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| Author | : Neelam Poonawala |
| Publisher | : |
| Total Pages | : 146 |
| Release | : 2008 |
| Genre | : Auditors |
| ISBN | : |
| Author | : Larry R. Davis |
| Publisher | : |
| Total Pages | : 52 |
| Release | : 2008 |
| Genre | : |
| ISBN | : |
We examine the relation between auditor tenure and a firm's ability to use discretionary accruals to meet or beat analysts' earnings forecasts. Regulators have long expressed concern over the use of earnings management to attain earnings targets. These concerns are compounded by lingering questions over whether long-term auditor-client relationships impair an auditor's ability to independently stem such practices. The profession counter-argues that mandatory auditor rotation reduces auditors' familiarity with the client and adversely affects audit quality. Consistent with both arguments, we find that firms with both short (two to three years) and long (13-15 years or more) tenure are more likely to report levels of discretionary accruals that allow them to meet or beat earnings forecasts. The results suggest that while regulatory mandates for periodic auditor turnover have negative effects, sustained long term auditor-client relationships may be also detrimental to audit quality. The generalizability of our results may not extend to firms that are not covered by analysts, as these firms do not face the same public pressure to manage earnings in order to meet or beat expectations.
| Author | : Nelson Milan Carrasco Abarca |
| Publisher | : |
| Total Pages | : 92 |
| Release | : 2013 |
| Genre | : Audit committees |
| ISBN | : |
In a recent concept release the Public Company Accounting Oversight Board (PCAOB) highlighted concerns regarding auditor independence and auditor objectivity. They expressed concern that auditors may have a bias to accept management's views, particularly in long auditor tenure relations, and asked for public comments on the idea of mandatory auditor rotation. Prior research has focused primarily on the auditor side of the relation, however, my study considers the collaborative effect of the three parties involved in the financial reporting process (management (Chief Executive Officer (CEO), the auditor, and the audit committee). I find that longer collaborative tenure between the CEO and the auditor is associated with lower positive discretionary accruals (i.e., less earnings management). This finding is contrary to the PCAOB's concerns regarding long auditor tenure and lower financial reporting quality. I do not find that the joint tenure of the three parties (CEO, auditor and audit committee chair) is significantly associated with earnings management or accrual quality. I also find that the first year of an audit committee chair change is associated with an increase in positive discretionary accruals. This association does not differ based on different lengths of auditor tenure. However, longer collaborative tenure between the auditor and the CEO constrains earnings management and there is an even greater effect when there is an audit committee chair change (i.e., there are lower positive discretionary accruals). This study provides evidence that longer auditor tenure is not necessarily an undesirable situation, either by itself and particularly not if the long tenure is coupled with long tenure of the CEO.
| Author | : |
| Publisher | : GRIN Verlag |
| Total Pages | : 34 |
| Release | : 2017-06-20 |
| Genre | : Business & Economics |
| ISBN | : 366846748X |
Seminar paper from the year 2017 in the subject Business economics - Accounting and Taxes, grade: 1,3, , language: English, abstract: This paper studies the relation between audit and earnings quality. It examines whether firms audited by a Big 4 member engage in higher earnings management activities as proxied by the magnitude of discretionary and absolute accruals, as well as an income smoothing measure. The author predicts that large auditors have higher competencies and incentives to deliver a higher quality audit. Therefore, their clients are expected to reveal less sophisticated earnings management and thus higher earnings quality. The results do not support this relation. Since standardsetters have been concerned about managers’ use of discretion to manage earnings in their financial reports, an increasing amount of empirical research was conducted to address this issue, additionally to regulation. While independent auditors (aim to) assure that these statements are in accordance with legal compliance, the actual audit quality can be grasped as the contingency that the auditor exposes and discloses an anomaly in their clients’ financial reports. Whereas numerous audit scandals threaten the trustworthiness of well-known large auditors, there is various research revealing that Big N audited firms are supposed to disclose financial reports of higher quality. Supplementing misguiding accrual accounting practices in this regard, this study also addresses another proxy for earnings management: income smoothing. Burgstahler and Dichev (1997) explain corporate income smoothing with the fact that managers avoid revealing earning decreases and losses to diminish costs arising from transactions with stakeholders. Similarly, Degeorge, Patel and Zeckhauser (1999) show that managers smooth earnings to meet analysts’ forecasts. On the other hand there are various contrary studies. DeFond and Jimbalvo (1993) found that auditor-client disagreements resulting from earnings management, are more present in Big 4 audited firms. They explain this with the properties of the “common” Big 4 clients. For the reason of the ambiguous results, it is interesting to study the effects and compare them with prior evidence to answer the question whether Big 4 auditors deliver “higher” quality in terms of a “better” financial reporting. The terms are operationalized using a dis-cretionary accruals and income smoothing measure and analyzed for (non-)Big 4 audited UK-firms in the period 2005-2011.
| Author | : Connie L. Becker |
| Publisher | : |
| Total Pages | : |
| Release | : 2000 |
| Genre | : |
| ISBN | : |
This paper examines the relation between economic incentives to manage earnings and discretionary accruals and the modifying effects of audit quality on this relation. We hypothesize that incentives to smooth earnings and incentives created by debt agreements motivate managers to strategically bias earnings. However, we expect that earnings manipulation is tempered by the quality of the firm's external auditor. The findings indicate that companies with non-Big Six auditors (a proxy for lower audit quality) report discretionary accruals that significantly increase income compared to companies with Big Six auditors. We also find that managers respond to debt contracting and income-smoothing incentives by strategically reporting discretionary accruals. In addition, companies with incentives to smooth earnings upwards (downwards) report significantly greater income-increasing (decreasing) discretionary accruals when they have non-Big Six auditors. However, we do not find that audit quality affects earnings management that occurs in response to high leverage.
| Author | : Dan Li |
| Publisher | : |
| Total Pages | : |
| Release | : 2007 |
| Genre | : Accounting firms |
| ISBN | : |
Accounting regulators are concerned about the potential threat of long-term auditor-client relationships on auditor independence, leading to lower audit quality. The main objective of this study is to examine the association between auditor tenure and an important feature of accounting, namely conservatism. Following Basu (1997) and Ball, Kothari and Robin (2000), I define conservatism as the quicker recognition in earnings of bad news about expected future cash flows. I investigate whether long-term auditor-client relationships are associated with less timely recognition of earnings to bad news, and a lower rate of reversal of negative earnings changes. The overall results strongly show that conservatism decreases as auditor tenure lengthens. The results are robust across various measures of conservatism and a series of sensitivity tests. However, auditors' litigation exposure appears to be able to mitigate the adverse impact of auditor tenure. In additional tests, I find that the reduced conservatism is not driven by the larger clients that auditors have incentives to retain. Moreover, I find that even industry specialists could not avoid the negative impact of longer auditor-client relationships on conservatism. The study provides some support to the regulators who are concerned about the potential negative impact of auditor tenure on audit quality and the rule of mandatory audit firm rotation.
| Author | : Ulf Mohrmann |
| Publisher | : Logos Verlag Berlin GmbH |
| Total Pages | : 300 |
| Release | : 2016-02-15 |
| Genre | : Business & Economics |
| ISBN | : 3832541853 |
The dissertation consists of four essays on the quality of audited financial statements. The first analysis investigates the association between several regulations of the audit market and earnings characteristics. The second essay differentiates between different drivers of audit quality after an auditor change by comparing the effects of voluntary and mandatory auditor changes. The third study analyses the different strategies of Big4 and non-Big4 auditors in dealing with Level 3 fair values. The fourth part examines banks' valuation behavior concerning Level 3 fair values.
| Author | : |
| Publisher | : |
| Total Pages | : 612 |
| Release | : 2008 |
| Genre | : Dissertations, Academic |
| ISBN | : |
| Author | : David Adu-Boateng |
| Publisher | : |
| Total Pages | : 306 |
| Release | : 2012 |
| Genre | : |
| ISBN | : |
Audit firm tenure impacts the quality of audit work and the disclosure of material internal control weaknesses. Public firms are required by the Sarbanes Oxley Act of 2002 (SOX) Section 302 to disclose material internal control weaknesses. Researchers debate whether audit firm rotation is necessary for improving audit quality (Chen, Lin, & Lin, 2008). Generally, an auditor needs sufficient time to become familiar with a client's business in order to enhance effective controls and financial reporting. However, long tenure may diminish auditor independence, and in turn reduce the quality of audit work and encourage a client to violate SOX disclosure requirements. Therefore, it is expected that the disclosure of material internal control weaknesses is less likely given long audit tenure. Prior studies consider many variables that impact the disclosure of control weaknesses, except audit tenure. Further, prior studies do not address the issue of whether familiarity or independence explains non-disclosure. This dissertation investigates the role of audit firm tenure and concludes that the disclosure of material internal control weaknesses is more likely given short tenure. Further, familiarity with the client's business, which is associated with long tenure, explains non-disclosure and not the lack of independence. Therefore, audit firm rotation may not be necessary.
| Author | : James M. Braswell |
| Publisher | : |
| Total Pages | : |
| Release | : 2007 |
| Genre | : Audit committees |
| ISBN | : |
Regulators and financial reporting institutions have recently increased their focus on audit committee composition, indicating an acknowledgement of the potential importance of audit committee monitoring efforts on financial reporting quality. I extend prior corporate governance research by exploring whether the duration of service on a specific audit committee (i.e., audit committee tenure) affects earnings quality, future financial performance and cost of capital. Using a sample of 2,355 firm years for fiscal years 1998-2003, I test the potential association between audit committee tenure and GAAP-based earnings quality proxies and find some evidence that audit committee tenure improves earnings quality by limiting the degree to which management relies on accruals to determine income. I also test whether audit committee tenure effectively reduces real earnings management proxies since such techniques reflect routine business decisions that often fall outside of GAAP's jurisdiction. I find that audit committee tenure is associated with the use of abnormally low discretionary expenses, suggesting that current-period earnings are artificially inflated when audit committee tenure is relatively longer. The next stage of my study examines the effect of audit committee tenure on firm performance. Audit committees can influence firm performance by two avenues. First, committee effectiveness can influence the quality of reported earnings, which could reduce the cost of capital and improve firm performance by making positive NPV projects more feasible. The audit committee also oversees risk management activities and internal reporting efforts that are ultimately used by the board of directors to monitor and ratify management's strategic decisions. The results of this analysis provide evidence consistent with the entrenchment hypotheses since audit committee tenure appears to have a negative effect on future firm performance. I conclude the study by analyzing the potential association between audit committee tenure and cost of capital. After employing both cost of equity and cost of debt proxies as dependent variables, I find no significant associations with audit committee tenure.
