To test the hypotheses, the coefficients of the interaction variables were examined. Tang, J.Y., Crossan, M. and Rowe, W.G. This study fills a gap in the literature by addressing the associations of client characteristics (e.g. Managers of companies listed on the TSE should consider the relationship of the auditor's characteristics to increase the quality of financial reporting when selecting an auditor. The coefficient of the interaction variable in the Model (2) was used to test the second hypothesis. 1-16. (2020) examine the relationship between a firm's business strategy and its corporate social responsibility (CSR) performance. Finkelstein and Hambrick (1990) call this tendency strategic conformity (homogeneity). (2003), Auditor industry specialization and earnings quality, Auditing: A Journal of Practice and Theory, Vol. We use the level of discretionary accruals and audit fees as a output-based and input-based proxy for audit quality, respectively. Feng, Nancy Chun, Individual Auditor Characteristics and Audit Quality: Evidence From Nonprofits in the U.S. (July 25, 2020). 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. The previous studies have identified audit quality attributes which can contribute in assessments of audit quality in the PSOs. Previous empirical evidence suggests that client characteristics (e.g. If the client deviates from the business strategy, it is expected that auditors with high tenure will be able to better evaluate accounting policies and procedures, and thus increase the financial reporting quality. In the first hypothesis of the research, it was mentioned that the positive association between auditor industry specialization and financial reporting quality will be more pronounced for clients with deviant strategies. In addition, because of their high explanatory power, these models have been used in Iranian economy. Audit partner tenure, audit firm tenure, and discretionary accruals: does long auditor tenure impair earnings quality? This section examines the method for measuring research variables. However, a strategy deviant (heterogeneity) is created when the company's strategy differs from that of similar companies in the industry and deviates from the industry norm. Bentley, K.A., Omer, T.C. 2, pp. 24 No. To achieve this goal, accounting standards-setting bodies have attempted to improve the quality of information by changing the conceptual framework. Ghorbani, A. and Salehi, M. (2020), Earnings management and the informational and disciplining role of debt: evidence from Iran, Journal of Asia Business Studies, Vol. (2016) and Sari (2018) argue that client strategy deviation can lead to industry-specific auditors having knowledge advantages. The knowledge gap hypothesis is used to investigate strategy deviations in the relationship between auditor industry expertise and financial reporting quality (Yuan etal., 2016; Sari, 2018). These results are consistent with those reported by Ghorbani and Salehi (2020). This result is consistent with the knowledge gap hypothesis for audit firms. 105-127. Banimahd, B., Poorzamani, Z. and Ahmadi, S.A. (2013), The value relevance of audit report, auditor type and auditor tenure: evidence from Iran, Asian Journal of Finance and Accounting, Vol. To investigate how individual audit partner characteristics affect audit quality, I follow Petrovits et al. 5, pp. The effects of auditor characteristics on audit quality before and This study contributes to regulators, practitioners, investors, and academics by examining the effect of SOX on audit quality in a comprehensive way. (2016), Understanding the relation between financial reporting quality and audit quality, Auditing: A Journal of Practice and Theory, Vol. Effects of audit committee chair characteristics on auditor choice "We have high standards for accountability and transparency in Washington, and our Office works to uphold those expectations, including in our own operations," State Auditor Pat McCarthy said. 6, pp. 94 No. 119-134. T1 - The effects of auditor characteristics on audit quality before and after the enforcement of Sarbanes-Oxley Act. and Jiang, W. (2012), Earnings management and auditor specialization in the post-sox era: an examination of the banking industry, Journal of Banking and Finance, Vol. Gul, F.A., Fung, S.Y.K. 2, pp. Krishnan, G.V. Business strategy refers to how companies compete in an industry or competitive market (Olson etal., 2005). The Sargan test for over-identifying restrictions and Wald test for the significance of the estimated model was used. Section 4 presents empirical results. Investors must consider the auditor characteristics when selecting companies listed on the TSE. Suggested Citation, 120 Tremont StBoston, MA 02108United States617-573-8719 (Phone), Corporate Finance: Governance, Corporate Control & Organization eJournal, Subscribe to this fee journal for more curated articles on this topic, Governmental & Nonprofit Accounting eJournal, Corporate Governance: Actors & Players eJournal, Organizations & Markets: Formal & Informal Structures eJournal, We use cookies to help provide and enhance our service and tailor content. 5. Hassan, S.U. Palmrose, Z.V. Barzide, F., Javani Ghalandari, M. and Azimi, A. The quick ratio (QR) variable, which is a measure of a company's liquidity, is calculated by dividing current assets minus inventory by non-current debt (Ittonen etal., 2013). Ghosh, A. and Moon, D. (2005), Auditor tenure and perceptions of audit quality, The Accounting Review, Vol. According to the research hypothesis, the results showed that auditor industry specialization has a positive association with financial reporting quality, and this relationship is strengthened by deviation from the firm's business strategy. The Iranian Auditing Organization (IAO) was established after the consolidation of these government auditors in 1987. The research hypotheses were analyzed using a multivariate regression model and panel data. This study includes 1,450 firm-year observations and 145 companies listed on the Tehran Stock Exchange (TSE) over a ten-year period from 2011 to 2020. Cookie Settings. This result is similar to previous research such as Yuan etal. The data used in this study were from 2011 to 2020 and 145 companies were selected as the research sample. It is likely that auditor characteristics influence audit outcomes and that the market can associate such characteristics when interpreting information on audited financial statements. However, opponents argue that auditors can gain a great deal of experience and knowledge of the company's operations and system processes over time, thereby increasing financial reporting quality (Patterson etal., 2019; Chen etal., 2008). This page was processed by aws-apollo-l100 in. Journal of Public Budgeting, Accounting & Financial Management, Forthcoming 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. At the end of an audit, the opinion is rendered and provided to current and potential clients, stakeholders, and investors. EconPapers: Individual auditor characteristics and audit quality Poner, 1980; Miles and Snow, 1978) have been used to measure business strategies. However, in this study, the authors emphasize the conformity (homogeneity) strategy in the industry, which has not been studied in the Iranian capital market. 3, pp. DSitATEit) is positive and significant, the second hypothesis is not rejected. Thus, the first hypothesis of this study was not rejected. 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. However, this law was implemented in Iran in 2001 and led to the establishment of the Iranian Association of Certified Public Accountants (IACPA). You may be able to access this content by logging in via your Emerald profile. 4, pp. They proxy the dependent variable (audit quality) using the usual dichotomous variable of 1 if big 4 audit firm and 0 if otherwise. Using a sample of US nonprofit organizations, where the identity of the auditor in charge of the audit is revealed, I investigate whether individual auditor characteristics (gender, engagement size and tenure) are associated with audit quality. Thus, the auditor work will be better and audit quality will increase. What is an Audit? - Types of Audits & Auditing Certification | ASQ 47 No. (2002), The quality of accruals and earnings: the role of accrual estimation errors, The Accounting Review, Vol. client strategy) on the relationship between auditor characteristics (including auditor industry specialization and auditor tenure) with financial reporting quality. and Snow, C.C. In addition, the adjusted coefficient of determination shows that in the first and second models, 50 and 56% of the changes in the dependent variable respectively, are explained. 147-160. Thus, by adding the first-order autoregressive (AR (1)) variable to the research models, the autocorrelation problem can be solved. auditor tenure) and financial reporting quality. https://doi.org/10.1108/JPBAFM-10-2019-0157. The effect of auditor features on audit quality | Tkhne - Review of Table7 (available online at: https://drive.google.com/file/d/1T12O4yDzGMQyOn52PyjC-lb_BSo-w5Rk/view?usp=sharing) presents the results of the interaction association between auditor tenure and deviation of the business strategy with financial reporting quality. Mintzberg, H., Ahlstrand, B. and Lampel, J. 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 . (2016) pointed out that companies with deviant strategies are more likely to have information asymmetry problems. A higher strategy deviation (SD) number means that the company's resource allocation pattern has a significant deviation from the industry strategy norms. 47-63. 9, pp. Future study with more advanced econometric models is needed to mitigate self-selection bias. Good Auditors Have Integrity. Auditor characteristics and the financial reporting quality: the 4, pp. 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. To investigate how individual audit partner characteristics affect audit quality, I follow Petrovits et al. Auditor tenure (ATE) has a positive and significant correlation with financial reporting quality variables (i.e. Little research has been conducted in the Iranian capital market on business strategy and they have used dominant views (Tanani and Mohebkhah, 2014; Barzide etal., 2019). and Skantz, T. (2009), Auditor tenure, auditor specialization, and information asymmetry, Managerial Auditing Journal, Vol. 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. 2, pp. In this research, the adjusted Jones model (1995) is cross-sectional estimated and the absolute value of the residual model is used. This result shows that auditor tenure in the sample companies was approximately two years. 8 Qualities Of An Auditor To Look Out For | Ideagen However, Tang etal. title = "The effects of auditor characteristics on audit quality before and after the enforcement of Sarbanes-Oxley Act". . Statistical tests, such as the F-Limer test and Hausman tests, need to be used in panel data to identify the appropriate technique. (2018), Auditor industry specialization and audit quality: the role of client strategy, Empirical Research in Accounting, Vol. Additional analysis suggests tenure and engagement load results are sensitive to the sample specification employed. 4. 217-239. 51 No. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode. 24 No. We use the level of discretionary accruals and audit fees as a output-based and input-based proxy for audit quality, respectively. (2016), and Mashaykhi etal. PwC reveals 5 crucial characteristics of auditors - Accounting Today If the coefficient of the interaction variable (i.e. This study contributes to regulators, practitioners, investors, and academics by examining the effect of SOX on audit quality in a comprehensive way. 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. We then find that the magnitude of discretionary accruals decreased in the post-SOX period for the clients of local auditors and new auditors but not for the clients of Big 4 auditors, industry specialist auditors, and large office size auditors. Published by Emerald Publishing Limited. These companies' auditing was entrusted to government auditors. However, ambiguity or overconfident managers cause a company to deviate from industry strategy norms (Tang etal., 2011). Thus, in addition to state-owned companies, the IAO has audited private companies. 3, pp. Auditing is defined as the on-site verification activity, such as inspection or examination, of a process or quality system, to ensure compliance to requirements. This relationship improves when the client's business strategy deviates from the industrynormal strategy. 27 No. and Yoo, J.W. Finally, another distinctive feature of this study is that I examine the impact of individual auditor characteristics on audit quality in a setting where Big 4 audit firms are not dominant. 5, p. 651. Higher residual values represent a lower quality of financial reporting. 34 No. The two dominant frameworks of business strategies are Poner (1980) and Miles and Snow (1978). All data required to test the research hypotheses were collected directly from audited financial statements on the TSE. Some audits have special administrative purposes, such as auditing . Accordingly, the F-Limer test was performed. 1, pp. The firm age variable refers to the number of years the company (Chi and Chin, 2011). For example, in Iranian Auditing Standard (IAS) 315, the auditor is required to have sufficient knowledge of the firm's business strategy. The authors have motivated several reasons to choose the Iranian capital market as a suitable case for this research. Jaggi, B., Gul, F.A. The knowledge gap hypothesis is based on the idea that the knowledge advantage of industry specialists causes an auditor industry specialization to have more knowledge than that of a non-expert auditor (DiMaggio and Powell, 1983). I gratefully acknowledge data collection assistance from graduate assistants Ryan Antonucci, Hieu Pham, and Steven Ross. Salehi, M., Tarighi, H. and Shahri, T.A. 77 s-1, pp. First, this study offers a more comprehensive examination on the impact that a broader set of individual auditor characteristics on audit quality in the nonprofit setting, compared to Fitzgerald et al. (2002), Discussion of the quality of accruals and earnings: the role of accrual estimation errors, The Accounting Review, Vol. Here, we analyse the influence of several auditor characteristics on audit quality, namely gender, education, education area and experience, in a European setting. 23 No. 2, pp. Bentley-Goode etal. (1986), Audit fees and auditor size: further evidence, Journal of Accounting Research, Vol. 1-22. A review of the auditor industry specialization literature shows that auditor specialization in the relevant industry has a high level of knowledge, and therefore, the quality of financial statements is higher. Furthermore, because of the different operations of financial companies, it is necessary to remove them from the research sample. (2011) and Yuan etal. Auditor industry specialization refers to the accumulated specialized knowledge the auditor has gained from providing audit services to many clients in the same industry (Gul etal., 2009). The sample includes all the companies listed on the TSE from 2011 to 2020. Business strategy is very important in the development of a company and determines the direction of its progress and development over time. Another limitation is that my sample consists of nonprofit organizations and may not be generalizable to for-profit firms. (2023), "Auditor characteristics and the financial reporting quality: the moderating role of the client business strategy", Asian Journal of Accounting Research, Vol. strategy deviation) moderates the relationship between auditor characteristics and financial reporting quality. In order to test and evaluate the research hypotheses, the following multiple regression models have been used. Auditor characteristics - Quality Audit Guide 26 No. An important factor that can diminish this purpose is auditor tenure, because as auditor tenure increases, the auditor becomes more dependent on the client and financial reporting quality decreases. 29 No. For both ADA and CFADA dependent variables, the coefficient of the interaction of auditor industry specialization and strategy deviation is positive and significant (i.e. (2005), The performance implications of fit among business strategy, marketing organization structure, and strategic behavior, Journal of Marketing, Vol. Audit fees and earnings management: differences based on the type of audit (2020), How strategic conformity interacts with innovation: an empirical study on Korean manufacturing firms from the perspective of optimal distinctiveness, Journal of Open Innovation: Technology, Market, and Complexity, Vol. Therefore, private companies are allowed to use the services of certified public accountants. Consistent with previous research, the available resource-allocation model was used to determine a company's strategy (Tang etal., 2011; Yuan etal., 2016; Sari, 2018). 92-103. This can increase competition in the auditing market. Finally, the average of the six indicators was used to calculate the strategy deviation (SD). This result shows that approximately 48% of companies have been audited by auditor industry specialist (AIS). (2010), National level, city level auditor industry specialization and cost of debt, Accounting Horizons, Vol. 9, pp. (2011) and Fitzgerald et al. In the next step, we removed from the research sample companies that were delisted from the TSE during the research period or whose information was not available and sufficient. In other words, the relationship between auditor characteristics and the quality of financial reporting improves when the firm has a strategy diversion. Does Big 6 auditor industry expertise constrain earnings management? They see what works, what does not work, strengths, weaknesses of standards, codes, procedures and systems. That opinion is the culmination of all the hard work completed during the review period, and clients need it to hold weight with their own customers. Investors concerned about the quality of financial reporting are advised to consider the auditor's characteristics when making a decision. This paper discusses main issues of the environment of the PSOs as follow: the nature and the types of the PSOs, financial reporting system, the laws and regulations, the governance method, the auditing, and the internal control through discussing these factors: the . Miles, R.E. Finally, by applying the stated criteria, the firm-year observations of the company were reduced to 1,450 (including 145 firms). The results of testing the second hypothesis indicate that the positive relationship between auditor tenure and financial reporting quality is greater in companies that deviate from the strategy. Almutairi, A.R., Dunn, K.A. (2015), and Patterson etal. Table1 (available online at: https://drive.google.com/file/d/1h3ceirKUdfsm4DZMxxqWzn1M3k_qLG7L/view?usp=sharing) outlines the sample selection procedure. Evidence from the Italian experience, Client size, auditor specialization and fraudulent financial reporting, The impact of deviant strategy on corporate innovation performance: the moderating role of equity incentives and market competition, 6th International Conference on Financial Innovation and Economic Development (ICFIED 2021). 49-65. In addition, Iranian Auditing Standard (IAS) No. Supplement, pp. The users of accounting information can use quality accounting information to make economic decisions. 3, pp.

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