Abstract

This study aims to investigate the influence of blockchain and artificial intelligence on the audit quality of firms from Turkey. Primary data from 300 respondents are collected through random sampling to attain the study’s objectives. PLS-SEM is used to investigate the relationship between exogenous and endogenous variables. Our findings show that blockchain technologies and artificial intelligence (AI) utilization in their financial system positively impact audit quality by assisting in the audit process and the detection of fraud, which also improves financial reporting. Blockchain and Artificial Intelligence in the financial system create confidence for investors, stakeholders, and legislators. Moreover, this study advocated significant implications for investors, government, firms, and policymakers. Investors can make investment decisions based on the accuracy of the financial accounts; the government and policymakers can improve the governance mechanism by using the study’s findings.

Introduction

Audits play a vital role in ensuring compliance with laws, regulations, and accounting standards. Companies are subject to various regulatory requirements and must adhere to accounting principles and reporting frameworks [1]. High-quality audits provide independent assurance that these compliance requirements are met, reducing the risk of penalties, legal consequences, or reputational damage [2]. Quality audits contribute to effective corporate governance by holding management accountable and independently assessing the company’s financial reporting [3]. By examining internal controls and risk management processes, audits help identify weaknesses and areas for improvement, enhancing organizational transparency and accountability. Audits protect the interests of various stakeholders, including employees, customers, suppliers, and lenders [4]. By assuring the accuracy and reliability of financial statements, audits help safeguard the investments, jobs, and contractual relationships associated with a company. This promotes trust and stability in the business environment.

Auditing quality is an interesting research problem and is influenced by many factors such as the blockchain, Artificial Intelligence, professional skepticism, auditor independence, audit firm size, regulatory environment, technological advancements, and the adoption of innovative audit tools. Professional skepticism plays a pivotal role in audit quality [5]. Auditor independence, ensuring auditors maintain an unbiased stance, is fundamental for objective and reliable audit outcomes [6]. The audit firm size has been identified as a factor, with larger firms often having more resources and expertise to deliver higher-quality audits [7]. The regulatory environment and oversight mechanisms significantly impact audit quality, as stringent regulations and effective oversight contribute to a more robust auditing process [8]. Technological advancements and the adoption of innovative audit tools have emerged as crucial factors shaping audit quality in the contemporary business landscape [9]. Understanding the intricate interplay of these factors is essential for advancing research and enhancing the overall quality and effectiveness of auditing practices. Therefore, these factors are widely discussed in the previous literature in different demographic contexts but lack the investigation on Artificial Intelligence (AI) and blockchain technology in relation to audit quality in the modern world.

Conclusion and recommendations

Our findings show that AI improves audit quality by providing assistance and timely fraud detection. AI’s data analysis capabilities, ability to identify complex fraud patterns, and real-time monitoring contribute to more effective and efficient audits. As AI advances, it holds tremendous potential to enhance auditing practices’ overall quality and effectiveness. This study provides specific insights into the implications of these technologies within Turkey and also other varieties of implications for investors, management, stakeholders, and policymakers. The study assessed the level of adoption and readiness of Turkish auditing firms to embrace blockchain and AI technologies. It identified the factors influencing the adoption process, including organizational culture, infrastructure, resources, and regulatory environment. Understanding the current state of technology adoption in Turkey sheds light on the potential implications for audit quality.

The implications of blockchain and AI on fraud detection and risk assessment practices in Turkish audits can be explored. The study assessed how these technologies improve the ability to detect and prevent fraud, including identifying unusual patterns, real-time monitoring of transactions, and using predictive analytics. It can also examine the impact of risk assessment methodologies and the ability to assess risks accurately. The investor can invest by seeing the audit quality of the firms within Turkey to protect their investment, and the government can make the legislation in the weakness and delayed audit without enjoying the blockchain technologies and the other factors. Future research should be conducted on the efficiency of blockchain technology that is effective in the accounting system and preparation of the financial system that makes it easier for the technologies to improve the audit quality. Some more Blockchain units should be included in further research. Due to the limitation, we included one economy in our investigation; future research should include more than one and compare each economy, the use, and the efficiency of the artificial intelligence system.

Abstract

     This study examines whether influenza-like illnesses (ILIs), a potential threat to the conduct of public company audits, are associated with audit outcomes. Because the peak months of flu season overlap with audit busy season, audit offices most at risk of ILIs may be adversely affected. The demanding nature of audit busy season and the culture of audit firms may compel employees to go to work sick, a phenomenon known as presenteeism. When auditors go to work with flu-like symptoms, cognitive functioning is impaired, resulting in brain fog. This impairment may influence auditors’ ability to exercise judgment and professional skepticism, leading to adverse outcomes. Using data collected from the Centers for Disease Control and Prevention (CDC) we find that the filing of audit reports is delayed and audit quality suffers in audit offices most at risk of influenza-like-illnesses. The observed effects of health impairments on company outputs have broad implications for both the audit profession and workplaces as a whole.

Introduction

     Influenza (the flu) infects as many as 60.8 million people in the U.S. each year (CDC, 2017), approximately 20 percent of the population. The magnitude of individuals with the flu results in significant productivity loss in the workplace, where employees lose 69 percent of expected working hours while sick (Van Wormer et al., 2017). As auditing requires high cognitive functioning, a capability that is impaired when auditors are sick, we predict that audit firms are highly susceptible to the costly effects of influenza-like illnesses (ILI). Flu season peaks in the months of December through March and therefore directly overlaps with audit busy season.1 Although the timing of the flu is consistent year-to-year, the severity and distribution of the disease vary over time and across states. This study examines the risk of contracting an influenza-like illness and its impact on auditors’ work.2

     Employees who have the flu often go to work sick, an act referred to as presenteeism, which limits their productivity on the job (Goetzel et al., 2004, Hemp, 2004, Hansen and Anderson, 2008, Schultz et al., 2009, Petrie et al., 2016). Anecdotal evidence suggests that auditors rarely stay at home when sick. To corroborate this, we conduct an exploratory survey, the results of which identify that 87 percent of auditors go to work while sick.3,4 Among other debilitating physical conditions, presenteeism is characterized by an influenza-induced phenomenon commonly referred to as “brain fog,” a symptom that reduces alertness, memory, and accuracy (Smith et al., 2004).5 Audit work requires judgment, professional skepticism, and overall high cognitive functioning, and thus, brain fog may negatively influence auditors’ work. If this is the case, impaired cognitive functioning may result in longer audit delays and impaired audit quality. However, auditors consistently work under pressure and may be able to overcome the negative effects of an ILI.6 Regardless, we predict that when auditors are at greater risk of an influenza-like illness, audit report lag will be prolonged and audit quality will suffer.

Conclusion

     This paper investigates whether influenza-like illnesses, whose peak season directly overlaps with audit busy season, are associated with audit outcomes. We examine the impact of ILIs on audit delay and quality and find that audit delay, measured with report lag and the likelihood of non-timely filings, increases when auditors are more likely to be at risk of an ILI and ILI symptoms induce inefficiencies in the audit. We find that audit quality, measured with discretionary accruals and material weakness errors, declines in states with the worst ILI outbreaks. Overall, our results suggest that ILIs may impair auditors’ judgment and decision-making abilities. To our knowledge, this is the first study to examine the association between auditor health and audit outcomes.

     The results of this study are highly informative to audit firms. We propose that the effects of ILIs on audit outcomes arise when auditors go to work while sick. The heavy demand of busy season workloads may create environments in which auditors feel like taking a sick day is not an option. In addition, culture and work-life-balance initiatives within a firm or office may influence auditors’ decision to work while sick. This issue further extends to inter-firm relationships, where interactions with other engagement team members may drive perceptions of the appropriateness of working while sick. If auditors did not work while sick, firms and offices would have better visibility into the impact of influenza on productivity and be able to assign additional resources to audit tasks, as needed. Our evidence may encourage audit firms to evaluate policies that incentivize working while sick.

Abstract

     This paper updates how archival audit research has evolved since the summary in Francis (2004) of what we knew then about audit quality. The paper describes an evolution from “going big” and asking basic questions about the audit market, institutions, and audit quality, to “going small” with a focus on smaller units of analysis (offices, partners, and engagement teams) as the key to understanding audit quality. I used to believe that audit firm differences, and differences across offices within firms, were the most important audit-related sources of variation in quality, and that differences in people and audit teams were relatively unimportant. However, the evidence in Cameran, Campa, and Francis (2022) using UK partner data convinced me otherwise. I now believe the behaviors of partner-led engagement teams are just as important (and maybe more important) than audit firms and offices in understanding audit quality. However, to learn more about partner-led teams means going inside the black box of audit firms, which requires proprietary data from audit firms and research access to their professional staff. I conclude with an example of collaborative research with audit firms.

Auditing, accounting and audit research

     Francis (2004) provided an assessment of what we knew at the time about audit quality from archival research.1 The current paper updates Francis (2004) by describing the arc of audit quality research in recent years. The phrase “going big, going small” is a metaphor for how we frame audit research. The broad goal in “going big” is to understand fundamental propositions about auditing, institutions, and audit markets. For example, why is auditing demanded, and what are the role of institutions in giving audits their economic value? In contrast, “going small” views auditing in more granular ways and in more situation-specific and localized contexts. It also poses counter-factual propositions. For example, why are audits valuable in some settings, but not others? Earlier studies suggested that large international audit firms generally do better audits. However, more recent research shows that this is not universally true and identifies conditions in which audits by larger audit firms may (or may not) be of higher quality relative to the audits of smaller firms.2

     The goal of audit research is to understand the institutional, organizational, and individual-level factors that drive high-quality audits. This knowledge is important to the audit firms that produce audits so they can improve their audits, to the people who rely on audited accounting information, and to the regulatory bodies that monitor auditors and oversee the quality of audits.

Conclusion

     Economics-based archival research that “goes big” will continue to be important in studying institutions, regulations and their effects on audit markets and audit quality. As stated earlier, institutions in particular are important and have a first-order effect on audit quality. However, an organizational behavior research approach that “goes small” is needed to understand the internal workings of the audit itself, to learn how individual differences in people and their leadership behaviors affect audits, how people work best together in effective engagement teams, and how audit firms can develop an internal organizational culture that enables and rewards the team-based production of high-quality audits. These are the kinds of research questions we need answers to in order to fully understand the drivers of audit quality, over and above the effects of country-level institutions.

Abstract

     In this study, we investigate whether and to what extent country-level board reforms affect audit pricing decisions. We find audit fees are positively associated with board reforms. An increase in audit fees is more pronounced for firms that switched up to Big N auditors following board reforms. After board reforms, firms are less likely to issue restatements, and both analyst forecast accuracy and management forecast frequency increase, indicating improved audit quality and information transparency in the postreform period. Moreover, the positive relation between board reforms and audit fees is more evident for firms in countries that lack institutional governance mechanisms, captured by emerging capital markets, high political risk, weak governmental enforcement actions and low corporate governance quality. Overall, our findings broadly support the view that audit fees increase upon demand for better audit quality.

INTRODUCTION

     To date, most empirical research on board and audit committee independence has not explicitly separated the gross costs and benefits of reforms, but rather, has focused on the net impact to financial reporting outcomes, firm value and capital markets in assessing the merits (Fauver et al., 2017; Cohen et al., 2014; Klein, 2002; Palmrose et al., 2004; Hribar & Jenkins, 2004; Becker et al., 1998; Dhaliwal et al., 2010; Griffin et al., 2008; Tsui et al., 2001; Abbott et al., 2003). This empirical stream has provided valuable, yet mixed, findings: the net effect of board independence and a separate audit committee varies significantly across firms, industries and countries (Fauver et al., 2017). Such variations call for a better understanding of the specific nature of costs and benefits to determine the economic trade-off of board reforms. To respond to such a call, this study is able to quantify the direct statutory audit costs incurred by firms by examining the adoption of board reforms.

     We focus on audit costs because the adoption of board reforms is likely to have a profound impact on audit time and effort to review clients’ financial statements. Therefore, audit fees represent a direct, observable and measurable cash outflow that may incorporate significant changes in the board structure and composition.1 The impact of board reforms on audit fees is twofold. On the one hand, a more effective board with independent directors may demand higher audit quality (greater assurance), which requires more audit effort, to protect their reputation and to avoid future legal liability.2 This is consistent with the theory that audit fee is an input-based audit quality measure and restatement is an output-based audit quality measure, according to DeFond and Zhang (2014). As a result, the demand for high audit quality may increase audit costs/fees by ensuring that auditors perform sufficient and appropriate audit procedures (Carcello et al., 2002; Abbott et al., 2003; Zhang & Yu, 2016) and thereby reducing the likelihood of future financial restatements, which supports quality demand hypothesis.3

CONCLUSION

     One of the potential benefits of board reforms is to improve the process by which auditors are selected, retained and compensated. That raises an interesting question to accounting researchers and practitioners. To the best of our knowledge, this study is the first to test the association between board reforms and audit fees in a global setting. Due to different types and components of board reforms as well as country-level characteristics, prior studies provide mixed evidence as to whether such potential benefits of board reforms are being achieved. This study provides a comprehensive empirical analysis of the relation between a board reform’s efficacy and audit pricing decisions.

Abstract

     While prior studies have linked the relationship between resources, time pressure, and audit quality, prior empirical studies generally measure the notion of audit offices’ resources or capacity in relatively simplified, indirect, or context-specific ways. In this study, we use two measures of an audit office’s unused capacity pertaining to normal audit tasks in Yu (2018) to examine their associations with several proxies for audit quality (discretionary accruals, earnings benchmarks, and going concern audit opinions). Empirical results show some evidence that higher (lower) unused capacity can result in better (worse) audit quality; and if any, this seems to occur only in Big 4 audit offices.

Introduction

     Many experimental or survey-based auditing studies have attempted to verify the association between auditor’s resources, pressure, and audit quality (e.g., Agoglia et al., 2010; Bennett et al., 2015; Coram et al., 2004; Lambert et al., 2017; McDaniel, 1990; Mocadlo, 2021). On the one hand, audit engagements conducted in fiscal year-end months with high levels of unused resources or capacity may impose less pressure on auditors, and the resources available to deal with unexpected and difficult audit-related decisions may also be more sufficient, leading to better quality audits. On the other hand, audit engagements conducted in fiscal year-end months with tight capacity conditions may impose more pressure on auditors and limit their access to resources, possibly resulting in inferior audits. In empirical studies, although many prior papers have attempted to capture different aspects of resources or capacity to investigate the association between pressure and audit quality, their proxies, are somehow relatively simplified, indirect, or context-specific (e.g., Bills et al., 2016; Czerney et al., 2019; Francis et al., 2017; López & Peters, 2012). Therefore, in this study, we use the measures of an audit office’s “unused capacity pertaining to normal audit tasks” in Yu (2018), to examine their associations with audit quality.1 The first measure, UNUSCAP1, is calculated as one minus “the current year’s aggregate audit fees in a specific month for an audit city office, divided by the current year’s highest monthly aggregate audit fees for that audit city office.”2 Alternatively, considering the potential entrance barriers among client firms from different industries, the second measure, UNUSCAP2, is calculated using office-industry (SIC division) as another calculation unit. The identification of “month” referenced above is based on the client firms’ fiscal year-end month.3

Conclusion

     Differentiating from prior empirical studies that measure the notion of audit offices’ resources or capacity in relatively simplified, indirect, or context-specific ways, we use audit office’s unused capacity pertaining to normal audit tasks in Yu (2018) to directly investigate whether time pressure caused by the level of an audit office’s capacity can influence audit quality. Although this study may contribute to the literature by measuring capacity of audit offices in a different way, readers must keep in mind the underlying assumptions and limitations regarding the calculation of UNUSCAP1 and UNUSCAP2 discussed throughout this paper. Finally, we urge more researchers to come up with measures that better capture the notion of resources or capacity, especially under some Asia-Pacific jurisdictions (e.g., Taiwan and China) where the data for practicing offices are not easily collected.

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Abstract

We present empirical evidence regarding the association between audit quality and real earnings management in case of the capital market of Bangladesh. Our analysis visualizes a panel of 2195 firm data with year-level observations which are listed on the Dhaka Stock Exchange throughout the period of 2000–2017. We report inverse association between ‘big 4’ audit firms’ service and levels of real earnings management practices. This result suggests that the client pool of big audit firms are less likely to engage in earnings management. This particular result is also consistent with the ‘big 4’ audit firms’ commitment to their reputation and long track-records of noted exhibition of due diligence. Also, we find no association between industry-specialized auditor (in terms of audited assets) and real earnings management. This result provides important insights to the nature of competition in the audit market of Bangladesh. Finally, we also observe no correlation between audit specialization (in terms of audited revenue) and real earnings management. This pattern invokes significant findings regarding the industrial depth of specialization of Bangladeshi firms. It also uncovers whether ‘specialized’ provision of audit service can meaningfully serve the more ‘generalized’ nature of industrial composition of the firms active in the capital market of the country.

Introduction

Bangladesh has graduated from the category of ‘least-developed countries’ to the status of a ‘developing country’ back in 2018 (Khatun 2018). Bangladesh achieved this recognition from United Nation with respect to compliance to all of the three requirements for graduation (GNI Per Capita, Human Assets Index and Economic Vulnerability Index). The country has maintained more than six percent average GDP growth rate in last 10 years (MOF 2018). The International Monetary Fund (IMF) predicts that Bangladesh will be able to maintain the growth rate (Ahasan 2019). For the coming years. PricewaterhouseCoopers expect that by maintaining this growth rate, Bangladesh’s economy will be the 23rd largest in the world by 2050. Despite the episodes of developmental success story of Bangladesh, the capital market of Bangladesh is widely regarded as inefcient to supply the required funds for burgeoning corporate sector.

During the last seven years, Performance of Bangladesh Capital market has not been consistence with developments in the macro-economic realm. In 1st July, 2010, General Index of Dhaka Stock Exchange was 6153 and in 1st July 2017, it was 5654. During this period, there was a decrease of five hundred points, yet GDP growth rate was more than 6.5 percent on average. There may be diferent reasons underlying this anomaly. In 2010, Bangladesh Capital Market witnessed a massive downside of its indexes. Government formed an investigation committee to fnd out the reasons for this unusual drive of the market. This committee mentioned diferent reasons for such anomalous behavior of the market.

Abstract

Keywords

JEL classification

1. Introduction

2. Literature review and hypothesis development

3. Research design

4. Summary statistics and results

5. Robustness checks

6. Further research

7. Conclusion

Credit author statement

Funding

References

Abstract

We examine whether the diversity of signing auditors affects audit quality of listed firms in China. Using the Blau’s index of diversity measure based on eight characteristics of signing auditors and a series of audit quality proxies, including modified audit opinions (MAO), restatement of annual financial reports (Restate), and discretionary accruals (DA), we document a negative relationship between the diversity of signing auditors and firms’ audit quality. Additional analyses show that corporate governance, signing auditor and audit firm characteristics moderate the relationship between the diversity of signing auditors and audit quality. Our findings suggest that reducing the diversity of signing auditors is an effective way to improve audit quality.

1. Introduction

Audit quality is an important part of the information disclosure system, which directly affects the quality of accounting information that leads to stakeholders’ decisions and actions (Francis, 1984). A large body of literature investigates the factors contributing to audit quality from the perspective of audit firms and listed companies including audit firm size, audit firm or auditor rotation, and the corporate governance structure of listed companies (Behn et al., 2008; Choi et al., 2010; DeAngelo, 1981; DeFond & Zhang, 2014; Deng et al., 2012; Firth et al., 2012; Zhao et al., 2020). In addition, several recent studies suggest that personal characteristics of the signing auditors are associated with audit quality (Guan et al., 2016; He et al., 2017; Knechel et al., 2015). However, the literature focuses on various characteristics of one auditor (i.e., the engagement partner) on audit quality. In practice, a listed company’s audit is generally the responsibility of several auditors, including the engagement and the review partners. These partners are all signing auditors. It is not clear how audit quality relates to the characteristics of an audit team. We examine this research question.

Several recent accounting scandals in Chinese capital market have turned the spotlight on audit quality issues. A listed company named FUREN Pharmaceutical (Stock Code: 600781.SH) failed to pay a RMB 60 million (approximately US$ 8.57 million) dividend promised to investors on July 20th, 2019, while apparently holding a cash balance of more than RMB 1.8 billion (approximately US$ 257 million).1 Another case of accounting fraud occurred at KDX Company (002450.SZ) in 2018.2 Ironically, the auditing firm of the two companies, Ruihua Certified Public Accountants Firm, had been issuing unqualified audit opinions for more than six years, when in fact, modified audit opinions seemed more appropriate in both cases. The auditing opinions on FUREN Pharmaceutical and KDX Company turned out to be completely lacking in their assurance function. Such an abominable level of audit quality seriously misled the investors’ decisions and actions, damaged investor confidence, and thus adversely affected the order of the capital market. These events provided us with the impetus to explore the role of audit team characteristics in audit quality.

Abstract

Keywords

1. Introduction

2. PCAOB registration, literature review, and hypothesis development

3. Sample and research design

4. Results

5. Conclusion

Data availability

Declaration of Competing Interest

Acknowledgement

Appendix.

References

Abstract

Despite the importance of registration with the PCAOB, there is surprisingly little academic research on the registration process and its impact on audit outcomes (Abernathy et al., 2013). The PCAOB allows registration of audit firms from non-US countries. However, China and a few other countries do not allow the PCAOB to conduct inspections of audit firms. We take advantage of this setting to investigate whether PCAOB-registered audit firms improve audit quality in the absence of inspections and whether they charge an audit fee premium. Our findings indicate that audit quality increases following PCAOB registration and that clients pay higher audit fees for audits by PCAOB-registered firms.

1. Introduction

Following the high-profile audit failures of Enron, WorldCom, Sunbeam, and other companies, the Sarbanes-Oxley Act of 2002 (SOX) created the Public Company Accounting Oversight Board (PCAOB) to oversee the auditing industry. Under SOX, audit firms, including non-U.S. firms that audit or play a substantial role in the audit of clients listed on U.S. stock exchanges, are subject to oversight by the PCAOB. Although PCAOB regulations require inspection of both U.S. and non-U.S. registered audit firms, legal constraints have prevented the PCAOB from inspecting registered audit firms in China. Interestingly, despite these restrictions on PCAOB inspections, some audit firms in China have nevertheless chosen to register with the PCAOB. We examine whether the audit quality of PCAOB-registered audit firms improves and whether the audit fees paid to the auditors increase following PCAOB registration.

Since its inception, the PCAOB and its activities have attracted considerable attention from academics. One widely debated question that has been studied is whether PCAOB inspections are effective at improving audit quality. Critics argue that although PCAOB inspectors may be more independent, PCAOB inspections may not improve audit quality because peer review inspectors may possess greater expertise.1 Academic research on the effects of PCAOB inspections generally finds that they have a positive impact on audit quality (e.g., Carcello et al., 2011, Defond and Lennox, 2017) and that PCAOB inspection reports provide signals about audit quality (e.g., Dee et al., 2011, Abbott et al., 2013, Gunny and Zhang, 2013). We add to research on the impact of the PCAOB by examining whether PCAOB registration is associated with increased audit quality in China, a country where inspections are not allowed. Given the weak institutional environment in China, client firms may attempt to communicate the reliability of their financial reports by hiring a credible auditor. Employing a PCAOB-registered auditor may be an approach that client firms take to signal the reliability of their financial statements. Further, if clients value audit firm association with the PCAOB, they may be willing to pay an audit fee premium.

Abstract

     This study analyzes the auditor personality impact on audit quality, using partial least squares structural equation model and fuzzy-set qualitative comparative analysis methods. This research draws on the insights of Big 5 personality theory and empirical studies in audit quality. The PLS-SEM result reveals that the traits of agreeableness, conscientiousness and openness are positively associated with professional skepticism of auditors, while conscientiousness and neuroticism negatively affect reduced audit quality practices. The fsQCA results show the existence of multiple configurations of personality traits leading to high (low) audit quality. Moreover, the causal asymmetry found reveals that personality is a combination of individual traits that interact in a differentiated and complex way with audit quality. This study complements previous research on auditor’s drivers for supplying audit quality and provides support to audit firm decisions informing about the most relevant combinations of personality traits that auditors must have to make outstanding audit quality.

Introduction

     The provision of credible accounting information is very relevant to improve resource allocation and efficient contracts and it can be achieved through auditing (DeFond and Zhang, 2014). The confidential nature of auditing, which is in force in many countries, prevents users of financial statements from accessing the quality of the work carried out by auditors (Gundry and Liyanarachchi, 2007). However, it is not possible to anticipate the situations in which auditors could compromise audit quality (Gundry and Liyanarachchi, 2007).

     Christina and Brahmana (2019) state that, even though some studies link the individual differences in auditors to audit quality, the results are still not consistent. Some studies focused on the effect of several individual auditors’ personal characteristics, but did not focus on auditor personality (Gul, Wu and Yang, 2013). The studies that focused on the effect of auditor personality on audit quality found a significant relationship between them (Gundry and Liyanarachchi, 2007; Christina and Brahmana, 2019; Balasingam, Arumugam and Sanatova, 2019).

Conclusions, contributions, limitations and future research

     Overall, the results of our study show that there is a relationship between personality and audit quality. The PLS-SEM result reveals that agreeableness, conscientiousness and openness are positively associated with professional skepticism of auditors, while conscientiousness and neuroticism negatively affect RAQP. Additionally, configurational analysis has shown that there are different combinations (asymmetric) of personality traits that lead to the same outcomes in audit quality.

      The findings provide important theoretical, practical and policy implications. First, our work shows that personality traits are a driver of audit quality. Audit quality is influenced by contextual factors (Kleinman, Lin and Palmon, 2014), as personality may be influenced by national culture (Church, 2016). Our finding agrees with the conclusions of studies conducted in other countries (e.g., Farag and Elias, 2016), showing that the relationship seems to be indifferent to the country context. Second, we used the ‘Big Five’ taxonomy to structure the dimensions of the auditor personality, a model that has been used more since the 90 s (John et al., 2008), being the grand theory that explains the functioning of the whole individual (McCrae and Costa, 2008a). However, auditing research has used other taxonomies, such as the typeA and type-B personality model. Third, fsQCA method allows exploring the complexity of the characteristics associated with the auditor’s personality, accepting that there is more than one solution to achieve a desired outcome. Moreover, the causal asymmetry finding reveals that the linear causal methods provide limited understanding of the complexity of drivers of audit quality. Personality is a combination of individual traits that interact in a differentiated and complex way with audit quality. To the best of our knowledge, this is a pioneering study in the use of quantitative and qualitative methods in the relationship analysis between personality traits and audit quality. Moreover, the combination of two different statistical methods lends greater robustness and depth to our research. Fourth, the presence of equifinality in the personality and audit quality relationship shows the absence of an optimal audit professional prototype. Individuals are a heterogeneous strategic asset in audit firms (Samagaio and Rodrigues, 2016), being their main production factor. Consequently, the coexistence of persons with different personalities in an audit firm should call for redoubled care in defining policies for hiring and promoting its professionals and in assigning them to the various engagements, particularly those individuals (partners, managers, and seniors) who make the decisions that most influence the quality of the audit report (e.g., sufficiency and adequacy of audit evidence). A decrease in audit quality negatively impacts the prestige and performance of audit firms (Climent-Serrano, Bustos-Contell, Labatut-Serer and Rey-Martí, 2018). Finally, the relationship found between personality and audit quality has implications for policymakers. The Framework for Audit Quality (IAASB, 2014) recognizes that auditors’ characteristics are one of the determinants of audit quality. Our finding suggests that regulators should consider personality in the entry process to the profession and indicators of quality assessment, broadening the range of human capital attributes normally considered (education, knowledge, and experience).

Abstract

     Using a sample of U.S. seasoned equity offering (SEO) during the period 2002–2017, we document that audit quality is associated with SEO issuance method choice. Specifically, firms with higher quality auditors are more likely to adopt the accelerated offerings issue method instead of using other seasoned equity offering methods. We also identify that audit tenure and industry audit specialization influence the relation between audit quality and the likelihood of undertaking accelerated SEO offerings, and that the relationship is more pronounced in the presence of weaker firm-level information and governance environments. Extending from the conclusion that accelerated offerings serve as a quality certification mechanism, we also find that firms completing accelerated offerings enjoy lower audit fees in subsequent years. These firms also exhibit superior post-SEO-issue long-term abnormal stock performance. Overall, our study shows that the certifying and monitoring role of auditors is valuable to clients, underwriters, and investors in SEO transactions.

Introduction

     It has long been theoretically recognized that the asymmetry of information between firms and outside investors can determine firms’ financing choices because higher information asymmetry results in higher external financing costs (Myers, 1984 and Myers & Majluf, 1984).1 In the literature on seasoned equity offerings (SEOs) where firms raise additional capital from the equity market, the certification hypothesis (Beatty & Ritter, 1986; Booth & Smith, 1986; Carter & Manaster, 1990) proposes that asymmetric information between issuing firms and investors implies that any quality certification mechanism that helps investors verify SEO issuing firms should be especially valuable. Because firms’ financial statements play an important role in reducing information asymmetry in capital markets and auditors provide the key accredited service assuring the integrity of this information, we expect that the quality of audit services serves as an important governance and certification mechanism in SEOs. Furthermore, we propose that this certification mechanism is relevant to SEO issuing firms in terms of increasing the likelihood of successfully completing shorter issue processes through attracting both underwriter and investor participation, with audit quality having an important role in reducing underwriter engagement risk and acting as a substitute for more extensive due diligence assessment of issuing firms. In this study, therefore, we examine the role of firm auditor quality in determining the choice of SEO issue methods as a certification and monitoring mechanism and also aiding in underwriter attraction. We also examine the relation between SEO methods and post-SEO firm outcomes – in terms of audit fees and longterm stock performance.

Conclusion

     Despite the prominence of auditor quality in certifying financial information in the capital market (Blackwell, Noland, & Winters, 1998; Hogan, 1997; Pittman & Fortin, 2004), the relation between auditor quality and the choice of SEO issue method has not been thoroughly examined in the prior literature. Our study provides new insights into the role of auditor status as a certification mechanism in SEOs and the impact of issuance choice of SEOs on audit pricing and long-run performance.

      We document evidence that auditor quality, based on Big 4 auditor status, has a significant association with the design features of SEO offerings. Specifically, firms with high quality auditors are more likely to use the accelerated offering SEO method rather than the traditional firm commitment offer process and other issue methods. We confirm this finding using audit fees, accrual levels and mid-tier audit firms as alternative proxies for audit quality and also find that the role of audit quality in facilitating accelerated offering use is more prominent in cases of shorter audit tenure, the appointment of non-specialist auditors and in the presence of weaker firm-level information and corporate governance environments.

     We also provide support for a certification role for accelerated offerings in the post-SOE period. We document that firms completing accelerated offerings pay lower subsequent audit fees relative to firms using firm commitment and other offering methods. These firms also exhibit higher long-term post-issue abnormal share price performance. This is in stark contrast with the negative signalling implications of equity capital raisings generally documented in the SEO literature.

Abstract

     Internal audit quality is the foundation for a company’s survival and development across the world. As a result, global efforts have been made to develop a scientific and accurate evaluation index for internal audit quality. However, literature shows that existing internal audit quality evaluation indices have many flaws, such as a lack of systematic internal audit evaluation indicators, poor execution, and inability to identify priority areas. To address gaps in the literature, this study intended to construct an internal audit quality evaluation index utilizing the joint approaches of the Balanced Scorecard, Delphi Process, and Analytical Hierarchy Process. A systematic literature review, examination of companies’ internal audit guidelines, Balanced Scorecard, and Delphi approaches resulted in a multilevel internal audit quality evaluation index with five dimensions (stakeholder satisfaction, stakeholder contribution, financial results, internal audit process, and learning and growth) and 36 indicators. The Analytical Hierarchy Process revealed that the most prioritized dimension is the internal audit process. The consistency ratio and evaluation feedback from the listed companies’ internal auditors, management, and audit committee members revealed that the results are valid and reliable.

Introduction

     Internal audit quality is the foundation for a organization’s survival and development across the world. According to Boskou et al., 2019, internal audit quality (IAQ) is a critical component of an organization’s sustainability since it assists the business in maintaining effective controls and avoiding fraud. Several publications (Ashbaugh-Skaife et al., 2008; Hoai et al., 2022) have shown that effective internal control may improve the quality of financial reporting. It is commonly acknowledged that IAQ is a critical component of successful internal control, on which financial reporting quality is also dependent. It helps the organization’s operations since it is a separate activity that assists a corporation in achieving its goals by employing a well-organized approach to risk management, internal control, and governance efficiency and effectiveness (Stewart and Subramaniam, 2010; El Gharbaoui and Chraibi, 2021). Scholars from all around the world have discovered a link between IAQ and organizational performance (Hazaea et al., 2020; Kaawaase et al., 2021). Hence, IAQ is of interest to managers, shareholders, investors, auditors, and consequently international organizations and nations.

     In line with the usefulness of the IAQ, there have been global efforts in establishing a scientific evaluation index for IAQ. International organizations and regulatory bodies such as the Financial Reporting Council (FRC) and the largest six audit firms in the United Kingdom; the Public Company Accounting Oversight Board (PCAOB) in the United States; the Chartered Accountants of Australia and New Zealand (CAANZ); the Accounting and Corporate Regulatory Authority (ACRA) in Singapore; and the International Organization of Securities Commissions (IOSCO) put forward indicators for evaluating IAQ. For instance, PCAOB published 28 indicators for evaluating audit quality while CAANZ published only nine indicators. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) also published five components of a firm’s internal control system with 17 principles (COSO, 2013).

Conclusion and recommendations

     The need for a scientific and reliable IAQE index to guide companies to improve internal auditing influenced this study. This study constructed the IAQE index by combining literature review, preliminary analysis, and review of companies’ internal audit guidelines, BSC, Delphi Process, and AHP methodologies. A systematic literature review, review of companies’ internal audit guidelines, BSC, and Delphi approaches resulted in a multilevel IAQE index comprising five dimensions and 36 indicators. Eight indicators were selected stakeholder dimension, nine indicators for stakeholder contribution dimension, seven indicators for financial results dimension, six indicators for internal audit process dimension, and six indicators for learning and growth dimension. The AHP results through experts’ judgment of the dimensions and indicators revealed that all the five dimensions are important in the IAQE index system. Overall, “achieving internal audit objectives” had the highest weight while “the number of complaints received by the internal audit department” had the lowest weight in the IAQE index system. The CR and feedback evaluation from the internal auditors and audit committee members of the selected enterprises revealed the acceptability of the results. In line with internal auditing standards, the developed IAQE index fits well with internal audit components since the index offers an independent, objective assurance and consulting among key stakeholders internal auditing for evaluating and improving the efficacy of risk management, control, and governance systems.

1. Introduction

2. Background and hypotheses development

3. Sample and research design

4. Results

5. Conclusion

Appendix A. RepRisk’s 28 ESG issues coverage

Appendix B. Definition of variables

Appendix C. Supplementary material

References

Abstract

In recent years, investors have begun to value companies’ reputations through their environmental, social, and governance (ESG) practices. ESG risk can affect business processes and controls and can heighten financial risk and threaten a firm’s survival. This study examines whether and how the severity of media coverage of a firm’s negative ESG issues (tainted ESG reputation) is associated with audit effort and audit quality. I find that auditors manage the higher expected engagement risk conveyed by tainted ESG reputation by applying higher audit effort. Next, I observe that the increased effort is associated with auditors likely detecting and requiring adjustments for material misstatements and that tainted ESG reputation is associated with fewer misstatements (i.e., reduces poor audit quality). The association between tainted ESG reputation and audit quality is driven primarily by increased audit report lag, not by increased audit fees. Further, I find that tainted ESG reputation is positively associated with audit effort and reduces poor audit quality for up to three years. The results also show that the audit effort and audit quality effect vary across the three components of ESG.

Introduction

Investors have long focused on the reputations of companies (e.g., Demiroglu and James, 2010; Helm, 2007; Shane and Cable, 2002) and, in recent years, have directed their attention to companies’ environmental, social, and governance (ESG) practices (Bernow et al., 2017; Committee of Sponsoring Organizations of the Treadway Commission [COSO], 2018). When a company’s ESG practices falter, the market reacts negatively (e.g., Capelle-Blancard and Petit, 2019; Grewal et al., 2018) The significance of ESG factors to today’s investors is articulated in a January 2018 letter from Laurence Fink, chairman and CEO of BlackRock, to the leadership of the world’s largest companies.2 Fink asserts that addressing ESG-related risks is key to longterm value creation. Consistent with this, growing investor pressure on corporate managers to address ESG risks has driven new regulations mandating ESG disclosures in a number of countries.

The United States has no policy requiring firms to publicly disclose ESG factors. The Securities and Exchange Commission (SEC) retreated from a proposal to implement ESG disclosure after receiving comments on its proposed rules, even though the comments were generally supportive.4 Absent mandatory ESG disclosure, the media disseminates information about companies’ ESG actions to investors. Recent empirical evidence suggests that the intensity and reach of media coverage of a firm’s ESG mistakes can harm investors’ perceptions of a firm and can heighten their assessment of its financial risk (Kölbel et al., 2017).