Search results

1 – 4 of 4
Per page
102050
Citations:
Loading...
Access Restricted. View access options
Article
Publication date: 22 June 2012

Monika Causholli and W. Robert Knechel

The purpose of this paper is to examine the circumstances under which high quality audits reduce a firm's cost of debt. The paper extends previous research by Pittman and Fortin…

3524

Abstract

Purpose

The purpose of this paper is to examine the circumstances under which high quality audits reduce a firm's cost of debt. The paper extends previous research by Pittman and Fortin by considering how auditor quality relates to the capital cycle and industry of the firm.

Design/methodology/approach

The paper uses a sample of US initial public offerings (IPOs) from 1986 to 1998 to analyze a firm's debt costs for the five years following the IPO. The paper uses a firm's private age as a proxy for its capital cycle and existing banking relationships to capture the likely extent of debt dependence prior to IPO. The authors separately analyze technology firms from other firms.

Findings

Consistent with prior literature, it is found that firms that are young at the time of an IPO pay higher interest rates and auditor quality plays a significant role in lowering the cost of debt financing. Consistent with the hypotheses made, the authors also observe that the effect of auditor quality is larger for firms in the high tech industry sector. Further, the relationship between auditor quality and age depends on industry, with the benefits of hiring a high quality auditor primarily accruing to younger tech firms and older non‐tech firms.

Originality/value

While the issue of auditor quality and cost of debt has been examined by previous researchers, the additional insight that the effect of auditor quality depends on both capital cycle (age) and industry of a firm, increases understanding of the circumstances under which the audit of financial statements is socially desirable and economically valuable to investors and other stakeholders.

Details

Managerial Auditing Journal, vol. 27 no. 6
Type: Research Article
ISSN: 0268-6902

Keywords

Access Restricted. View access options
Article
Publication date: 5 October 2015

W Robert Knechel

The purpose of this paper is to summarize the effect that the passage of the Sarbanes–Oxley Act of 2002 (SOX) by the US Congress had on audit research. More specifically, the…

1817

Abstract

Purpose

The purpose of this paper is to summarize the effect that the passage of the Sarbanes–Oxley Act of 2002 (SOX) by the US Congress had on audit research. More specifically, the paper compares the nature of research about auditing conducted before the Act’s passage to the nature of research about audit regulation that dominates the literature since its passage.

Design/methodology/approach

The paper builds on an extensive review of the research literature before and after the passage of SOX to suggest and examine potential future research paths that might develop in auditing. The streams of research are linked and organized around four themes: auditing as a competitive process, auditing as a service process, auditing as a production process and auditing as a quality control process.

Findings

In general, auditing research prior to SOX tended to focus on issues encountered in the practice of auditing with tangential implications for audit regulation. The passage of SOX had the effect of focusing audit research on the nature, costs and benefits of regulation, particularly the components of the law that had the most effect on auditing such as the prohibition against many non-audit services, the establishment of the Public Company Accounting Oversight Board as a standard setter that also inspects audit firms, and the introduction of the requirement that a client’s internal control over financial reporting be examined and opined upon as part of an integrated audit. Although this research has increased our understanding of auditing and regulation, the heavy focus on SOX has pushed research about auditing itself to a lesser role. The profession’s, academy’s and regulatory understanding of auditing may benefit from a more balanced approach to auditing as something separate from the regulation of auditing.

Originality/value

The intent of this paper is to challenge the way researchers think about research questions in auditing. Hopefully, this approach will encourage auditing researchers to look at the audit and audit regulation through a new lens, testing propositions and aspects of auditing that have been overlooked by the dominate focus on audit regulation over the past decade.

Details

Managerial Auditing Journal, vol. 30 no. 8/9
Type: Research Article
ISSN: 0268-6902

Keywords

Access Restricted. View access options
Article
Publication date: 26 June 2019

Yu-Tzu Chang and Dan N. Stone

This paper aims to examine the effects of firm size on audit proposal readability and audit proposal readability on auditor selection using readability metrics.

697

Abstract

Purpose

This paper aims to examine the effects of firm size on audit proposal readability and audit proposal readability on auditor selection using readability metrics.

Design/methodology/approach

Adopting the Flesch reading ease readability formula, the authors analyze the readability of 370 hand-collected audit proposals submitted by audit firms for US state and local governments’ audit service contracts.

Findings

The authors find differences in readability across audit firm size, specifically the proposals written by smaller firms are more readable than those submitted by larger firms. The results further indicate that readability metrics correlate with auditor selection, i.e. an increase in audit proposal readability from the first to third quartile improves the likelihood of a firm winning the engagement by about 6 per cent, ceteris paribus. In addition, while audit fees and an existing auditor–client relationship are associated with engagement success, proxies for audit quality (i.e. audit firm size, audit experience of lead partner) are not.

Research limitations/implications

The Flesch reading ease measure is a simple linear combination of text attributes, which assumes that readability is a single, unidimensional construct. Simple readability metrics, such as the Flesch reading ease, may confound environmental complexity with readability.

Practical implications

Readability improves audit proposal success.

Originality/value

The results provide insight to accounting stakeholders regarding the potential influence of readability on audit firm selection. In short, readability matters.

Details

Managerial Auditing Journal, vol. 34 no. 8
Type: Research Article
ISSN: 0268-6902

Keywords

Access Restricted. View access options
Article
Publication date: 28 June 2019

Yu-Tzu Chang and Dan N. Stone

This paper aims to introduce the emerging artificial-intelligence-based readability metrics (Coh-Metrix) to examine the effects of firm size on audit proposal readability.

686

Abstract

Purpose

This paper aims to introduce the emerging artificial-intelligence-based readability metrics (Coh-Metrix) to examine the effects of firm size on audit proposal readability.

Design/methodology/approach

Coh-Metrix readability measures use emerging computation linguistics technology to better assess document readability. These metrics measure co-relations of words, sentences and paragraphs on multi-dimensions rather than adopting the unidimensional “bag of words” approach that examines words in isolation. Using eight Coh-Metrix orthogonal principal component factors, the authors analyze the Chang and Stone (2019) data set comprised of 370 hand-collected audit proposals submitted by audit firms for the US state and local governments’ audit service contracts.

Findings

Audit firm size has a significant impact on the readability of audit proposals. Specifically, as measured by the traditional readability metric, the proposals from smaller firms are more readable than those submitted by larger firms. Furthermore, decomposed readability metrics indicate that smaller firm proposals evidence stronger (deep) text cohesion, whereas larger firm proposals evidence a stronger narrative structure and higher connectivity (relational indicators) among proposal elements. Unlike the traditional readability metric, however, the emergent readability metrics are uncorrelated with auditor selection.

Research limitations/implications

Work remains to develop and validate Coh-Metrix measures that are specific to the context of accounting and auditing practice. Future research can use emerging readability measures to examine various textual features (e.g. text cohesion) in finance or accounting related documents.

Practical implications

The results provide practitioners with insight into the proposal writing strategies and practices of larger and smaller firms. In addition, the results highlight the differing audit firm selection outcomes from traditional and Coh-Metrix readability metrics.

Originality/value

This study introduces new data and holistic readability measures to the auditing literature.

Details

Managerial Auditing Journal, vol. 34 no. 8
Type: Research Article
ISSN: 0268-6902

Keywords

1 – 4 of 4
Per page
102050