Have You Seen...?
Sudip Bhattacharjee, Virginia Tech
Brian Mayhew, University of Wisconsin
Evelyn Patterson, Indiana University Purdue University Indianapolis
and Mark F. Zimbelman, Brigham Young University
"Learning by Doing and Audit Quality," by P. J. Beck and M. G. H. Wu. Contemporary Accounting Research (Volume 23, 2006): 1-30.
This study presents a nonstrategic, dynamic Bayesian model in which auditors' learning on the job and their choice of professional services jointly affect audit quality. While performing audits over time, auditors accumulate client-specific knowledge so that their posterior beliefs about clients are updated and become more precise (a surrogate for audit quality). Auditors can enrich their knowledge accumulation by performing nonaudit services (NAS). This effect permits auditors to anticipate and to learn about changes in clients' business models, which improves their advisory capacity. Large professional fees can induce auditors to provide NAS that increase engagement risk and diminish audit quality. However, when NAS reduce engagement risk and increase audit quality, auditors may provide NAS without charging clients. The analysis helps explain why the scope of the audit has evolved over time and why the boundaries between audit and NAS are constantly shifting. A recent example of such a shift is that the Sarbanes-Oxley Act adds control attestation to audits for public companies traded in U.S. markets.
"A Political–economic Analysis of Auditor Reporting and Auditor Switches," by K. Hung Chan, K. Z. Lin and P. Lai-lan Mo. Review of Accounting Studies (Volume 11, 2006): 21-48.
This study examines whether auditor opinions are affected by political and economic influences from governments. Auditor locality (local versus non-local) is used to capture such influences from local governments in China. Based on data from China's stock markets for the period 1996–2002, local auditors, who have greater economic dependence on local clients and are subject to more political influence from local governments than non-local auditors, are inclined to report favorably on local government-owned companies to mitigate probable economic losses.
"An Experimental Test of the Interaction of the Insurance and Information-Signaling Hypotheses in Auditing," by D. M. O'Reilly, R. A. Leitch and B.Tuttle. Contemporary Accounting Research (Volume 23, 2006): 267-289.
Three incentives for hiring auditing services have been proposed in the literature: (1) to signal outsiders about the company's prospects, (2) to provide a potential source of loss recovery for investors (insurance), and (3) to reduce agency costs. This study examined the potential for the first two (signaling and insurance) to interact while controlling for agency costs. Using highly experienced financial analysts, the authors find that that the effect of the going-concern opinion on investor value judgments is moderated by the extent to which the auditor provides an insurance function. Specifically, the negative effect of a going-concern opinion on the analysts' stock price estimates is reduced by the extent that the environment treats the auditor as an insurer.
"Audit Fees: A Meta-analysis of the Effect of Supply and Demand Attributes," by D. C. Hay, W. R. Knechel and N. Wong. Contemporary Accounting Research (Volume 23, 2006): 141-191.
The authors evaluate and summarize the large body of audit fee research and use meta-analysis to test the combined effect of the most commonly used independent variables. The perspective provided by the meta-analysis allows for reconsideration of the anomalies, mixed results, and gaps in audit fee research. The findings indicate that, although many independent variables have consistent results, several show no clear pattern in the results and others only show significant results in certain periods or particular countries.
"An Examination of the Ethical Commitment of Professional Accountants to Auditor Independence," by Y. Gendron, R. Suddaby, and H. Lam, Journal of Business Ethics (Volume 64, 2006): 169-193.
A survey of professional accountants was used to explore the degree to which changing work conditions have altered individual accountants' commitment to auditor independence. The authors find that accountants working outside of public accounting have a higher commitment to independence than do accountants working in the context of public accounting firms. In addition, accountants in large international accounting firms (i.e. the "Big Four") report lower commitment to auditor independence than do others in public accounting. And we observe that older accountants report stronger commitment to auditor independence and that commitment to one's client does not necessarily result in a loss of commitment to the core professional value of independence.
"Do Investors Care About the Auditor's Economic Dependence on the Client?," by I. K. Khurana and K. K. Raman. Contemporary Accounting Research (Forthcoming).
This study investigates whether investor perceptions of the financial reporting credibility of
Big Five audits is related to the auditor's economic dependence on the client as measured by nonaudit as well as total (audit and nonaudit) fees paid to the incumbent auditor. The study uses
cost of equity capital as a proxy for investor perceptions of financial reporting credibility, and examine auditor fees both as a proportion of the revenues of the audit firm and the revenues of the audit firm's practice office through which the audit was conducted. Findings suggest that both nonaudit as well as total fees are perceived negatively by investors independent of corporate governance, i.e., investors do not perceive the auditor as compensating for weak governance.
"International versus Domestic Auditing of Bank Solvency," by A. Feltenstein and R. Lagunoff. Journal of International Economics, (Volume 67, 2005): 73-96.
This paper examines alternative ways to prevent losses from bank insolvencies. The authors develop a model that compares two alternative institutions for bank auditing. The first is a system of central bank auditing of national banks. The second is carried out by an international agency that collects and disseminates risk information on banks in all countries. The international auditor is shown to perform at least as well, and sometimes better than, auditing by either central banks or voluntary disclosure by the banks themselves in preventing losses.
"Audit Fees and the Large Auditor Premium in the Italian Market," by M. Cameran. International Journal of Auditing, (Volume 9, 2005): pp. 129-146.
This research highlights the determinants of audit fees in the Italian audit market. The author describes why Italy is not directly comparable with other countries where prior fee studies have been conducted. As such, a fee model for the Italian market is developed. Consistent with previous studies, findings show that the size, complexity of auditee, and audit risk have an impact on the audit fee paid by Italian clients. Moreover, auditor size is also relevant but was attributed solely to KPMG.
"A Comparative Study of Pricing of Audit Services in Emerging Economies," by K. Ahmed and M. Goyal. International Journal of Auditing, (Volume 9, 2005)
This paper empirically examines audit fee determinants in three emerging economies within South Asia. Using data from Bangladeshi firms, Indian firms and Pakistani firms, the results show that size of the reporting entity, multinational affiliation and size of the audit firms are the most important determinants across the three countries. No significant relations were found between audit fees and the firm's financial condition and auditee complexity. The results of this study provide useful insights into the role of contracting cost variables and auditors' billing practices in comparative and emerging economies in general, and South Asia in particular.
"Auditors' Reporting Options and Client Disclosure," by J. V. Carcello, J. Lin and K. Raghunandan. Research in Accounting Regulation (Volume 18, 2005)
This paper examines whether the quality of footnote disclosures about pending litigation related loss contingencies deteriorated after SAS No. 79 removed the option available to auditors to issue a modified audit report for uncertainties. The authors conclude that there is no difference in the quality of disclosures in periods before and after SAS No. 79 became effective. The results suggest that reducing reporting options for auditors did not have an adverse effect on the quality of financial statement disclosures.
"Contagion or Competition: Going Concern Audit Opinions for Real Estate Firms," by R. S. Elliott, M. J. Highfield and M. Schaub. Journal of Real Estate Finance and Economics (Volume 32, 2006)
This study examines whether intra-industry information transfers from going-concern audit opinion announcements create contagion or competitive stock price reactions for other real estate firms operating in the same line of business. Using returns from publicly-traded land subdivision/development firms and Real Estate Investment Trusts, the authors find modest evidence supporting a competitive effect among rival firms as a result of another real estate firm announcing the receipt of a Going Concern Opinion from its independent auditors.
"Auditor Reputation, Auditor Independence, and the Stock Market Impact of Andersen's Indictment on Its Client Firms," by. S. Krishnamurthy, J. Zhou and N. Zhou. Contemporary Accounting Research (Volume 23, 2006)
This paper uses a broad sample of Andersen clients to investigate whether the decline in Andersen's reputation, due to its criminal indictment adversely impacted the market's perception of its audit quality. The results show that when news about Andersen's indictment was released, the market reacted negatively to Andersen clients. More importantly, the indictment period abnormal return is significantly more negative when the market perceived the auditor's independence to be threatened. The study also examines the abnormal returns when firms announce the dismissal of Andersen as an auditor. Results suggest that when firms quickly dismissed Andersen, the announcement returns are significantly higher when firms switched to a Big 4 auditor than when they either switch to non-Big 4 auditors or do not announce the identity of the replacement auditor.
"A Note on Pre-Sarbanes-Oxley Act Users' and Auditors' Perceptions of a Limitations Paragraph in the Auditor's Internal Control Report," by B. P. Foster, W. E Gist, G. McClain and T. Shastri. Research in Accounting Regulation (Volume 18, 2005)
This study examines the impact of a limitations paragraph on users' and auditors' perceptions about readability of the auditor's internal control report, reliability provided by the report over financial reporting, and the auditors' exposure to liability. Data obtained from a field experiment indicates that the limitations paragraph may be perceived by users as providing less than a reasonable degree of assurance, and that the internal control report format without the limitations paragraph would significantly enhance users' perceptions about the report's readability, without increasing the liability as perceived by auditors.
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