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"AUDITOR"
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Do Individual Auditors Affect Audit Quality? Evidence from Archival Data
We examine whether and how individual auditors affect audit outcomes using a large set of archival Chinese data. We analyze approximately 800 individual auditors and find that they exhibit significant variation in audit quality. The effects that individual auditors have on audit quality are both economically and statistically significant, and are pronounced in both large and small audit firms. We also find that the individual auditor effects on audit quality can be partially explained by auditor characteristics, such as educational background, Big N audit firm experience, rank in the audit firm, and political affiliation. Our findings highlight the importance of scrutinizing and understanding audit quality at the individual auditor level.
Journal Article
Big N Auditors and Audit Quality
Whether Big N auditors provide higher audit quality than non-Big N auditors remains a debate. We add new evidence to this debate by utilizing the setting of Big N auditors' acquisitions of non-Big N auditors. We identify 331 treatment firms that switched to Big N auditors due to the exogenous shocks imposed by Big N acquisitions. Our difference-in-differences analyses show that treatment firms' audit quality improves after switching to Big N auditors. In comparison, mergers or acquisitions among non-Big Ns have little impact on audit quality. Our cross-sectional analyses suggest the audit quality improvement among treatment firms is more likely due to Big N auditors' general competence rather than their industry-specific expertise. Finally, we find that treatment firms experience no significant market reactions around the announcements of Big N acquisitions, indicating that the capital markets may not attach any premium to the improved audit quality associated with Big N auditors.
Journal Article
Why are expanded audit reports not informative to investors? Evidence from the United Kingdom
Standard-setters worldwide have passed new audit reporting requirements aimed at making audit reports more informative to investors. In the UK, the new standard expands the audit reporting model by requiring auditors to disclose the risks of material misstatement (RMMs) that had the greatest effect on the financial statement audit. Using short window tests, prior research indicates that these disclosures are not incrementally informative to investors (Gutierrez et al. in Review of Accounting Studies 23:1543–1587, 2018). In this study, we investigate three potential explanations for why investors do not find the additional auditor risk disclosures to be informative. First, using long-window tests, we find no evidence that the insignificant short-window market reactions are due to a delayed investor reaction to RMMs. Second, using value relevance tests, we show that the insignificant market reactions are not due to auditors disclosing irrelevant information. Finally, we provide evidence suggesting that RMMs lack information content because investors were already informed about the financial reporting risks before auditors began disclosing them in expanded audit reports.
Journal Article
The Impact of the PCAOB Individual Engagement Inspection Process—Preliminary Evidence
This study investigates the impact on auditors' and clients' activities of Public Company Accounting Oversight Board (PCAOB) inspections of individual engagements. I find that both auditors and clients react to a Part I Finding, which identifies audit deficiencies on their inspected engagements. Audit firm effort increases on inspected engagements and non-inspected engagements of offices or partners that receive a Part I Finding, suggesting direct, as well as spillover, effects of the PCAOB inspections. The client is also more likely to switch auditors. However, auditor effort and financial reporting quality subsequently decline for inspected engagements that did not receive a Part I Finding. In these cases, clients are less likely to switch auditors. Additional analyses show that the auditor reaction depends on whether the auditor is an industry specialist, the client reaction depends on the size of the auditor, and effects on financial reporting quality depend on whether the deficiency is a firm-wide issue. Overall, these results suggest that both audit firms and clients care about the PCAOB individual engagement inspection process and, in several instances, gravitate toward the level set by the Part I Finding bar.
Journal Article
Auditor characteristics and audit report lag: A research from the Indonesian Stock Exchange
This study aims to determine the effect of auditor specialists, auditor reputation, auditor gender, auditor education level, and auditor professional certification on audit report lag by using research objects, namely all companies listed on the Indonesia Stock Exchange (IDX) for the 2017-2021 period. The sampling technique in this study used a purposive sampling technique. The data analysis used in this study is the Eviews 9 panel data regression analysis software. The results show that the auditor specialist independent variable has a negative effect on audit report lag. Meanwhile, auditor reputation, auditor gender, and auditor education level do not effect audit report lag. The professional certification of auditors has a positive effect on audit report lag. Meanwhile, the addition of control variables, namely firm size and loss, has a positive effect on audit report lag. However, the control variable ROA has a negative effect on audit report lag.
Journal Article
Individual Auditor Social Responsibility and Audit Quality: Evidence from China
Capitalizing on a unique setting in China where auditors disclose their prosocial activities, we examine the role that auditor social responsibility plays in shaping their performance. In one direction, behavior consistency theory implies that individual auditors exhibiting more social commitment in their off-the-job activities behave similarly during engagements, enhancing the quality of their audits. In the other direction, accounting firms’ internal structures along with external disciplinary forces mute the impact of heterogeneous auditor characteristics on their performance. In a staggered difference-in-differences design, we report a significant fall in the magnitude of companies’ discretionary accruals and the incidence of financial reporting irregularities after their auditors begin contributing to social welfare, relative to companies whose auditors refrain from contributing during the same timeframe. Additional evidence implies that the higher audit quality stems from auditors better protecting their independence and improving their competence in the post-contribution period. Collectively, our results provide insights into the importance of auditors’ prosocial attitudes to their external monitoring.
Journal Article
The Contagion Effect of Low-Quality Audits at the Level of Individual Auditors
This study examines the relation between the audit failures of individual auditors and the quality of other audits performed by these same auditors. Employing a Chinese setting where audit reports reveal the identities of engagement auditors, we find that auditors who have performed failed audits also deliver lower-quality audits on other audit engagements, with this \"contagion\" effect spreading both over time and to other audits performed by these same auditors in the same year. However, we find little evidence that an audit failure also casts doubt on the quality of audits performed by \"non-failed\" auditors who are same-office colleagues of a \"failed\" auditor. We further discover that the contagion effect is attenuated for female auditors, auditors holding a master's degree, and auditors with more auditing experience. Our results underscore the usefulness of disclosing the identity and personal characteristics of individual auditors to investors and regulators.
Journal Article