This paper investigates the effects on audit quality and audit fees of requiring the engagement partner to sign the audit report in the United Kingdom (U.K.). The effect of requiring the engagement ...partner to sign the audit report is timely since the Public Company Accounting Oversight Board (PCAOB) is considering mandating a similar requirement in the United States (U.S.). In the first year after the introduction of the signature requirement, we find a significant decline in abnormal accruals and the propensity to meet an earnings threshold, and we find a significant increase in the incidence of qualified audit reports and in earnings informativeness. In addition, audit fees are significantly higher in the post-signature period than in the pre-signature period. Moreover, we compare U.K. firms with a matched sample of U.S. firms and firms in other European countries in periods both before and after the U.K. adopted a signature requirement. Our results are generally consistent with the argument of improved audit quality in U.K. firms after the signature requirement is adopted.
The PCAOB recently considered implementing mandatory audit firm rotation in hopes of better aligning auditors' interests with investors' interests, suggesting that the PCAOB views long auditor tenure ...as problematic. However, the accounting profession argues that long tenure actually improves audit quality. This study provides insight into investors' views by evaluating the market's reaction to events related to the potential adoption of rotation that occurred between 2011 and 2013. The results provide some evidence that the market reacts negatively (positively) to events that increased (decreased) the likelihood of rotation, although these results are sensitive to the market index used to calculate abnormal returns. More importantly, particularly given the lack of a U.S.-specific control group, cross-sectional tests provide strong evidence that the market reaction is more negative (positive) on dates that increased (decreased) the likelihood of rotation given longer auditor tenure. Moreover, we also find that the market reaction is more negative (positive) on dates that increased (decreased) the likelihood of rotation given a Big 4 auditor.
SUMMARY
We examine whether internal auditing provides value to organizations by reducing risk. We compare the changes in risks between audited business units and matched non-audited units within the ...same company. This design allows us to isolate the importance of an internal audit while holding constant changes in risk due to the organization and time period. Based on ratings from the heads of audited and non-audited units, we find that managers of audited units perceive a greater decline in risk as well as a greater increase in performance compared to managers of non-audited units. We also find that companies that have had a quality assurance review and are used as a management training ground are associated with greater reductions in risk and improved overall performance. Our study contributes to the academic literature by documenting a new facet of internal audit benefits—risk reduction—and internal audit characteristics that increase risk reduction.
SUMMARY Over the past two decades, the corporate governance literature in accounting and auditing has grown rapidly. To better understand this body of work, we discuss 12 recent literature review or ...meta-analysis papers and summarize selected results (i.e., clusters of papers with new and interesting results) from recent empirical research papers, after reviewing the findings of over 250 studies. Our corporate governance focus is primarily on corporate board and audit committee issues. We discuss the major insights from this literature and the practice implications of these findings. In addition, we identify a number of opportunities for future research. In particular, we make suggestions for: (1) improved research paradigms in corporate governance, (2) extensions of existing research, and (3) new or emerging lines of research.
SYNOPSIS This study examines how using the internal audit function as a management training ground (MTG) impacts managers' reliance on internal auditor recommendations. While prior research suggests ...that using internal audits as a MTG can adversely affect financial reporting quality, external audit fees, and internal audit efficiency, many internal audit functions use this practice. We study how this practice influences another important stakeholder—senior management. Based on survey results of 355 chief audit executives (CAEs), we find that CAEs perceive senior management to be more likely to use recommendations from MTG internal auditors than non-MTG internal auditors. To bolster the validity of these findings and provide evidence as to why this is the case, we conduct two experiments with 147 executives (47 MTurk workers) with an average of about 25 (13) years of experience. The experimental results confirm the survey results. We also find that the key reason why managers rely more on MTG than non-MTG recommendations is that MTG internal auditors are perceived to have more natural ability, which is a key driver in managers' reliance decisions. Taken together, our research provides the first empirical evidence that there are positive consequences to using the internal audit function as a MTG in contrast to the negative consequences previously reported. Data Availability: Please contact the authors.
The Audit Committee Oversight Process Beasley, Mark S.; Carcello, Joseph V.; Hermanson, Dana R. ...
Contemporary accounting research,
03/2009, Letnik:
26, Številka:
1
Journal Article
Research finds that independent audit committees and audit committee financial experts are generally effective in monitoring financial reporting and auditing processes. However, not all audit ...committees that appear in form to be independent are in fact actually independent, and not all financial experts with similar backgrounds and credentials are equally effective. We examine whether the benefits of having an independent and expert audit committee are diminished when the chief executive officer (CEO) is involved in the selection of board members. Using restatements, our results provide some evidence that the monitoring benefits of having an independent and expert audit committee are only maintained when the CEO is not formally involved in selecting board members. Further, we find that these results appear to be driven by the more severe restatements, including misstatements in conjunction with fraudulent financial reporting. In addition, we find our results continue to apply in the post-SOX period -- a period that provides data for a more exact measure of CEO involvement in the director selection process, although these data have more limited variation in audit committee characteristics. Finally, we find that the stock market's negative reaction to a restatement announcement is mitigated only when the audit committee is independent and the CEO was not involved in selecting board members. PUBLICATION ABSTRACT
One important role of audit committees is to protect external auditors from dismissal following the issuance of an unfavorable report. We examine auditor dismissals following new going-concern ...reports that Big 6 firms issued between 1988 and 1999. Our findings suggest that audit committees with greater independence, greater governance expertise, and lower stockholdings are more effective in shielding auditors from dismissal after the issuance of new going-concern reports. In addition, we find that the relation between audit committee independence and auditor protection from dismissal has grown stronger over time. Finally, independent audit committee members experience a significant increase in turnover rate after auditor dismissals. These findings, coupled with those from Carcello and Neal (2000), suggest that when affiliated directors dominate the audit committee, management often can (1) pressure its auditor to issue an unmodified report despite going-concern issues, and (2) dismiss its auditor if the auditor refuses to issue an unmodified report.
We examine the likely effects of a regulatory requirement for the engagement partner to be personally identified in the audit report. We develop a model in which the engagement partner determines the ...level of resources devoted to the audit and whether to report aggressively. As long as the partner does not personally suffer reputation damages arising from aggressive reporting, the partner makes decisions that are optimal from the firm's perspective. However, the identification of the partner misaligns the incentives between the partner and the firm. We find that audit report accuracy should increase because engagement partners will find it optimal to gather more evidence. However, engagement partners may report more conservatively than the firm would prefer, as a result of misaligned incentives between the partner and the firm. Interestingly, the effects of a partner identification requirement are predicted to be more pronounced for large firms than for small firms, possibly affecting audit market competition and concentration. Overall, a partner identification requirement is likely to decrease the welfare of partners and firms and will not necessarily be socially optimal.
Governance and the Common Good Carcello, Joseph V.
Journal of business ethics,
05/2009, Letnik:
89, Številka:
Suppl 1
Journal Article
Recenzirano
The importance of corporate governance in ensuring reliable financial reporting is examined in this article, and the roles of individuals involved in the governance process are examined from the ...perspective of ensuring the common good. Initially, adopting the positivist tradition that dominates the academic literature in accounting, the relations between financial reporting quality and the activities of senior management, the board of directors and its audit committee, and external auditors are examined. Unlike much of the academic literature, this article also adopts a normative perspective and offers suggestions as to the proper roles of these parties. Finally, suggestions for future research are offered.
