Do Firms That Have a Common Signing Auditor Exhibit Higher Earnings Comparability?

Abstract

We hypothesize that if individual auditors possess unique audit styles that they consistently apply to different audit engagements, then client firms with a common signing auditor will exhibit higher earnings comparability. Using a large sample of Chinese firms, we find that client firms report more comparable earnings when they are audited by the same individual auditor than when they are audited by (1) different audit firms, (2) the same audit firm, but different audit offices, and (3) the same audit office, but different individual auditors. The individual auditor style effect is stronger for larger audit firms, senior signing auditors, and signing auditors with more stable teamwork experience. We also document that having a common signing auditor is associated with lower analyst earnings forecast error and dispersion for client firms. This study contributes to the literature by showing that individual auditors have a significant impact on client firms' earnings comparability.

The Difference between Senior Manager Compensation and Salaries of Full-Time Employees in Non-Management Positions on Corporate Governance in Taiwan

“…To understand whether two CPAs are simultaneously responsible or whether the dual-signature requirement has created an impact of DME on CGES, the Public Company Accounting Oversight Board (2009) identified that a signature of a CPA on an audit report may help increase accountability and transparency. Since 1983, Taiwan has required that financial statements filed with the Public Issuance Division must be audited by two CPAs and signed to certify the financial statements with jointly guaranteed responsibility (Chen et al 2020). First, the empirical results in Table 6 shows that the DME estimation coefficient is 0.1675 (z = 4.24, p < 0.01), reaching a significant level of 1%.…”

The Moderating Effect of Firm Characteristics on the Relationship between the Audit Style and Firm-pair Earnings Comparability: An Evidence from Listed Firms on the Egyptian Stock Exchange

“…However, there is some audit literature that has focused on the role of audit in enhancing the quality of financial statements in terms of increasing the financial statements' comparability. In this context, prior research (Francis et al, 2014;Kawada, 2014;Mohseni et al, 2014) has agreed that firms that are audited by the same audit firm have greater comparable earnings, similarly if being audited by the same auditor (e.g., Chen et al, 2020;Jiu et al, 2020).…”

“…Regarding the determinants of the financial statements' comparability, prior studies have focused on the adoption of IFRS (e.g., Barth et al, 2012;Brochet et al, 2013;DeFond et al, 2011;Lin et al, 2019), the effectiveness of the audit committee (e.g., Endrawes et al, 2020), and the audit style (e.g., Cao et al, 2016;Chen et al, 2020;Francis et al, 2014;Jiu et al, 2020;Kawada, 2014). Audit style means that each audit firm has its own internally developed working rules that interpret the accounting and auditing standards and guide its auditors when implementing the audit process.…”

“…Consequently, each audit firm applies the same audit strategy when auditing their clients in the same industry which would result in greater similarity in their earnings structure (Francis et al, 2014;Kawada, 2014). Empirical studies have measured the audit style using the same audit firm (e.g., Chen et al, 2020;Mohseni et al, 2014), the Big 4 audit firms (e.g., Francis et al, 2014;Jiu et al, 2020;Kawada, 2014), or the same audit partner (e.g., Chen et al, 2020;Jiu et al, 2020;Mohseni et al, 2014).…”

“…Since the important role of audit in achieving earnings quality, this research has followed Chen et al (2020) using the differences in the discretionary accruals (DA), as a measure of earnings comparability, among 1,039 firm-pairs over the period 2016-2019. The data are collected for 57 firms from 6 sectors listed on the EGX.…”