Does Regulator Selection of Auditors Improve Audit Quality? Evidence from Auditor Designation in Korea

Bae, Gil S.; Kallapur, Sanjay; Rho, Joon Hwa

doi:10.2139/ssrn.2037712

Cited by 3 publications

(7 citation statements)

References 38 publications

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“…Effects of litigation risk modified opinions and tendency to meet/beat benchmark as proxies for audit quality, Bae et al (2012) did not find a positive association between regulator designation of auditors and audit quality.…”

mentioning

confidence: 59%

“…While auditors are expected to be independent, extensive research shows that auditors face various conflicts of interests which impair auditor independence (King, 2002;Moore et al, 2006;Kouakou et al, 2013). There are various threats to auditor independence, and the practice of management having control over auditor appointment and compensation is believed to be a fundamental threat (Bae et al, 2012;Mayhew and Pike, 2004;Ronen, 2010). As described by Warren Buffet (Buffett and Clark, 2006):…”

Section: Introductionmentioning

confidence: 99%

“…To further improve auditor independence, some researchers have explored alternative approaches to curb management's influences over auditors by changing the institutional structure governing the auditor appointment processes. For example, some recent studies examine alternative auditor appointment processes such as investor selection of auditors (Mayhew and Pike, 2004) and the designation of auditors by regulators (Chi et al, 2013;Bae et al, 2012;Bing et al, 2010;Kim and Yi, 2009;Jeong et al, 2005).…”

Section: Introductionmentioning

confidence: 99%

“…While prior archival studies started to examine the designation of auditors by regulators, these studies have produced inconsistent results. For example, some studies found a positive association between regulator designation of auditors and audit quality (Kim and Yi, 2009), whereas others found no such association (Bae et al, 2012). As a result, the true effects of having regulators assigning auditors are still unknown.…”

Section: Introductionmentioning

confidence: 99%

“…As a result, the true effects of having regulators assigning auditors are still unknown. In addition, it is difficult for archival studies to disentangle confounding factors (Bruynseels et al, 2013) from regulator designation of auditors in such approaches (Bae et al, 2012).…”

Section: Introductionmentioning

confidence: 99%

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Does regulator designation of auditors improve independence?

Tang

Ruan²,

Yang

2017

MAJ

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Purpose The practice of management having control over auditor appointment and compensation is believed to be a fundamental cause for the lack of auditor independence. While researchers propose alternative auditor appointment procedures to improve auditor independence, there are a few settings that allow researchers to examine alternative auditor appointment procedures such as regulator designation of auditors. This research aims to investigate the effects of regulator designation of auditors and litigation risk on auditor independence in a Chinese setting Design/methodology/approach This study adopts a 2 × 2 between-subjects experimental design. A total of 110 surveys were sent out and 81 were collected from eastern China. Findings The results of an experiment with 81 Chinese auditors indicate that regulator designation of auditors improves auditor independence. In particular, auditors designated by the regulator feel less pressure from the audited company, perceive themselves to be more independent and are more willing to challenge the audited company’s aggressive financial reporting compared with those directly hired by the company. In addition, litigation risk moderates the effect of regulator designation of auditors on auditor independence such that regulator designation of auditors has a stronger impact on auditor independence when the litigation risk is low. Research limitations/implications This study is also subject to limitations. First, regulator designation of auditors in China was examined. While regulator designation of auditors seems to improve auditor independence in the Chinese context, it is unclear if the same results will be observed in other economies, as China is a unique setting. For example, the majority of listed companies in China are under the control of government-related agencies. Consequently, the government has significant power in influencing auditor appointment policy. In contrast, the majority of other economies are more market-oriented with less government influence. Future studies in other markets will further enrich the understanding on regulator designation of auditors. Second, only regulator designation of auditors for state-owned enterprises was examined. It is unclear how regulator designation of auditors would affect non-state-owned enterprises. Moreover, future research could investigate the designation of auditors in other forms such as the designation of auditors by investors. Third, auditor appointment procedure may affect perceived risk of loss of client which in turn influences auditor independence. Future research could further investigate the mechanism through which regulator designation of auditors affect auditor independence. Originality/value Results of an experiment with 81 Chinese auditors show that regulator designation of auditors can improve auditor independence. In a decision context where auditors must provide judgments relating to a proposed audit adjustment that is quantitatively material and will affect the client’s ability to meet debt covenants, auditors designated by the State-Owned Assets Management Bureaus are more resistant to management pressure and are less willing to accept the management’s aggressive financial reporting practice than those directly hired by the company.

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mentioning

confidence: 59%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Does regulator designation of auditors improve independence?

Tang

Ruan²,

Yang

2017

MAJ

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Redressing the fundamental conflict of interest in public company audits

Salterio

2022

Int J Auditing

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The goal of various audit industry reforms is to better align the interests of the auditor with external stakeholders. These proposed reforms ignore the fundamental conflict of interest—‘the client’ hires, fires and determines the compensation for the auditor. This problem is fundamental in that ‘the client’ is normally the management or board of the firm who, on occasion, have reason to want to take advantage of the inherent imprecision in accounting for their benefit and subtlety pressure the auditor to achieve this. My evidence‐based proposal takes advantage of the well‐known aversion of managers and boards to government intervention. It incentivizes management and boards to demand rigorous audits by requiring regulatory bodies impose their choice of auditor on public companies that meet well‐specified criteria that indicate poor‐quality reporting (e.g., restatement of financial statements). This proposed reform retains the ‘on average’ benefits that extant research shows the current system of private sector auditing provides while stimulating greater managerial and director self‐interest in high‐quality financial reporting.

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