Managerial Auditing Journal

Broye, Géraldine; Johannes, Pauline

2023 Managerial Auditing Journal

doi: 10.1108/maj-06-2022-3604

This study aims to examine how the prestige of audit committee (AC) chairpersons influences earnings management.Design/methodology/approachThe sample contains 1,973 firm-year observations of French listed firms for the period 2007–2018. The authors examine the status of AC chairs and CEOs by focusing on the French business elite system. This study tests the association between AC chairs’ (relative) status and the level of earnings management using measures of accrual earnings management and real earnings management (REM).FindingsThe results of this study do not show that high-status AC chairs constrain accruals manipulation. However, the results provide evidence that they play a key role in constraining REM. High-status AC chairs are more likely to enhance the monitoring of this type of manipulation, given their thorough knowledge and understanding of the firm’s business environment and practices. This study also finds evidence that AC chairs with a status higher than CEOs are associated with lower levels of REM. The results suggest that prestigious AC chairs influence lower status CEOs’ strategic decisions.Originality/valueThis study demonstrates that high-status AC chairs play an important role in detecting and constraining deviations from normal business practices. The results have substantial implications for boards, which will benefit from an understanding of how the appointment of high-status chairs affects financial reporting quality.

Skomra, Justyna; Sellers, R. Drew; Skomra, Piotr Antoni

2023 Managerial Auditing Journal

doi: 10.1108/maj-03-2022-3471

This study aims to investigate the busy season contagion effects on other clients of the Big 4 auditor’s local office associated with the non-timely (NT) filing(s) by large accelerated filer (LAF) client(s) of the office. Specifically, the authors examine the influence such events have on the audit quality and timeliness of other clients of that office.Design/methodology/approachUsing panel data of annual NT filings of LAF clients between 2006 and 2019, the authors apply the ordinary least squares regression technique to model audit reporting lag (ARL) and the logistic regression technique to model the probability of restatements.FindingsControlling for audit firm, industry and year-fixed effects, the authors find that a LAF NT filing reduces audit quality and audit timeliness of other clients of the office, as measured by restatement risk and ARL. The impact on ARL is most pronounced on the medium and small clients within the office. The deteriorated audit quality is observed for medium clients.Research limitations/implicationsThe results of this study have practical implications for auditors and regulators. They reveal the contagion effect in the auditor’s local office with the NT LAF client. The main limitation of the study is the lack of staffing utilization data to allow for drawing conclusions on causality.Originality/valueTo the best of the authors’ knowledge, this is the first study to document the contagion effect of NT filings of LAF clients conducted at the auditor’s local office level.

Choi, Seung Uk; Na, Hyung Jong; Lee, Kun Chang

2023 Managerial Auditing Journal

doi: 10.1108/maj-10-2021-3342

The purpose of this study is to examine the relationship between explanatory language, audit fees and audit hours to demonstrate that auditors use explanatory language in audit reports to explain perceived audit risk.Design/methodology/approachThe authors construct the sentiment value, a novel audit risk proxy derived from audit reports, using big data analysis. The relationship between sentiment value and explanatory language is then investigated. The authors present the validity of their new metric by examining the relationship between sentiment value and accounting quality, taking audit fees and hours into account.FindingsThe authors first find that reporting explanatory language is positively related to audit fees. More importantly, the authors provide an evidence that explanatory language in audit reports is indicative of increased audit risk as it is negatively correlated with sentiment value. As a positive (negative) sentimental value means that the audit risk is low (high), the results indicate that auditors describe explanatory language in a negative manner to convey the inherent audit risk and receive higher audit fees from the risky clients. Furthermore, the relationship is strengthened when the explanatory language is more severe, such as reporting the multiple numbers of explanatory language or going-concern opinion. Finally, the sentiment value is correlated with accounting quality, as measured by the absolute value of discretionary accruals.Originality/valueContrary to previous research, the authors’ findings suggest that auditors disclose audit risks of client firms by including explanatory language in audit reports. In addition, the authors demonstrate that their new metric effectively identifies the audit risk outlined qualitatively in audit report. To the best of the authors’ knowledge, this is the first study that establishes a connection between sentiment analysis and audit-related textual data.

Bailey, Cristina; Brody, Richard G.; Gupta, Gaurav; Nash, Jonathan

2023 Managerial Auditing Journal

doi: 10.1108/maj-02-2023-3831

This study aims to examine the objectivity of accounting professionals based in India.Design/methodology/approachTo examine the objectivity of accountants based in India, this study performs an experiment using a well-established instrument from prior literature. The authors asked accounting professionals based in India to act as either the seller or buyer in a hypothetical acquisition scenario. Participants were asked to evaluate the obsolescence of an apparel company’s inventory, assessing both the probability of inventory obsolescence and the likelihood they would propose an inventory write-down.FindingsThe results indicate external auditors and tax professionals were able to remain objective, reflected in the consistency of their assessments across the buyer and seller conditions. Internal auditors were less objective, evaluating inventory obsolescence as more likely when their client was considering buying a subsidiary than when their client was considering selling a subsidiary. Internal auditors were also more likely to recommend an inventory write-down adjustment when hired by the buyer than when hired by the seller.Originality/valueThis study informs regulators and accounting professionals. Offshoring has “prompt(ed) questions regarding the factors that affect the quality of work in India” (Dickey et al., 2022, p. 680). While the authors do not prescribe specific actions, this study provides evidence on the decision-making process of accounting professionals based in India that regulators might use to craft policy. Furthermore, this study responds to calls for additional evidence on the decision-making process of accounting professionals based in India (Spilker et al., 2016; Mohapatra et al., 2015), and for evidence on the objectivity of internal auditors (Burt and Libby, 2021; Stewart and Subramaniam, 2010).

Baatwah, Saeed Rabea; Al-Ansi, Ali Ali; Almoataz, Ehsan Saleh; Salleh, Zalailah

2023 Managerial Auditing Journal

doi: 10.1108/maj-05-2022-3570

The COVID-19 pandemic has introduced new challenges for auditors to provide high-quality audits. These challenges pose interesting questions about the ability of auditors to obtain audit evidence and ensure appropriate conclusions. In response to these questions, this paper aims to examine how self-efficacy affects the auditors’ effort and performance during COVID-19 and how remote audit proficiency helps them respond to these challenges, as reflected in more effort and high-quality performance.Design/methodology/approachTo test the hypotheses, this study used a quantitative approach in which 193 Saudi auditors were surveyed and partial least squares structural equation modeling was used to analyze the data.FindingsThe authors demonstrated that self-efficacy is positively associated with the perceived audit effort and performance during the COVID-19 crisis. The results also showed that remote audit proficiency plays a significant role during COVID-19 as it can help auditors exert more effort and perform audit activities effectively. This study also found that remote audit mediates the association between self-efficacy and both effort and performance during COVID-19. These results are also asserted under several robust analyses.Originality/valueTo the best of the authors’ knowledge, these findings provide the first evidence on the effect of COVID-19 on auditors and have implications for both theory and practice.

Wang, Yonghai; Wang, Jiawei

2023 Managerial Auditing Journal

doi: 10.1108/maj-09-2022-3681

This study aims to examine the causal relationship between mandatory CSR disclosure and financial audit efficiency.Design/methodology/approachThe authors use the unique institutional setting of China, where a subset of listed firms are mandated to disclose their corporate social responsibility (CSR) reports. The authors use propensity score matching and difference-in-differences approaches to compare audit efficiency in the pre- and post-mandatory CSR disclosure periods between the treatment and control groups. The regression models are estimated with robust standard errors clustered at the firm level.FindingsThis study finds that following China’s adoption of the mandatory disclosure of CSR, audit report lags decreased by 6% on average, suggesting that audit efficiency improved greatly following mandatory CSR disclosure. Moreover, this association is stronger when firms have better CSR performance, higher CSR report preparation costs, more earnings management before disclosure regulations and better internal controls and when firms belong to high-profile industries and in Big 4 (Big 10) accounting firms. Moreover, neither audit quality nor audit fees decrease when shorter audit lags occur for firms with mandatory CSR disclosures. Overall, the evidence suggests that mandatory CSR disclosure has a positive effect on audit efficiency and that the improvement of audit efficiency does not come as a consequence of reducing audit fees or deteriorating audit quality.Research limitations/implicationsThe results reported in this study have practical and policy implications for policymakers, accounting firms and auditors to pay more attention to CSR information.Originality/valueThis study provides evidence of the causal relationship between mandatory CSR disclosure regulation and audit efficiency. It enriches the research on audit service production efficiency from the perspective of nonfinancial information disclosure.

Saggese, Sara; Sarto, Fabrizia; Romano, Rosaria; Viganò, Riccardo

2023 Managerial Auditing Journal

doi: 10.1108/maj-05-2022-3544

Building upon multiple theories (i.e. agency, signalling and human capital), this paper aims to explore the effects of directors’ education on audit fees and to assess the mediating role of audit committee (AC).Design/methodology/approachThe authors use an econometric analysis of Italian-listed non-financial firms during the period 2012–2015 using single-mediator models through ordinary least squares and logit regressions. Moreover, the authors apply the path analysis with the bootstrap method to test the mediating effect.FindingsFindings show that the directors’ level of education improves audit fees. Additionally, the presence of an AC and the financial expertise of its members mediate this relationship.Practical implicationsBy offering insights into the implications for audit pricing of the board and AC human capital, the paper helps regulators and policy-makers to understand which characteristic of such governance bodies improves auditing quality and the provision of better financial reporting.Originality/valueThe study uses a unique data set hand-collected from multiple sources and advances the auditing literature by shedding light on the reasons behind the influence of directors’ characteristics on audit fees and on the role played by the AC.

Zhang, Yi; Wang, Yang; Liao, Jiaxin

2023 Managerial Auditing Journal

doi: 10.1108/maj-07-2022-3642

Improving audit quality is an important research area of managerial accounting. This study focuses on the informal institutions within organizations and their impact on audit quality. Specifically, this study aims to examine the impact of the informal hierarchy among directors on audit quality.Design/methodology/approachThe authors examine Chinese companies with listed shares from 2008 to 2020. The authors proxy for audit quality using discretionary accruals and small profits, and use ordinary least squares regression to test their hypotheses.FindingsThe results demonstrate that the informal hierarchy of the board improves audit quality. The results are robust to a battery of sensitivity analyses. Additionally, there is weak evidence that the effect of the board’s informal hierarchy on audit quality is weaker in state-owned enterprises. Moreover, the mechanism tests indicate that the board’s informal hierarchy improves audit quality through the improvement of internal controls. In addition, the impact of the informal hierarchy among directors on audit quality further improves firm performance. However, audit fees are not reduced further because the board’s informal hierarchy demands higher audit quality by choosing industry audit experts.Originality/valueThis study not only enriches the research on the economic consequences of the board’s informal hierarchy but also expands on studies on antecedents of audit quality.

Kang, Minjung; Kim, Sangil; Lee, Ho-Young

2023 Managerial Auditing Journal

doi: 10.1108/maj-04-2023-3892

This study aims to examine the effects of allocation of audit hours to year-round audits and audit partners on audit quality when a new partner is appointed.Design/methodology/approachUsing proprietary data of partners’ names and audit hours in the year-round context, the authors build a model testing input factors related to audit production and new partner assignment in 1,209 Korean listed firms during the period of 2015–2018.FindingsThe results show that in the partner rotation, the more audit hours spent, the more audit hours are allocated to the year-round audit, or more nonpartners’ audit hours are allocated to the year-round audit, the higher the audit quality. Subsample analyses show that these findings are concentrated in firms with longer audit tenure or low audit risk.Research limitations/implicationsThe findings may provide regulatory authorities with practical guidelines concerning partner rotation and how to allocate audit hours to different audit stages and ranks (partner vs staff).Originality/valueTo the best of the authors’ knowledge, this study provides the first evidence of the joint effects of partner rotation and audit hour allocation on audit quality.