Chee Yeow Lim

Corporate Governance, Legal Environment, and Auditor Choice in Emerging Markets

In this study, we examine the effect of firm-level governance on the firms choice of an external auditor. Further, we test how the relation between corporate governance and auditor choice may be affected by the strength of legal environment. The results show that firm-level governance scores are positively related to the firms auditor choice. This association is strengthened by country-level legal protection. Specifically, the positive association between auditor choice and the firm-level governance scores is weaker (stronger) in a low (high) legal environment. These findings are robust after controlling for determinants that were found to be significant in earlier research. Overall, our results suggest that the benefits arising from the employment of high-quality auditors are likely to be greater when legal environment is stronger because both auditors and firms are subject to more severe legal punishments for opportunistic behavior.

Control Divergence, Timeliness in Loss Recognition, and the Role of Auditor Specialization: Evidence from around the World

This paper seeks to investigate how control-cash flow divergence of a firms ultimate owner may affect the timeliness of accounting recognition of economic losses (TLR) relative to recognition of economic gains, and if engaging an audit industry specialist mitigates the reduced TLR arising from control divergence. Our results show that firms with greater divergence in control and cash flow rights are less timely in loss recognition (relative to gain recognition). We also find evidence that clients audited by industry specialists are associated with greater TLR. More important, we find that the negative association between control divergence and the TLR is moderated by the auditor industry specialization. The results are robust to controls for legal institutions, political economy, extralegal institutions, firm and industry characteristics, and the potential endogeneity between auditor choice and control divergence. Given that Bushman, Piotroski, and Smith (2006) provide evidence to suggest that TLR is a desirable attribute of accounting since it leads to significant positive economic consequences, the findings of our study suggest that hiring an audit industry specialist in the presence of control divergence can lead to positive economic consequences for the firm.