Enforcement Actions and Auditor Changes

Brocard, Marcus; Franke, Benedikt; Voeller, Dennis

doi:10.1080/09638180.2017.1307130

Cited by 18 publications

(14 citation statements)

References 34 publications

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“…Future research would benefit from a further investigation of the impact of PCAOB inspections on other audit quality dimensions of small audit firms over time. Furthermore, future research could advance our insights on the impact of public oversight by contributing to the limited research on its effects in other parts of the world (e.g., Brocard et al, 2018;Carson et al, 2017;Sundgren & Svanström, 2017). For example, researchers could exploit the European setting where there is substantial variation in inspection regimes in terms of for example frequency of inspections, disclosure of inspections and enforcement of sanctions.…”

Section: Resultsmentioning

confidence: 99%

PCAOB Inspections and Audit Fees: An Analysis of Inspection Rounds of Small Audit Firms

Vanstraelen

Zou

2020

European Accounting Review

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This study investigates the impact on audit pricing of PCAOB inspection outcomes on the quality control systems of small audit firms. Quality control deficiencies (QCDs) provide a strong signal about audit quality, which is expected to lead to price changing. We first document that audit fees in the pre-inspection period were higher for small audit firms without QCDs, implying that quality differences were already partially known and priced in the market. Next, we find evidence that in the post-inspection period audit fees further increase for firms without QCDs, while there is limited evidence for fee increases for firms with remediated QCDs, suggesting changes in audit firm reputation. Interestingly, we do not find support for fee changes for audit firms with disclosed quality control deficiencies. Finally, the magnitude of change in audit fees decreases over time. Collectively, these findings contribute to our understanding of audit quality differences amongst small audit firms and the functioning of the small audit firm market.

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Section: Resultsmentioning

confidence: 99%

PCAOB Inspections and Audit Fees: An Analysis of Inspection Rounds of Small Audit Firms

Vanstraelen

Zou

2020

European Accounting Review

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“…(2008) provide evidence of important losses for KPMG‐Germany following a high‐level audit scandal. Furthermore, the external two‐tier audit quality enforcement system is likely to incentivize firms to avoid being ‘named and shamed’ as a consequence of failed audits (Hitz et al ., 2012; Brocard et al ., 2018). In line with these incentives, audit firms are likely to institute strict controls on the audit assignments, together with standardized working procedures and centralized decision making.…”

Section: Institutional Setting Prior Literature and Hypothesesmentioning

confidence: 99%

“…To emphasize reputational concerns, we exploited the establishment of a two‐tier ‘naming and shaming’ provision to enforce audit quality uniformity for listed firms, set up in 2005 as part of the Financial Reporting Enforcement Panel (FREP). Specifically, we used the 2005 FREP adoption as a ‘shock’ to determine if these new regulations constrained individual auditor style effects (see also Brocard et al ., 2018). Despite regulators’ aims to increase audit quality and uniformity, we did not find a significant reduction in engagement or review partner style effects in the post‐2005 period.…”

mentioning

confidence: 99%

The Effect of Auditor Style on Reporting Quality: Evidence from Germany

Porumb

Jong

Huijgen

et al. 2021

Abacus

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This paper examines whether the ‘style’ of individual auditors influences financial reporting quality in Germany. Audit quality in Germany should be uniformly high, because of strong reputational needs, strict controls on operating procedures, and quality enforcement mechanisms. An audit partner's style should not affect this quality level. However, our results do not support this expectation. Exploiting a unique dataset comprising the names of the audit engagement and review partners of listed German companies, we find that audit engagement partners in Germany have a significant influence on audit quality, beyond firm‐ and office‐level factors. In contrast, audit review partners do not have a consistent significant influence on audit quality. We measure audit quality by the level of a firm's abnormal accruals and its propensity to meet or beat an earnings target. We also find that the 2005 adoption of a new audit quality enforcement system that includes ‘naming and shaming’ does not reduce the influence of audit partner style on financial reporting quality.

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“…For example, US studies find restatement announcements are associated with improved corporate governance as evidenced by changes to the board of directors (Johnstone et al 2011), to the audit committee members (Carver 2014), that can result in changing the audit firm (Mande and Son 2013). In Germany, Brocard et al (2018) find that auditor changes are more likely to occur before the announcement of the restatement, and firms tend to change from non-Big4 to Big4 auditors. This finding suggests that misstatement clients seek the reputation of Big4 auditors, and Ebner et al (2017) find similar results supporting the "labeling" effect of auditor change resulting in the switch to a more reputable auditor.…”

Section: Introductionmentioning

confidence: 99%

“…This finding suggests that misstatement clients seek the reputation of Big4 auditors, and Ebner et al (2017) find similar results supporting the "labeling" effect of auditor change resulting in the switch to a more reputable auditor. The findings that Big4 auditors do not hesitate to take over as clients the misstatement firms has been attributed to the limited auditor liability in Europe by Brocard et al (2018), and in Asia by Hasnan et al (2013). Thus, non-US studies provide mixed evidence as to whether the benefits of mandatory auditor partner rotation outweigh the costs.…”

Section: Introductionmentioning

confidence: 99%

The Effect of Board Links, Audit Partner Tenure, and Related Party Transactions on Misstatements: Evidence from Chile

Mahenthiran

Palavecinos

Fuente‐Mella

2020

IJFS

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Companies restate when material misstatements are identified in previously issued financial statements. Misstatement research in Latin America is sparse, even though they are an important context to study this phenomenon. Chile’s corporate governance regulations are considered exemplars for Latin American countries but its auditing profession is not well developed. Thus, Chile provides an interesting context to study the complementary roles of audit and board governance affecting misstatements. Using a sample of 104 Chilean listed firms over seven years, our study finds that the board links and audit partner tenure negatively affect misstatements. Specifically, given the prevalence of related party transactions (RPTs) in conglomerates, the finding suggests that cross directors monitor high-value RPTs, but that this is not a substitute for auditor expertise. The findings raise questions about the advisability of mandating audit partner rotation to strengthen auditor independence because the results indicate that a short audit partner tenure leads to the auditor not developing client-specific knowledge. The study makes contributions to the corporate governance literature by highlighting that board monitoring is not a good substitute for auditor monitoring of financial reporting integrity, and suggesting the need for having licensing requirements to become an auditor.

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Enforcement Actions and Auditor Changes

Cited by 18 publications

References 34 publications

PCAOB Inspections and Audit Fees: An Analysis of Inspection Rounds of Small Audit Firms

PCAOB Inspections and Audit Fees: An Analysis of Inspection Rounds of Small Audit Firms

The Effect of Auditor Style on Reporting Quality: Evidence from Germany

The Effect of Board Links, Audit Partner Tenure, and Related Party Transactions on Misstatements: Evidence from Chile

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