Mara Cameran

Mandatory Audit Firm Rotation and Audit Quality

Abstract In a setting where mandatory audit firm rotation has been effective for more than 20 years (i.e. Italy), we analyse changes in audit quality during the auditor engagement period. In our research setting, auditors are appointed for a three-year period and their term can be renewed twice up to a maximum of nine years. Since the auditor has incentives to be re-appointed at the end of the first and the second three-year periods, we expect audit quality to be lower in the first two three-year periods compared to the third (i.e. the last) term. Assuming that a better audit quality is associated with a higher level of accounting conservatism, and using abnormal working capital accruals as a proxy for the latter, we find that the auditor becomes more conservative in the last three-year period, i.e. the one preceding the mandatory rotation. These results are confirmed using Basus [1997. The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3–37] timely loss recognition model. In an additional analysis, we use earnings response coefficients as a proxy for investor perception of audit quality, and we observe results consistent with an increase in audit quality perception in the last engagement period.

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.

Audit Fees and IAS/IFRS Adoption: Evidence from the Banking Industry

The adoption of International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) has two opposite effects on audit fees: on the one hand, greater effort is required from auditors, which is likely to be reflected by higher fees; on the other hand, if IAS/IFRS improve the quality of financial reporting, expected liability costs could decrease and lower fees may be demanded. We consider a large sample of Italian banks and we examine the effect of IAS/IFRS adoption on audit fees. The results show that higher fees (19.29 per cent in real terms) are paid after the switch to the new standards. Using a standard earnings management model, we do not find support for the idea that financial reporting quality is affected by the adoption of IAS/IFRS. The observed increase in fees is positively associated with the presence of financial derivatives held for hedging purposes. This paper extends the findings of prior research on the effect of IAS/IFRS adoption on audit fees; contrary to prior contributions, our analysis concentrates on the banking industry. Furthermore, unlike prior works, we consider both listed and non-listed firms.

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.

Audit team attributes matter: how diversity affects audit quality

Abstract How audit teams are structured and function plays a crucial role in determining the level of audit service quality. Despite this claim, little empirical research has been conducted on this effect. Using private data from two of the Big 4 audit firms, we fill this gap and document how diversity of audit teams influences audit quality. By combining the existing work in psychology and sociology with that in auditing, we develop our model by arguing that teams are composed not simply of single auditors but of sub-teams of individuals whose various combinations affect team performance. Starting from this premise, we study how the diversity of audit teams in terms of the different mix of work assigned to staff, seniors, managers, and partners influences audit quality and how this effect varies depending upon years of tenure. We also show that the proportion of leading auditors characterized by a common educational background and the percentage of female leading auditors affect audit quality. As an additional analysis, we examine how team diversity affects audit efficiency. The same elements found relevant for audit quality also affect audit efficiency.

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.