Threats to auditor independence: Evidence from Iran

This paper aims to examine threats to auditor independence in Iran. A mixed questionnaire, including both quantitative closed-ended questions and an open-ended qualitative question, is developed to investigate threats to auditor independence. Moreover, thematic analysis is used to triangulate the results against financial media articles throughout 1994 – 2014. Findings suggest that while bribery, non-audit services, and economic condition are key threats to auditor independence in Iran, gifts and presents do not compromise independence given the Iranian culture. This study contributes to a better understanding of auditor independence in Iran, which may apply to other regional settings. Moreover, it provides some suggestions to improve the current Iranian Audit Organisation’s auditor independence framework. (JEL M32)N/

The Effects of Auditor Tenure on Fraud and Its Detection

We examine the strategic effects of auditor tenure on the auditor's testing strategy and the manager's inclination to commit fraud. Most empirical studies conclude that longer tenure improves audit quality. Proponents of restricting tenure argue that longer tenure impairs auditor independence and a "fresh look" from a new auditor results in higher audit quality. Validating this argument requires testing whether the observed difference in audit quality between a continuing auditor and a change in auditors is less than the theoretically expected difference in audit quality without impairment. Our findings provide the guidance necessary for developing such tests. Our results show that audit risk (the probability that fraud exists and goes undetected) is lower in both periods for the continuing auditor than with a change in auditors. More importantly, we show that across both periods, expected undetected fraud is lower for the continuing auditor than with a change in auditors

Audit market competition: auditor changes and the impact of tendering

Increased competition within the external audit market and the recent phenomenon of audit tendering has renewed interest in the factors influencing auditor changes. In this paper, a questionnaire instrument is used to elicit perceptions of the factors which influence auditor-client realignments in this new environment and to indicate the relative influence of economic and behavioural factors. Positive, statistically significant associations were found between unsolicited approaches and the consideration of either a change in auditor or the conduct of a competitive tender. Fees are both the most frequently cited reason for considering auditor change and the most frequently cited factor influencing the selection of a new auditor. The chemistry of the relationship with senior audit firm personnel was ranked as more important than service issues in new auditor selection. Several significant associations between the reasons for change and both company size and type of change are identified. In particular, smaller companies, and companies changing from a non-Big Six firm, were more likely to change due to the need for a wider range of services and the influence of third parties. Findings indicated that 55% of auditor changes were effected by means of a tender, with the incumbent auditor having only an 18% chance of retaining the client. The various stages of the tender process appear to be dominated by the finance director, with audit committees having a restricted role. Tenders resulted in significant fee reductions in the year of change

Firm corruption in the presence of an auditor

This paper develops a framework to explore firm corruption taking account of interaction with an auditor. The basic idea is that an auditor can provide auditing and other (consultancy) services. The extent of the other services depends on firm profitability. Hence auditor profitability can increase with firm corruption that may provide an incentive to collude in corrupt practices. This basic idea is developed using a game theoretic framework. It is shown that a multiplicity of equilibria exist from stable corruption, through auditor controlled corruption, via multiple equilibria to honesty on behalf of both actors. Following the development of the model various policy options are highlighted that show the difficulty of completely removing corrupt practices

The Effects of an Auditor\u27s Communication Mode and Professional Tone on Client Responses to Audit Inquiries

In this study, we investigate whether receiving an auditor inquiry via e-mail differentially affects client responses as compared to more traditional modes of inquiry, and whether those responses are affected by the auditor\u27s professional tone. In an experiment, experienced business professionals respond to an auditor\u27s information request regarding a potential accounting adjustment. We varied the communication mode of the request (e-mail, audio, or visual) and the professional tone of the communication (more versus less professional) and then measured the extent to which participants revealed information that either supported or did not support the client\u27s accounting position. We find that if an auditor asks for information via e-mail, client responses are more biased towards information that supports the client\u27s position as compared to audio or visual inquiries. In addition, we find that clients respond in a more biased manner when the inquiry is worded in a less professional tone as compared to a more professional tone. Further underscoring the implications of these findings for audit outcomes, our results suggest that if an auditor\u27s request leads clients to provide a response that is biased towards client-supporting information, clients may be less likely to agree with an auditor\u27s proposed income-decreasing adjustment

Litigation Risk and Abnormal Accruals

In this paper, we examine the relation between auditor litigation risk and abnormal accruals over the 1989-2007 time period. We address potential endogeneity in prior studies by jointly modeling abnormal accruals and litigation risk in a simultaneous equation system. Our findings suggest that client-specific litigation risk affects auditor incentives to acquiesce to client demands for earnings management, i.e., the higher the risk of auditor litigation, the greater the auditor’s restraining influence on the abnormal accruals reported by the client. We also find evidence that abnormal accruals increase the likelihood of auditor litigation. We also document that the 1995 Public Securities Litigation Reform Act (PSLRA) lowered the client-specific risk of auditor litigation. Litigation reform remains a topic of ongoing interest. Our findings contribute to a better understanding of the effects of litigation reform (and related changes in legal exposure) on auditor incentives and earnings management.: Litigation risk, abnormal accruals, auditor incentives

Public sector performance auditing: Emergence, purpose and meaning

The purpose of this paper is to evaluate the extant Anglo-American literature on 'performance auditing for the public sector', in order to identify the socio-economic and political themes that influenced the emergence of public sector performance auditing. The paper also seeks to develop an understanding of the role and practice of performance auditing in the public sector. Common catalysts for change appear to rest in the influence of the local governmental senior auditor (e.g. Auditor General), the existence of public sector reform and changes in standardisation generally. The traditional role of the public sector auditor has undergone significant change over time. In particular, the scope of the public sector audit now exceeds the expectation that the auditor only check for regulatory and procedural compliance. It is now expected that the auditor enhance accountability in the management of public sector resources. The perceived objectives of performance auditing (economy, efficiency and effectiveness) emerge as a strong theme, one which seems to comply with these more modern expectations of performance

Firm corruption in the presence of an auditor

This paper develops a framework to explore firm corruption taking account of interaction with an auditor. The basic idea is that an auditor can provide auditing and other (consultancy) services. The extent of the other services depends on firm profitability. Hence auditor profitability can increase with firm corruption that may provide an incentive to collude in corrupt practices. This basic idea is developed using a game theoretic framework. It is shown that a multiplicity of equilibria exist from stable corruption, through auditor controlled corruption, via multiple equilibria to honesty on behalf of both actors. Following the development of the model various policy options are highlighted that show the difficulty of completely removing corrupt practices.firm corruption, auditor corruption, perfect equilibrium

The influence of banks on auditor choice and auditor reporting in Japan

Debt as opposed to equity as the major source of financing and the influence of banks on the corporate governance of listed companies are unique features of the Japanese business environment. This thesis investigates how these features affect the choice of auditor by Japanese listed companies and auditor reporting by Japanese CPA firms on those companies. Pong and Kita (2006) provided some univariate analyses and indicated that Japanese companies tended to select the same external auditors as their main banks to reduce the agency costs. In this thesis, I further examine the influence of main banks on auditor selection by logistic regression and also investigate the influence of main banks on auditor reporting quality after controlling self-selection bias. Using data from Japanese listed companies in the Tokyo Stock Exchange over the 2002-2008 period, I provide empirical evidence that companies with more reliance on main bank loans are more likely to choose their main banks’ external auditors. Using the Propensity Score Matching method and the Heckman two-step binary probit model to control for self-selection bias, the empirical results support the hypothesis that main bank auditors are more likely to issue modified opinions to the borrowing companies than non-main bank auditors, providing evidence of higher audit quality from main bank auditors. As a sensitivity test, I also use discretionary accruals as a measure of audit quality. the results indicate that companies who choose the same auditors as their main banks have higher audit quality than companies who choose different auditors from their main banks. My thesis contributes to the existing auditing literature in several ways. First, by studying the influence of debt financing on auditor choice and auditor reporting, this thesis extends the auditor market research that focuses mainly on the role of auditors in equity markets to the bank-based market. Furthermore, this thesis also complements auditing research on the influence of institutions on audit quality