Jaime J. Schmidt

Perceived Auditor Independence and Audit Litigation: The Role of Nonaudit Services Fees

ABSTRACT: This study investigates whether audit litigants act as if they believe jurors will associate auditor-provided nonaudit services (NAS) with impaired auditor independence, and thus substandard auditor performance. Using GAAP-based financial statement restatements disclosed from 2001–2007 as an indicator for audit failure, I find that the amount of NAS fees and the ratio of NAS fees to total fees is positively associated with the likelihood that a restatement results in audit litigation. I also find that when plaintiff attorneys argue that auditor independence was impaired due to dependence on client fees and, in particular, NAS fees, restatement-related audit litigation is more likely to result in an auditor settlement and a larger amount of settlement. These results suggest that audit litigants act as if they believe NAS fees will strengthen the case against the auditor, and thus affect the court resolution if the lawsuit is taken to verdict. Data Availability: All data are publicly available fro...

When Do Ineffective Audit Committee Members Experience Turnover

We use information extracted from a major proxy advisory service to test predictions from institutional theory regarding when and why audit committee (AC) members experience turnover because of evidence of ineffective governance. First, we broadly categorize AC ineffectiveness concerns as either (i) financial reporting failures or (ii) characteristics of individual AC members. Institutional theory suggests that the visible nature of the first category is more likely to threaten perceptions of AC legitimacy and hence prompt turnover, which is what we find. We then enrich the analysis by interacting the AC-member ineffectiveness indicators with the extent of shareholder protest votes, finding that shareholder dissent elevates the turnover effects of both categories of ineffectiveness, as institutional theory would predict. Finally, we find that otherwise effective AC members face an increased likelihood of turnover if they serve on the AC when financial reporting failures are discovered, even if they were not on the AC when the events precipitating the failures occurred. Overall, our findings support the institutional theoretic premise that boards take remedial actions when necessary to restore perceived legitimacy.

Using Sec Edgar Views to Measure Competition Among Big 4 Auditors

Prior research provides mixed evidence about whether sufficient audit market competition exists and whether competition impairs or improves audit quality. A major impediment to this stream of research is the unobservable nature of the bidding process by which auditors compete for clients. In this study, we apply a machine learning algorithm to non-incumbent (i.e., competitor) auditor views of public companies’ SEC filings to estimate the probability of bidding at the company-year level. We validate our probability estimates using a proprietary sample where all instances of bidding are known. We then investigate the association between the probability of bidding and previously documented measures of auditor competition (i.e., market concentration), audit quality, and audit pricing. Consistent with concerns that market concentration impedes competition, we find that bidding is less likely in industry-concentrated markets. However, contrary to conclusions in the prior literature, we find no evidence that local market concentration is associated with competitive bidding. We also find that bidding is associated with higher quality auditing but does not constrain audit fees.