The Importance of Audit Firm Characteristics and the Drivers of Auditor Change in UK Listed Companies

This paper explores the importance of audit firm characteristics and the factors motivating auditor change based on questionnaire responses from 210 listed UK companies (a response rate of 70%). Twenty-nine potentially desirable auditor characteristics are identified from the extant literature and their importance elicited. Exploratory factor analysis reduces these variables to eight uncorrelated underlying dimensions: reputation/quality; acceptability to third parties; value for money; ability to provide non-audit services; small audit firm; specialist industry knowledge; non-Big Six large audit firm; and geographical proximity. Insights into the nature of 'the Big Six factor' emerge. Two thirds of companies had recently considered changing auditors; the main reasons cited being audit fee level, dissatisfaction with audit quality and changes in top management. Of those companies that considered change, 73% did not actually do so, the main reasons cited being fee reduction by the incumbent and avoidance of disruption. Thus audit fee levels are both a key precipitator of change and a key factor in retaining the status quo

Audit opinions and information asymmetry in the stock market

This study analyses the relationship between the content of the audit reports and information asymmetry levels in the stock market for a sample of Spanish firms. By implementing an association study, we document (1) that firms with audit qualifications show higher information asymmetry levels than those with unqualified opinions; (2) firms with non-quantified qualifications show higher informational asymmetry than firms with quantified qualifications; and (3) we find a stronger effect on the level of informational asymmetry in the case of going concern qualifications. Our findings suggest that audit qualifications reporting more uncertainty on firm accounting statements result in higher adverse selection risk.David Abad acknowledges financial support from the Ministerio de Ciencia y Competitividad through grants ECO2013-44409-P and ECO2014-58434-P. Juan Pedro Sánchez-Ballesta acknowledges financial support from Fundación Séneca (15358/PHCS/10). José Yagüe acknowledges financial support from Fundación Caja Murcia

Audit market structure, fees and choice in a period of structural change: evidence from the UK – 1998–2003

This paper presents evidence on audit market concentration and auditor fee levels in the UK market in the crucial period of structural change following the PricewaterhouseCoopers’ (PwC) merger and encompassing Andersen’s demise (1998–2003). Given the current interest in auditor choice, analysis is also undertaken at the individual audit firm level and by industry sector. There is evidence of significant upward pressure on audit fees since 2001 but only for smaller auditees. Audit fee income for top tier auditors (Big 5/4) did not change significantly while the number of auditees fell significantly, consistent with a move towards larger, less risky, clients. A decomposition analysis of the aggregate Big 5/4 concentration ratio changes over the period identifies the impact of four distinct consumer-based reasons for change: leavers; net joiners; non-par auditor switches; and (only for the audit fees measure) audit fee changes. Andersen’s demise markedly reduced the level of inequality among the top tier firms but PwC retained its position as a ‘dominant firm’. On switching to the new auditor, former Andersen clients experienced an initial audit fee rise broadly in line with inflation, with no evidence of fee premia or discounting. They also reported significantly lower NAS fees, consistent with audit firms and auditees responding to public concerns about perceptions of auditor independence. There is no general evidence of knowledge spillover effects or cross-subsidisation of the audit fee by NAS. The combined findings provide no evidence to indicate that recent structural changes have resulted in anticompetitive pricing; the key concerns remain the lack of audit firm choice and issues concerning the governance and accountability of audit firms

Anticipation and Reaction to Going Concern Modified Audit Opinions by Sophisticated Investors

The purpose of this paper is to examine whether institutional investors (i) anticipate a distressed firm\u27s receipt of a first‐time going‐concern modified audit opinion, and (ii) react to a first‐time going‐concern modified opinion by engaging in abnormal net selling of firm shares. Using a proprietary database of US institutional investor trades, we find that institutional investors are net sellers of first‐time going‐concern opinion firms beginning 6 months before the release of the report and remain net sellers through the subsequent 3 months. We also find that the severity of the reasons auditors modify their opinions is associated with increased trading activity, but only after the opinion is publicly available. Our results support the position that an auditor\u27s going‐concern modified opinion is influential in the marketplace by documenting that institutional investors anticipate this price‐relevant information and react through increased selling. The finding of increased net selling of firms with more severe reasons for report modifications provides evidence of the incremental informational value of the wording in the modified opinion

Disproportionate Insider Control and the Demand for Audit Quality

We examine the relationship between disproportionate insider control, enabled through dual-class share structures, and the demand for audit quality. Using a comprehensive hand-collected sample of U.S. dual-class firms, we find that, consistent with outside shareholders’ increased demand for external monitoring, as well as self-bonding by entrenched insiders, disproportionate insider control is positively associated with the propensity to hire a Big 4 or industry specialist auditor, auditor independence, and audit fees. Corroborating a self-bonding explanation, additional analyses show that audit quality mitigates the negative association of disproportionate insider control and firm value. In expanded analyses, we also investigate the separate effects of insider voting and cash flow rights on the demand for audit quality in dual-class firms. Consistent with general agency theory, we find a decreased (increased) demand for audit quality from incentive-alignment (entrenchment) effects of ownership

Audit Partner Industry Specialization and Audit Quality: Evidence from Spain

We investigate the impact of the industry specialization of individual auditors on audit quality. We aim to contribute to a quickly growing line of research examining the importance of audit partners as determinants of audit quality. To provide robust results, we use several proxies of both industry specialization and audit quality. We conduct the empirical analysis with a sample of Spanish listed companies for the research period between 2005 and 2013. Our main result is the lack of a significant impact of the industry specialization of audit partners on audit quality. This result seems sound, as it holds for the several measures of industry specialization and audit quality used in the empirical study. Our main result, which contradicts most of the scarce available evidence, would stress the importance of the institutional context in the study of the industry specialization-audit quality relationship and advocates the need for further research