- Log In/Sign Up
- E-ISSN2233-5382
- KCI
E-ISSN : 2233-5382
A Study on Audit Regulation Engagement Interview and Audit Quality
DU, Yanbin
Abstract
Purpose: This paper aims to investigate (1) whether the interviewed auditors conduct higher quality audit than the non-interviewed auditors and (2) whether the frequency of audit engagement interviews has an impact on audit quality. Research design, data, and methodology: Using a sample of Chinese A-share listed firms between 2011 and 2019, this paper empirically tests the effect of audit engagement interviews on auditor's behavior. We collect the data of audit engagement interviews on the CICPA's website. We use OLS regression, fixed-effect model and random-effect model to examine the association between audit engagement interviews and audit quality. Results: Findings indicate that the audit quality of the interviewed auditors is significantly greater than that of the non-interviewed auditors. The frequency of the audit engagement interviews is positively associated with audit quality. The interviewed auditors spend significantly more time on the audit. Furthermore, the positive association between audit engagement interviews and audit quality only exists in non-Big 4 auditors. Conclusions: Our findings provide evidence for the effectiveness of audit regulation enforcement. The results suggest that in an emerging market with weak legal systems, preventive regulations such as audit interviews have a deterrent effect and are necessary in alleviating information asymmetry and improving information environment.
- keywords
- Audit Engagement Interview, Audit Quality, Discretionary Accruals, Audit Delays
Reference
Al-Absy, M., Ismail, K., Chandren, S., & Al-Dubai, S. (2020). Involvement of Board Chairmen in Audit Committees and Earnings Management: Evidence from Malaysia. Journal of Asian Finance, Economics and Business, 7(8), 233–246. DOI:10.13106/jafeb.2020.vol7.no8.233
Bandura, A., & Mischel, W. (1965). Modification of SelfImposed Delay of Reward through Exposure to Live and Symbolic Models. Journal of Personality & Social Psychology, 2(5), 698-705. DOI:10.1037/h0022655
Becker, C., DeFond, M., Jiambalvo, J., & Subramanyam, K.(1998). The Effect of Audit Quality on Earnings Management. Contemporary Accounting Research, 15(1), 1-24.DOI:10.1111/j.1911-3846.1998.tb00547.x
Bikhchandani, S., & Welch, H. I. (1998). Learning from the Behavior of Others. Journal of Economic Perspectives, 12(3), 151-170. DOI:10.2307/2647037
Bing, L., & Liu, Z. (2017). The Oversight Role of Regulators:Evidence from SEC Comment Letters in the IPO Process. Review of Accounting Studies, 22(3), 1229–1260. DOI:10.1007/s11142-017-9406-2
Brown, S. V., Tian, X., & Tucker, J. W. (2018). The Spillover Effect of SEC Comment Letters on Qualitative Corporate Disclosure: Evidence from the Risk Factor Disclosure. Contemporary Accounting Research, 35(2), 622-656. DOI:10.1111/1911-3846.12414
Cahan, S. F., & Wei, Z. (2006). After Enron: Auditor Conservatism and Ex-Andersen Clients. The Accounting Review, 81(1), 49-82. DOI:10.2308/accr.2006.81.1.49
Casterella, J. R., Jensen, K., & Knechel, W. R. (2009). Is SelfRegulated Peer Review Effective at Signaling Audit Quality? Accounting Review, 84(3), 713-735. DOI:10.2308/accr.2009. 84.3.713
Chae, S.; & Hwang, H. (2017). The Effect of Audit Quality on Crash Risk: Focusing on Distribution & Service Companies. Journal of Distribution Science, 15(8), 47-54. https://doi.org/10.15722/jds.15.8.201708.47
Chen, G., Firth, M., Gao, N., & Rui, O. (2005). Is China’s Securities Regulatory Agency a Toothless Tiger? Evidence from Enforcement Actions. Journal of Accounting and Public Policy, 24(6), 451-488. https://doi.org/10.1016/j.jaccpubpol. 2005. 10.002
Christensen, B. E., Lundstrom, N. G., & Newton, N. J. (2021). Does the Disclosure of PCAOB Inspection Findings Increase Audit Firms' Litigation Exposure?. The Accounting Review, 96(3), 191–219. DOI:10.2308/TAR-2018-0151
Clor-Proell, S. M., Proell, C. A., & Warfield, T. D. (2014). The Effects of Presentation Salience and Measurement Subjectivity on Nonprofessional Investors’ Fair Value Judgments. Contemporary Accounting Research, 31(1), 45-66. DOI:10.1111/1911-3846.12041
Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and AccrualBased Earnings Management in the Pre-and-Post-SarbanesOxley Periods. The Accounting Review, 83(3), 757-787. DOI: 10.2308/accr.2008.83.3.757
De Angelo, L. E. (1981). Auditor Size and Audit Quality. Journal of Accounting and Economics, 3(3), 183-199. DOI:10.1016/0165-4101(81)90002-1
Dechow, P. M., Ge, W., & Schrand, C. (2010). Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences. Journal of Accounting and Economics, 50(2-3), 344-401. DOI:10.1016/j.jacceco.2010.09.001
Dechow, P. M., Lawrence, A., & Ryans, J. P. (2016). SEC Comment Letters and Insider Sales. Accounting Review, 91(2),401–439. DOI:10.2308/accr-51232
Dechow, P. M., Sloan, R. G., & Hutton, A. P. (1995). Detecting Earnings Management. Accounting Review, 70(2), 193-225. DOI:10.2307/258852
Defond, M. L., & Lennox, C. S. (2017). Do PCAOB Inspections Improve the Quality of Internal Control Audits. Journal of Accounting Research, 55(3), 591-627. DOI:10.1111/1475-679X.12151
Ettredge, M., Johnstone, K., Stone, M., & Wang, Q. (2011). The Effects of Firm Size, Corporate Governance Quality, and Bad News on Disclosure Compliance. Review of Accounting Studies, 16, 866–889. DOI:10.1007/s11142-011-9153-8
Eutsler, J. (2020). Risky Business: Assessing the Generalizability of the PCAOB’s Risk-Based Inspection Reports for Annually Inspected Audit Firms. Auditing: A Journal of Practice &Theory, 39(2), 117-138. DOI:10.2308/ajpt-18-122
Fan, J. P. H., & Wong, T. J. (2005). Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia. Journal of Accounting Research, 43(1), 35-72. DOI:10.1111/j.1475-679x.2004.00162.x
Feroz, E. H., Park, K., & Pastena, V. S. (1991). The Financial and Market Effects of the SEC’s Accounting and Auditing Enforcement Releases. Journal of Accounting Research, 29(Supplement), 107–142. DOI:10.2307/2491006
Ferris, S. P., Kumar, R., & Wolfe, G. A. (1992). The Effect of SEC-Ordered Suspensions on Returns, Volatility, and Trading Volume. Financial Review, 27(1), 1-34. DOI:10.1111/j.1540-6288.1992.tb01305.x
Firth, M., Rui, O. M., & Wu, X. (2009). The Timeliness and Consequences of Disseminating Public Information by Regulators. Journal of Accounting & Public Policy, 28(2), 118-132. DOI:10.1016/j.jaccpubpol.2009.01.001
Fogarty, T.J. (1996). The Imagery and Reality of Peer Review in the US: Insights from Institutional Theory. Accounting, Organizations and Society, 21(2-3), 243–267. DOI:10.1016/0361-3682(95)00001-1
Gabrielsen, G., Gramlich, J. D., & Plenborg, T. (2002). Managerial Ownership, Information Content of Earnings, and Discretionary Accruals in a Non-US Setting. Journal of Business Finance & Accounting, 29(7-8), 967-988. DOI:10.1111/1468-5957.00457
Geiger, M. A., & Rama, D. V. (2008). Audit Firm Size and Going-Concern Reporting Accuracy. Accounting Horizons, 20(1), 1-17. DOI:10.2308/acch.2006.20.1.1
Ghosh, A., & Moon, D. (2005). Auditor Tenure and Perceptions of Audit Quality. The Accounting Review, 80(2), 585-612. DOI:10.1116/1.579644
Ghoshal, S., Bengtzen, M., & Roberts, S. (2020). Short Memories? The Impact of SEC Enforcement on Insider Leakage. Journal of Law, Finance, and Accounting, 5(2), 273-305. DOI: 10.1561/108.00000048
Gramling, A. A., Krishnan, J., & Zhang, Y. (2011). Are PCAOBIdentified Audit Deficiencies Associated with a Change in Reporting Decisions of Triennially Inspected Audit Firms?. Auditing, 30(3), 59-79. https://doi.org/10.2308/ajpt-10048
Guay, W. R., Kothari, S. P., & Watts, R. L. (1996). A MarketBased Evaluation of Discretionary-Accrual Models. Journal of Accounting Research, 34(Supplement), 83-105. DOI:10.2307/2491427
Gunny, K. A., & Hermis, J. M. (2020). How Busyness Influences SEC Compliance Activities: Evidence from the Filing Review Process and Comment Letters. Contemporary Accounting Research, 37(1), 7-32. DOI:10.1111/1911-3846.12507
He, X., Pittman, J., & Rui, O. (2016). Reputational Implications for Partners after a Major Audit Failure: Evidence from China. Journal of Business Ethics, 138(4), 703-722. DOI:10.1007/s10551-015-2770-6
Herbig, P., & Milewicz, J. (1993). The Relationship of Reputation and Credibility to Brand Success. Journal of Consumer Marketing, 10(3), 18-24. DOI:10.1108/EUM0000000002601
Hilary, H., & Lennox, C. (2005). The Credibility of SelfRegulation: Evidence from the Accounting Profession's Peer Review Program. Journal of Accounting and Economics, 40(1-3), 211-229. DOI:10.1016/j.jacceco.2005.03. 002.
Hunter, I. (1956). The Influence of Mental Set on ProblemSolving. British Journal of Psychology, 47(1), 63-64. DOI:10.1111/j.2044-8295.1956.tb00563.x
Johnson, E. S., Reichelt, K. J., & Soileau, J. S. (2020). The Impact of PCAOB Auditing Standard NO.5, the PCAOB Inspection Regime, and the Great Recession on Audit Fees and Audit Quality. Journal of Accounting, Auditing and Finance, (4), 1-24. https://doi.org/10.1177/0148558 X20982207
Khurana, I. K., Lundstrom, N. G., & Raman, K. K. (2021). PCAOB Inspections and the Differential Audit Quality Effect for Big 4 and Non-Big 4 US Auditors. Contemporary Accounting Research, 38(1), 376-411. DOI:10.1111/1911-3846.12636
Krishnamurthy, S., Zhou, J., & Zhou, N. (2006). Auditor Reputation, Auditor Independence, and the Stock-Market Impact of Andersen’s Indictment on Its Client Firms. Contemporary Accounting Research, 23(2), 465-490. DOI:10.1506/14P1-5QRR-1NAF-3CE1
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W.(1998). Law and Finance. Journal of Political Economy, 106(6), 1113-1155. https://doi.org/10.1086/ 250042
Lamoreaux, P. T. (2016). Does PCAOB Inspection Access Improve Audit Quality? An Examination of Foreign Firms Listed in the United States. Journal of Accounting &Economics, 61(2-3), 313-337. DOI:10.1016/j.jacceco.2016.02.001
Levitt, SD, & List, J.A. (2011). Was There Really a Hawthorne Effect at the Hawthorne Plant? An Analysis of the Original Illumination Experiments. American Economic Journal, 3(1), 224-238. DOI:10.1257/app.3.1.224
Lewellyn, K. B., & Bao, S. (2017). The Role of National Culture and Corruption on Managing Earnings around the World. Journal of World Business, 52(6), 798-808. https://doi.org/10.1016/j.jwb.2017.07.002
Nicholls, C. (2016). The Impact of SEC Investigations and Accounting and Auditing Enforcement Releases on Firms'Cost of Equity Capital. Review of Quantitative Finance &Accounting, 47(1), 57-82. DOI:10.1007/s11156-014-0494-9
Ollinger, M., Gary, J., & Günther, K. (2008). Investigating the Effect of Mental Set on Insight Problem Solving. Experimental Psychology, 55(4), 269-282. DOI:10.1027/1618-3169.55.4.269
Pittman, J. A., & Fortin, S. (2004). Auditor Choice and the Cost of Debt Capital for Newly Public Firms. Journal of Accounting & Economics, 37(1), 113-136. DOI:10.1016/j.jacceco.2003. 06.005
Pratt, J., & Stice, J. D. (1994). The Effects of Client Characteristics on Auditor Litigation Risk Judgments, Required Audit Evidence, and Recommended Audit Fees. The Accounting Review, 69(4), 639-656. DOI: 10.2307/248435
Rose, C., & Thomsen, S. (2004). The Impact of Corporate Reputation on Performance: Some Danish Evidence. European Management Journal, 22(2), 201-210. DOI:10.1016/j.emj.2004.01.012
Roychowdhury, S. (2006). Earnings Management through Real Activities Manipulation. Journal of Accounting & Economics, 42(3), 335-370. DOI:10.1016/j.jacceco.2006. 01.002
Seetharaman, A., Gul, F. A., & Lynn, S. G. (2002). Litigation Risk and Audit Fees: Evidence from UK Firms Cross-Listed on US Markets. Journal of Accounting and Economics, 33(1), 91-115. DOI:10.1016/S0165-4101(01)00046-5
Skinner, D. J., & Srinivasan, S. (2012). Audit Quality and Auditor Reputation: Evidence from Japan. Accounting Review, 87(5), 1737-1765. DOI:10.2308/accr-50198
Smith, D. B., Stettler, H., & Beedles, W. (1984). An Investigation of the Information Content of Foreign Sensitive Payment Disclosures. Journal of Accounting and Economics, 6(2), 153–162. DOI:10.1016/0165-4101(84)90011-9
Teoh, S. H., & Wong, T. J. (1993). Perceived Auditor Quality and the Earnings Response Coefficient. The Accounting Review, 68(2), 346-366. DOI:10.2307/248405
Tian, X., Udell, G. F., & Yu, X. (2016). Disciplining Delegated Monitors: When Venture Capitalists Fail to Prevent Fraud by Their IPO Firms. Journal of Accounting & Economics, 61(2-3), 526-544. DOI:10.1016/j.jacceco.2015.09.004
Wang, Q. (2016). Determinants of Segment Disclosure Deficiencies and the Effect of the SEC Comment Letter Process. Journal of Accounting & Public Policy, 35(2), 109-133. DOI:10.1016/j.jaccpubpol.2015.11.005
Warfield, T. D., Wild, J. J., & Wild, K. L. (1995). Managerial Ownership, Accounting Choices, and Informativeness of Earnings. Journal of Accounting and Economics, 20(1), 61-91. DOI:10.1016/0165-4101(94)00393-J
Weber, J., Willenborg, M., & Zhang, J. (2008). Does Auditor Reputation Matter? The Case of KPMG Germany and ComROAD AG. Journal of Accounting Research, 46(4), 941-972. https://doi.org/10.1111/j.1475-679X.2008.00298.x
- Downloaded
- Viewed
- 0KCI Citations
- 0WOS Citations