IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v58y2014i2p327-338.html
   My bibliography  Save this article

Issues raised by studying DeFond and Zhang: What should audit researchers do?

Author

Listed:
  • Donovan, John
  • Frankel, Richard
  • Lee, Joshua
  • Martin, Xiumin
  • Seo, Hojun

Abstract

We view audit-quality choice as one among many that managers make to maximize firm value. We question whether audit-quality differences among publicly traded companies are of significant interest to investors, clients, and auditors and ask for research on this topic. Relatedly, we ask for research on whether auditors and their clients show behavior consistent with regulated audit quality exceeding the audit quality level demanded absent regulation. We propose that researchers incorporate the competitive advantages of auditors and the institutional features of the audit process into the definition of audit quality. We propose that audit quality research test for externalities and inefficiencies to understand whether auditors and their clients are choosing the efficient level of audit quality. We note the legislative, judicial, and executive powers residing in the PCAOB.

Suggested Citation

  • Donovan, John & Frankel, Richard & Lee, Joshua & Martin, Xiumin & Seo, Hojun, 2014. "Issues raised by studying DeFond and Zhang: What should audit researchers do?," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 327-338.
    • Handle: RePEc:eee:jaecon:v:58:y:2014:i:2:p:327-338
    DOI: 10.1016/j.jacceco.2014.09.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165410114000512
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jacceco.2014.09.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Joseph Weber & Michael Willenborg & Jieying Zhang, 2008. "Does Auditor Reputation Matter? The Case of KPMG Germany and ComROAD AG," Journal of Accounting Research, Wiley Blackwell, vol. 46(4), pages 941-972, September.
    2. Edward L. Glaeser & Andrei Shleifer, 2003. "The Rise of the Regulatory State," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 401-425, June.
    3. Andrei Shleifer, 2010. "Efficient Regulation," NBER Chapters, in: Regulation vs. Litigation: Perspectives from Economics and Law, pages 27-43, National Bureau of Economic Research, Inc.
    4. Paul A. Copley & Edward B. Douthett, 2009. "Are Assurance Services Provided by Auditors on Initial Public Offerings Influenced by Market Conditions?," Contemporary Accounting Research, John Wiley & Sons, vol. 26(2), pages 453-476, June.
    5. Kennedy, J & Peecher, ME, 1997. "Judging auditors' technical knowledge," Journal of Accounting Research, Wiley Blackwell, vol. 35(2), pages 279-293.
    6. Mcdaniel, Ls & Kinney, Wr, 1995. "Expectation-Formation Guidance In The Auditors Review Of Interim Financial Information," Journal of Accounting Research, Wiley Blackwell, vol. 33(1), pages 59-76.
    7. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    8. Paul G. Mahoney, 2009. "The Development of Securities Law in the United States," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 325-347, May.
    9. Datar, Srikant M. & Feltham, Gerald A. & Hughes, John S., 1991. "The role of audits and audit quality in valuing new issues," Journal of Accounting and Economics, Elsevier, vol. 14(1), pages 3-49, March.
    10. Ray Ball, 2009. "Market and Political/Regulatory Perspectives on the Recent Accounting Scandals," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 277-323, May.
    11. Admati, Anat R & Pfleiderer, Paul, 2000. "Forcing Firms to Talk: Financial Disclosure Regulation and Externalities," The Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 479-519.
    12. Alexander Dyck & Adair Morse & Luigi Zingales, 2010. "Who Blows the Whistle on Corporate Fraud?," Journal of Finance, American Finance Association, vol. 65(6), pages 2213-2253, December.
    13. Antle, R, 1982. "The Auditor As An Economic Agent," Journal of Accounting Research, Wiley Blackwell, vol. 20(2), pages 503-527.
    14. Ball, Ray & Jayaraman, Sudarshan & Shivakumar, Lakshmanan, 2012. "Audited financial reporting and voluntary disclosure as complements: A test of the Confirmation Hypothesis," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 136-166.
    15. Robin Greenwood & David Scharfstein, 2013. "The Growth of Finance," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 3-28, Spring.
    16. Michael Minnis, 2011. "The Value of Financial Statement Verification in Debt Financing: Evidence from Private U.S. Firms," Journal of Accounting Research, Wiley Blackwell, vol. 49(2), pages 457-506, May.
    17. Lambert, Richard, 2010. "Discussion of "Implications for GAAP from an analysis of positive research in accounting"," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 287-295, December.
    18. Srivastava, Anup, 2014. "Why have measures of earnings quality changed over time?," Journal of Accounting and Economics, Elsevier, vol. 57(2), pages 196-217.
    19. Holger Daske & Luzi Hail & Christian Leuz & Rodrigo Verdi, 2013. "Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions," Journal of Accounting Research, Wiley Blackwell, vol. 51(3), pages 495-547, June.
    20. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    21. Coase, R H, 1974. "The Lighthouse in Economics," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 357-376, October.
    22. DeFond, Mark & Hu, Xuesong & Hung, Mingyi & Li, Siqi, 2011. "The impact of mandatory IFRS adoption on foreign mutual fund ownership: The role of comparability," Journal of Accounting and Economics, Elsevier, vol. 51(3), pages 240-258, April.
    23. Christensen, Hans B. & Hail, Luzi & Leuz, Christian, 2013. "Mandatory IFRS reporting and changes in enforcement," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 147-177.
    24. Peltzman, Sam, 1975. "The Effects of Automobile Safety Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 677-725, August.
    25. Joshua D. Angrist & Kathryn Graddy & Guido W. Imbens, 2000. "The Interpretation of Instrumental Variables Estimators in Simultaneous Equations Models with an Application to the Demand for Fish," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(3), pages 499-527.
    26. repec:ucp:bkecon:9780226320625 is not listed on IDEAS
    27. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    28. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    29. Raghuram G. Rajan, 2006. "Has Finance Made the World Riskier?," European Financial Management, European Financial Management Association, vol. 12(4), pages 499-533, September.
    30. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    31. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shivaram Rajgopal & Suraj Srinivasan & Xin Zheng, 2021. "Measuring audit quality," Review of Accounting Studies, Springer, vol. 26(2), pages 559-619, June.
    2. Daniel Aobdia & Luminita Enache & Anup Srivastava, 2021. "Changes in Big N auditors’ client selection and retention strategies over time," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 715-754, February.
    3. Matthias Breuer, 2021. "How Does Financial‐Reporting Regulation Affect Industry‐Wide Resource Allocation?," Journal of Accounting Research, Wiley Blackwell, vol. 59(1), pages 59-110, March.
    4. Christensen, Brant & Lei, Lijun (Gillian) & Shu, Sydney Qing & Thomas, Wayne, 2023. "Does audit regulation improve the underlying information used by managers? Evidence from PCAOB inspection access and management forecast accuracy," Accounting, Organizations and Society, Elsevier, vol. 106(C).
    5. Dong Drew Li & Wenguang Lin & Pei-Yu Sun & Yunshu Tang & Zheng Cheng, 2024. "Breaking the Big Four brand’s halo effect precisely: evidence from the association between RMM coverage ratios and integrated audit effectiveness," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1291-1328, April.
    6. Marcus M. Doxey & James G. Lawson & Thomas J. Lopez & Quinn T. Swanquist, 2021. "Do Investors Care Who Did the Audit? Evidence from Form AP," Journal of Accounting Research, Wiley Blackwell, vol. 59(5), pages 1741-1782, December.
    7. Murali Jagannathan & Srinivasan Krishnamurthy & Joshua Spizman, 2021. "Board committees and director departures," The Financial Review, Eastern Finance Association, vol. 56(4), pages 619-644, November.
    8. Aobdia, Daniel & Shroff, Nemit, 2017. "Regulatory oversight and auditor market share," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 262-287.
    9. Ege, Matthew & Knechel, W. Robert & Lamoreaux, Phillip T. & Maksymov, Eldar, 2020. "A multi-method analysis of the PCAOB’s relationship with the audit profession," Accounting, Organizations and Society, Elsevier, vol. 84(C).
    10. Dan Dhaliwal & Paul N. Michas & Vic Naiker & Divesh Sharma, 2020. "Greater Reliance on Major Customers and Auditor Going‐Concern Opinions," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 160-188, March.
    11. Samagaio, Antonio & Rodrigues, Ricardo, 2016. "Human capital and performance in young audit firms," Journal of Business Research, Elsevier, vol. 69(11), pages 5354-5359.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ormazabal, Gaizka, 2018. "The Role of Stakeholders in Corporate Governance: A View from Accounting Research," CEPR Discussion Papers 12775, C.E.P.R. Discussion Papers.
    2. Michael Minnis & Nemit Shroff, 2017. "Why regulate private firm disclosure and auditing?," Accounting and Business Research, Taylor & Francis Journals, vol. 47(5), pages 473-502, July.
    3. Benito Arruñada, 2011. "Mandatory accounting disclosure by small private companies," European Journal of Law and Economics, Springer, vol. 32(3), pages 377-413, December.
    4. Christian Leuz & Peter D. Wysocki, 2016. "The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 525-622, May.
    5. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    6. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    7. Liu, Tingting & Liu, Yu & Ullah, Barkat & Wei, Zuobao & Xu, Lixin Colin, 2021. "The dark side of transparency in developing countries: The link between financial reporting practices and corruption," Journal of Corporate Finance, Elsevier, vol. 66(C).
    8. Jeong-Bon Kim & Mikhail Pevzner & Xiangang Xin, 2019. "Foreign institutional ownership and auditor choice: Evidence from worldwide institutional ownership," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(1), pages 83-110, February.
    9. Xianjie He & Jeffrey Pittman & Oliver Rui, 2016. "Reputational Implications for Partners After a Major Audit Failure: Evidence from China," Journal of Business Ethics, Springer, vol. 138(4), pages 703-722, November.
    10. Robert M. Bushman & Regina Wittenberg‐Moerman, 2012. "The Role of Bank Reputation in “Certifying” Future Performance Implications of Borrowers’ Accounting Numbers," Journal of Accounting Research, Wiley Blackwell, vol. 50(4), pages 883-930, September.
    11. Baylis, Richard M. & Burnap, Peter & Clatworthy, Mark A. & Gad, Mahmoud A. & Pong, Christopher K.M., 2017. "Private lenders’ demand for audit," Journal of Accounting and Economics, Elsevier, vol. 64(1), pages 78-97.
    12. De George, Emmanuel T. & Li, Xi & Shivakumar, Lakshmanan, 2016. "A review of the IFRS adoption literature," LSE Research Online Documents on Economics 67599, London School of Economics and Political Science, LSE Library.
    13. Pantic, B., 2016. "Comparability of financial reports: A literature review of most recent studies," Working Papers 6451, Graduate School of Management, St. Petersburg State University.
    14. Emmanuel T. De George & Xi Li & Lakshmanan Shivakumar, 2016. "A review of the IFRS adoption literature," Review of Accounting Studies, Springer, vol. 21(3), pages 898-1004, September.
    15. Marinovic, Iván & Sridhar, Sri S., 2015. "Discretionary disclosures using a certifier," Journal of Accounting and Economics, Elsevier, vol. 59(1), pages 25-40.
    16. J.A. den Hertog, 2010. "Review of economic theories of regulation," Working Papers 10-18, Utrecht School of Economics.
    17. Élodie Bertrand, 2006. "La thèse d'efficience du « théorème de Coase ». Quelle critique de la microéconomie ?," Revue économique, Presses de Sciences-Po, vol. 57(5), pages 983-1007.
    18. Nicola Gennaioli & Giacomo A. M. Ponzetto, 2015. "Optimally vague contracts and the law," Economics Working Papers 1410, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2017.
    19. Lars Hornuf & Matthias Schmitt & Eliza Stenzhorn, 2020. "Does a Local Bias Exist in Equity Crowdfunding?," CESifo Working Paper Series 8154, CESifo.
    20. Clarkson, Peter & Gao, Ru & Herbohn, Kathleen, 2020. "The relationship between a firm’s information environment and its cash holding decision," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(2).

    More about this item

    Keywords

    Auditors; Audit quality; Regulatory intervention; PCAOB;
    All these keywords.

    JEL classification:

    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:58:y:2014:i:2:p:327-338. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jae .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.