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Author: Mohamed A. Hegazy
Publisher:
ISBN:
Category :
Languages : en
Pages : 23
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This paper aims at investigating the effect of industry specialization on the audit quality and earnings quality. It examines the relation between industry specialization and earnings quality, financial reporting quality, and audit quality. The research posits that industry specialization constrains earnings management. In addition, it hypothesized a positive relationship between industry specialization and financial reporting quality. An experiment was conducted in an audit firm with international affiliation in Egypt to test the research hypotheses. The results indicate that there is no significant difference between industry specialist auditors and non-specialists in constraining earnings management. In addition, findings support that financial reporting quality was significantly higher when specialists conducted the audit. The results provide empirical evidence consistent with the hypothesis that auditor with industry specialization improves audit quality. Finally, industry specialization enables auditors to realize the amendments in auditing standards better than non-specialists.
Author: Mohamed A. Hegazy
Publisher:
ISBN:
Category :
Languages : en
Pages : 23
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Book Description
This paper aims at investigating the effect of industry specialization on the audit quality and earnings quality. It examines the relation between industry specialization and earnings quality, financial reporting quality, and audit quality. The research posits that industry specialization constrains earnings management. In addition, it hypothesized a positive relationship between industry specialization and financial reporting quality. An experiment was conducted in an audit firm with international affiliation in Egypt to test the research hypotheses. The results indicate that there is no significant difference between industry specialist auditors and non-specialists in constraining earnings management. In addition, findings support that financial reporting quality was significantly higher when specialists conducted the audit. The results provide empirical evidence consistent with the hypothesis that auditor with industry specialization improves audit quality. Finally, industry specialization enables auditors to realize the amendments in auditing standards better than non-specialists.
Author: Mohamed Samy Eldeeb
Publisher:
ISBN:
Category :
Languages : en
Pages : 36
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Book Description
The effect of the economic financial crisis worldwide has increased the need for auditors to provide a high quality services to their clients. An important element considered by clients for selecting their auditors is whether the audit firm has specialization in particular industry. Audit firm industry specialization provides clients with value for money services to help management achieve efficiency and effectiveness in their operations. Other benefits for audit firms may include increased market share, audit tenure, better financial reporting and less earnings management, audit quality with less restatements of financial information, appropriate audit fees, less exposure to litigation risk, less enforceable action by supervisory bodies and ability to compete in highly competitive environment. Specialization was also seen as critical for the survival of the auditing profession. This research analyzes the effects of audit firm industry specialization on the retention of the audit firm and growth in its business. Factors such as whether the firm is a big 4, with international affiliation, local firm, type of industry and growth were also studied for audit firm retention and growth. The sample studied includes the top 100 publicly held companies' annual reports in the Egyptian stock market during the period 2007-2011 which are analyzed to determine the audit firms' retention and growth. The results support that industry specialization has an important effect on the auditor's retention especially for industry where capital investment is significant such as building, construction, financial services and housing and real estate. Big 4 audit firms retained their clients due to their industry specialization and brand name. The findings provided evidence that good knowledge of accounting & auditing standards resulted in audit firms with international affiliation competing with big 4 for clients' retention & growth in business. The result also showed some evidence that the auditing profession in Egypt is dominated by the big 4 and the Central Audit Organization.
Author: Connie L. Becker
Publisher:
ISBN:
Category :
Languages : en
Pages :
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This study examines the relation between audit quality and earnings management. Consistent with prior research, we treat audit quality as a dichotomous variable and assume that Big Six auditors are of higher quality than non-Big Six auditors. Earnings management is captured by discretionary accruals that are estimated using a cross-sectional version of the Jones (1991) model. Prior literature suggests that auditors are more likely to object to management's accounting choices that increase earnings (as opposed to decrease earnings) and that auditors are more likely to be sued when they are associated with financial statements that overstate earnings (as compared to understate earnings). Therefore, we hypothesize that clients of non-Big Six auditors report discretionary accruals that increase income relatively more than the discretionary accruals reported by clients of Big Six auditors. This hypothesis is supported by evidence from a sample of 10, 379 Big Six and 2, 179 non-Big Six firm-years. Specifically, clients of non-Big Six auditors report discretionary accruals that are, on average, 1.5 to 2.1 percent of total assets higher than the discretionary accruals reported by clients of Big Six auditors. Also, consistent with earnings management, we find that the mean and median of the absolute value of discretionary accruals are greater for firms with non-Big Six auditors. This also indicates that lower audit quality is associated with more quot;accounting flexibility.quot.
Author: Abdullah Mohammed Ayedh
Publisher:
ISBN:
Category : Auditing
Languages : en
Pages : 726
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Book Description
The early twenty first century witnessed several accounting scandals that culminated in the collapse of many renown large organizations such as Enron and the bankruptcy filing of WorldCom. These scandals cast doubts on the quality of auditing. As part of the efforts of restoring quality of auditing and earnings reporting, several standards, guidelines, and codes have been imposed by International and Malaysian regulatory bodies. However, those regulatory authorities view audit quality as subjective, multi-dimensional, vast and a complex issue (Financial Reporting Council, 2007; International Auditing and Assurance Standard board, 2011; Canadian Public Accountability Board, 2012), which makes it difficult to define and measure. In order to untangle this multi-dimensional and complex issue, this study conducted a systematic review, maps the audit quality literature and came up with an audit quality framework (AQF). AQF is a comprehensive framework with the inclusion of the International Standard on Quality Control 1 (ISQC 1). The AQF is further enhanced by inculcating qualities from an Islamic perspective. The AQF reveals that the outcome of a quality audit should be reflected in the financial reporting quality, which is proxied by diminished earnings management practices. There is strong evidence that earnings management practices during the abnormal time (financial crisis) differed in terms of magnitude and direction (Mohd-Saleh and Ahmed, 2005; Johl et al., 2007; Iatridis and Dimitras, 2013). Hence, whether earnings management practices in the context of Malaysian listed companies really differ during the recent financial crisis needs to be tested before determining whether audit quality determinants are able to alleviate it. Therefore, this study examines earnings management practices during the recent financial crisis and makes a comparison with the pre-crisis period. In addition, this study investigates the effect of different determinants of audit quality on earnings management practices. The hypotheses of this study were developed and examined based on the related literature, both agency and big bath theories. Data were collected from literature, databases, related regulations and standards (audit quality framework), annual reports (audit quality determinants), and the Bloomberg database (earnings management components). The AQF suggests that audit quality determinants can be categorized into two major dimensions of attributes (i.e. proficiency and morality). The proficiency attributes dimension is related to the ability of the auditor to detect the misstatement, whilst the morality attributes dimension is the willingness of the auditor to report the detected misstatement. The Islamic perspective shows that the two main categories of the AQF (proficiency, morality) are not new and are referred to in the Holy Qur'ān as strength and trustworthiness. Furthermore, Islam emphasizes more on the latter. As for the empirical findings of paired-sample T-tests analysis for 1,189 firm-years, it is revealed that there is a significant decrease of positive earnings management and a significant increase in downwards earnings management during the recent global financial crisis (2009; 2008) compared to before crisis period (2006; 2005). These findings confirm that Malaysian managers apply the big bath strategy during the crisis period. However, the magnitude of earnings management of the Malaysian companies in the recent financial crisis was distinctly lower than those of prior studies (Johl et al., 2007; Iatridis and Dimitras, 2013). Considering this difference, the study tests whether audit quality determinants, as used by prior studies, similarly deterred earnings management practices in the recent crisis in Malaysia. The findings of the regression analysis for the 245 Malaysian listed companies revealed that five out of ten audit quality determinants (i.e. audit firm type, auditor industry specialist, board of directors' size, board of directors' independence, and audit committee independence) play a significant role in restricting earnings management practices. Therefore, the study shows that, by analysing the empirical findings and referring back to the AQF, audit quality determinants related to competent monitoring by expert auditors (proficiency attributes) and independent board of directors and audit committee (morality attributes) deter earnings management practices during the recent financial crisis. However, other audit quality determinants seem ineffective under these circumstances.
Author: Jonas Tritschler
Publisher: Springer Science & Business Media
ISBN: 3658041749
Category : Business & Economics
Languages : en
Pages : 251
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Arising from the author’s experience as a practicing CPA, this book is quite different from other research in this field, as it confronts the subject of audit quality from a pragmatic perspective. The first goal of Jonas Tritschler is to develop an audit quality metric on national audit firm level. Financial reporting errors, as detected by the German enforcement institutions during examinations, which subsequently are published in the German Federal Gazette by the involved companies, are the data basis for this measurement. Using the developed audit quality metric, the second goal of this study is to analyze audit quality differences of selected audit firms by comparing their deployed audit input factors such as employee’s competence (ratio of certified professionals to total audit staff), experience of employees (average tenure of employees in years) and client-specific experience (client fluctuation rate). Results indicate a correlation between audit quality according to the developed metric and the operationalized audit input factors mentioned above.
Author: Jagan Krishnan
Publisher:
ISBN:
Category :
Languages : en
Pages :
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This study compares the earnings response coefficients of clients of industry specialist and non-specialist auditors. Prior work (e.g., DeAngelo 1981) has suggested that auditors offer different levels of audit quality, in response to client variations in the demand for different levels of audit quality (Watts and Zimmerman 1986). One component of the quality difference across auditors is industry specialization (Craswell et al. 1995). Empirical evidence on the effect of industry specialization on audit quality proxies such as audit fees, auditor litigation and compliance with accounting standards is mixed. This study examines the hypothesis that industry specialization leads to a better quality of audit by comparing the earnings response coefficients of clients audited by industry specialists with those of clients not audited by industry specialists. Teoh and Wong (1993) argue that audit quality is positively associated with the client's quality of earnings and therefore the earnings response coefficient (ERC), which is the responsiveness of the stock market to information about unexpected earnings. They present evidence that one measure of audit quality, auditors' brand-name (Big 6 or not), is positively associated with the ERC. This paper extends this argument by examining the effect of another facet of audit quality, auditor industry specialization, on the ERC. The results suggest that, after controlling for previously established correlates of the ERC, as well as industry affiliation, clients of industry specialist auditors have higher ERCs than clients of non-specialist auditors.
Author:
Publisher: GRIN Verlag
ISBN: 366846748X
Category : Business & Economics
Languages : en
Pages : 34
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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: Joshua Ronen
Publisher: Springer Science & Business Media
ISBN: 0387257713
Category : Business & Economics
Languages : en
Pages : 587
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Book Description
This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?
Author: Debra C. Jeter
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
As audit quality is paramount in returning the profession to the “priesthood” in the wake of accounting scandals such as Enron and bank failures, perhaps the most important question with respect to industry specialization is whether or not industry specialists provide truly superior quality audits. Research in industry specialization by auditors has focused to date primarily on addressing this question; the pricing of audits by specialists is a related issue also examined in a number of studies. Research suggests that specialists are associated with higher earnings quality for their auditees, whether due to intervention in the reporting process, or because management anticipates such intervention and constrains opportunistic earnings management. The role of industry specialization in audit pricing has been frequently addressed in the literature, and yet remains largely unresolved. Some studies present evidence of specialist premiums, while others find no premiums or premiums only for certain subsets of clients. In its 2003 report, the GAO expressed some concern that auditor choice was limited for large national and multinational companies requiring industry-specific expertise, noting that an auditor who audits a number of smaller companies within an industry may not have the necessary expertise to handle the larger clients in that industry. Most researchers, however, find little evidence of adverse impacts such as oligopolistic pricing as a result of the increased audit market concentration resulting from the audit firm mergers and demise of Arthur Andersen. Industry specialization, if pursued as a means of enhancing the knowledge and understanding necessary to conduct superior audits, should result in benefits to both client and auditor. Industry specialists may be able to provide higher levels of assurance because they are more likely to assess risks, and to detect financial reporting errors and irregularities, and are thus equipped to deliver better planned and more effective audits.
Author: Reem J. Almousawi
Publisher:
ISBN:
Category :
Languages : en
Pages : 89
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