Albert L. Nagy

Client size, auditor specialization and fraudulent financial reporting

This study examines the effect that client size has on the relation between industry‐specialist auditors and fraudulent financial reporting. Most of the major accounting firms have organized their audit practices along industry lines, reflecting a belief that industry specialization leads to higher quality audits. Furthermore, regulatory bodies and extant research suggests that larger clients have greater bargaining power and are more likely to be able to convince the auditor to acquiesce to aggressive accounting. Also, it may be more difficult for an auditor to possess industry expertise for larger clients who are likely to be more complex and operate in more than one industry. Consistent with previous research, we generally find a significant negative relation between auditor industry specialization and client financial fraud. Also, as expected, the negative relation between auditor industry specialization and financial fraud is weaker for larger clients. This study provides evidence that the positive benefits of auditor industry specialization in deterring financial fraud is affected by client size.

An assessment of the newly defined internal audit function

The new definition of internal auditing defines the function as an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. The purpose of this paper is to summarize an assessment of this new definition obtained through structured interviews from 11 internal audit directors of large publicly traded companies. The responses from the directors indicate that there are wide differences in viewpoints and objectives; but a definite shift has occurred in the overall scope of internal audit towards operational activities. While most of the interviewees are in conceptual agreement with the new internal audit definition, an underlying warning is vocalized: “Don’t throw out the franchise”. That is, the traditional role of the internal auditor should not be completely abandoned. These, along with other responses pertaining to related issues and suggestions for future research, are summarized throughout the paper.

An empirical examination of corporate myopic behavior: a comparison of Japanese and U.S. companies

Abstract The purpose of this study is to examine whether differences in the corporate environments of Japanese and U.S. companies are associated with differences in the extent to which Japanese and U.S. managers engage in corporate myopic behavior. This paper empirically examines the management myopia issue by comparing the level of income smoothing that occurs between U.S. and Japanese companies. A system of simultaneous equations is employed to measure the extent that management uses discretionary accruals and research and development (R&D) investments to smooth income. Our results suggest that while both Japanese and U.S. managers engage in some amount of myopic behavior (i.e., smooth income), Japanese managers do so at a significantly higher level.

Audit partner specialization: the case of Andersen followers

Purpose - The purpose of this paper is to examine the effects of auditor specialization, at both the partner and office levels, on audit quality within a developed market (the USA). Design/methodology/approach - This study exploits the environment created when several large accounting firms purchased select Andersen offices following the firms demise in 2002. OLS regressions were estimated from a sample of companies that assumingly followed their Andersen partner to the purchased accounting firm to examine the association between abnormal discretionary accruals and auditor specialization at both the office and partner levels. Findings - The descriptive statistics and regression results show a significant negative relation between audit partner specialization and abnormal accruals. Furthermore, the results suggest that partner level specialization has a greater effect on audit quality than that of office level specialization. Originality/value - This study contributes to the literature by examining the effects of auditor specialization at both the office and partner levels on audit quality within a developed market. The results of this study should be of interest to academics, investors, and regulators and help them in their assessments of auditor quality.

Accounting firms cautiously maneuver in the new audit environment – a note

Purpose - This paper seeks to discuss the effect that the Sarbanes-Oxley Act (SOA) had on both the nature of the external audit function and overall audit quality. Additionally, it aims to discuss how audit firms maneuvered through the newly regulated environment, and what their strategic actions are for the future. Design/methodology/approach - This discussion is based on interviews conducted with auditors from nine public accounting firms located in Northeast Ohio, United States of America. The sample consisted of five national and four regional firms, and the interviewees included mostly partners and a few senior managers. Findings - The increased oversight and workload resulting from the SOA requirements has changed the nature of the external audit function to more compliance type work, and the environment has created much anxiety for the auditors. The new reform has significantly impacted the audit environment in terms of: scope of services; client assessment procedures; management and audit committee relationships with the external auditor; audit firm personnel management; and the long-term outlook of the profession. The details of these impacts are discussed throughout the paper. Research limitations/implications - This paper provides detailed insight as to how the SOA impacted the audit profession. Hopefully, such an understanding will benefit future research in measuring the costs and benefits of the new reform. Lastly, a future research showed further examine the effect that the SOA has had on overall audit quality. Originality/value - This paper summarizes the insightful comments obtained in structured interviews with several leading audit professionals. The sample was judged to be highly knowledgeable of the changing audit environment caused by the SOA. With an improved understanding of its impacts, regulators, practitioners, and academics can better assess the effectiveness of the SOA.

Section 404 implementation

Section 404 of the Sarbanes‐Oxley Act requires management to include in the annual report a report on the effectiveness of the companys internal control over financial reporting. This assessment must be supported by evidential matter, including documentation, regarding both the design of internal controls and the testing process. Understandably, many executives are seeking the assistance from their internal auditors in satisfying the Section 404 requirements, leaving internal auditors with the important task of ensuring that the corporations internal control system is properly documented and tested. This paper discusses how nine leading internal auditors of large publicly listed corporations are assisting their respective companies in implementing the Section 404 requirements. Further discusses some of the significant issues that these auditors are addressing and their prediction on the expected future impact of Section 404.

Audit partner specialization and audit fees

Purpose - – The purpose of this paper is to examine partner specialization effects on audit fees in the US audit market. Design/methodology/approach - – This study exploits the unique environment created from the demise of Andersen to examine the effect of partner specialization on audit fees in the US audit market. An ordinary least squares regression was estimated from a sample of ex-Andersen clients that assumingly followed their ex-Andersen audit partner to the new audit firm. Findings - – The results show significant positive relations for both audit partner- and office-level specialization and audit fees and suggest that auditor specialization at both the partner- and local office-level demand a fee premium in the US audit markets. Furthermore, the results do not show a significant difference between partner- and office-level specialization effects on audit fees. Originality/value - – This study contributes to the audit quality literature by examining the effects of auditor specialization at both the office and partner levels on audit fees within a developed market. The results of this study should be of interest to academics, investors and regulators and help them in their assessments of audit quality.

Financial information systems service providers and the internal control report

Purpose - The purpose of this paper is to examine if a conflict of interest arises when auditors opine on an internal control system that consists of an information system recently designed and implemented by their own firm. Design/methodology/approach - A sample of companies was selected that had a financial information design and implementation service (FISD) disclosure in 2000-2001 and a Section 404 internal control report issued in 2004-2005. Both descriptive statistics and logistic regression results provide insight into the relation between the type of internal control report issued and the FISD provider. Findings - After considering the type of auditor change (forced versus voluntary) and the timing of the consulting division split-offs, the results suggest that a material weakness internal control report is less likely if the same audit firm issued the internal control opinion and performed the FISD service. This result lends some support to the regulators concern that certain types of non-audit services (NAS) may cause auditors to audit their own work. Originality/value - This study contributes to the literature by examining if the performance of a certain type of NAS (FISD) resulted in auditors auditing their own work when opining on certain internal control systems. To the authors knowledge, this is the first study of its type in relation to auditors auditing their own work.

SOX 404(b) exemption effects on auditor changes

Purpose - This paper aims to investigate whether the Sarbanes-Oxley Act: Section 404(b) exemption caused an increase in auditor changes due to changes in expectations for both auditors and their clients. Design/methodology/approach - This paper predicts that this exemption caused a significant amount of auditor changes post-exemption, due to a change in expected future economic rents (audit scope demands) for auditors (clients). Logistic regression analysis is used to examine whether auditor changes increased for non-accelerated filers (public companies with less than

Audit-Office Non-CPA Composition and Audit Outcomes

75 million in public float), who were affected by this exemption, compared to auditor changes for accelerated filers (public companies with greater than