Using 145 companies listed on the TSE from 2011 to 2020, the results show that client strategy deviation affects the relationship between auditor characteristics (auditor industry specialization and auditor tenure) and financial reporting quality. If the interaction variable (i.e. Farhangdoust, S. and Sayadi, L. (2020), Capturing differences in conservatism following earnings restatements: further evidence from Tehran stock exchange, Asian Journal of Accounting Research, Vol. One caveat of this study is that self-selection bias may be present when a client chooses an audit firm, the audit firm selects a client, and the audit firm assigns a partner to the engagement. Previous empirical research shows that strategy deviation can affect auditor tenure (Yuan etal., 2016; Srinidhi etal., 2010; Almutairi etal., 2009). Jaggi, B., Gul, F.A. This study contributes to regulators, practitioners, investors, and academics by examining the effect of SOX on audit quality in a comprehensive way. 3, pp. Does Big 6 auditor industry expertise constrain earnings management? N2 - This study investigates the effect of several auditor characteristics on audit quality before (i.e., pre-SOX period over 2000-2001) and after SOX (i.e., post-SOX period over 2003-2004). 2, pp. 4, pp. 4 Big firms) were active in Iran. Future studies with data including additional audit quality measures could shed more light on the topic. Supplement, pp. Auditor's Independence and Audit Quality: A Study of Selected Deposit 2, pp. DiMaggio and Powell (1983) found that firms usually follow a corporate strategy similar to that of their industry peers because strategy deviation reduces shareholder confidence and corporate legitimacy. (2004), Client size, auditor specialization and fraudulent financial reporting, Managerial Auditing Journal, Vol. Mintzberg, H., Ahlstrand, B. and Lampel, J. The research results of Mashaykhi etal. Salehi, M., Tarighi, H. and Shahri, T.A. 3, pp. Auditor tenure (ATE) has a positive and significant correlation with financial reporting quality variables (i.e. 4, pp. 147-173. Financial statement data and information related to the auditor characteristics were collected from the annual reports of companies listed on the TSE. Minutti-Meza, M. (2013), Does auditor industry specialization improve audit quality?, Journal of Accounting Research, Vol. First, the mean and standard deviation of each of the above variables were calculated separately for each industry-year. Based on this, cash flow-adjusted Jones model (CFADA) was created. I add three characteristics of the auditor in charge gender, engagement size and tenure to their models. 613-623. This research draws on the insights of Big 5 personality theory and empirical studies in audit quality. At the end of an audit, the opinion is rendered and provided to current and potential clients, stakeholders, and investors. Some of their scores are related to client recognition and financial reporting quality. and Nagy, A.L. To investigate how individual audit partner characteristics affect audit quality, I follow Petrovits et al. 3, pp. However, with the beginning of the Iranian revolution in 1979, most companies in Iran became nationalized and their ownership became state-owned. To learn more, visit Ilaboya and Ohiokha (2014), this study empirically examines the impact of audit firms' characteristics on audit quality. I thank Bill Baber, Karen Kitching, Linda Myers, Christine Petrovits, and participants at the American Accounting Association's 2013 Auditing Section and Government and Nonprofit Section midyear meetings and Suffolk University Research Workshop for helpful comments and suggestions. Strengthening the audit committee is an increasingly important element in the agenda of academics, practitioners and policy-makers in their effort to improve the quality of financial information and to promote audit quality. https://doi.org/10.1108/JPBAFM-10-2019-0157. 600-623. Finally, Section 5 presents our conclusions. 1, pp. The client strategy deviation is based on the company-realized resource allocation model provided by Mintzberg (1978) and Mintzberg etal. (2018) who investigate client characteristics and partner tenure as determinants of ICDs in nonprofits. Specifically, we examine how five audit firm- and office-level characteristics, such as Big 4 membership, industry specialist auditor, local auditor, new auditor (i.e., anauditor on the initial audit engagement with a client), and audit office size, influence audit quality in the period before and after SOX. Lime etal. PDF Audit Partner Characteristics: a Literature Review and Future Directions To investigate how individual audit partner characteristics affect audit quality, I follow Petrovits et al. 3, pp. 35 No. 10 No. In other models, auditor tenure has been replaced. 3, pp. Feng, Nancy Chun, Individual Auditor Characteristics and Audit Quality: Evidence From Nonprofits in the U.S. (July 25, 2020). Chi, H.Y. We first find that audit fee premiums for Big 4 auditors, industry specialist auditors, local auditors, new auditors, and large office size auditors increased significantly in the post-SOX period. Finkelstein, S. and Hambrick, D.C. (1990), Top-management-team tenure and organizational outcomes: the moderating role of managerial discretion, Administrative Science Quarterly, Vol. In other words, the relationship between auditor characteristics and the quality of financial reporting improves when the firm has a strategy diversion. The mean auditor tenure (ATE) is 2.333. 563-587. After collecting data from the comprehensive database of all listed companies (CODAL [1]), the analysis was performed using Eviews software. (2003), Auditor industry specialization and earnings quality, Auditing: A Journal of Practice and Theory, Vol. Design/methodology/approach https://doi.org/10.1108/JPBAFM-10-2019-0157. DeFond and Zhang (2014) reviewed the auditor tenure literature and concluded that the results of previous research indicate that long tenure can enhance financial reporting quality. (2002), The quality of accruals and earnings: the role of accrual estimation errors, The Accounting Review, Vol. 2, pp. In previous research such as Tang etal. 2513-2547. Geletkanycz, M.A. strategy deviation) moderates the relationship between auditor characteristics and financial reporting quality. Auditor Characteristics, Audit Tenure, Audit Fee and Audit Quality - SSRN Financial reporting quality is used as the dependent variable and auditor characteristics are used as independent variables. 4, pp. 7, pp. Habib and Hasan (2020) investigated association between firm-level business strategies and the readability of narrative disclosures in annual reports. (2019) examine whether a firm's business strategy affects its information environment. A higher strategy deviation (SD) number means that the company's resource allocation pattern has a significant deviation from the industry strategy norms. The coefficient of the interaction variable in the Model (2) was used to test the second hypothesis. (2023), "Auditor characteristics and the financial reporting quality: the moderating role of the client business strategy", Asian Journal of Accounting Research, Vol. We first find that audit fee premiums for Big 4 auditors, industry specialist auditors, local auditors, new auditors, and large office size auditors increased significantly in the post-SOX period. Alexandria Claypole 09 May 2022 Internal auditors are a crucial pillar of good governance, risk management and controls in any organisation. Litigation risk is an important driver of audit quality (DeFond and Zhang 2014).Prior literature finds that auditors respond with greater conservatism when litigation risk is high (e.g., DeFond and Subrahmanyam 1998; Heninger 2001; Cahan and Zhang 2006; Kaplan and Williams 2013; Lennox and Kausar 2017).Furthermore, a recent study by Lennox and Li documents that an auditor's experience with . Poner, 1980; Miles and Snow, 1978) have been used to measure business strategies. 5, pp. 32 No. Thus, the results of the F-Limer test in Table4 (available online at: https://drive.google.com/file/d/1dKUreAe1G7h_U6YCBwqxDjv0HLqbxEM_/view?usp=sharing) indicate that in all research models the panel data method is suitable for estimating the regression. Therefore, the aim of this paper is to empirically examine whether the effect of audit fees on audit quality, measured by the level of earnings management, is affected by the type of audit (voluntary vs mandatory), as well as whether the effect of audit fees on audit quality is different depending on the type of audit. Investors concerned about the quality of financial reporting are advised to consider the auditor's characteristics when making a decision. This study investigates the effect of several auditor characteristics on audit quality before (i.e., pre-SOX period over 2000-2001) and after SOX (i.e., post-SOX period over 2003-2004). (2003), Transparency, financial accounting information, and corporate governance, Economic Policy Review, Vol. We also highlight that increased audit fee premiums for some types of auditors do not accompany corresponding improvements in the quality of discretionary accruals by employing both audit fees and discretionary accruals as proxies for audit quality. Thus, the first hypothesis of this study is as follows: The positive association of auditor industry specialization on the financial reporting quality increases when companies deviate from their business strategy. Powered by Pure, Scopus & Elsevier Fingerprint Engine 2023 Elsevier B.V. We use cookies to help provide and enhance our service and tailor content. The plan, released today, sets out the areas the FMA will focus on when reviewing the quality of regulated audits, and contributing to the integrity . 8 Qualities Of An Auditor To Look Out For | Ideagen Does auditor industry specialization improve audit quality? Cameran, M., Francis, J.R., Marra, A. and Pettinicchio, A. 47 No. Auditor size and audit quality, Journal of Accounting and Economics, 3 (3 . In additional analyses, I use subsamples partitioned by client risk and audit firm size, and find that individual auditor characteristics generally play a more significant role in the issuance of ICDs and QAOs for riskier clients than for less risky clients. Table6 (available online at: https://drive.google.com/file/d/1hhFddO7oCMvnwPkOlC0jVYRTLND-qJal/view?usp=sharing) presents results of regression estimation of the first hypothesis. This result shows that auditor tenure in the sample companies was approximately two years. Auditors seek to enhance financial reporting quality and ensure accounting information by applying accounting and auditing standards. (2018) who investigate client characteristics and partner tenure as determinants of ICDs in nonprofits. This result supports the second hypothesis. Considering competition among Iranian audit firms, managers and partners of audit firms can form specialized teams to increase the quality of financial reporting. Specifically, we examine how five audit firm- and office-level characteristics, such as Big 4 membership, industry specialist auditor, local auditor, new auditor (i.e., anauditor on the initial audit engagement with a client), and audit office size, influence audit quality in the period before and after SOX. In addition, in both models, auditor industry specialization has a positive association with the quality of financial reporting (AIS=0.022 and 0.008; p-values < 5% and < 5%, respectively). Hassan, S.U. My results show that female auditors are more likely to report internal control deficiencies and issue qualified audit opinions (QAOs) to nonprofits. Iranian Securities and Exchange Organization's (SEO) rule restricts the TSE listed firms' auditor choice SEO' trusted auditors, which includes the IAO and private audit firm. and Smith, A. Numerous factors, such as a firm's strategy deviation, can affect this relationship. The residuals from the following regression are used as proxies for financial reporting quality.