Md Khokan Bepari and Abu Taher Mollik
This study aims to examine whether audit partners’ gender affects the year-to-year changes (year-to-year additions and drops) of key audit matters (KAMs) identified in the audit…
Abstract
Purpose
This study aims to examine whether audit partners’ gender affects the year-to-year changes (year-to-year additions and drops) of key audit matters (KAMs) identified in the audit report. This study also examines whether female audit partners’ audit experiences, accounting education and narcissism reduce the difference in time variances of KAMs reporting between female and male audit partners. This study defines the year-to-year additions and drops of KAMs as the time variance of KAMs.
Design/methodology/approach
Data of this study includes the audit reports of Australian Securities Exchange 300 companies for the period from 2017 to 2021. This study also applies the theory of female auditors’ preference for anchoring and availability heuristics. This study uses multivariate regression with robust standard errors clustered by the firms. This study also uses several robustness tests.
Findings
The findings suggest that female audit partners disclose fewer time variant KAMs in that they have a lower tendency both to add new KAMs and to drop old KAMs. Further analysis suggests that the differences between female and male audit partners decrease as the female audit partners’ experience increases or if the female audit partner possesses a bachelor’s degree in accounting. Female audit partners’ narcissism also reduces the gender gap in the time variances of KAMs.
Practical implications
The fact that female audit partners report more stable KAMs implies that there are differences between female and male audit partners in the way audit risk assessments are conducted, audits are planned and professional judgement is applied by female and male audit partners.
Social implications
The findings imply that female audit partners’ experience, accounting education and narcissistic personality can play a significant role in explaining the differences in audit outcomes produced by male and female audit partners.
Originality/value
This study is novel in showing that female audit partners report more stable and less time-variant KAMs. The findings of this study may inform audit firms and regulators that female audit partners’ experience, tertiary qualifications in accounting and narcissistic personality traits may be effective means of reducing the gender gap in auditing. The findings also imply that auditors’ observable and unobservable personality traits affect audit outcomes.
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Md Khokan Bepari, Shamsun Nahar, Abu Taher Mollik and Mohammad Istiaq Azim
In this study the authors examine the nature and contents of key audit matters (KAMs), and the consequences of KAMs reporting on audit quality in the context of a developing…
Abstract
Purpose
In this study the authors examine the nature and contents of key audit matters (KAMs), and the consequences of KAMs reporting on audit quality in the context of a developing country, Bangladesh. The authors’ proxies of audit qualities are discretionary accruals, small positive earnings surprise, audit report lag, earnings management via below the line items and audit fees.
Design/methodology/approach
The authors use content analysis of the KAMs for the period 2018–2021 to understand the nature and extent of KAMs reported by auditors in Bangladesh. The authors then use multivariate regression analysis to examine the effect of the number and content characteristics of KAMs on audit quality by using multivariate regression analysis.
Findings
Auditors in Bangladesh disclose a higher number of KAMs compared to other countries, disclose short descriptions of KAMs and industry generic KAMs. The authors document significant cross-sectional variations in the number and content characteristics of KAMs reported by auditors in Bangladesh. The authors’ pre-post analysis suggest that audit quality has improved after the adoption of KAMs. Cross-sectional analysis suggests that KAMs number and content characteristics are related to audit quality.
Practical implications
The authors’ findings imply that the KAMs reporting has the potential to play significant monitoring role in reducing the opportunistic behavior of managers. Hence, KAMs reporting can play a significant role in reducing the agency problem. For regulators, shareholders and corporate managers, the authors’ findings imply that if the audit quality is to be increased, the audit effort should be supported by an appropriate amount of audit fee.
Social implications
The content characteristics of KAMs significantly influence managerial reporting behavior and affect the level of audit efforts.
Originality/value
Unlike developed countries (Gutierrez et al., 2018; Lennox et al. 2022), this study supports that KAMs reporting improves audit quality and control opportunistic behavior of managers in developing countries. The authors show that even though the KAMs disclosure quality is poor, it has the potential to improve financial reporting quality.
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Md. Khokan Bepari, Shamsun Nahar, Mohammad Istiaq Azim and Abu Taher Mollik
This study aims to examine the strategies that auditors in Bangladesh follow in identifying and reporting key audit matters (KAMs). The study also examines the factors affecting…
Abstract
Purpose
This study aims to examine the strategies that auditors in Bangladesh follow in identifying and reporting key audit matters (KAMs). The study also examines the factors affecting auditors’ strategies in the identification and disclosures of KAMs.
Design/methodology/approach
The authors have conducted interviews with audit partners, chief financial officers (CFOs) and regulators involved in KAMs reporting and monitoring. The authors have used the lens of institutional theory of coercive, mimetic and normative isomorphism and the concept of decoupling.
Findings
Auditors have used a decoupling strategy by identifying and reporting greater number of industry-generic KAMs than that of other countries in an effort to minimize risks and avoid regulatory scrutiny, although they disclose remote risks as KAMs and mask severe problem areas of the client. Because of the principle-based approach of International Standards on Auditing (ISA) 701 and because of the pressure and misunderstanding from the audit committee, auditors report industry-generic items and generic descriptions of KAMs.
Practical implications
The findings have important implications for the standard setters and local and global audit firms for the diffusion of new auditing standards in different jurisdictions. Without the development of audit firm-level capability and the corporate governance environment, changes in standards may not be effective in achieving the objectives of the standards.
Social implications
Although auditors consider that the KAMs reporting requirements provide with opportunities to enhance audit profession’s legitimacy and public trusts, the actual KAMs reporting practices are driven by the market logic, an urge to maintain the status quo with clients and eventual rationalization of the impairment of professional independence.
Originality/value
Given the dearth of prior research on the implementation and diffusion patterns of ISA 701 KAMs reporting, this study fills the gap in the literature. To the best of the authors’ knowledge, this is the first known study to examine auditors’ strategic responses to balance among conflicting priorities in reporting KAMs.
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Md Khokan Bepari, Shamsun Nahar and Abu Taher Mollik
This paper aims to examine the perspectives of auditors, regulators and financial report preparers on the effects of key audit matters (KAMs) reporting on audit effort, fees…
Abstract
Purpose
This paper aims to examine the perspectives of auditors, regulators and financial report preparers on the effects of key audit matters (KAMs) reporting on audit effort, fees, quality and report transparency.
Design/methodology/approach
The authors conducted 21 semi-structured interviews with stakeholders (13 Audit Partners, 5 Chief Financial Officers and 3 regulators) and thematically analysed the interviews. They use the frame of “Paradox of Transparency” to explain the findings.
Findings
Auditors perceive that the overall quality control of their audits has improved both in the planning and execution stages, and such improvement can mostly be attributed to the coercive pressures from professional bodies and regulators. Nevertheless, audit fee remains unchanged. Auditors disclose industry generic items and descriptions of KAMs, sometimes masking the real problem areas of the clients. Even after improving the performative audit quality, transparency of audit reporting has not improved. Issues that warrant going concern qualifications or audit report modifications are now reported as KAMs. Hence, KAMs reporting might make the audit report less transparent.
Practical implications
Localised audit environments and institutions affect the transparency of KAMs reporting. Without attention to corporate governance and auditors’ independence issues, paradoxically, performative improvement in audit quality (due to the KAMs reporting requirement) does not enhance the transparency of audit reports.
Originality/value
To the best of the authors’ knowledge, this study is the first to provide field-level evidence in Bangladesh and other developing countries about the perceptions of auditors, financial report preparers and regulators on the effects of KAMs reporting on audit efforts, fees, quality and report transparency.
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Md Khokan Bepari and Abu Taher Mollik
This paper aims to critically analyse the content of the assurance statements of corporate sustainability reports to examine the degree to which assurance statements enhance and…
Abstract
Purpose
This paper aims to critically analyse the content of the assurance statements of corporate sustainability reports to examine the degree to which assurance statements enhance and uphold organisational transparency and accountability to stakeholders.
Design/methodology/approach
This framework of content analysis draws on a research instrument developed by O’Dwyer and Owen (2005), as well as the most recent assurance guidelines (Global Reporting Initiative) and standards AA1000AS, 2008 and ISAE 3000.
Findings
Due to the lack of stakeholders’ engagement in the assurance process, due to the scope limitation placed on the assurance engagement and due to the reluctance of the assuror to address the assurance statements to the stakeholders groups, sustainability assurance practice cannot be considered as the accountability enabler. With persistent focus on internal systems, process, data generation and data capture, assurance practice is serving more as an internal control tool than as a social accounting/auditing instrument.
Research limitations/implications
A single country context is studied. However, to the extent that assurances are conducted using common sets of assurance standards and guidelines, there is external validity of the findings.
Practical implications
Despite the institutional initiatives by the global and local institutions regarding social and environmental sustainability reporting and assurance, the assurance practice has not yet emerged as a tool of social accountability.
Originality/value
This study provides a comprehensive and up-to-date empirical assessment of the degree to which the sustainability assurance practice encompasses the issue of stakeholders’ interests and forms the potential basis for policy implications to the assurance practice and to the assurance standard setting process.
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Md Khokan Bepari and Abu Taher Mollik
This study aims to examine the impact of the recent regime change in accounting for goodwill, from the systematic periodic amortisation to the impairment testing, on the frequency…
Abstract
Purpose
This study aims to examine the impact of the recent regime change in accounting for goodwill, from the systematic periodic amortisation to the impairment testing, on the frequency and the extent of goodwill write-offs in the context of Australia. It also examines the impact of the change from the amortisation approach to the impairment approach on the value relevance of older goodwill.
Design/methodology/approach
The authors approach the first research question by comparing the actual amount of goodwill impairment charge by the sample firms with the minimum “as if” amortisation charge that would have been required under the amortisation regime. The authors approach the second question using a modified Ohlson model (1995), similar to Bugeja and Gallery (2006). The sample consists of 911 firm-year observations with the number of observations in the particular year being 238, 242, 220 and 211 in 2009, 2008, 2007 and 2006, respectively.
Findings
The findings suggest that the adoption of the impairment approach has decreased the frequency and the amount of goodwill write-off. The goodwill impairment amount is substantially less than the “as if” amortisation amount that would have been required under the amortisation regime. The results also suggest that older goodwill is now value-relevant, whereas goodwill purchased during the current year is not value-relevant. One reason for this may be that AASB 3: Business Combination allows for the provisional allocation of the purchase price to goodwill to be allocated to other identifiable intangible assets latter on. Hence, during the year of business combination, investors do not form a firm view of the amount of goodwill arising out of the business combination.
Research limitations/implications
This study uses data for the first four years since the inception of the impairment approach.
Practical implications
The findings of this study have important implications for the fair value accounting debate. The discretions allowed the managers under the impairment approach to improve the information content of goodwill. The relatively low levels of goodwill impairment even during the 2008-2009 global financial crisis contradict to the apprehensions found in the literature that managers will use the goodwill write-off as a tool for downward earnings management. The findings also imply that if managers are allowed with adequate flexibility through accounting standards rather than stipulating some systematic and mechanistic rules, the information value of the accounting measurement may improve.
Social implications
The findings feed into the debate of “rule-based” versus “principle-based” accounting standards and favours the “principle-based” accounting standards. The findings also contribute to the accounting measurement literature by concluding that if allowed with discretionary choices, managers may not always opt for the conservative accounting measurements (such as, recording goodwill write-offs).
Originality/value
Adopting an alternative approach, this study shows that the fair value accounting for goodwill has resulted in an optimistic approach to goodwill write-offs. It has also improved the information content of reported goodwill. This is the first known study addressing the research questions in consideration after the adoption of the goodwill impairment approach.
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Md Khokan Bepari, Sheikh F. Rahman and Abu Taher Mollik
This study aims to examine the impact of the 2008-2009 global financial crisis (GFC) on Australian firms' compliance with IFRS 36/AASB 136 for goodwill impairment testing. It also…
Abstract
Purpose
This study aims to examine the impact of the 2008-2009 global financial crisis (GFC) on Australian firms' compliance with IFRS 36/AASB 136 for goodwill impairment testing. It also examines the factors associated with the cross-sectional variations in the compliance levels.
Design/methodology/approach
Based on a survey of disclosure notes in companies' annual reports, firm-level compliance scores were developed and further analysed applying quantitative statistical methods.
Findings
The findings suggest that firms' compliance has increased during the GFC compared to the PCP. There was no significant intra-period change in the compliance levels during the PCP. Firms belonging to goodwill intensive industries show greater compliance levels than firms in other industries. Audit quality is also a significant determinant of firms' compliance with IFRS for goodwill impairment testing. Goodwill intensity is a significant determinant of firms' compliance level during the GFC but not during the PCP. Firm size is associated with the compliance levels when the industry effects are not controlled for. When the industry effects are controlled for, the effect of size on firms' compliance levels disappears. Profitability is also associated with firms' compliance with IFRS for goodwill impairment testing. However, firms' leverage ratio is not significantly associated with compliance levels.
Originality/value
This is the first known study to examine the issue of compliance with IFRS for goodwill impairment testing in the context of the GFC and the PCP.
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The purpose of this study is to examine the relative and the incremental value relevance of book value and earnings in the Australian market in the context of the 2008-2009 global…
Abstract
Purpose
The purpose of this study is to examine the relative and the incremental value relevance of book value and earnings in the Australian market in the context of the 2008-2009 global financial crisis (GFC) and the non-crisis period (NCP).
Design/methodology/approach
Least square regressions are used to examine the research questions. Changes in the coefficient estimates and the relative explanatory power (adjusted R2) of book value (BV) and earnings between the GFC and the NCP are examined.
Findings
The findings suggest that both BV and earnings are value relevant in the Australian market surrounding the GFC. There were structural breaks in the association of BV and earnings with firms’ market value. The value relevance of earnings has increased and that of BV has decreased during the GFC compared to the NCP. During the study period, the explanatory power of earnings was greater than that of the BV.
Research limitations/implications
The single country context examined limits the generalisability of the findings.
Practical implications
The importance of this study lies in its showing the sustained importance of earnings in security valuation even during a period of macroeconomic uncertainty. Australian accounting standards have been shaped by a balance sheet focus. The recent move towards the fair value-based International Financial Reporting Standards (IFRS) has further enhanced the focus on the balance sheet. Nevertheless, the evidence in the present study demonstrates that even for a country with a balance sheet focus, the value relevance of earnings increases during a GFC. Hence, it is the earnings number, rather than the balance sheet, which should receive greater attention from accounting regulators and auditors.
Originality/value
This is the first known study to examine the value relevance of fundamental accounting information, such as BV and earnings, in the context of the 2008-2009 GFC. It extends prior research in the context of the 1997 Asian financial crisis and provides evidence on the impact of a worldwide exogenous shock on the value relevance of BV and earnings from a relatively mature and developed country with different legal, institutional and enforcement backgrounds.
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Khokan Bepari, Sheikh F. Rahman and Abu Taher Mollik
The purpose of this paper is to investigate the incremental value relevance of cash flow from operations (CFO) given book value and earnings. It also examines the relative value…
Abstract
Purpose
The purpose of this paper is to investigate the incremental value relevance of cash flow from operations (CFO) given book value and earnings. It also examines the relative value relevance of earnings and CFO and changes therein between the 2008‐2009 global financial crisis (GFC) and the pre‐crisis period (PCP).
Design/methodology/approach
Least square regressions are estimated using modified Ohlson model to examine the research questions. Relative and incremental value relevance is examined by adjusted R2 and Vuong Z statistics.
Findings
The findings suggest that CFO has value relevance incremental to book value and earnings. The findings also suggest that earnings has greater relative and incremental information content than CFO in the Australian market. The value relevance of earnings has increased and that of CFO has decreased during the GFC compared to the PCP.
Research limitations/implications
This study focuses on a single country. Future studies can conduct cross‐country examination of the impact of the GFC on the value relevance of earnings and CFO.
Practical implications
This study contributes to the debate on the value relevance of CFO incremental to book value and earnings. It also extends the literature, showing that earnings has information content (value relevance) superior to CFO in the Australian market even during an economy‐wide exogenous shock like the one of the 2008‐2009 GFC.
Originality/value
This is the first known study examining the value relevance of fundamental accounting information such as earnings and CFO in the context of the 2008‐2009 GFC. It extends prior research in East Asian countries in the context of 1997 Asian financial crisis and provides evidence on the impact of a world‐wide exogenous shock on the value relevance of earnings and CFO from a relatively mature and developed country with different legal, institutional and enforcement backgrounds.
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Md Khokan Bepari and Abu Taher Mollik
The purpose of this paper is to examine the effect of audit quality on firms’ compliance with IFRS for goodwill impairment testing and disclosure. Differences in the compliance…
Abstract
Purpose
The purpose of this paper is to examine the effect of audit quality on firms’ compliance with IFRS for goodwill impairment testing and disclosure. Differences in the compliance among the clients of Big-4 auditors and between the clients of Big-4 and non-Big-4 auditors are examined. This study also examines the effect of audit committee (AC) members’ accounting and finance backgrounds on firms’ compliance with IFRS for goodwill impairment testing and disclosure.
Design/methodology/approach
Different univariate tests, multivariate regressions and fixed effect panel regressions have been used to examine the hypotheses. The sample includes 911 firm-year observations for the period of 2006-2009.
Findings
A statistically significant difference in compliance levels has been found between the clients of Big-4 and non-Big-4 auditors. The compliance levels of the clients of Big-4 auditors have also been found to be significantly different. The findings also suggest that AC members’ accounting and finance backgrounds are positively associated with firms’ compliance with IFRS for goodwill impairment testing and disclosure.
Research limitations/implications
The single country context and the single standard context limit the generalizability of the findings.
Practical implications
The findings of this study have important implications for researches in accounting, finance and corporate governance that usually consider Big-4 auditors vs non-Big-4 auditors as a proxy for audit quality. The results also reinforce the importance of developing institutional mechanisms such as high-quality auditing or corporate governance (AC members’ expertise) to encourage firms’ compliance with IFRS.
Originality/value
Firms’ compliance with IFRS for goodwill impairment testing is not essentially the same for the clients of all Big-4 auditors in Australia, suggesting that the quality of services provided by Big-4 auditors significantly differ from one another in enforcing their clients to compliance with IFRS. The lax enforcement on the part of auditors and the regulatory inaction in this regard may point to teething difficulties and systematic deficiencies in the move towards the impairment regime and fair value accounting. The findings also bear an important message for the move towards the harmonization of accounting practices.