auditor characteristics and audit qualityauditor characteristics and audit quality

61-69. Srinidhi etal. Business strategy refers to how companies compete in an industry or competitive market (Olson etal., 2005). and Twedt, B.J. (2016) and Sari (2018) argue that client strategy deviation can lead to industry-specific auditors having knowledge advantages. Leuz, C., Nanda, D. and Wysocki, P.D. 1, pp. After collecting data from the comprehensive database of all listed companies (CODAL [1]), the analysis was performed using Eviews software. Future research should consider the impact of other audit features, such as auditor fees and auditor size. 92-103. In this study, the moderator variable is the client strategy. 5, pp. Good Auditors Have Integrity. We also highlight that increased audit fee premiums for some types of auditors do not accompany corresponding improvements in the quality of discretionary accruals by employing both audit fees and discretionary accruals as proxies for audit quality. Strategy deviation is conceptually underpinned by the notion of firm conformity (DiMaggio and Powell, 1983). The adjusted R-squared, which indicates the explanatory power of the regression model for the dependent variables ADA and CFADA is 68 and 62% respectively. Thus, the results of the F-Limer test in Table4 (available online at: https://drive.google.com/file/d/1dKUreAe1G7h_U6YCBwqxDjv0HLqbxEM_/view?usp=sharing) indicate that in all research models the panel data method is suitable for estimating the regression. DSitAISit) in the Model (1) is positive and significant, the first hypothesis of the research is not rejected. 7, pp. (2019), Effects of business strategies on investment efficiency, Journal of Accounting Knowledge, Vol. (2003), Earnings management and investor protection: an international comparison, Journal of Financial Economics, Vol. Tang, J.Y., Crossan, M. and Rowe, W.G. The two dominant frameworks of business strategies are Poner (1980) and Miles and Snow (1978). In addition, in previous studies conducted in Iran and other countries, two dominant frameworks (i.e. 24 No. DeFond, M. and Zhang, J. random effects panel data method). This study examines how the client business strategy (i.e. I thank Bill Baber, Karen Kitching, Linda Myers, Christine Petrovits, and participants at the American Accounting Association's 2013 Auditing Section and Government and Nonprofit Section midyear meetings and Suffolk University Research Workshop for helpful comments and suggestions. Our findings contribute to the literature by documenting that various characteristics of AC chairs are important for enhancement of auditor selection and audit quality. Karami, G., Karimiyan, T. and Salati, S. (2017), Auditor tenure, auditor industry expertise, and audit report lag: evidences of Iran, Iranian Journal of Management Studies, Vol. 12 No. Evidence from archival data, The Accounting Review, Vol. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press, New York. Auditor size and audit quality, Journal of Accounting and Economics, 3 (3 . (2011), Firm versus partner measures of auditor industry expertise and effects on auditor quality, Auditing: A Journal of Practice and Theory, Vol. Farhangdoust, S. and Sayadi, L. (2020), Capturing differences in conservatism following earnings restatements: further evidence from Tehran stock exchange, Asian Journal of Accounting Research, Vol. The authors have motivated several reasons to choose the Iranian capital market as a suitable case for this research. Finally, discretionary accruals are used to assess financial reporting quality. The research findings state that auditor tenure has a positive association with financial reporting quality, and this relationship is strengthened when the company's business strategy deviates from the normal industry strategy. The second tradition is based on Chen, Y., Eshleman, J.D. 641-666. and Chin, C.L. Auditor characteristics have a positive relationship with the quality of financial reporting, helping policymakers and regulators of capital markets and auditing to improve the quality of financial reporting by setting accounting and auditing standards for client characteristics. Tanani, M. and Mohebkhah, M. (2014), The relation of business strategy with earnings quality and stock return in firms listed in TSE, Empirical Research in Accounting, Vol. However, ambiguity or overconfident managers cause a company to deviate from industry strategy norms (Tang etal., 2011). 1, pp. Does Big 6 auditor industry expertise constrain earnings management? Thus, a company's strategy is measured using six indicators (Yuan etal., 2016; Sari, 2018; Geletkanycz and Hambrick, 1997; Mintzberg, 1978; Mintzberg etal., 1998). (1998), Strategy Safari: A Guided Tour through the Wilds of Strategic Management, Free Press, New York. 224-238. Some audits have special administrative purposes, such as auditing . However, in this study, the authors emphasize the conformity (homogeneity) strategy in the industry, which has not been studied in the Iranian capital market. auditor tenure) and financial reporting quality. 275-326. In additional analyses, I use subsamples partitioned by client risk and audit firm size, and find that individual auditor characteristics generally play a more significant role in the issuance of ICDs and QAOs for riskier clients than for less risky clients. Firm versus partner measures of auditor industry expertise and effects on auditor quality, Earnings management and auditor specialization in the post-sox era: an examination of the banking industry, The quality of accruals and earnings: the role of accrual estimation errors, The iron cage revisited: institutional isomorphism and collective rationality, Capturing differences in conservatism following earnings restatements: further evidence from Tehran stock exchange, Top-management-team tenure and organizational outcomes: the moderating role of managerial discretion, Understanding the relation between financial reporting quality and audit quality, The external ties of top executives: implications for strategic choice and performance, Earnings management and the informational and disciplining role of debt: evidence from Iran, Auditor tenure and perceptions of audit quality, Earnings quality: some evidence on the role of auditor tenure and auditors' industry expertise, Do individual auditors affect audit quality? 193-228. Chen, C.Y., Lin, C.J. We then find that the magnitude of discretionary accruals decreased in the post-SOX period for the clients of local auditors and new auditors but not for the clients of Big 4 auditors, industry specialist auditors, and large office size auditors. 2, pp. They help with risk management, implement controls, and ensure good governance is maintained throughout the business. Higher residual values represent a lower quality of financial reporting. Previous research has only examined the role of auditor industry specialization. Although there are many alternative models for measuring earnings management, popular models include the adjusted Jones model (1995) and cash-flow-adjusted Jones model (2002). auditor industry specialization and auditor tenure). (2015), and Patterson etal. (2020), Business strategy and corporate social responsibility, Journal of Business Ethics, Vol. Carcello and Nagy (2004) find that the longer the auditor tenure, the lower the likelihood of fraudulent financial reporting. 34 No. From . Managers of Iranian companies are advised to consider the auditor's characteristics when choosing an audit firm to increase financial reporting quality. 9, pp. 27 No. Visit emeraldpublishing.com/platformupdate to discover the latest news and updates, Answers to the most commonly asked questions here, Isfahan (Khorasgan) Branch, Islamic Azad University, Auditor tenure, auditor specialization, and information asymmetry, Auditor industry specialization and earnings quality, Auditing: A Journal of Practice and Theory, The value relevance of audit report, auditor type and auditor tenure: evidence from Iran, Effects of business strategies on investment efficiency, Business strategy, financial reporting irregularities, and audit effort. In other words, the relationship between auditor characteristics and the quality of financial reporting improves when the firm has a strategy diversion. The study concludes that audit quality moderates the relationship between board characteristics and audit report lag of listed non-financial companies in Nigeria and recommended strict adherence . This study contributes to regulators, practitioners, investors, and academics by examining the effect of SOX on audit quality in a comprehensive way. (2016), and Mashaykhi etal. We also highlight that increased audit fee premiums for some types of auditors do not accompany corresponding improvements in the quality of discretionary accruals by employing both audit fees and discretionary accruals as proxies for audit quality. 654-681. The results of the Wooldridge test show that there is autocorrelation in all research models. In other models, auditor tenure has been replaced. Auditors seek to enhance financial reporting quality and ensure accounting information by applying accounting and auditing standards. Earnings management and investor protection: an international comparison, National level, city level auditor industry specialization and cost of debt, How strategic conformity interacts with innovation: an empirical study on Korean manufacturing firms from the perspective of optimal distinctiveness, Journal of Open Innovation: Technology, Market, and Complexity, Auditor industry specialization and audit quality: the role of client strategy, Discussion of the quality of accruals and earnings: the role of accrual estimation errors, Organizational Strategy, Structure and Process, Strategy Safari: A Guided Tour through the Wilds of Strategic Management. (2018), Auditor industry specialization and audit quality: the role of client strategy, Empirical Research in Accounting, Vol. Overall, a review of previous research shows that benefits of information and knowledge are created for auditors over time. Another caveat of this study is that the tenure variable is truncated compared to prior literature (e.g. McNichols, M.F. However, Tang etal. The results of this study indicate the association of the client's business strategy with the relationship between the auditor characteristics and the financial reporting quality. (2016) and Sari (2018) research. 6, pp. (2015), Are there adverse consequences of mandatory auditor rotation? Section 3 describes the research design and data collection. and Snow, C.C. In order to develop and grow economically, the government adopted privatization measures. Section 2 presents the related theory, develops the research hypothesis, and reviews previous studies. 32 No. 5, p. 651. In all research models, Hausman statistic rejects the null hypothesis (i.e. Specifically, we examine how five audit firm- and office-level characteristics, such as Big 4 membership, industry specialist auditor, local auditor, new auditor (i.e., anauditor on the initial audit engagement with a client), and audit office size, influence audit quality in the period before and after SOX. The first measure of earnings quality (ADA) was based on the adjusted Jones model (1995). Based on this, cash flow-adjusted Jones model (CFADA) was created. https://doi.org/10.1108/JPBAFM-10-2019-0157, Available at SSRN: If you need immediate assistance, call 877-SSRNHelp (877 777 6435) in the United States, or +1 212 448 2500 outside of the United States, 8:30AM to 6:00PM U.S. Eastern, Monday - Friday. Yuan etal. Before the Iranian Revolution, international auditing firms (i.e. The mean auditor tenure (ATE) is 2.333. Journal of Public Budgeting, Accounting & Financial Management, Forthcoming 8 No. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. The empirical results show that female auditors are more likely to report internal control deficiencies (ICDs) and issue qualified audit opinions (QAOs) to nonprofits. (2011) and Fitzgerald et al. This result is consistent with those of Cameran etal. This study contributes to the literature in several ways. Chen etal. 4, pp. This result shows that auditor tenure in the sample companies was approximately two years. (2002), Discussion of the quality of accruals and earnings: the role of accrual estimation errors, The Accounting Review, Vol. Feng, N.C. (2020), "Individual auditor characteristics and audit quality: evidence from nonprofits in the US", Journal of Public Budgeting, Accounting & Financial Management, Vol. A higher strategy deviation (SD) number means that the company's resource allocation pattern has a significant deviation from the industry strategy norms. N2 - This study investigates the effect of several auditor characteristics on audit quality before (i.e., pre-SOX period over 2000-2001) and after SOX (i.e., post-SOX period over 2003-2004). Future studies with data including additional audit quality measures could shed more light on the topic. Specifically, we examine how five audit firm- and office-level characteristics, such as Big 4 membership, industry specialist auditor, local auditor, new auditor (i.e., anauditor on the initial audit engagement with a client), and audit office size, influence audit quality in the period before and after SOX. For more than 10 years, auditors at PwC have been creating new solutions to simplify the audit through innovation. The second measure of earnings quality (CFADA) was based on Dechow and Dichev (2002). Yuan etal. 779-817. These companies' auditing was entrusted to government auditors. Prior studies suggest that academic research requires more focus on the level of individual auditors. 60 No. However, some companies use different strategies to take higher risks and create wealth for stakeholders (Chen, 2021). In the GMM technique, the heterogeneity of variance and autocorrelation can be considered simultaneously. Lim, M.S., Kim, C.Y. This implies that firms in the same industry consciously imitate on another. Overall, our study shows that the effect of SOX on audit quality is not homogeneous across different types of auditors and two proxies for audit quality. Overall, our study shows that the effect of SOX on audit quality is not homogeneous across different types of auditors and two proxies for audit quality. 65-87. Sun, J. and Liu, G. (2012), Auditor industry specialization, board governance, and earnings management, Managerial Auditing Journal, Vol. 51 No. In the first step, it is necessary to choose between the least-squares regression (OLS) and panel data methods. Finally, the results of this study indicate that the knowledge gap hypothesis exists not only for the auditor industry specialization but also for other auditor characteristics (i.e. 585-612. The plan, released today, sets out the areas the FMA will focus on when reviewing the quality of regulated audits, and contributing to the integrity . McNichols (2002) adds the revenue and gross property plant and equipment variables to Dechow and Dichev (2002) to measure earnings quality. In the next step, we removed from the research sample companies that were delisted from the TSE during the research period or whose information was not available and sufficient. Thus, in addition to state-owned companies, the IAO has audited private companies. abstract = "This study investigates the effect of several auditor characteristics on audit quality before (i.e., pre-SOX period over 2000-2001) and after SOX (i.e., post-SOX period over 2003-2004). Auditor industry specialization refers to the accumulated specialized knowledge the auditor has gained from providing audit services to many clients in the same industry (Gul etal., 2009). According to the research hypothesis, the results showed that auditor industry specialization has a positive association with financial reporting quality, and this relationship is strengthened by deviation from the firm's business strategy. 359-377. Furthermore, because of the different operations of financial companies, it is necessary to remove them from the research sample. Banimahd, B., Poorzamani, Z. and Ahmadi, S.A. (2013), The value relevance of audit report, auditor type and auditor tenure: evidence from Iran, Asian Journal of Finance and Accounting, Vol.