Client acceptance and continuation decisions

https://egrove.olemiss.edu/dl_proceedings/1049/thumbnail.jp

The Impact of Partners’ Economic Incentives on Audit Quality in Big 4 Partnerships

Economic incentives are fundamental for understanding auditor behavior. In this paper, we investigate the association between the extent of partners’ fee-based compensation, partners’ observable net wealth, and audit quality. Using a sample of Belgian Big 4 audit firms and their predominantly private clients, our results suggest a negative association between audit quality and partner fee-based compensation, and a positive association between audit quality and partner observable net wealth. Moreover, our results show that the latter association is most significant when a partner is carrying a lot of debt, which indicates that a partner’s financial situation may affect audit quality. The extent of fee-based incentives also varies among partners of the same audit firm. Furthermore, partner and client characteristics differ based on the extent of fee-based compensation. Our findings should be of interest to regulators and audit firms as they suggest that audit partner’s economic incentives significantly affect audit quality.acceptedVersio

Exploratory analysis of the determinants of audit engagement resource allocations

https://egrove.olemiss.edu/dl_proceedings/1051/thumbnail.jp

Multimarket Contact and Mutual Forbearance in Audit Markets

Competition in audit markets is an important topic but direct tests of market competition have been limited. In this paper, we examine how audit firms behave when they are confronted with competition from another firm in a wide range of industry segments in a local market. Sharing a large number of market segments can lead to mutual forbearance among audit rivals. Such mutual forbearance is likely to manifest as higher audit fees in a market because rivals are hesitant to aggressively compete in the face of potential competitive retaliation. Using a sample of 25,662 observations from 2004 to 2015, we find evidence that supports this argument as proxied by the extent that audit firms compete in the same industries in the same locations. This result persists after controlling for several tight fixed-effects specifications based on time, location, industry, and market segments. In supplementary tests, we also find that the likelihood of client switching is negatively associated with the multi-industry contact of the incumbent, but clients that do switch are more likely to choose an alternative audit firm that confronts the predecessor auditor in fewer market segments. Our evidence is consistent with mutual forbearance among rival audit firms when confronted with the same competitor in different market segments.acceptedVersio

The demand attributes of assurance services and the role of independent accountants

Several initiatives and auditors’ professional organizations have argued that assurance about the quality of information, processes, or compliance encompasses the future market base for the accounting profession. However, the market for assurance services is in its formative stage and not well understood. Based on data from Dutch Executive Board members this paper reports how desirable attributes of service providers differ across potential providers and affect the demand for assurance services, specifically the attractiveness of independent accountants as assurance service providers

The Future of Assurance in Capital Markets: Reclaiming the Economic Imperative of the Auditing Profession

SYNOPSIS Efficient capital markets rely on a continuous supply of reliable, timely, and audited information. The economic value of an audit derives from the reduction in risk of erroneous or manipulated information. Traditionally, the auditing has focused on annual financial reports. Given the speed of information creation and dissemination, the role of auditors may need to adapt. There are three areas in which auditors might help improve information quality: (1) non-GAAP earnings; (2) ESG reporting; and (3) cybersecurity risks disclosures. To provide assurance over these types of information, audit firms need to identify the appropriate subject matter for assurance, obtain expertise to provide assurance, develop a verification process, and commit to a system of organizational support. Multidisciplinary practices have the potential to provide many types of expanded assurance. However, success is not inevitable, and market, social, and regulatory forces will have much to say about the emergence of new assurance initiatives.</jats:p