Regulatory responses to auditor independence dilemmas – who takes the stronger line?

A key part of corporate governance reforms in Australia, as represented by CLERP 9, addresses concerns over the audit function and the role of independent auditors in monitoring managers and providing useful information to stakeholders about the financial position of the company. In comparing the regulatory responses to auditor independence dilemmas, there have been claims that CLERP 9 is less ‘stringent’ than the reforms imposed by the Sarbanes Oxley Act in the US. This paper looks at three particular situations that have been the subject of recent reform to strengthen independence: the mandatory rotation of auditors, recruitment of former auditors as board members, and provision of non-audit services to clients. In each case, we compare the similarities and differences of the regulatory response between Australia and US, to distil the efficacy of the CLERP 9 approach.

The impact of auditor independence regulations on established and emerging firms.

Purpose – The purpose of this paper is to study whether auditor independence reforms introduced in 2004 led to an enhancement in earnings quality in the post-reform era. Design/methodology/approach – This study predicts that as the cost of compliance will vary based on a firm's existing corporate governance regime and the level of external scrutiny (monitoring) it faces, we compare the earnings quality of a sample of “established” (S&P/ASX 100) to a sample of “emerging” (S&P/ASX Small Ordinaries Index) firms. The paper examines the reporting behaviour of the two groups of listed entities, covering the regulatory change period 2003-2006. The paper uses regression modelling to test the associations between increased audit independence, earnings quality and corporate governance mechanisms over the pre- and post-regulatory period. Findings – The paper's results confirm that earnings quality for the established firms was enhanced in the post-reform period; while this was not the case for emerging firms. The evidence also suggests that corporate governance mechanisms of board independence and board financial skill are associated with higher earnings quality; while the higher the concentration of insider firm ownership is associated with lower earnings quality. Practical implications – This study provides policy makers with evidence as to changes in reporting behaviour following law reform aimed at strengthening auditor independence. Originality/value – The studies on earnings quality are informed by the US market practices. Australia provides a unique setting through its auditor independence reforms to examine the impact of reform choices. This study also investigates two specific subsets of the market: established firms and emerging firms.

Auditor independence : an analysis of the adequacy of selected provisions in CLERP 9

Worldwide corporate collapses in the past have highlighted various weaknesses in corporate governance, which included auditor independence. This thesis advocates the use of private interest theory as a framework to evaluate proposals for law reform related to the independence of external company auditors. This study argues that the current regulation of auditor independence falls short of the 'ideal independence' required by the general public. This is because the regulation was developed, in some instances, to serve the private interests of powerful lobby groups rather than the public interest. This research concludes that there is a case for reform of the existing requirements in the Corporations Act 2001 (Cth) in respect of auditor independence.

An evaluation of the indicators of threat to auditor independence in an Islamic legal system: The case of Iran

This study aimed to assist in developing a more effective framework for regulating auditor independence practice in Iran, a non-IFRS country with an Islamic legal system. It investigated the following general research question: In order to increase auditor independence in a non-IFRS country with an Islamic legal system, what are the potential indicators of threats to auditor independence, and how should a regulator prioritise addressing these threats?

The Effect of Non-Audit Services on Auditor Independence : A study on 11 food retail- and wholesale companies in the United Kingdom

Purpose – The purpose of this study is to investigate the effect of non-audit services on auditor independence, and the importance of non-audit services as a source of income for audit firms in the United Kingdom. Design/method/approach – This study will examine 11 companies in the food retail- and wholesale industry during 2007 - 2014. Five indicators have been used; (1) Appointed auditor and provision of non-audit services to audit clients; (2) Auditor tenure; (3) Non-audit services in relation to total services; (4) Tax-services in relation to non-audit services, (5) Big Four’s revenue. Information has been collected using the quantitative approach through annual- and transparency reports. The threshold used to measure possible independence threats (self-review-, self-interest- and familiarity threat) has been set at 18,5 %. Findings – This study concludes that the jointly provision of audit- and nonaudit services possibly causes impairment of auditor independence, and that non-audit services is an important source of income for audit firms. The findings showed that in 99 %, companies purchased non-audit services from their statutory auditor. Non-audit services in relation to total services surpassed the threshold in 78 % of all financial years. Likewise, tax-services in comparison to non-audit services exceeded the threshold in 65 % of all financial years. The Big Four’s revenue from non-audit services to audit clients in relation to total revenue is almost constantly below the threshold. However, in all financial years except from one, total revenue from non-audit services surpassed revenue from audit services by far. Contribution – The study contributes to the ongoing discussion about nonaudit services effect on auditor independence. Originality/value – This study is one of few that provide detailed information about non-audit services in the food retail- and wholesale industry. It highlights social and ethical issues with regard to agency relationships.  

Mandatory auditor rotation : Australian evidence

A key part of the auditor independence reforms in Australia, as represented by Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) (CLERP 9), mandates audit partner rotation. The change was criticised predominantly due to the costs imposed on both the audit firms and the audit clients. This study examines the Australian experience post-CLERP 9 with mandated auditor rotation. Based on data of audit partner rotation over 2003–2009 (on average 1200 listed Australian companies over the sample period), we show that audit partner tenure sat at a median of 2–3 years, but that the maximum audit partner tenure was as high as 20 years in the pre-CLERP 9 period. For around 85% of the market, audit partner rotation occurred voluntarily at between 1–5 years. The interesting result is that for 15% of the market, the mandated audit partner rotation had a significant impact on corporate governance practice. There is also a greater observed impact of mandatory rotation on audit engagements involving the non-global auditing firms. These findings inform the debate as to the ‘costliness’ of the law reform.

Audit fees, non-audit fees and auditor going-concern reporting decisions in the United Kingdom

The accounting profession has come under increased scrutiny over recent years about the growing number of non-audit fees received from audit clients and the possible negative impact of such fees on auditor independence. The argument advanced is that providing substantial amounts of non-audit services to clients may make it more likely that auditors concede to the wishes of the client management when difficult judgments are made. Such concerns are particularly salient in the case of reporting decisions related to going-concern uncertainties for financially stressed clients. This study empirically examines audit reports provided to financially stressed companies in the United Kingdom and the magnitude of audit and non-audit service fees paid to the company’s auditors. We find that the magnitude of both audit fees and non-audit fees are significantly associated with the issuance of a going-concern modified audit opinion. In particular, financially stressed companies with high audit fees are more likely to receive a going-concern modified audit opinion, whereas companies with high non-audit fees are less likely to receive a goingconcern modified audit opinion. Additional analyses indicate that the results are generally robust across alternative model and variable specifications. Overall, evidence supports the contention that high non-audit fees have a detrimental effect on going-concern reporting judgments for financially stressed U.K. companies.

Audit pricing, reporting quality, and auditor switches in the post -SOX period

The Sarbanes-Oxley Act represents an important watershed event in the history and regulation of the accounting profession. In this dissertation, I develop arguments as to why we can expect differences in auditor behavior before and after SOX and empirically test if indeed there were differences in auditor behavior before and after SOX. My dissertation consists of three essays. For the three essays, I investigate issues related to auditor independence, audit pricing, the impact of auditor changes in the post-SOX period. The motivation for the first part of my research comes from the SEC's assertions that there are differences between types of non-audit services in terms of their potential to adversely impact auditor independence. The first part of my dissertation empirically validates the SEC's assertions that auditors would be more conservative in those instances where the tax and other non-audit services fee ratios are high but not when the audit-related fee ratio is high. The second part of my study examines if auditors are less likely to "low ball" their audit fees in the period after SOX than in the period preceding SOX. Legislators, regulators, and the media have expressed concerns that auditors "low ball" the fees for initial year audits and that such low-balling can lead to reduced audit quality. I find that there is significant initial year audit fee discount in pre-SOX period and but the fee discount does not hold in post-SOX periods. The third part of my dissertation examines the association between auditor switches and auditor conservatism. I find that a large portion of Big 4 clients switch to non-Big 4 auditors and there is no significant evidence indicating that successor auditors are more conservative in the post-SOX period.

Corporate governance, accounting and finance: a review

We review accounting and finance research on corporate governance (CG). In the course of our review, we focus on a particularly vexing issue, namely endogeneity in the relationships between CG and other matters of concern to accounting and finance scholars, and suggest ways to deal with it. Given the advent of large commercial CG databases, we also stress the importance of how CG is measured and in particular, the construction of CG indices, which should be sensitive to local institutional arrangements, and the need to capture both internal and external aspects of governance. The ‘stickiness’ of CG characteristics provides an additional challenge to CG scholars. Better theory is required, for example, to explain whether various CG practices substitute for each other or are complements. While a multidisciplinary approach to developing better theory is never without its difficulties, it could enrich the current body of knowledge in CG. Despite the vastness of the existing CG literature, these issues do suggest a number of avenues for future research.

Auditoria às demonstrações financeiras num contexto de crise estudo de caso: inquérito às sociedades de Revisores Oficiais de Contas das empresas cotadas na CMVM

Dissertação de Mestrado apresentado ao Instituto de Contabilidade e Administração do Porto para a obtenção do grau de Mestre em Auditoria sob orientação da Doutora Alcina Portugal Dias

Audit Tendering in the UK: A Review of Stakeholders’ Views

This study reports the results of a content analysis of the comment letters sent to the UK Financial Reporting Council (FRC), in response to its consultation document on the 2012 revisions of the UK Corporate Governance Code, concerning the proposal for mandatory audit tendering. The results indicate a general support for the FRC’s proposals with a number of key concerns related to audit quality, auditor independence and audit cost. There is also clear conflict of interests among some stakeholder groups such as audit firms and companies on one side and institutional investors on the other side. There is evidence of conflict of interest between Big 4 and non-Big 4 audit firms. Implications for future consultations and legislations are also discussed.

Fatores influenciadores da gestão da qualidade e independência do auditor: um estudo de caso

Dissertação apresentada ao Instituto Superior de Contabilidade para obtenção do Grau de Mestre em Auditoria Orientada por: Doutora Alcina Dias

External audit in the National Health Service in England and Wales:a study of an oversight body's control of auditor remuneration

In the National Health Service (NHS) in England and Wales an oversight body, the Audit Commission (AC), defines the scope of the external auditors’ work, appoints the auditors and has oversight of their fees and audit quality. This heavily regulated audit regime mitigates some of the deficiencies observed in high profile corporate failures. Independence, it has been argued, is influenced by the total auditor remuneration paid by the client. In this study we examine total auditor remuneration in a regulated market which seeks to ensure audit independence and audit quality. In particular we undertake rigorous analysis of auditor remuneration by the type of auditor: We place emphasis on the differentiation between private sector firms and the AC’s in-house auditors (District Audit). Individual private audit firms charge premiums (up to 16%) for particular audit work in identified locations, but no premiums were found when we examined total auditor remuneration. The regime appears to permit efficient operation of the audit market while safeguarding both audit independence and standards.

Audit report on the City of Independence, Iowa for the year ended June 30, 2015

Audit report on the City of Independence, Iowa for the year ended June 30, 2015