Issues Raised by Studying DeFond and Zhang - What Should Audit Researchers Do?

Donovan, John; Frankel, Richard M.; Lee, Joshua A.; Martin, Xiumin; Seo, Hojun

doi:10.2139/ssrn.2491135

Cited by 22 publications

(28 citation statements)

References 55 publications

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“…Our findings also extend the emerging body of research on how auditor going‐concern assessments are affected by information contained in corporate disclosures as well as key financial ratios (Bruynseels and Willekens 2012; Bruynseels et al ). In doing so, we respond to Carson et al's () and Donovan et al's () call for more audit research in settings where auditors' access to private information would be salient in assessing the going‐concern uncertainties associated with information reflected in corporate disclosures.…”

Section: Introductionmentioning

confidence: 91%

Greater Reliance on Major Customers and Auditor Going‐Concern Opinions

Dhaliwal

Michas

Naiker

et al. 2020

Contemporary Accting Res

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In this study, we predict and provide evidence that distressed firms that rely more heavily on major customers for sales have a comparatively higher incidence of receiving going‐concern opinions (GCOs). Moreover, we find that the effect of increased reliance on major customers is driven by firms that are more distressed. We also theorize that variations in key characteristics of the relationship between a distressed firm and its largest major customer are incrementally linked to GCOs, and present evidence consistent with this. Specifically, we find that the effect of greater reliance on major customers is driven by firms that are relatively smaller than their largest major customer. Additionally, we find that greater reliance on major customers is positively (negatively) associated with GCOs when firms are in a shorter (longer) relationship with their major customer and when firms have a different auditor to (same auditor as) the largest major customer. Overall, our study indicates that supply chain relationships are relevant business risks associated with auditors' going‐concern assessments.

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Section: Introductionmentioning

confidence: 91%

Greater Reliance on Major Customers and Auditor Going‐Concern Opinions

Dhaliwal

Michas

Naiker

et al. 2020

Contemporary Accting Res

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“…However, some studies explicitly question whether financial analysts actually pay attention to audit quality. For example, Donovan et al (2014) examine the transcripts of conference calls and find that analysts rarely mention and question the audit or auditors. Further, a recent survey of sell-side analysts (Brown et al 2015) suggests that analysts rate an audit by a Big 4 auditor as a relatively less important signal of earnings quality.…”

Section: Introductionmentioning

confidence: 99%

Audit Quality and Properties of Analysts' Information Environment

He¹,

Sidhu²,

Taylor

2014

SSRN Journal

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We consider how audit quality impacts sell-side analysts' information environment. Using the method outlined by Barron et al. (1998), we examine whether higher audit quality is associated with differences in the weight analysts place on common information relative to private information, as well as the extent to which audit quality separately impacts the precision of analysts' private and common information. Our results show that, in instances where analysts revise their earnings forecasts for year t+1 shortly after the release of year t earnings, higher audit quality results in analysts placing more weight on public information. The precision of private (as well as public) information is improved. These results extend our understanding of how audit quality impacts on attributes of analysts' forecasts and provides support for the argument that audit quality has important capital market implications.

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“…Hence, these companies do not come into existence, and if they did, they would immediately disappear as they would be unable to find a stakeholder that would want to do business with them. As far as audit firms are concerned Donovan et al (2014) would predict that audit firms who render a subpar audit service cannot exist as no company could benefit from selecting a deficient auditor. As this mechanism is in place this would lead Donovan et al (2014) to conclude that it is futile to conduct research into auditing: "We [researchers] tend not to concern ourselves with the quality of products that result from a competitive equilibrium where we believe that consumers and pro-ducers are acting rationally with full information."…”

mentioning

confidence: 99%

“…As far as audit firms are concerned Donovan et al (2014) would predict that audit firms who render a subpar audit service cannot exist as no company could benefit from selecting a deficient auditor. As this mechanism is in place this would lead Donovan et al (2014) to conclude that it is futile to conduct research into auditing: "We [researchers] tend not to concern ourselves with the quality of products that result from a competitive equilibrium where we believe that consumers and pro-ducers are acting rationally with full information." DeFond presented the opposite opinion at the second auditing conference of the Foundation for Auditing Research (June 2017, see also DeFond & Zhang, 2014;DeFond, Lennox & Zhang, 2016).…”

mentioning

confidence: 99%

“…Indeed, if it was the case that companies would not enter into the market unless they were at least clearly as good in producing value and in conveying their achievements as timely and accurate as their competitors and that if they were to enter the market that they would dissolve almost instantaneously than it would make no sense to study the work of auditors for inefficient auditors would not exist. The economic literature, however, has advanced beyond the idea that Donovan et al (2014) put forward. Indeed, this literature takes issue with the puzzle over the astounding differences in productivity between companies and countries.…”

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confidence: 99%

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Can research improve audit practice?

Bouwens¹

2017

MAB

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Imagine that you want to decide what auditor to select and there are two potential auditors on the market to audit your financial statements. One auditor will make sure that the whole world believes that the financial statements of your company reflect the economic conditions your firm faces and makes sure that this believe is warranted. The second auditor is less able to provide that level of assurance. Which auditor will the company select?

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Issues Raised by Studying DeFond and Zhang - What Should Audit Researchers Do?

Cited by 22 publications

References 55 publications

Greater Reliance on Major Customers and Auditor Going‐Concern Opinions

Greater Reliance on Major Customers and Auditor Going‐Concern Opinions

Audit Quality and Properties of Analysts' Information Environment

Can research improve audit practice?

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