SUMMARY:
Recent changes in the audit and financial reporting environment have resulted in longer audit report lags and have increased the importance of identifying factors associated with a timely audit. We examine timeliness implications of office-specific attributes of the audit firm. Specifically, we examine whether office-specific industry expertise, office size, and the importance of the client to the local office are associated with audit delay (i.e., the time between fiscal year-end and the audit report date). We explore the sensitivity of our results to various measures and consider the impact of earnings quality. We examine two types of industry expertise and whether the aforementioned audit firm attributes are associated with a propensity to issue an early earnings announcement. We find that office-specific industry expertise is negatively associated with audit delay (for all but the largest quartile of firm offices) while office size and client importance are both positively associated with audit delay; however, the most important clients are associated with a more timely audit. Office-specific industry expertise is positively associated with the propensity to announce earnings substantially early and such expertise garnered via a product-specialist strategy is positively associated with audit delay relative to a low-cost specialist strategy. Our study provides further support for the importance of office-specific characteristics on audit and financial reporting outcomes and provides evidence of the benefit of office-specific industry expertise.
We examine the effects of a large number of clients in an audit office using the same enterprise-resource planning (ERP) system such as SAP or Oracle resulting in what we term “client accounting system homogeneity” on audit efficiency and effectiveness. Using a unique dataset of ERP system implementations, we find that accounting system homogeneity is positively associated with audit efficiency. Specifically, we find lower (higher) audit fees for clients using an ERP system from a vendor used by a higher (lower) proportion of clients in that office. We further document that accounting system homogeneity is associated with improved audit effectiveness as proxied by two accruals-based measures, incorrect internal control weakness reporting, and restatements. Our findings are reflective of a new form of knowledge spillover from repeated experiences auditing clients using similar accounting systems, resulting in audits that are not only less expensive but also of higher quality.
This study investigates the consequences of information systems compatibility between the target and acquirer firms in the context of mergers and acquisitions (M&A). Using a unique data set of ERP implementations, we find that acquirers using the same ERP vendor as their targets exhibit shorter post-merger operating cycles and shorter post-merger audit delays relative to acquirers with different ERP vendors than their targets. In supplemental analysis, we find evidence that acquirers with the same ERP vendor as their target also exhibit more accurate management forecast guidance following the acquisition. The findings of this study should be of interest to capital market participants and managers involved in M&A activity by providing evidence about how the degree of compatibility between acquirer and target ERP systems impacts post-merger activities across different economically significant functional areas.
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