Earnings Quality and Auditor Independence: An Examination Using Non-audit Fee Data

Dee, Carol Callaway; Lulseged, Ayalew; Nowlin, Tanya S.

doi:10.2139/ssrn.304185

Cited by 7 publications

(1 citation statement)

References 36 publications

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“…Building on this statement, US empirical studies provide generalised evidence that auditor size is positively related with audit quality using different sources such as audit premiums (Simunic, 1980;Moizer, 1997;DeFond, Francis and Wong, 2000;Ferguson, Francis and Stokes, 2003), the level of sanctions (Palmrose, 1988;Feroz, Park and Pastena, 1991), audit thresholds (Francis and Krishnan, 1999), abnormal accruals (Becker et al, 1998;Francis, Maydew and Sparks, 1999) and the market value of earnings surprises (Teoh and Wong, 1993). As a consequence of this, auditor size has been widely accepted as a good proxy for audit quality in the literature (DeFond, 1992;Mutchler, Hopwood and McKeown, 1997;Francis, Maydew and Sparks, 1999;Callaway, Lulseged and Nowlin, 2002;Vander Bauwhede and Willekens, 2004;Tilis, 2005).…”

Section: Auditor Size (Hypothesis 1)mentioning

confidence: 99%

Are Spanish auditors effective in transmitting manipulation practices? An analysis of the ambiguity implicit in modified reports

Arnedo

Lizarraga

Alegría

2009

IJAAPE

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This study proposes auditors' effectiveness in the transmission (AET) of GAAP misstatements as a new measure of audit quality that is obtained from the audit report. We carry out a content analysis of the audit reports of a sample of 533 pre-bankrupt Spanish firms and find that the poorly enforced Spanish environment results in strategies of a lower than expected effectiveness in three aspects: the type of qualification chosen, the wording used and the adjustments proposed. We subsequently use AET to test for audit quality differences in three dimensions: auditor size, audit market experience and the client's closeness to failure. Larger auditors are more effective in the transmission of the GAAP misstatements. We also find increasing audit quality throughout our 1990 2001 period of analysis and with the clients' closeness to failure. Our results constitute a reference for regulators, not only in Spain, but also in similar European code-law regimes where qualifications for GAAP violations are usually included in the audit reports.

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Section: Auditor Size (Hypothesis 1)mentioning

confidence: 99%

Are Spanish auditors effective in transmitting manipulation practices? An analysis of the ambiguity implicit in modified reports

Arnedo

Lizarraga

Alegría

2009

IJAAPE

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Non-audit services and the value relevance of accounting information: a case study

Fan

Chen

Jung

2010

IJRM

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Auditor Compensation Pattern Of S&P 500 Corporations Before And After The Passage Of Sarbanes-Oxley Act

Pandit

Subrahmanyam

Rubenfield

2011

JABR

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The years 2001-02 were marked with an outburst of huge corporate financial failures that eroded billions of dollars from the stockholders’ equity and shook the confidence of the investor community. One of the issues that rose to the surface was the payment of huge nonaudit service fees by publicly traded companies to their auditors.  In response to the outcry against the alleged role of the auditors in the corporate scandals, Congress passed Sarbanes-Oxley Act of 2002 (SOX), which imposed a prohibition on the supply of certain nonaudit services by a CPA firm to its audit clients in order to reduce the suspected  revenue-dependence of auditors on their audit clients.  The study described in this paper examines the pattern of auditor compensation in the years 2001 and 2004 (i.e., pre- and post-SOX periods), for a sample of large public companies, to determine how the auditor compensation has changed during this three-year period and whether the new regulations have decreased such revenue-dependence of the auditor. The study also examines if each of the Big 4 CPA firms that dominate the audit market for large public companies have experienced a change in the pattern of their revenues drawn from different sources of auditor compensation. The results show that not only the composition of auditor compensation has changed after the passage of SOX but also the overall compensation paid by the sampled companies to their auditors has gone up noticeably in many cases, primarily due to a phenomenal rise in audit fees, which still may continue to threaten the auditor’s independence in the audit process.  Further, during this three-year period, each of the Big 4 CPA firms has shifted its emphasis on the different sources of its revenues from these large public companies.

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Earnings Quality and Auditor Independence: An Examination Using Non-audit Fee Data

Cited by 7 publications

References 36 publications

Are Spanish auditors effective in transmitting manipulation practices? An analysis of the ambiguity implicit in modified reports

Are Spanish auditors effective in transmitting manipulation practices? An analysis of the ambiguity implicit in modified reports

Non-audit services and the value relevance of accounting information: a case study

Auditor Compensation Pattern Of S&P 500 Corporations Before And After The Passage Of Sarbanes-Oxley Act

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