Further Evidence on the Effect of Regulation on the Exit of Small Auditors from the Audit Market and Resulting Audit Quality

Fargher, Neil; Jiang, Alicia; Yu, Yangxin

doi:10.2308/ajpt-51943

Cited by 8 publications

(2 citation statements)

References 23 publications

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“…After SOX, the PCAOB supervises audit firms and performs inspections of quality controls on audit firms that render services to public companies of the USA. The PCAOB inspections improve audit quality by incentivizing low-quality auditors to exit the market (DeFond and Lennox, 2011; Fargher, Jiang and Yu, 2018). The inspections of PCAOB also apply to foreign audit firms offering services to companies issuing the American Depositary Receipt.…”

Section: Regulation Previous Literature and Hypothesis Developmentmentioning

confidence: 99%

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MASs, alliance and performance: an evidence of SOX effects

Chen

Mardjono

Yang

2022

MAJ

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Purpose To maintain auditor independence, Section 201 of the Sarbanes–Oxley Act of 2002 (SOX) imposes restrictions on audit firms in rendering management advisory services (MASs) to audit clients. Responding to the requirement, audit firms establish a strategic alliance with consulting companies to expand their scope of services to alleviate the impairment of auditor independence. Taiwan follows the spirit of SOX in related laws and regulations. To investigate the effects of SOX on Taiwanese auditing industry, this study aims to examine the relationship between MASs and operating performance of audit firms. Design/methodology/approach This study obtains empirical data from the 1989–2017 Survey Report of Audit Firms in Taiwan, published by the Financial Supervisory Commission (FSC). FSC administers the survey across all registered audit firms annually to collect business information on the auditing industry for macro-economic analysis and industrial policy development. The authors group audit firms into three categories: national, regional and local firms. Based on the structure-conduct-performance (S-C-P) theoretical framework, this study establishes the following cross-sectional regression equation to test the authors’ hypotheses. Findings Main results indicate that national firms have better post-SOX firm and alliance performance. Both firm and alliance MASs contribute more to the performance of national firms after SOX. Practical implications This study claims that national firms establish alliance with consulting companies for resource sharing but regional and local firms for tax-saving. Originality/value Consistent with the economic theory of regulation and resource-based theory, SOX matters in Taiwan.

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Section: Regulation Previous Literature and Hypothesis Developmentmentioning

confidence: 99%

“…Some prior researches examine the effects of SOX on auditing industry in the past decade, such as DeFond and Lennox (2011), Knechel and Sharma (2012); Fargher et al (2018); and Alali et al (2019). Most of the studies focus on the scenario in the USA.…”

Section: Introductionmentioning

confidence: 99%

MASs, alliance and performance: an evidence of SOX effects

Chen

Mardjono

Yang

2022

MAJ

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The interdependence between market structure and the quality of audited reports: the case of non-audit services

Bleibtreu

Stefani

2022

Rev Account Stud

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This paper addresses the effects of a prohibition of providing non-audit services (NAS) to audit clients. By combining a strategic auditor–client game with a circular market-matching model that has an endogenous number of auditors, we take into account the interdependence between the auditors’ and clients’ incentives, the market structure, and the quality of audited reports. We show that the regulation’s effects depend on the preexisting audit market concentration and the types of blacklisted NAS. In sharp contrast to the effects that regulators desire, a prohibition of providing NAS to audit clients can further increase audit market concentration and decrease the quality of audited reports if the fees that auditors previously earned from providing the blacklisted NAS were relatively high, compared to the reduction in audit costs that result from spillovers. In contrast, a prohibition of the NAS that generate intense spillovers and low NAS fees can have the unexpected—but desired—effect of decreasing market concentration; however, reporting quality also decreases.

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The impact of external auditors on firms’ financial restatements: a review of archival studies and implications for future research

Velte

2022

Manag Rev Q

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A systematic literature review includes 69 archival studies on the impact of external auditors on firms’ financial restatements, based on principal agent theory. In more detail, we separate between auditor incentives and auditor competencies to supply a high audit quality. Financial restatements represent one of the most important proxies of audit quality in archival audit research, stressing an increased relevance in empirical research, business practice and regulatory initiatives. The review highlights that many studies on auditor incentives and competencies show inconclusive results on firms’ financial restatements (e.g., fee and rotation studies). But there are indications that especially auditor expertise and audit firm size significantly decrease financial restatements. In discussing potential future research, we emphasize the need for a more detailed analysis of restatements proxies, controls for audit risk, inclusion of (corporate) governance mechanisms as possible moderators or mediators, and sustainability issues of the audit team.

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Further Evidence on the Effect of Regulation on the Exit of Small Auditors from the Audit Market and Resulting Audit Quality

Cited by 8 publications

References 23 publications

MASs, alliance and performance: an evidence of SOX effects

MASs, alliance and performance: an evidence of SOX effects

The interdependence between market structure and the quality of audited reports: the case of non-audit services

The impact of external auditors on firms’ financial restatements: a review of archival studies and implications for future research

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