Consequences of Low-Quality Audits for Engagement Partners PDF Download
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Author: Daniel Aobdia
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
We investigate the consequences of low-quality audits for engagement partners in the US and the role audit firm quality control systems play in this process. We employ a sample period during which the identity of the engagement partner on specific audits is not publicly known to isolate the effect of quality control systems on partner management. We find that restatements result in partner changes for both restating and non-restating clients. Because the identity of the partner on an audit is not publicly known, non-restating clients may not be fully aware of the restatements associated with their engagement partners. We find that audit firms with ineffective partner quality control systems take advantage of this opaque information environment and do not replace low quality partners, especially if the partners can bring in large audit fees. Even if these audit firms replace the partner, they do not supply a new partner with higher quality. Our results highlight the importance of an effective quality control system in disciplining partners. When audit firm quality control systems fail, enhanced transparency through disclosing the identity of the engagement partner may be necessary in disciplining the auditing labor market.
Author: Daniel Aobdia
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
We investigate the consequences of low-quality audits for engagement partners in the US and the role audit firm quality control systems play in this process. We employ a sample period during which the identity of the engagement partner on specific audits is not publicly known to isolate the effect of quality control systems on partner management. We find that restatements result in partner changes for both restating and non-restating clients. Because the identity of the partner on an audit is not publicly known, non-restating clients may not be fully aware of the restatements associated with their engagement partners. We find that audit firms with ineffective partner quality control systems take advantage of this opaque information environment and do not replace low quality partners, especially if the partners can bring in large audit fees. Even if these audit firms replace the partner, they do not supply a new partner with higher quality. Our results highlight the importance of an effective quality control system in disciplining partners. When audit firm quality control systems fail, enhanced transparency through disclosing the identity of the engagement partner may be necessary in disciplining the auditing labor market.
Author: Wuchun Chi
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
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 re-allocation of assignments (both as a lead engagement partner and as a concurring (second) partner). 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. The results suggest that audit clients can obtain valuable information from partner name disclosures and that audit firms signal a commitment to quality by managing engagement partner assignments.
Author: Mai Dao
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
The debate concerning the recent regulation in the United States mandating accounting firms to disclose engagement partners' identity is ongoing. We examine the impact of the Public Company Accounting Oversight Board's (PCAOB) requirement of disclosing engagement partners' names on Form AP on the quality of audit engagements. Using two measures of audit quality (abnormal accruals and the probability of detecting material weaknesses in internal control), we find that disclosing engagement partners' names is associated with a lower level of abnormal accruals and a higher probability of accounting firms detecting material weaknesses in internal control. Our study extends the contemporary research on the disclosure of engagement partners' identification by providing additional evidence to the literature on this issue in the U.S. setting. Our study also provides evidence supporting the PCAOB's perception that this disclosure leads to higher audit quality.
Author: Clive S. Lennox
Publisher:
ISBN:
Category :
Languages : en
Pages : 56
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Book Description
Audit firms face conflicting incentives. On one hand, they are motivated to provide high quality audits in order to protect their reputations and avoid regulatory sanctions but, on the other hand, they also need to please their clients in order to increase their revenues. We argue that these conflicting incentives become apparent when comparing the partners who conduct audits (i.e., 'engagement partners') and the partners who are responsible for monitoring audit quality (i.e., 'review partners'). Given their different responsibilities within the audit firm, we predict that review partners monitor audit quality more closely when they are motivated to work harder, whereas engagement partners tend to work harder by trying to please their clients. Consistent with these predictions we find that the associations between audit adjustments and partner ownership are: 1) significantly positive for review partners, 2) significantly negative or insignificant for engagement partners, and 3) significantly more positive for review partners than engagement partners. Our findings suggest that larger ownership stakes motivate review partners to monitor audit quality more closely, while larger ownership stakes do not motivate engagement partners to deliver higher quality audits.
Author: Elizabeth Cowle
Publisher:
ISBN:
Category :
Languages : en
Pages : 180
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Book Description
I investigate whether audit firms reallocate partner resources following restatement announcements and, consequently, whether a supply-side response is beneficial in mitigating the previously documented implications of realized audit failures. I find a positive association between prior period restatement announcements and the year-over-year percentage change in the number of engagement partners allocated to a local audit office. Further analysis suggests that a supply-side response is beneficial in mitigating the persistence of low-quality audits and lost market share. However, I also find some evidence suggesting that the reallocation of partner resources can be detrimental to audit quality at offices from which partners are reallocated, suggesting that firms may be responding to problems at one office at the detriment of another. Taken together, my findings speak to the importance of partner resource allocation and suggest one observable and measurable supply-side response that can help firms mitigate the negative consequences associated with audit failures.
Author: Daniel Aobdia
Publisher:
ISBN:
Category :
Languages : en
Pages : 53
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Book Description
This paper examines whether the identity of the individual audit partners provides informational value to capital market participants beyond the value provided by the identity of the audit firms. Using data from Taiwan, where firms are mandated to disclose the names of the engagement partners, we find a positive association between the partner's quality and the client firm's earnings response coefficient. We also find a positive market reaction when a firm replaces a lower quality partner with a higher quality one. Moreover, we find evidence that firms audited by higher quality partners experience smaller Initial Public Offering (IPO) underpricing and are able to obtain better debt contract terms. Overall, these results suggest that the quality of engagement partners matters to capital market participants.
Author: Liuchuang Li
Publisher:
ISBN:
Category :
Languages : en
Pages : 55
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Book Description
Francis and Michas (2013) discover that the occurrence of an audit failure actually signals a more systematic problem with audit quality at the affected office. Using the Chinese setting where the identities of engagement auditors are revealed in audit reports, this study further explores whether the phenomenon of contagion is isolated to some specific auditors in an office or it indeed is an office-wide problem. We follow Francis and Michas (2013) to define an audit failure as an instance where a client firm subsequently makes a downward restatement of audited earnings. While we find similar evidence of contagion of low quality audits at office locations experiencing audit failures, the contagion effect actually is confined to the (other) audits performed by those specific auditors who are involved in audit failures, and it does not spread to the same-office auditors not involved in failures. We further find that the contagion effect is attenuated among female auditors, and for auditors with an accounting degree, with longer auditing experience, and with industry expertise. Our results suggest that the documented contagion effect of low quality audits is an individual auditor-level, rather than office-level, phenomenon. This underscores the importance of engagement auditor identification and the usefulness of disclosing auditors' personal characteristics.
Author: Wally Smieliauskas
Publisher: Routledge
ISBN: 0429854110
Category : Business & Economics
Languages : en
Pages : 489
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Book Description
Auditing has become an essential component in market societies and the need for auditing skills has risen in line with globalization. This textbook provides a comprehensive overview of the role of financial statement auditing in contemporary society, including the auditor’s role in evaluating the financial reporting of an auditee—a topic of central concern in the recent comprehensive review of the auditing profession in the Brydon Report (2019). The experienced authors provide insight into auditing research to help readers understand its function, regulation, and role in theory and practice. With focus on private sector financial statement auditing and its regulation, the book includes perspectives on social theory, history, and the importance of professional standards. The thought-provoking final chapter challenges students to consider the effectiveness of auditing in evaluating increasingly risky and complex accounting estimates involving assumptions about future events. A fundamental approach to auditing theory, this textbook will be useful reading for advanced undergraduate and postgraduate students across business and accounting fields.
Author: Yanyan Wang
Publisher:
ISBN:
Category :
Languages : en
Pages : 53
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Book Description
We study whether audit-partner quality influences the probability of annual report misstatements (measured by restatements) and whether various levels of quality control attenuate such influences. We measure audit-partner quality with audit failure rate (i.e., the total number of audit failures associated with an audit partner divided by the total number of audit reports signed by the same partner). We report the following key findings. First, an audit partner's past audit failure rate is positively associated with the probability that the current year annual report that he or she audits is subsequently restated. This positive association is more pronounced for engagement partners (i.e., partners who actually conduct the audits) than for review partners (i.e., partners who review the audits). Incorporating audit partner audit failure rates substantially increases the predictive power for future financial report restatements. Second, neither engagement-team-level nor audit-firm-level quality controls consistently attenuate engagement audit partners' influence on the probability of future restatements. Third, engagement audit partners' influence on the probability of future restatements becomes stronger for audits of more important clients. Taken together, the evidence suggests that, despite various levels of quality control, audit-partner quality significantly influences engagement quality and that such influences are exacerbated by audit partners' own economic incentives.
Author: Mine H. Aksu
Publisher:
ISBN:
Category :
Languages : en
Pages : 51
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Book Description
We investigate the association between audit quality and some unique attributes of the engagement audit partners in the Turkish audit market during the period 2008-2014. We specifically examine the impact of the engagement partners' ownership stakes in their audit firms, their busyness and in-house tenure in their current firms, and whether the impact is different for the “top guys” with the largest % ownership in the firm, on the probability of restatements, qualified opinions, going concern qualifications, and less egregious and less direct earnings management type audit failures such as the use of discretionary accruals. The results show that ownership % plays a role in independent audit judgments and increases the audit quality. We contribute to audit firm partnership and audit quality literature by introducing the engagement partner's ownership stake in his firm as a comprehensive proxy for the auditor's supply of audit quality. This variable could also be helpful in many emerging markets where audit fees data are not publicly disclosed. The study also sheds some light on whether the accounting and auditing reforms that took place in 2012 improved audit quality in Turkey. Our study may be of interest to researchers, regulators and client and audit firms all over the world.
