Managerial Auditing Journal

Nuijten, Arno; Keil, Mark; Sarens, Gerrit; van Twist, Mark

2019 Managerial Auditing Journal

doi: 10.1108/maj-02-2018-1811

Information system projects often go awry and when they do internal auditors are often in a position to bring the problems to management’s attention. However, managers are not always receptive to risk warnings, even when internal auditors who are role prescribed to carry out this function deliver such warnings. This phenomenon is known as the deaf effect. This paper aims to examine the actions that internal auditors take to resolve the deaf effect and how these actions affect the auditor–manager relationship.Design/methodology/approachBased on a multiple case study approach, the authors conducted in-depth interviews with auditors and examined ten cases of the deaf effect from the auditor’s perspective.FindingsThe findings revealed three categories of actions that auditors took in response to the deaf effect and how these actions immediately affected the auditor–manager relationship. Further, by analyzing the subsequent sequence of actions taken by the auditor in each case, the authors identified three distinct patterns that capture the dynamics of the auditor–manager relationship over time until the deaf effect was, ultimately, resolved.Originality/valueSeveral practitioner studies have shown that internal auditors and managers struggle to build effective relationships, even under the most favorable circumstances and the authors suggest that deaf effect situations are likely to pose an even greater challenge to the auditor–manager relationship. The study contributes to the discourse on internal audit effectiveness in several ways. First, the authors identified three categories of actions that internal auditors took in response to the deaf effect. The authors found that two of these categories of action are related to the two distinct roles that internal auditors can play (inspector or consultant). Second, the authors examined how these categories of actions played out over time, influencing the auditor–manager relationship dynamics.

Lin, Xiaojun; Liu, Ming; So, Simon; Yuen, Desmond

2019 Managerial Auditing Journal

doi: 10.1108/maj-04-2018-1868

The purpose of this study is to investigate whether corporate social responsibility (CSR) can lower tax risk. Previous studies have demonstrated a negative link between CSR and tax aggressiveness. Generally, corporations engaging in social irresponsibility tend to undertake aggressive tax planning; whereas socially responsible firms enjoy tax savings. Because several recent studies have suggested that lower tax payments do not necessarily create higher tax risk, an exploration of the relationship between CSR and tax risk was not only interesting but also important.Design/methodology/approachUsing an ethical perspective of CSR, this paper argues that executives who are nourished by an ethical climate tend to make responsible and reliable operating decisions. Therefore, their corporations would have better control of tax administration, and the corresponding tax risk would be constrained. Such corporations would enjoy greater tax savings while keeping their tax risk at relatively low levels. However, this reasoning ignores the fact that limited economic resources would constrain a firm from practicing CSR in the form of donations. This situation would also influence its attitude toward tax strategies. Specifically, when a firm’s performance is unsatisfactory, the cultural effect of CSR may diminish or even disappear.FindingsFirms donating additional resources to CSR activities can construct a more ethical work climate that encourages executives to control tax risk while lowering tax expenses. For firms with unsatisfactory performance, the ethical benefits of CSR could disappear, thus suggesting a relationship with firm performance. This finding contributes to the knowledge on the ethical implications of CSR and proposes that the culture argument is conditional on satisfactory firm performance.Originality/valueThis study explores the association between corporate culture (CSR) and tax risk. The empirical results help shareholders, analysts and other investors to make their business decision better because CSR or corporate culture is less likely to change suddenly or dramatically in an abbreviated time. The finding of this study shed light on the importance of corporate culture on making an investment evaluation or decision. In addition, this study extends the research on CSR by demonstrating that the effects of CSR are conditioned on firm performance. The beneficial effect of CSR on tax risk would disappear when firms have unfavorable financial performance.

Liu, Guoping; Sun, Jerry

2019 Managerial Auditing Journal

doi: 10.1108/maj-05-2018-1883

The purpose of this study is to examines whether clients’ share prices responded to three events, including the Securities and Exchange Commission (SEC) launch of administrative proceedings against five Chinese accounting firms on December 3, 2012, for their failure to hand over audit work papers due to conflict of jurisdiction; the issuance of SEC Administrative Law Judge Elliot’s ruling on January 22, 2014; and the settlement of the administrative proceedings on February 6, 2015.Design/methodology/approachThis study uses the Schipper and Thompson approach.FindingsIt is found that share prices responded negatively around December 3, 2012, for USA-listed Chinese companies who were audited by Chinese auditors.Originality/valueThis study provides evidence on how share prices reacted to SEC enforcement actions against an affair of non-audit failure.

Dunn, Kimberly; Kohlbeck, Mark; Mayhew, Brian

2019 Managerial Auditing Journal

doi: 10.1108/maj-07-2018-1930

This paper aims to evaluate policymakers’ concerns about the lack of competition in highly concentrated markets for public company audits by examining the association between audit fees and the inequality of Big 4 market shares at both the USA national-industry and city-industry levels.Design/methodology/approachUsing publicly available data, this paper uses regression analysis to examine publicly available data to test research hypotheses related to the association between audit market inequalities and audit fees at both the USA national-industry and city-industry levels.FindingsThe findings support a U-shaped association between national-industry inequality and audit fees. As inequality initially increases, fees decrease; however, as inequality becomes increasingly large fees increase. The city-industry level analysis shows the opposite pattern. The results are consistent with capacity constraints at the national-industry level that are less binding at the city-industry level.Research limitations/implicationsThis study provides evidence that market inequality has a non-linear association with audit price and contributes to the limited findings in industrial organization research on the importance of market share inequality in highly concentrated markets.Originality/valueThis study provides new insights into the growing body of research on audit market structure by documenting that national-industry and city-industry analysis provides different insights into the market structure. In addition, the sample period for this study (2004-2017) addresses the General Accounting Office (GAO) concern about the lack of a stable audit market in the period it examined (GAO, 2008, p. 94) and finds evidence of market structure effects not present in the earlier GAO studies (GAO, 2003, 2008).