Domenico Campa

‘Big 4 Fee Premium’ and Audit Quality. Latest Evidence from UK Listed Companies

Purpose - Using the most recent observations (2005-2011) from a sample of UK listed companies, This paper aims to investigate whether Big 4 audit firms exhibit a “fee premium” and, if this is the case, whether the premium is related to the delivery of a better audit service. Design/methodology/approach - Univariate tests, multivariate regressions and two methodologies that control for self-selection bias are used to answer the proposed research questions. Data are collected from DataStream. Findings - Findings provide consistent evidence about the existence of an “audit fee premium” charged by Big 4 firms while they do not highlight any significant relationship between audit quality and type of auditor with respect to the audit quality proxies investigated. Research limitations/implications - Evidence from this paper might signal the need for legislative intervention to improve the competitiveness of the audit market on the basis that its concentrated structure is leading to “excessive” fees for Big 4 clients. Findings might also enhance Big 4 client bargaining power. However, as the paper analyses only one country, generalizability of the results might be a limitation. Originality/value - This study joins two streams of the extant literature that investigate the existence of a “Big 4 audit fee premium” and different levels of audit quality among Big 4 and non-Big 4 clients. Evidence supports the concerns raised by the UK House of Lords in 2010 that the concentrated structure of the audit market could be the driver of “excessive” fees for Big 4 clients as it does not find differences in audit quality between Big 4 and non-Big 4 clients.

IFRS Adoption Among Private Companies: Impact on Earnings Quality

EU gave the opportunity to each Member State to oblige/allow non-listed (i.e., private) companies to use international financial reporting standards (IFRS). Considering a sample of Italian private companies that switched to IFRS in the time span from 2005 to 2008, we compare financial reporting quality between IFRS adopters and a matched sample of companies still using local (Italian) generally accepted accounting principles (GAAP). This should be of interest for the EU Commission in evaluating the impact of the current financial reporting regulation and for EU national regulators, who are left with a certain degree of flexibility in endorsing parts of the European legislation. Overall, our results show that IFRS adoption did not improve reporting quality among private companies but, on the contrary, decreased it. As companies can exploit the level of flexibility embedded in IFRS to pursue their own reporting interests, separate analyses were conducted taking into consideration firms’ incentives. In particular, assuming that entities controlled by listed companies might have switched to IFRS mainly for complying with parent company requirements and/or simplifying the financial reporting process, we run the analyses separately for this sub-sample and other firms. Findings reveal signs of earnings quality deterioration for both groups although the impact seems slightly worse for subsidiaries of listed companies.

Non-Audit Services Provided to Audit Clients, Independence of Mind and Independence in Appearance: Latest Evidence from Large UK Listed Companies

This paper investigates whether the provision of non-audit services (NAS) to audit clients impairs auditor independence of mind and independence in appearance. The main contributions of this paper are in terms of its timeliness with respect to regulatory changes, the simultaneous examination of both forms of auditor independence and the methodological innovation whereby it uses a variable derived from the level of abnormal audit fees as a moderating variable in order to capture the direct impact of the NAS fee level on auditor independence as well as how its influence is moderated by the level of unexpected audit fees. Our results indicate that auditor independence of mind is compromised by the size of NAS fees, particularly for clients who pay below the level of expected audit fee. The stock market perceives that auditor independence is compromised by NAS fees but, at the same time, additional tests indicate that there are benefits that accrue from NAS and, in particular, the relation between return and non-discretionary net income is increasing in NAS fees. The balance of evidence suggests that the European Union is correct in undertaking some reform of the auditing market.

An Assessment of Corporate Governance Reforms in Italy Based on a Comparative Analysis of Earnings Management

– The purpose of this paper is to evaluate the impact of corporate governance reforms in Italy. , – The authors argue that the effectiveness of corporate governance can best be assessed with reference to the choices made by management or controlling shareholders. They use the curtailment of earnings management as a desirable and measureable outcome of good corporate governance to assess Italy’s progress since the 1990s. The UK is used as a reference point because it is a European Union (EU) economy of comparable size and there is evidence that its firms managed earnings to a much lesser extent than their counterparts in Italy in the 1990s. A matched sample of UK and Italian firms was used for the empirical analysis. , – It was found that in contrast to the situation in the 1990s, firms in Italy do not manage earnings to a greater extent than their UK counterparts after the corporate governance reforms. In addition, firm-level governance has a greater effect on earnings management in Italy than in the UK. The authors attribute this to firm-level governance compensating for deficiencies in national institutions. , – The restriction of earnings management is just one positive consequence of good governance. Other positive outcomes require to be studied to form a complete picture of the impact of governance reforms in Italy. , – This paper is the first to use an outcome-driven approach to evaluate the impact of governance reforms.

Earnings management among bankrupt non-listed firms: evidence from Spain

We analyse whether Spanish non-listed bankrupt firms are more inclined to manage earnings in comparison with their non-bankrupt pairs during the years preceding a legal procedure for bankruptcy. We also investigate the techniques these companies employ to manage earnings and when they start using earnings manipulation practices. Analysing a matched sample of bankrupt and healthy companies, we find that bankrupt firms manage earnings upwards more than their healthy pairs. They achieve that by employing both accrual and real activity manipulation. These two practices start at least three years before the beginning of the bankruptcy procedure, but real activity manipulation stops the year immediately before filing for bankruptcy. Findings also indicate that earnings management tools change based on the industry in which firms operate and the number of years preceding the bankruptcy. This evidence is relevant to governments, monitoring bodies and all those involved in an insolvency procedure.

Ireland's Foreign Direct Investment Sector: The Impact of a Hypothetical Irish Euro Zone Exit

The European sovereign debt crisis that has been playing out since 2008 has lead too much questioning over the future of the single currency which, so far, favoured foreign direct investment (FDI) in countries such as Ireland, contributing to their well-being and growth. Drawing on data gathered from interviews with individuals involved in different divisions of the FDI sector, namely the services, high-tech and life sciences, this study evaluates the hypothetical consequences for Ireland’s FDI sector, following an Irish Euro zone exit. The findings illustrate that the reactions of foreign companies would heavily depend on the ease of transferability in the organisation’s operations. Ireland outside the Euro zone would struggle to both maintain and attract new FDI. The resultant consequences for Ireland’s economy would include increased unemployment, reduced exchequer returns and export levels, as well as stagnant economic growth.

Audit Effects of Accounting Firm Organization Levels

Accounting firms are required by auditing standards to have control systems that ensure the quality of audits. These controls operate at three distinct levels of the organization. Firms develop firm-wide control systems. However, accounting firms are decentralized and the control systems are implemented by local practice offices and specific partners/audit teams working out of engagement offices. Our study examines the incremental importance of each of the three levels in explaining audit outcomes (quality of audit earnings, going concern reporting, and audit fees). The fixed effects of firms, offices, and partners are all significant, but the largest effect is inter-partner variation, and this finding holds for both Big 4 and non-Big 4 firms. An r-square decomposition analysis shows that partner fixed effects account for 31 to 51 percent of the explanatory power of models, far more than offices (11 to 18 percent) and firm-level effects (2 to 9 percent). Analysis of individual partner coefficients indicates the magnitudes are economically significant as well. Finally, a set of partner demographic variables explains relatively little compared to partner fixed effects, which suggests that publicly-available demographic data may be of relatively limited value in understanding the drivers of inter-partner differences and their effects on audit quality.

Ownership Structure and the Performance of Chinese Listed Firms after the Share Reform: Latest Evidence from the Manufacturing Sector

This paper investigates the relationship between ownership structure and the financial performance of Chinese manufacturing firms after the implementation of the 2005 reform of tradable and non-tradable shares. Using data from 2011 to 2014 and hand-collected ownership information, the results highlight that ownership concentration and the level of legal person shareholdings have a positive effect on firm performance. They also indicate that the level of state and individual investor shareholdings does not improve company performance. The relationship between the level of state and legal person shareholdings and firm performance is not linear and, in the simultaneous presence of these two ownership types, the dominance of one of the two drives the overall effect. The paper also shows that the 2005 reform has increased ownership dispersion, but has not changed the relationship between the type of dominant shareholder and firm performance highlighted in earlier studies.

Comments by the European Accounting Association on the International Accounting Education Standards Board Consultation Paper ‘Meeting Future Expectations of Professional Competence: A Consultation on the IAESB’s Future Strategy and Priorities’

Abstract On December 2015, the International Accounting Education Standards Board (IAESB) issued a consultation paper entitled ‘Meeting future expectations of professional competence: A consultation on the IAESB’s future strategy and priorities’. Its aim is ‘to obtain public comment on its vision for the next five years and the strategic priorities it believes need to be addressed in serving the public interest’ [International Accounting Education Standards Board [IAESB]. (2015a). Meeting future expectations of professional competence: A consultation on the IAESB’s future strategy and priorities. Consultation paper. Retrieved from https://www.ifac.org/publications-resources/consultation-paper-meeting-future-expectations-professional-competence, p. 3]. This article reports the answers of the European Accounting Association to the questions asked in the consultation paper. The comments suggest a reinforcement of the entry requirements that would include a proper education background, advanced levels of both some technical competences and interpersonal/communication skills as well as a very strong ethical commitment. They also recommend a more thorough development process for the continuous education of accountants, a stronger link between practitioners and academia, insights for new IESs and more effective communication strategies about IAESB activities.