains the most important stakeholder and tax accounting dominates financial reporting. The work of local auditors is considered less reliable than that of their Big 4 counterparts. International organizations and the Big 4 auditors provide stimuli for and assistance with international standards’ adoption. Accounting and audit research is limited. The scarcity of data forces most authors to focus on the qualitative evaluation of accounting and audit reforms. Some opt for surveys. Few papers include empirical analyses. Our review covers jurisdictions, which have received limited attention in prior literature. We inform future empirical work and speak to the generalizability of previous research findings to this set of countries.

ALÉM DA AUDITORIA FINANCEIRA: FATORES QUE PODEM INFLUENCIAR A PRESENÇA DAS GRANDES FIRMAS DE AUDITORIA CONTÁBIL NO MERCADO DE ASSEGURAÇÃO EXTERNA DOS RELATÓRIOS DE SUSTENTABILIDADE NO BRASIL

Objetivo: Esta pesquisa busca analisar os fatores que podem influenciar a presença das grandes firmas de auditoria contábil no mercado de asseguração externa dos Relatórios de Sustentabilidade (RS) no Brasil. Método: A amostra compõe-se de 47 companhias de capital aberto que asseguraram seus RS no período de 2012 a 2018. Os dados foram analisados por meio das técnicas estatísticas Anacor, HOMALS e regressão hierárquico logístico para dados em painel. Resultados: Os resultados apontaram que a prestação conjunta de auditoria contábil e asseguração externa dos RS, bem como o isomorfismo mimético são fatores que afetam positivamente a presença das firmas Big-4 no mercado de asseguração externa dos RS no Brasil, caracterizando a vantagem competitiva dos provedores de contabilidade sobre os demais provedores nesse emergente mercado. Contribuições: Este trabalho traz importantes implicações para profissionais e reguladores da área contábil, pois o reconhecimento das firmas de auditoria contábil no mercado de asseguração externa dos RS deve promover o interesse em desenvolver apoio institucional a essa prática.