Chan-Jane Lin

Determinants of Audit Staff Turnover: Evidence from Taiwan

High employee turnover has long been a concern in the public accounting profession. Frequent hiring, training, and replacement of professional staff could have an adverse impact on audit quality. Using proprietary data from a Big Four accounting firm in Taiwan, we employ survival analysis and examine the factors that explain the turnover of entry‐level auditors. We find that female auditors are more likely to depart the accounting firm, while performance ratings, salary, and accounting background are significantly related to higher retention rates. We do not find, however, that masters degrees incrementally increase the retention rates of professional employees. These results hold after controlling for macroeconomic factors. Our evidence complements prior survey studies and suggests that gender, performance, salary, and accounting degree explain employee turnover in Taiwanese public accounting firms.

Changes in ownership structure and the value of the firm: The case of mutual-to-stock converting thrift institutions

This study examines some economic and organizational changes which result from the conversion of Mutual Thrift Institutions to publicly traded stock charter corporations. We focus on the relation between the initial value of the converted firm and subscription decisions by management and by regular depositors, and the employment of a prestigious underwriter or auditor. Whereas the proportion of managerial subscriptions displays a convex relationship with the firms initial value, the relation between the regular depositor subscription and the converted firms value is linear and positive. The status of the underwriter or auditor is unrelated to the value of the converted firm. These findings are attributed to the particular regulatory setting that governs the MTI conversion process, to constraints on ownership holdings and to the oversight function of the regulator.

Dual audit, audit firm independence, and auditor conservatism

Purpose - – This study aims to examine whether Chinas unique dual audit policy affects one specific aspect of audit quality: auditor conservatism. In China, listed companies issuing B/H-shares in addition to A-shares must release two financial reports – one based on Chinese accounting standards and the other based on international accounting standards (ISA). The China Securities Regulatory Commission (CSRC) further requires that the financial reports following Chinese accounting standards should be audited by a domestic CPA firm, and the financial reports following ISA should be audited by an approved overseas CPA firm. This study investigates whether the dual audit requirement induces more auditor conservatism. Design/methodology/approach - – Based on a sample of 7,046 firm-year observations that issue A-shares from 2001 to 2006, the authors empirically test whether the dual audit requirement induces more auditor conservatism, measured by the level of discretionary accruals. Findings - – The authors find the dual audit requirement significantly restricts the use of income-increasing discretionary accruals but not income-decreasing discretionary accruals. Moreover, financial reporting becomes most conservative when two auditors are from two un-affiliated audit firms. Nevertheless, the difference-in-difference analysis fails to show a significant decrease in auditor conservatism after the revocation of the dual audit rule for the treatment group with dual audit before but no dual audit after 2007 comparing to the control group that experience no change in 2007. Originality/value - – First, the previous studies examine issues regarding the effects of supervision pressure through experimental setting. The authors extend the literature by examining empirically the impact of perceived peer pressure on auditor conservatism. Second, the findings from China regarding the effect of the dual audit system on auditor conservatism serve as a reference for other emerging markets that have not yet established sound audit systems.

Going Private Decision and Firm Characteristics: Evidence from the Regulation Change in Taiwan

Firms in Taiwan had been required to go public if their capital exceeds 200 million NT dollars since 1981. However, this capital threshold was lifted in November 2001. The main purpose of this research is to investigate the factors that may influence the going private decision due to the regulation change. The empirical results show that firms with distorted capital formation process at or after mandated public offerings choose to go private immediately after the deregulation. The results also indicate that firms with poor financial performances are more likely to go private. We conjectured it is due to the profitability requirement for firms to be listed in Taiwan Security Exchange or traded Over the Counter. Therefore, public firms will have incentives to go private if the listing seems mission impossible. The above finding provides the evidence that firms going private take consideration of costs and benefits of staying public.

Costs and benefits in the choice of the audit and underwriting quality in the IPO market: An empirical analysis of competing theories

Publisher Summary This chapter examines the choice of auditors and underwriters by entrepreneurs prior to initial public offerings (IPOs). DFH predicted that entrepreneurs who face greater future cash flow risk will benefit from hiring a high-quality auditor, whereas TT predicted that they will benefit from hiring a low-quality auditor or underwriter. This chapter focuses on developing proxy tests to evaluate empirically the supply-side effect of risk, that is the impact of firm-specific risk on the incremental cost of hiring a high-quality auditor or underwriter, and partially examines the demand-side effect of risk. Recent empirical studies indicate that riskier entrepreneurs may benefit from hiring high-quality auditors, but these studies make no direct empirical examination of the supply-side effect. Regressions with slope dummies indicate that the incremental deflated cost of hiring a high-quality auditor or a prestigious underwriter increases as firm-specific risk increases. The supply-side and demand-side findings indicate that for high firm-specific risk, the incremental costs exceed the incremental benefits of hiring a high-quality auditor or underwriter.

Auditor switch decisions under forced auditor change: evidence from China

Purpose - – From 2000 to 2007, 14 Chinese accounting firms had their audit licenses terminated or suspended for different reasons, forcing clients of these accounting firms to select new auditors within a short period of time. The purpose of this paper is to examine the auditor switching patterns and audit partner following decision of these clients and the effect of both client and (terminated or suspended) auditor characteristics on the auditor change decisions. Design/methodology/approach - – By using 245 (191) clients of terminated or suspended audit firms, the authors apply logistic regressions to investigate clients’ switching decision (following decision). Findings - – The empirical results indicate that state-owned enterprises tend not to switch to Big 4 audit firms; clients with dual shares tend to choose from the Big 4 for their succeeding audit firms. Moreover, companies whose preceding auditors received severe regulatory sanctions are less likely to switch to auditors of higher quality; companies who hired local auditors are more likely to follow their preceding audit partners as a result of forced auditor change. Originality/value - – This study enriches forced auditor change literature by discussing both clients’ and preceding auditor’s attributes on clients’ switching and following decisions.

The Effect of Incentive Compensation Plans on Operating Performance and Shareholder Wealth: Evidence from Taiwanese Electronic Industry

This paper examines the effect of incentive compensation plans of Taiwanese electronic companies on their operating performance and stock return. The results show that the employee bonus ratio measured by fair value has a positive incentive effect on subsequent operating performance before adjusting the expenses of employee bonus. But, after considering the expenses of employee bonus to adjust operating performance, the results show that greater bonus ratio do not create better subsequent adjusted operating performance. These results may be caused by excessive profit-sharing before the revising of accounting treatment for employee bonus. We also find the same results about subsequent stock return that it links the shareholder wealth. In addition, the results fail to support the hypothesis that the greater the proportion of the stock bonus the better the subsequent operating performance and stock return. Our findings provide some evidences to support the amendment in the accounting rules for employee bonus to reflect the compensation cost.

Operating Performance and Investment Expenditures Following Open Market Share Repurchases

We examine long-term operating performance and investment expenditures following open market share repurchase announcements between August 2000 and December 2003 by firms whose shares traded on the Taiwan Stock Exchange (TSE) or OTC market. We find that repurchasing firms experience significant abnormal declines in operating performance relative to non-repurchasing firms in the year preceding the event. Further, we do not find any evidence that our sample firms outperform the matching firms in the 4 years following the announcement of the share repurchase programs. Our findings do not support the idea that share repurchases signal an improvement in future operating performance. With respect to the investment expenditures, our empirical results indicate that repurchasing firms do not invest more than their industry peers after the repurchase announcement, which tends to support the prediction of the free cash flow hypothesis. However, we find no evidence that firms reduce their cash reserves after the share repurchase announcements. Overall, this study provides limited evidence to support for the free cash flow hypothesis.