The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market

Choi, Jong‐Hag; Doogar, Rajib; Ganguly, Ananda R.

doi:10.2139/ssrn.268304

Cited by 12 publications

(2 citation statements)

References 11 publications

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“…The results on whether auditor rotation achieves the expected favorable results have been mixed. Prior evidence has suggested that long tenure of auditors is associated with lower likelihood of issuing going concern or qualified audit opinion, hence impaired independence (Choi and Doogar, 2005; Ruiz-Barbadillo et al , 2009).…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Audit rotation, information asymmetry and the role of political connections: international evidence

Tessema

Abou-El-Sood

2022

MEDAR

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Purpose Audit rotation (AR) is a key policy initiative implemented in global jurisdictions to deal with concerns about audit quality. Auditing financial reports involves communicating attested value-relevant company information to investors, and hence audit quality plays a role in the quality of financial reporting information. This paper aims to investigate whether AR affects the degree of information asymmetry (IS) between investors. It further aims to examine whether voluntary AR results in less asymmetric information compared to mandatory AR. Additionally, it examines whether political connections moderate the association between AR and IS. Design/methodology/approach The authors use data from publicly traded banks across the Gulf Cooperation Council (GCC) for the period 2010–2018. The authors include several variables to control for corporate governance and other firm-specific characteristics by using country-year fixed-effects regression model. Findings The authors find higher IS for banks that periodically rotate auditor, while banks voluntarily choose to rotate auditors obtain high-quality audits, which results in higher trading volume and lower stock return volatility, hence lower IS. The results suggest that when banks voluntarily choose to rotate auditors, investors perceive these banks as more committed to obtaining high-quality audits relative to mandatory AR. Providing higher quality audits enhances the credibility of reported information and thus reduce the level of IS. Moreover, IS following AR is higher for politically connected banks than for similar but politically unconnected banks. Finally, investors perceive voluntary AR as a disciplining tool, which mitigates IS. This mitigating role is not affected by bank political connectedness. Research limitations/implications This study has limitations as the definition of AR could be interpreted as binary or too narrow, and hence it may not be appropriate to generalize findings to different contexts. Nonetheless, this study casts light on a new perspective to reconcile the existing mixed evidence on the influence of AR on IS and the moderating role of political connections. A further limitation is that because of data unavailability, the authors were unable to use other proxies (e.g. bid-ask spreads and analyst forecast dispersion) of IS. Practical implications The present findings provide insight to regulators, policymakers and standard setters on the potential adverse effect of political connections on the role of AR in mitigating IS. The results underscore the importance of voluntary AR, and suggest that regulators, policymakers and standard setters encourage firms to rotate their auditors periodically. Originality/value This study provides evidence in a setting that is unique at the economic, social and regulatory levels. Prior literature is lacking and has been centered on developed countries or focusing on single-country specifications. The data set of this study is unique and allows us to examine the interplay between political influence that arises through ownership and management roles of influential members of state.

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Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Audit rotation, information asymmetry and the role of political connections: international evidence

Tessema

Abou-El-Sood

2022

MEDAR

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“…To deal with the litigation risk, large international firms focus more on risk-based client recruitment at the beginning of audits (Choi & Doogar, 2001). In China, pressure on CPA firms comes mainly from regulatory penalties such as licence revocation rather than lawsuits against auditors.…”

Section: Auditors' Self Protection and Performance-related Maosmentioning

confidence: 99%

An Analysis of Auditing Environment and Modified Audit Opinions in China: Underlying Reasons and Lessons

Chen

Wang³

2005

Int J Auditing

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One of the most notable changes that economic reform in Chinahas brought about is the revival of its accounting profession. The rapid development of independent auditing over the past two decades has been phenomenal, and from 1995 to 2000, about 15% of listed Chinese companies received modified audit opinions (MAOs) on their annual reports every year. The aim of this current study is to conduct a comprehensive analysis of the auditing environment to explain, through descriptive evidence, the motivating forces and underlying reasons behind the large number of MAOs in China. First, we review important events during this rapid development to facilitate a better understanding of the Chinese auditing environment. Second, we analyze the auditing environment and identify government regulations as the primary driving force behind the high percentage of MAOs. Finally, we conduct a further analysis of MAOs and demonstrate additional motivations and underlying reasons for the large number of MAOs that implicate both auditors and preparers in China. This study not only facilitates our understanding of accounting and auditing in China, but also offers lessons and implications for other countries with emerging accounting institutions and stock markets. While government may have an irreplaceable role to play in an emerging market where market forces are relatively weak, local environments and unique factors must be identified and analyzed to fully understand the implications of independent auditing. This study presents such an analysis in the case of China.

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Audit Firm Portfolio Management Decisions

Johnstone

Bedard

2004

J of Accounting Research

244

127

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We examine client acceptance and client continuance decisions of a large audit firm to provide empirical evidence on the extent and nature of risk avoidance that the firm uses to purposefully manage its client portfolio. Our results support several key new inferences regarding audit firm portfolio management decisions. First, the results show that this firm is shedding the riskier clients in its portfolio, consistent with the risk avoidance theory of audit firm portfolio management. Second, the results show that the firm's newly accepted clients are less risky than its continuing clients. Although results of both the client continuance and client acceptance decisions imply a less risky portfolio emerging over time, there are greater differences in risk between continuing and discontinued clients than between continuing and newly accepted clients. Third, we find that audit risk factors are more important in audit firm portfolio management decisions than are financial risk factors. Finally, we find no evidence that audit pricing affects the client acceptance and continuance decisions of this firm, controlling for risk and other client characteristics. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2004.

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The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market

Cited by 12 publications

References 11 publications

Audit rotation, information asymmetry and the role of political connections: international evidence

Audit rotation, information asymmetry and the role of political connections: international evidence

An Analysis of Auditing Environment and Modified Audit Opinions in China: Underlying Reasons and Lessons

Audit Firm Portfolio Management Decisions

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