IDEAS home Printed from https://ideas.repec.org/p/ant/wpaper/2023007.html
   My bibliography  Save this paper

European evidence on the effects of audit office changes on clients' financial reporting quality

Author

Listed:
  • AYOUB, Maysam

Abstract

Prior research suggests that the financial reporting quality may be influenced by audit office-level characteristics. Yet, many factors are likely to influence whether within-firm office changes result in a positive or negative association with reporting quality. When clients switch to a different office within the same audit firm, they can potentially benefit from fresh perspectives and insights from the new audit team and partners. On the contrary, this transition may compromise the quality of the audit due to a decline in the team’s understanding of the client’s specific needs and the initial cost pressures required for the new team to prepare for the new assignment. Nevertheless, the ability of an audit office to provide a high-quality audit depends partly on how it relates to the network of offices in which it operates. Considering that changes in offices within the same audit firm reflect a challenge in efficiently allocating audit resources, we investigate whether there is a decline in financial reporting quality when a client changes to a different audit office within the same firm. We also examine whether teams from more connected offices are more capable of managing the transition and preserving reporting quality. Contrary to expectations, our analysis did not reveal any indication of a decline in financial reporting quality in a European context, and we did not find evidence that the adverse impact of changes in audit offices within the same firm, if any, on financial reporting quality lessens with greater network connectedness. Further, the additional testing results demonstrate that alterations in the auditor-client distance, as well as office upsizing, downsizing, upgrading, or downgrading of specialization, do not lead to a deterioration in financial reporting quality

Suggested Citation

  • AYOUB, Maysam, 2023. "European evidence on the effects of audit office changes on clients' financial reporting quality," Working Papers 2023007, University of Antwerp, Faculty of Business and Economics.
    • Handle: RePEc:ant:wpaper:2023007
    as

    Download full text from publisher

    File URL: https://repository.uantwerpen.be/docstore/d:irua:17651
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Chaney, Paul K. & Faccio, Mara & Parsley, David, 2011. "The quality of accounting information in politically connected firms," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 58-76, February.
    2. Francis, J & Philbrick, D & Schipper, K, 1994. "Shareholder Litigation And Corporate Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 137-164.
    3. Connie L. Becker & Mark L. Defond & James Jiambalvo & K.R. Subramanyam, 1998. "The Effect of Audit Quality on Earnings Management," Contemporary Accounting Research, John Wiley & Sons, vol. 15(1), pages 1-24, March.
    4. Clive S. Lennox, 1999. "Audit Quality and Auditor Size: An Evaluation of Reputation and Deep Pockets Hypotheses," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(7&8), pages 779-805.
    5. DeFond, Mark L. & Jiambalvo, James, 1994. "Debt covenant violation and manipulation of accruals," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 145-176, January.
    6. Beck, Matthew J. & Gunn, Joshua L. & Hallman, Nicholas, 2019. "The geographic decentralization of audit firms and audit quality," Journal of Accounting and Economics, Elsevier, vol. 68(1).
    7. Gopal V. Krishnan, 2005. "Did Houston Clients of Arthur Andersen Recognize Publicly Available Bad News in a Timely Fashion?," Contemporary Accounting Research, John Wiley & Sons, vol. 22(1), pages 165-193, March.
    8. Francis, Jere R., 2004. "What do we know about audit quality?," The British Accounting Review, Elsevier, vol. 36(4), pages 345-368.
    9. E. Johnson & Inder K. Khurana & J. Kenneth Reynolds, 2002. "Audit†Firm Tenure and the Quality of Financial Reports," Contemporary Accounting Research, John Wiley & Sons, vol. 19(4), pages 637-660, December.
    10. Heidi Vander Bauwhede & Marleen Willekens, 2004. "Evidence on (the lack of) audit-quality differentiation in the private client segment of the belgian audit market," European Accounting Review, Taylor & Francis Journals, vol. 13(3), pages 501-522.
    11. Matthew J. Beck & Jere R. Francis & Joshua L. Gunn, 2018. "Public Company Audits and City‐Specific Labor Characteristics," Contemporary Accounting Research, John Wiley & Sons, vol. 35(1), pages 394-433, March.
    12. Clive S. Lennox, 1999. "Audit Quality and Auditor Size: An Evaluation of Reputation and Deep Pockets Hypotheses," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(7‐8), pages 779-805, September.
    13. Reynolds, J. Kenneth & Francis, Jere R., 2000. "Does size matter? The influence of large clients on office-level auditor reporting decisions," Journal of Accounting and Economics, Elsevier, vol. 30(3), pages 375-400, December.
    14. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    15. Johnson, Marilyn F. & Nelson, Karen K. & Frankel, Richard M., 2002. "The Relation Between Auditor's Fees for Non-audit Services and Earnings Quality," Research Papers 1696r, Stanford University, Graduate School of Business.
    Full references (including those not matched with items on IDEAS)

    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. Dusica STEVCEVSKA SRBINOSKA, 2022. "Audit modifications in emerging markets: The Macedonian Stock Exchange," Romanian Journal of Economics, Institute of National Economy, vol. 55(2(64)), pages 43-69, December.
    2. Mohamed Khalil & Aydin Ozkan, 2016. "Board Independence, Audit Quality and Earnings Management: Evidence from Egypt," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 15(1), pages 84-118, April.
    3. Daniela Hohenfels & Reiner Quick, 2020. "Non-audit services and audit quality: evidence from Germany," Review of Managerial Science, Springer, vol. 14(5), pages 959-1007, October.
    4. Neal Arthur & Medhat Endrawes & Shawn Ho, 2017. "Impact of Partner Change on Audit Quality: An Analysis of Partner and Firm Specialisation Effects," Australian Accounting Review, CPA Australia, vol. 27(4), pages 368-381, December.
    5. Steve Fortin & Jeffrey A. Pittman, 2007. "The Role of Auditor Choice in Debt Pricing in Private Firms," Contemporary Accounting Research, John Wiley & Sons, vol. 24(3), pages 859-896, September.
    6. Jeroen van Raak & Erik Peek & Roger Meuwissen & Caren Schelleman, 2020. "The effect of audit market structure on audit quality and audit pricing in the private‐client market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(3-4), pages 456-488, March.
    7. Xingqiang Du, 2019. "Does CEO-Auditor Dialect Sharing Impair Pre-IPO Audit Quality? Evidence from China," Journal of Business Ethics, Springer, vol. 156(3), pages 699-735, May.
    8. Kharuddin, Khairul Ayuni Mohd & Basioudis, Ilias G & Farooque, Omar Al, 2021. "Effects of the Big 4 national and city-level industry expertise on audit quality in the United Kingdom," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 43(C).
    9. Tsipouridou, Maria & Spathis, Charalambos, 2012. "Earnings management and the role of auditors in an unusual IFRS context: The case of Greece," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 21(1), pages 62-78.
    10. Xingqiang Du & Xu Li & Xuejiao Liu & Shaojuan Lai, 2018. "Underwriter–Auditor Relationship and Pre-IPO Earnings Management: Evidence from China," Journal of Business Ethics, Springer, vol. 152(2), pages 365-392, October.
    11. Nitai Chandra Debnath & Suman Paul Chowdhury & Safaeduzzaman Khan, 2022. "The impact of audit quality on real earnings management: evidence from Bangladesh," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(2), pages 218-231, June.
    12. Benjamin T. Albersmann & Daniela Hohenfels, 2017. "Audit Committees and Earnings Management – Evidence from the German Two-Tier Board System," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 18(2), pages 147-178, May.
    13. Tsipouridou, Maria & Spathis, Charalambos, 2014. "Audit opinion and earnings management: Evidence from Greece," Accounting forum, Elsevier, vol. 38(1), pages 38-54.
    14. Jin Suk Heo & Soo Young Kwon & Hun‐Tong Tan, 2021. "Auditors' Responses to Workload Imbalance and the Impact on Audit Quality," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 338-375, March.
    15. Francis, Jere R., 2004. "What do we know about audit quality?," The British Accounting Review, Elsevier, vol. 36(4), pages 345-368.
    16. Seyed Mahmoud Hosseinniakani & Helena Inacio & Rui Mota, 2014. "A Review on Audit Quality Factors," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(2), pages 243-254, April.
    17. Johnson, Elizabeth & Reichelt, Kenneth J. & Soileau, Jared S., 2018. "No news is bad news: Do PCAOB part II reports have an effect on annually inspected firms’ audit fees and audit quality?," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 106-126.
    18. Lin, Hsiao-Lun & Yen, Ai-Ru, 2022. "Auditor rotation, key audit matter disclosures, and financial reporting quality," Advances in accounting, Elsevier, vol. 57(C).
    19. Mohamed Khalil & Sandy Harianto & Yilmaz Guney, 2022. "Do political connections reduce earnings management?," Review of Quantitative Finance and Accounting, Springer, vol. 59(1), pages 273-310, July.
    20. Matthew Notbohm & Katherine Campbell & Adam R. Smedema & Tianming Zhang, 2019. "Management’s personal ideology and financial reporting quality," Review of Quantitative Finance and Accounting, Springer, vol. 52(2), pages 521-571, February.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:ant:wpaper:2023007. 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: Joeri Nys (email available below). General contact details of provider: https://edirc.repec.org/data/ftufsbe.html .

    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.