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Article
Publication date: 12 September 2024

Sangil Kim, Minjung Kang, Ho-Young Lee and Vivek Mande

This paper aims to examine how the allocation of audit hours to the year-round procedures, based on the risk of material misstatements in financial statements, impacts audit…

215

Abstract

Purpose

This paper aims to examine how the allocation of audit hours to the year-round procedures, based on the risk of material misstatements in financial statements, impacts audit quality.

Design/methodology/approach

Using a data set on audit hours spent on year-round and year-end procedures, the authors build an empirical model for testing the effectiveness of year-round auditing of Korean public firms during the period of 2014–2018.

Findings

The initial tests do not show that proportionate increases in year-round procedures increase audit quality. However, after the authors control for the risk of material misstatements, the authors find that proportionate increases in year-round audit hours generally increase audit quality, except for high-risk firms where audit quality increases only as year-end hours proportionately increase. For high-risk firms, the results suggest that increases in year-round audit procedures occur at the cost of the essential year-end work. Similarly, except for high-risk firms, the authors find that the allocation of more audit effort to year-round procedures improves audit efficiency.

Originality/value

To the best of the authors’ knowledge, this study provides some of the first empirical evidence showing how a risk-based approach to allocating audit effort over the duration of an audit can impact audit quality and efficiency. Regulatory bodies, such as the International Auditing and Assurance Standards Board and Public Company Accounting Oversight Board, which consider the proper allocation of audit hours as a key audit quality indicator, should find the results useful.

Details

Managerial Auditing Journal, vol. 39 no. 7
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 27 May 2014

Hung-Yuan (Richard) Lu and Vivek Mande

This study aims to examine whether banks are compliant with the Financial Accounting Standards Board’s standard Accounting Standards Update (ASU) 2010-06 requiring disaggregated…

618

Abstract

Purpose

This study aims to examine whether banks are compliant with the Financial Accounting Standards Board’s standard Accounting Standards Update (ASU) 2010-06 requiring disaggregated fair value hierarchy information. It also identifies institutional and firm-specific factors that are associated with compliance or non-compliance.

Design/methodology/approach

Using quarterly reports of banks for the first quarters of 2009 (pre- ASU 2010-06) and 2010 (post- ASU 2010-06), we hand-collect information on disclosures about fair values from the footnotes. Using a logistic regression with compliance/non-compliance as the dependent variable, we examine factors associated with compliance/non-compliance.

Findings

Results show that 23 per cent of banks do not comply with ASU 2010-06 and that the non-compliant banks tend to be small, lack effective internal controls and are more likely to be audited by non-specialist auditors.

Research limitations/implications

This study only considers one type of non-compliance with ASU 2010-06, i.e. whether or not firms provide disaggregated fair value hierarchy information. There may be other forms of non-compliance that the authors do not examine because of the difficulties involved in objectively defining non-compliance.

Practical implications

The findings suggest firms may need to increase training for internal personnel and hire high-quality auditors for ensuring compliance with fair value accounting rules. The authors also suggest that smaller firms may find compliance to be onerous and recommend additional research to examine whether smaller firms should be exempted from some or all of the fair value rules.

Originality/value

This study provides some of the first evidence on the level of compliance with mandated fair value disclosures.

Details

Managerial Auditing Journal, vol. 29 no. 6
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 11 March 2003

Vivek Mande, Mark E. Wohar and Richard F. Ortman

A number of U.S. studies have documented an optimistic bias in analysts’ forecasts of earnings. This study investigates whether the optimistic bias and asymmetric behavior of…

152

Abstract

A number of U.S. studies have documented an optimistic bias in analysts’ forecasts of earnings. This study investigates whether the optimistic bias and asymmetric behavior of forecast errors found in most U.S. studies exists in Japan. We find that for firms reporting profits, Japanese analysts’ forecasts have much greater accuracy and exhibit a small pessimistic bias in comparison to firms reporting losses, where analysts’ forecasts exhibit extremely poor accuracy and an extremely significant optimistic bias. The lack of ability to forecast losses is due to their transitory nature and not due to earnings management. Forecast accuracy and bias are not related to firm size, but are related to the magnitude of reported lossess and profits.

Details

Multinational Business Review, vol. 11 no. 1
Type: Research Article
ISSN: 1525-383X

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Article
Publication date: 4 January 2011

Vivek Mande and Myungsoo Son

The purpose of this study is to examine whether lengthy audit delays lead to auditor changes in the subsequent year. The paper hypothesizes that a lengthy interaction between…

4068

Abstract

Purpose

The purpose of this study is to examine whether lengthy audit delays lead to auditor changes in the subsequent year. The paper hypothesizes that a lengthy interaction between clients and their auditors reflects high audit risk factors relating to management integrity, internal controls, and the financial reporting process. It argues that auditors are more likely to drop clients with long audit delays because they would like to avoid these types of audit risks.

Design/methodology/approach

Using logistic regressions, the paper first tests whether a lengthy audit delay leads to an auditor change. It then examines whether as audit delays increase, auditor changes are more likely to be downward than lateral.

Findings

The results support the hypothesis that Big N auditor‐client realignments occur following long audit delays. Further, as the length of the delay increases, the paper finds that there are more downward changes.

Research limitations/implications

An implication of our study is that a long audit delay represents a publicly observed proxy for the presence of audit risk factors that lead to an auditor change.

Practical implications

This study suggests that all else constant, investors should consider a lengthy audit delay as indicating that there has been deterioration in the quality of the client‐auditor interaction. An audit delay also presents an observable proxy for successor auditors to consider while evaluating risks associated with a new client.

Originality/value

The results of our study increase our understanding of how Big N auditors manage their client portfolios to mitigate their exposure to risk factors.

Details

Managerial Auditing Journal, vol. 26 no. 1
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 4 January 2008

Neil Fargher, Ho‐Young Lee and Vivek Mande

This paper aims to examine the effect of audit partner tenure (PARTEN) on client managers' accounting discretion.

3746

Abstract

Purpose

This paper aims to examine the effect of audit partner tenure (PARTEN) on client managers' accounting discretion.

Design/methodology/approach

The authors contend that, when a new audit partner is from the same audit firm as the outgoing audit partner (audit partner rotation), audit quality increases because the new audit partner brings “fresh eyes” to the engagement.

Findings

The results confirm this conjecture. The authors find that, in the initial years of tenure of a new audit partner, client managers' accounting discretion decreases when the new partner is from the same audit firm as the outgoing partner. However, when the new audit partner is from a different audit firm as the outgoing partner (audit firm rotation), it is found that client managers' accounting discretion increases in those initial years.

Originality/value

The results provide support for recent legislation in the US restricting audit PARTEN and should be of interest to other regulatory bodies contemplating mandatory audit partner rotation.

Details

Managerial Auditing Journal, vol. 23 no. 2
Type: Research Article
ISSN: 0268-6902

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Book part
Publication date: 30 September 2019

Walied Keshk

Although prior research documents that analysts sometimes herd their forecasts, very few studies investigate how investors’ judgments are influenced by their perceptions of the…

Abstract

Although prior research documents that analysts sometimes herd their forecasts, very few studies investigate how investors’ judgments are influenced by their perceptions of the likelihood of analyst herding. I conduct an experimental study to investigate the conditions under which investors’ assessments of uncertainty about future earnings are influenced by their perceptions of the likelihood of analyst herding. As expected, and consistent with motivated reasoning, the results show that the temporal order of analyst forecasts influences investors’ estimates of the likelihood of analyst herding and investors’ uncertainty judgments when analyst forecasts are preference-inconsistent but not when analyst forecasts are preference-consistent. This study provides a potential explanation for the mixed findings of prior research in regard to investors’ reactions to the likelihood of analyst herding. In addition, this study extends research on investors’ credulity by providing evidence that motivated reasoning and skepticism may serve as a mechanism that contributes to that credulity.

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Article
Publication date: 11 February 2021

Satish Kumar, Nitesh Pandey, Bruce Burton and Riya Sureka

The Managerial Auditing Journal (MAJ) started publication in 1986 and celebrates its 35th year of publication in 2020. The purpose of this study is to provide a detailed…

779

Abstract

Purpose

The Managerial Auditing Journal (MAJ) started publication in 1986 and celebrates its 35th year of publication in 2020. The purpose of this study is to provide a detailed bibliometric analysis of the journal’s primary trends and themes between 1986 and 2019.

Design/methodology/approach

This study uses the Scopus database to analyse the most prolific authors in the MAJ along with their affiliated institutions and countries; the work also identifies the MAJ articles cited most often by other journals. A range of bibliometric devices is applied to analyse the publication and citation structure of MAJ, alongside performance analysis and science mapping tools. The study also provides a detailed inter-temporal analysis of MAJ publishing patterns.

Findings

The MAJ publishes around 40 articles each year with citations of this work steadily growing over time. The journal has attracted contributors from around the globe, most often affiliated with the USA, the UK and Australia. Thematic evolution of the journal’s themes reveals that it has expanded its scope to include topics such as internal auditing, internal control and corporate governance, whilst co-authorship analysis reveals that the journal’s collaboration network has grown to span the globe.

Research limitations/implications

As this study uses data from the Scopus database, any shortcomings therein will be reflected in the study.

Originality/value

This study provides the first overview of the MAJ’s publication and citation trends as well as the evolution of its thematic structure. It also suggests future directions that the journal might take.

Details

Managerial Auditing Journal, vol. 36 no. 2
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 7 July 2021

Eugenia Yujin Lee and Wonsuk Ha

This study aims to examine how auditors respond to the revelation of clients’ corporate fraud.

1647

Abstract

Purpose

This study aims to examine how auditors respond to the revelation of clients’ corporate fraud.

Design/methodology/approach

This study uses an ordinary least squares estimation to examine how audit fees and audit turnover change after the revelation of corporate fraud.

Findings

After a client discloses fraudulent activities, average audit fees significantly increase due to an increase in audit hours, rather than in audit premiums. Both new and continuing auditors increase audit hours for fraud firms, but only new auditors charge higher audit fees for the increased effort. In addition, when auditors are designated by regulators following the revelation of fraud, audit fees and premiums increase, but audit hours do not. Finally, auditor turnover becomes more frequent after the revelation of fraud. Overall, the findings suggest that auditors update their assessment of audit risks after fraud revelation and, thus, adjust their audit pricing and client acceptance decisions.

Practical implications

The study provides regulators and audit practitioners with insights into how to audit contract characteristics and regulatory intervention (auditor designations) affect auditors’ response to increased audit risks.

Originality/value

The study contributes to the auditing literature and practice by providing evidence on how auditors respond to the revelation of fraudulent activities and how their response depends on their ability to determine audit fees. Moreover, we provide novel evidence that audit contracting characteristics and regulatory requirements result in different responses of auditors toward changes in audit risks.

Details

Managerial Auditing Journal, vol. 36 no. 3
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 December 2020

Camillo Lento and Wing Him Yeung

This study aims to explore the audit quality supplied by the Big 4, large indigenous Chinese (LIC) and five largest second-tier international network (Tier 2) audit firms in China…

544

Abstract

Purpose

This study aims to explore the audit quality supplied by the Big 4, large indigenous Chinese (LIC) and five largest second-tier international network (Tier 2) audit firms in China during the second phase of their audit market development.

Design/methodology/approach

Ordinary least squares regression is used on an archival sample of firm-year observations. Endogeneity and self-selection bias are addressed by creating a propensity score matched sample and using two-stage regression with the inverse Mills’ ratio.

Findings

Strong evidence is found for higher levels of actual audit quality for the Big 4 relative to both LIC and Tier 2 audit firms. Weak evidence is found regarding the audit quality superiority of Tier 2 relative to LIC audit firms. Furthermore, the actual audit quality differential between the Big 4 relative to the LIC and Tier 2 firms widens after adopting International Financial Reporting Standards, which is contrary to the intention of Chinese regulators.

Originality/value

To the best of the authors’ knowledge, this is the first known empirical study to trisect Big N and non-Big N audit firm proxies into the Big 4, LIC and Tier 2. Currently, only qualitative studies have fully appreciated the unique regulatory roles of these three firm structures in developing China’s audit market, which reflect tensions between reliance on foreign expertise and self-determination. In addition, this study adds to the ongoing global dialogue on Tier 2 as an alternative to the Big 4 and the benefits of international accounting network membership.

Details

Managerial Auditing Journal, vol. 36 no. 1
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 September 2022

Li (Lily) Zheng Brooks, Susan Gill, Bernard Wong-On-Wing and Michael D. Yu

This study aims to examine the moderating effect of audit firm tenure on the association between corporate social responsibility (CSR) and firm value. Prior studies provide mixed…

1042

Abstract

Purpose

This study aims to examine the moderating effect of audit firm tenure on the association between corporate social responsibility (CSR) and firm value. Prior studies provide mixed results on this association, which may be due to differing theoretical expectations related to CSR and firm value. It is also possible that external stakeholders are unable to differentiate between positive and negative CSR investments, as CSR reports are generally not assured by independent third parties. Thus, the authors propose that audit firm tenure may be used by external stakeholders to evaluate CSR performance.

Design/methodology/approach

The authors use an ordinary least squares regression to examine the moderating effect of audit firm tenure on the relation between CSR and firm value after controlling for other determinants of firm value and various internal and external governance mechanisms documented in the literature. The sample consists of 15,707 firm-year observations from US firms during the sample period of 2000 to 2012. The authors measure CSR quality using rating scores from MSCI ESG STATS (formerly the KLD database), audit firm tenure as the number of years the incumbent auditor has served the client and firm value using Tobin’s Q.

Findings

The results indicate that CSR is positively associated with firm value when audit firm tenure is long but not when tenure is short. The results are robust to alternative measures of firm value, CSR performance scores, and individual CSR dimensions. The evidence supports the argument against mandatory audit firm rotation in the USA.

Research limitations/implications

Future studies could examine a similar issue in alternative settings and/or look at cross-sectional variations among firms on the association between CSR and firm value by other auditor traits such as auditor industry specialization and big-name reputation. Additionally, as auditor alone is unable to ensure the quality of management disclosures and their accountability, future studies could examine the moderating effect of internal and other external governance mechanisms on the association between CSR and firm value, exploring when the signaling effect of auditor tenure on CSR reporting quality and its effect on firm value is most salient.

Practical implications

The findings are important to regulators and investors. The authors provide evidence that longer audit tenure serves as a signaling device for external investors with regard to the quality of a firm’s CSR performance. Hence, the study facilitates regulators’ cost-benefit analysis related to mandating audit firm rotation. The evidence suggests that mandating a term limit on auditor tenure may have the unintended consequence of eliminating a signaling effect of auditor tenure on the quality of CSR disclosures under information asymmetry. This supports the Public Company Oversight Board’s decision to forgo the requirement of mandatory audit firm rotation in the USA.

Originality/value

Prior literature presents mixed findings on the association between CSR performance and firm value based on a variety of underlying theories (economic, stakeholder and contingency theory). Literature on mandatory auditor rotation has concentrated on the auditor tenure effect on perceived and actual audit quality as reflected in earnings quality. Relying on agency theory, this study posits that auditor tenure serves as a signal for the quality of CSR activities in the absence of CSR assurance reporting as CSR quality can be difficult to evaluate. The authors provide evidence that audit tenure moderates the association between CSR activities and firm value and longer audit tenure makes it more likely that the CSR activities are associated with increased firm value.

Details

Managerial Auditing Journal, vol. 37 no. 8
Type: Research Article
ISSN: 0268-6902

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