How Big-4 Firms Improve Audit Quality

Che, Limei; Hope, Ole‐Kristian; Langli, John Christian

doi:10.1287/mnsc.2019.3370

Cited by 83 publications

(39 citation statements)

References 60 publications

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“…The literature also shows that external auditors, such as Big 4 audit firms, provide additional monitoring and scrutiny of the financial accounting and reporting practices of firms, including banks, which helps to constrain distortions in reported accounting numbers and improve accounting disclosure quality (e.g. Ozili, 2017b;Huang et al, 2020;Che et al, 2020). DeBoskey and Jiang (2012) show that US banks audited by a Big 4 audit firm have reduced income smoothing.…”

Section: Literature Reviewmentioning

confidence: 99%

Big 4 auditors, bank earnings management and financial crisis in Africa

Ozili

2021

JFRA

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Purpose This paper aims to examine whether African banks audited by a Big 4 auditor use loan loss provisions (LLPs) for earnings management purposes before, during and after the global financial crisis. It focuses on income smoothing as a type of earnings management. Design/methodology/approach The study analyzed banks in 21 African countries from 2002 to 2014. The estimation techniques used are the fixed effect regression technique, descriptive statistic and Pearson correlation statistic. The model used in the study expresses LLPs as a function of its discretionary and non-discretionary determinants. Findings African banks audited by Big 4 auditors use LLPs to smooth income and the incentive to smooth income is greater during an economic downturn or recession. Also, African banks audited by a Big 4 auditor use income smoothing to lower high earnings during the financial crisis and in the pre-financial crisis period but not in the post-financial crisis period. Originality/value The literature shows that the presence of Big 4 auditors improves earnings quality. The direct impact of Big 4 auditors on earnings management in African banks has received little attention in the literature, and the impact of audit quality on bank earnings smoothing particularly in Africa is yet to be known.

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Section: Literature Reviewmentioning

confidence: 99%

Big 4 auditors, bank earnings management and financial crisis in Africa

Ozili

2021

JFRA

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“…A key feature of such a research design is that it holds both the client firm and the audit firm constant, which enables better isolation (identification) of audit partner effects (Chen et al ., 2008; Ittonen et al ., 2013; Hardies et al ., 2015). Focusing on audit partner changes alleviates many important concerns about endogeneity (simultaneity and correlated omitted variables) because each client serves as its own control (Bedard and Johnstone, 2010; Che et al ., 2020).…”

Section: Introductionmentioning

confidence: 99%

Archival research on audit partners: assessing the research field and recommendations for future research

Hardies

Hossain

Chapple

2020

Accounting & Finance

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In this paper, we assess the existing archival research on audit partners and provide recommendations for future research. Our empirical analyses suggest that the audit partner characteristics with the biggest impact are industry specialisation and client importance. We demonstrate that audit partner studies may suffer from omitted variable bias if they study audit partner characteristics in isolation, as they have often done. We also show that, for most audit partner characteristics, there is little within‐company and within‐partner variation. We therefore caution against routinely including company and audit partner fixed effects in audit partner studies. We also examine the importance of properly adjusting for dependence in the data in audit partner studies and suggest to cluster standard errors at the client firm level. Finally, we provide detailed descriptive information at the audit partner level in order to demonstrate how researchers could improve the reporting of audit partner level data.

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“…In summary, despite the existence of some current high-profile cases, the collective evidence strongly supports that audits of large (Big 4) accounting firms are higher quality than the alternative (Che et al , 2018).…”

Section: Background and Literature Reviewmentioning

confidence: 85%

Classifying internal audit quality using textual analysis: the case of auditor selection

Boskou

Kirkos

Spathis

2019

MAJ

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Purpose This paper aims to assess internal audit quality (IAQ) by using automated textual analysis of disclosures of internal audit mechanisms in annual reports. Design/methodology/approach This paper uses seven text mining techniques to construct classification models that predict whether companies listed on the Athens Stock Exchange are audited by a Big 4 firm, an auditor selection that prior research finds is associated with higher IAQ. The classification accuracy of the models is compared to predictions based on financial indicators. Findings The results show that classification models developed using text analysis can be a promising alternative proxy in assessing IAQ. Terms, N-Grams and financial indicators of a company, as they are presented in the annual reports, can provide information on the IAQ. Practical implications This study offers a novel approach to assessing the IAQ by applying textual analysis techniques. These findings are important for those who oversee internal audit activities, assess internal audit performance or want to improve or evaluate internal audit systems, such as managers or audit committees. Practitioners, regulators and investors may also extract useful information on internal audit and internal auditors by using textual analysis. The insights are also relevant for external auditors who are required to consider various aspects of corporate governance, including IAQ. Originality/value IAQ has been the subject of thorough examination. However, this study is the first attempt, to the authors’ knowledge, to introduce an innovative text mining approach utilizing unstructured textual disclosure from annual reports to develop a proxy for IAQ. It contributes to the internal audit field literature by further exploring concerns relevant to IAQ.

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How Big-4 Firms Improve Audit Quality

Cited by 83 publications

References 60 publications

Big 4 auditors, bank earnings management and financial crisis in Africa

Big 4 auditors, bank earnings management and financial crisis in Africa

Archival research on audit partners: assessing the research field and recommendations for future research

Classifying internal audit quality using textual analysis: the case of auditor selection

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