Effect of audit quality and accounting and finance backgrounds of audit committee members on firms’ compliance with IFRS for goodwill impairment testing

Abstract

Purpose – The purpose of this paper is to examine the effect of audit quality on firms’ compliance with IFRS for goodwill impairment testing and disclosure. Differences in the compliance among the clients of Big-4 auditors and between the clients of Big-4 and non-Big-4 auditors are examined. This study also examines the effect of audit committee (AC) members’ accounting and finance backgrounds on firms’ compliance with IFRS for goodwill impairment testing and disclosure. Design/methodology/approach – Different univariate tests, multivariate regressions and fixed effect panel regressions have been used to examine the hypotheses. The sample includes 911 firm-year observations for the period of 2006-2009. Findings – A statistically significant difference in compliance levels has been found between the clients of Big-4 and non-Big-4 auditors. The compliance levels of the clients of Big-4 auditors have also been found to be significantly different. The findings also suggest that AC members’ accounting and finance backgrounds are positively associated with firms’ compliance with IFRS for goodwill impairment testing and disclosure. Research limitations/implications – The single country context and the single standard context limit the generalizability of the findings. Practical implications – The findings of this study have important implications for researches in accounting, finance and corporate governance that usually consider Big-4 auditors vs non-Big-4 auditors as a proxy for audit quality. The results also reinforce the importance of developing institutional mechanisms such as high-quality auditing or corporate governance (AC members’ expertise) to encourage firms’ compliance with IFRS. Originality/value – Firms’ compliance with IFRS for goodwill impairment testing is not essentially the same for the clients of all Big-4 auditors in Australia, suggesting that the quality of services provided by Big-4 auditors significantly differ from one another in enforcing their clients to compliance with IFRS. The lax enforcement on the part of auditors and the regulatory inaction in this regard may point to teething difficulties and systematic deficiencies in the move towards the impairment regime and fair value accounting. The findings also bear an important message for the move towards the harmonization of accounting practices.

Introducing More IFRS Principles of Disclosure – Will the Poor Disclosers Improve?

“…The second category, pertaining to specific areas, includes studies of business combination and goodwill impairment test disclosures in Europe (Glaum, Schmidt, Street, & Vogel, 2013;Mazzi et al, 2017), Australia (Bepari & Mollik, 2015;Bepari, Rahman, & Taher, 2014;Guthrie & Pang, 2013), Singapore (Carlin, Finch, & Khairi, 2010), the Netherlands and Sweden (Hartwig, 2015); studies of financial instrument disclosures in Italy (Maffei, Aria, Fiondella, Spanò, & Zagaria, 2014), Portugal (Lopes & Rodrigues, 2007), the UK (Linsley & Shrives, 2006;Woods & Marginson, 2004), the US (Lu & Mande, 2014) and in European banks (Bischof, 2009 ); studies of segment disclosures in global IAS-adopter samples, primarily European (Prather-Kinsey & Meek, 2004;Street & Nichols, 2002), 8 Germany (Franzen & Weißenberger, 2015), the US (Chen & Liao, 2015); studies of disclosure compliance in relation to financial statement presentation disclosures in the UK (Iatridis & Valahi, 2010); share-based payment and executive compensation disclosures in Australia (Bassett, Koh, & Tutticci, 2007), France (Goh, Joos, & Soonawalla, 2016) and the US (Robinson, Xue, & Yu, 2011); contingent liabilities in the US (Hennes, 2014) and intangible assets in Italy (Devalle, Rizzato, & Busso, 2016).…”

“…Building on the results reported by Bepari et al (2014), Bepari and Mollik (2015) focus on audit quality differences by separating clients of Big-4 from non-Big-4 auditors and also take into account the potential effect of AC members' accounting and finance background. In this second study, the sample is larger and covers the period 2006-2009 and the authors conclude that there are significant differences in compliance when comparing Big-4 and Non-Big-4 clients and that the accounting and finance background of the members of the AC has a positive influence on compliance with goodwill impairment testing disclosure requirements.…”

The Impact of Audit Quality Indicators on the Timeliness of Goodwill Impairments: Evidence from the German Setting

“…This also represents a different way to investigate the role of auditors in improving financing reporting quality, and therefore complements the accounting literature on audit quality. Prior studies have assessed the impact of joint auditor pairs on impairment recognition in France (Lobo et al, 2017) and audit firm size on the compliance of impairment testing disclosures in Australia (Bepari and Mollik, 2015), as well as audit firm size and auditor industry specialization on the analyst forecast accuracy/ dispersion associated with goodwill impairments (Chen et al, 2015). In contrast, this study explicitly addresses the timeliness of goodwill impairments and focuses on several auditor characteristics, therefore providing a more in-depth analysis of audit quality factors.…”

The Influence of Earnings Management and Tax Planning on Firm Value with Audit Quality as Moderating Variable

“…Tax Planning have a negative influence on Firm Value 2.2.3 Audit Quality influence on Firm Value Audit quality is a situation where the company has been audited by the procedure well and credible independent parties. With audit quality, investors have high confidence to company information, it can increase the value of the company (Alzoubi, 2018;Hua et al, 2016;Alfraih, 2016;Bepari & Mollik, 2015;Afza & Nazir, 2014). Then the hypothesis of this study is: Hypothesis 3: Audit Quality have a positive influence on Firm Value 2.2.4 Audit Quality, Earnings Management and Firm Value Quality audit especially by independent auditors who make reliable financial reports, because they are free from the interests needed by Management.…”

“…At this stage, the role of auditors is necessary for investors to get their rights in receiving financial information company (Almutairi et al, 2009). By functioning as a controller, auditor qualified to suppress acts of earnings management by the company (Alhadab & Clacher, 2018;Asthana, 2014;Prawitt et al, 2009;Alzoubi, 2016;Huguet & Gandia, 2016;Rusmin, 2010;Rusmin et al, 2014;Zgarni et al, 2016) are also tax planning actions (Lin et al, 2012) resulting in the quality of financial statements (Alzoubi, 2018) according to regulations (Bepari, 2015) and have a good impact on performance (Hua et al, 2016) and firm value (Afza, 2014;Houmes et al, 2013;Khan et al, 2016),…”