The Consequences of Providing Lower-Quality Audits at the Engagement Partner Level

2019 ◽  
Vol 18 (3) ◽  
pp. 63-82 ◽  
Author(s):  
Wuchun Chi ◽  
Ling Lei Lisic ◽  
Linda A. Myers ◽  
Mikhail Pevzner ◽  
Timothy A. Seidel
Keyword(s):  
Audit Quality ◽  
Partner Selection ◽  
Recent History ◽  
Service Experience ◽  
Audit Firm ◽  
Audit Firms ◽  
Increased Risk ◽  
History Of ◽  
Using Data

ABSTRACT Using data from Taiwan, where a long history of engagement partner performance is available, we examine the reputational consequences that engagement partners suffer for having a recent history of past audit failures. We find that when an engagement partner's recent history of poor audit quality is observable to audit clients, they are more likely to lose clients and are less likely to be reassigned to serve other clients of the audit firm over the next five years. We also find that these engagement partners are more likely to stop serving as engagement partners in the next five years, and those who remain in client service experience a reallocation of assignments. Additionally, the clients that these partners continue to serve exhibit increased risk. Overall, our findings suggest that an engagement partner's prior audit quality influences clients' and audit firms' engagement partner selection.

Auditor rotations and audit quality

2019 ◽  
Vol 27 (4) ◽  
pp. 639-660 ◽  
Author(s):  
Devi Sulistyo Kalanjati ◽  
Damai Nasution ◽  
Karin Jonnergård ◽  
Soegeng Sutedjo
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Stock Exchange ◽  
Multivariate Regression Analysis ◽  
Cumulative Number ◽  
Firm Level ◽  
Content Type ◽  
Audit Firm ◽  
Audit Firms ◽  
Using Data

Purpose The purpose of this paper is to investigate the association between audit rotation – at the audit partner and audit firm level – and audit quality. As mentioned in the literature, audit rotation has several benefits, and one of them is it can bring a fresh look to audit tasks and subsequently improve audit quality. Moreover, audit itself can help a client to improve its financial reporting. However, ineffective communication between predecessor and successor audit partners or audit firms, and pseudo-rotation can hamper that benefit. Design/methodology/approach This study uses multivariate regression analysis to test its hypotheses. Using data from companies listed on the Indonesia Stock Exchange, the sample consists of 688 company-year observations covering the period 2003–2016. Findings This study finds that the cumulative number of audit partner rotations is positively associated with audit quality, indicating that rotations at the audit partner level will enhance audit quality. Conversely, it finds that the cumulative number of audit firm rotations is negatively associated with audit quality. Practical implications The study’s findings may assist regulators in crafting standards regarding audit rotation. As the findings show, audit partner rotation will improve audit quality, but the audit firm rotation will decrease audit quality. As this study tries to explain the decreasing audit quality from audit firm rotation could be a consequence of ineffective communication or pseudo audit firm rotation. Regulators should try to tackle these problems. Originality/value Instead of using tenure as a proxy for a rotation, this study creates a new proxy named the cumulative number of audit partner and audit firm rotations to provide evidence on the benefits of audit rotation.

Does Increased Audit Partner Tenure Reduce Audit Quality?

2008 ◽  
Vol 23 (4) ◽  
pp. 553-572 ◽  
Author(s):  
David L. Manry ◽  
Theodore J. Mock ◽  
Jerry L. Turner
Keyword(s):  
Audit Quality ◽  
Discretionary Accruals ◽  
Financial Statement ◽  
Risk Level ◽  
Negatively Associated ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Using Data ◽  
International Audit

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.

An Empirical Investigation of IPO Underpricing and the Change to the LLP Organization of Audit Firms

2004 ◽  
Vol 23 (1) ◽  
pp. 53-67 ◽  
Author(s):  
Steven R. Muzatko ◽  
Karla M. Johnstone ◽  
Brian W. Mayhew ◽  
Larry E. Rittenberg
Keyword(s):  
Initial Public Offering ◽  
Audit Quality ◽  
Limited Liability ◽  
Litigation Risk ◽  
Ipo Underpricing ◽  
Audit Firm ◽  
Legal Structure ◽  
Audit Firms ◽  
Public Offering

This paper examines the relationship between the 1994 change in audit firm legal structure from general partnerships to limited liability partnerships (LLPs) on underpricing in the initial public offering (IPO) market. The change in legal structure of audit firms reduces an audit firm's wealth at risk from litigation damages and reduces the incentives for intrafirm monitoring by partners within an audit firm. Prior research suggests that underpricing protects underwriters from litigation damages, and that the level of underpricing varies inversely with both the amount of implicit insurance provided by the audit firm and the quality of the audit services provided. We hypothesize the change in audit firm legal structure reduced the assets available from audit firms in IPO-related litigation and indirectly reduced audit quality by lowering intrafirm monitoring. As a result, underwriters have incentives as a joint and several defendant with the audit firms to increase IPO underpricing, particularly for high-litigation-risk IPOs, following audit firms' shifts to LLP status. Our findings are consistent with this hypothesis.

The Effect of Office Changes within Audit Firms on Clients' Audit Quality and Audit Fees

2020 ◽  
Vol 39 (1) ◽  
pp. 71-99
Author(s):  
Carl W. Hollingsworth ◽  
Terry L. Neal ◽  
Colin D. Reid
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Additional Analysis ◽  
Audit Firm ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact ◽  
Audit Partner Rotation

SUMMARY While prior research has examined audit firm and audit partner rotation, we have little evidence on the impact of within-firm engagement team disruptions on the audit. To examine these disruptions, we identify a unique sample of companies where the audit firm issuing office changed but the audit firm did not change and investigate the effect of these changes on the audit. Our results indicate that companies that have a change in their audit firm's issuing office exhibit a decrease in audit quality and an increase in audit fees. In additional analysis, we partition office changes into two groups—client driven changes and audit firm driven changes. This analysis reveals that client driven changes are more likely to result in a higher audit fee while audit quality is unchanged. Conversely, audit firm driven changes do not result in a higher audit fee but do experience a decrease in audit quality.

Leaving a joint audit system: conditional fee reductions

2014 ◽  
Vol 29 (2) ◽  
pp. 131-152 ◽  
Author(s):  
Claus Holm ◽  
Frank Thinggaard
Keyword(s):  
Audit Quality ◽  
Theory Development ◽  
Future Research ◽  
Research Approach ◽  
Content Type ◽  
Audit Firm ◽  
Audit System ◽  
Interaction Terms ◽  
Audit Firms ◽  
Audit Fee

Purpose – The authors aim to exploit a natural experiment in which voluntary replace mandatory joint audits for Danish listed companies and analyse audit fee implications of using one or two audit firms. Design/methodology/approach – Regression analysis is used. The authors apply both a core audit fee determinants model and an audit fee change model and include interaction terms. Findings – The authors find short-term fee reductions in companies switching to single audits, but only where the former joint audit contained a dominant auditor. The authors argue that in this situation bargaining power is more with the auditors than in an equally shared joint audit, and that the auditors' incentives to offer an initial fee discount are bigger. Research limitations/implications – The number of observations is constrained by the small Danish capital market. Future research could take a more qualitative research approach, to examine whether the use of a single audit firm rather than two has an effect on audit quality. The area calls for further theory development covering audit fee and audit quality in joint audit settings. Practical implications – Companies should consider their relationship with their auditors before deciding to switch to single auditors. Fee discounts do not seem to reflect long-lasting efficiency gains on the part of the audit firm. Originality/value – Denmark is the first country to leave a mandatory joint audit system, so this is the first time that it is possible to study fee effects related to this.

Fifteen-week window for recurrent muscle strains in football: a prospective cohort of 3600 muscle strains over 23 years in professional Australian rules football

2020 ◽  
Vol 54 (18) ◽  
pp. 1103-1107 ◽  
Author(s):  
John W Orchard ◽  
Mohammad Chaker Jomaa ◽  
Jessica J Orchard ◽  
Katherine Rae ◽  
Daniel Tyler Hoffman ◽  
...  
Keyword(s):  
Risk Factor ◽  
Return To Play ◽  
Recent History ◽  
Hamstring Injury ◽  
Muscle Strain ◽  
Increased Risk ◽  
Australian Football ◽  
History Of ◽  
Muscle Strain Injury ◽  
Injury Recurrence

ObjectivesTo determine the rates of muscle strain injury recurrence over time after return to play in Australian football and to quantify risk factors.MethodsWe analysed Australian Football League player data from 1992 to 2014 for rates of the four major muscle strain injury types (hamstring, quadriceps, calf and groin) diagnosed by team health professionals. Covariates for analysis were: recent history (≤8 weeks) of each of the four muscle strains; non-recent history (>8 weeks) of each; history of hip, knee anterior cruciate ligament, knee cartilage, ankle sprain, concussion or lumbar injury; age; indigenous race; match level and whether a substitute rule was in place.Results3647 (1932 hamstring, 418 quadriceps, 458 calf and 839 groin) muscle strain injuries occurred in 272 759 player matches. For all muscle strains combined, the risk of injury recurrence gradually reduced, with recurrence risks of 9% (hamstring), 5% (quadriceps), 2% (calf) and 6% (groin) in the first match back and remaining elevated for 15 weeks after return to play. The strongest risk factor for each muscle injury type was a recent history of the same injury (hamstring: adjusted OR 13.1, 95% CI 11.5 to 14.9; calf OR 13.3, 95% CI 9.6 to 18.4; quadriceps: OR 25.2, 95% CI 18.8 to 33.8; groin OR 20.6, 95% CI 17.0 to 25.0), followed by non-recent history of the same injury (hamstring: adjusted OR 3.5, 95% CI 3.2 to 3.9; calf OR 4.4, 95% CI 3.6 to 5.4; quadriceps OR 5.2, 95% CI 4.2 to 6.4; groin OR 3.5, 95% CI 3.0 to 4.0). Age was an independent risk factor for calf muscle strains (adjusted OR 1.6, 95% CI 1.3 to 2.0). Recent hamstring injury increased the risk of subsequent quadriceps (adjusted OR 1.8, 95% CI 1.2 to 2.7) and calf strains (OR 1.8, 95% CI 1.2 to 2.6). During the ‘substitute rule’ era (2011–2014), hamstring (adjusted OR 0.76, 95% CI 0.67 to 0.86), groin (OR 0.78, 95% CI 0.65 to 0.93) and quadriceps (OR 0.70, 95% CI 0.53 to 0.92) strains were less likely than outside of that era but calf (OR 1.6, 95% CI 1.3 to 1.9) strains were more likely than before the substitute rule era.ConclusionRecent injury is the greatest risk factor for the four major muscle strains, with increased risk persisting for 15 weeks after return to play.

Litigation Risk and Audit Firm Characteristics

2010 ◽  
Vol 29 (2) ◽  
pp. 71-82 ◽  
Author(s):  
Jeffrey R. Casterella ◽  
Kevan L. Jensen ◽  
W. Robert Knechel
Keyword(s):  
Insurance Companies ◽  
Prior History ◽  
Continuous Measure ◽  
Litigation Risk ◽  
Insurance Company ◽  
Firm Characteristics ◽  
Audit Firm ◽  
Growth Firms ◽  
History Of ◽  
Using Data

SUMMARY: This study examines the association between certain audit firm characteristics and audit firm litigation risk. Previous research shows a link between audit client characteristics and audit firm litigation risk. However, insurance companies do not make extensive use of financial information about individual audit clients to make risk assessments. Instead, they primarily use information about the audit firms themselves. Using data from a large insurance company, we examine the link between several audit firm characteristics and audit-related litigation. Based on a dichotomous measure of risk (existence of a lawsuit), we find that larger firms, firms experiencing rapid growth, firms that sue their clients, and firms with a history of problems all face greater litigation risk. Introducing a continuous measure of the cost of litigation we find, in addition to the previously mentioned risk factors, that firms with a prior history of regulatory problems and firms that choose smaller deductibles are more risky to the insurance company. However, our proxies for independence and expertise are not associated with litigation risk.

Does Audit Fee Homogeneity Exist? Premiums and Discounts Attributable to Individual Partners

2011 ◽  
Vol 30 (4) ◽  
pp. 249-272 ◽  
Author(s):  
Stuart D. Taylor
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Audit Market ◽  
Homogeneity Assumption ◽  
Audit Firms ◽  
Audit Fee ◽  
Using Data ◽  
The Individual ◽  
Made In

SUMMARY This paper investigates the implied assumption, made in many audit fee determination studies, that, within a given audit firm, all partners produce a statistically identical level of audit quality and earn a statistically identical level of audit fees. This is referred to as the “homogeneity assumption.” However, this is contradicted by the individual auditor behavioral literature, which shows that different individual auditor characteristics can have an impact on audit quality. Given the fact that audit partners differ in their quality, this paper hypothesizes that different audit partners will be able to earn differing levels of fees. This hypothesis is tested by estimating an audit fee model using data from 822 Australian publicly listed companies for the year 2005. Australia is an ideal audit market for this research, as the disclosure of the name of the audit engagement partner in the audit report is mandatory. The empirical results indicate that individual audit partners earn individual audit fee premiums (or discounts) that are not explainable by the audit firms of which they are members. Data Availability: All data have been extracted from publicly available sources.

scholarly journals FAR Research Project: The loss of talent: a threat for audit quality?

2017 ◽  
Vol 91 (9/10) ◽  
pp. 268-273
Author(s):  
Isabella Grabner ◽  
Judith Künneke ◽  
Frank Moers
Keyword(s):  
Audit Quality ◽  
Recent Survey ◽  
New Professionals ◽  
Research Project ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Labor Inputs

The main priority of the audit industry is to maintain and improve audit quality. While audit quality has been an important topic in both accounting academia and practice, there is still a lack of understanding of what drives audit quality. Given that people are the most valuable asset an audit firm has, we focus on examining the labor inputs as a driver of audit quality. Specifically, we argue that a key threat for audit quality that so far has been largely neglected is the loss of talent across the hierarchy. A well-known problem for audit firms is that they invest enormous resources in new professionals only to have many with talent leave (Patten, 1995; Vera-Muñoz, Ho & Chow, 2006; ACCA & ACRA, 2012). A recent survey by the Association of Chartered Certified Accountants finds that only about 38% are satisfied with their career and only 35% plan to stay beyond three years, with no significant differences across Big 4 and midtier firms (ACCA and ACRA, 2012).

Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees

2015 ◽  
Vol 91 (3) ◽  
pp. 767-792 ◽  
Author(s):  
Kenneth L. Bills ◽  
Lauren M. Cunningham ◽  
Linda A. Myers
Keyword(s):  
Audit Quality ◽  
Matched Control ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Audit Firm ◽  
Association Member ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Fee ◽  
Control Samples

ABSTRACT In this study, we examine the benefits of membership in an accounting firm association, network, or alliance (collectively referred to as “an association”). Associations provide member accounting firms with numerous benefits, including access to the expertise of professionals from other independent member firms, joint conferences and technical trainings, assistance in dealing with staffing and geographic limitations, and the ability to use the association name in marketing materials. We expect these benefits to result in higher-quality audits and higher audit fees (or audit fee premiums). Using hand-collected data on association membership, we find that association member firms conduct higher-quality audits than nonmember firms, where audit quality is proxied for by fewer Public Company Accounting Oversight Board (PCAOB) inspection deficiencies and fewer financial statement misstatements, as well as less extreme absolute discretionary accruals and lower positive discretionary accruals. We also find that audit fees are higher for clients of member firms than for clients of nonmember firms, suggesting that clients are willing to pay an audit fee premium to engage association member audit firms. Finally, we find that member firm audits are of similar quality to a size-matched sample of Big 4 audits, but member firm clients pay lower fee premiums than do Big 4 clients. Our inferences are robust to the use of company size-matched control samples, audit firm size-matched control samples, propensity score matching, two-stage least squares regression, and to analyses that consider changes in association membership. Our findings should be of interest to regulators because they suggest that association membership assists small audit firms in overcoming barriers to auditing larger audit clients. In addition, our findings should be informative to audit committees when making auditor selection decisions, and to investors and accounting researchers interested in the relation between audit firm type and audit quality.

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