Joint Audit, Game Theory, and Impairment-Testing Disclosures

Abstract

We examine the consequences on impairment testing disclosures of auditor-pair choice made by French listed companies where two (joint) auditors are required by law. Managers are likely to manipulate impairment-testing disclosures since it relies on unverifiable fair value estimates (e.g., goodwill). From a simple game theory model, we demonstrate that a Big-4 auditor paired with a non-Big 4 auditor increase auditors' incentives to force firms to disclose more because Big 4 auditor fully bears reputation costs. Using a disclosure score for firms composing the French SBF 120 index from 2006 to 2009, we provide evidence that combination of Big 4 / non-Big 4 auditors generate higher impairment-related disclosures levels whereas the other combinations, i.e. two Big 4 or two non-Big 4, tend to decrease the level of impairment-related disclosures. These empirical results are consistent with our model predictions and robust to various controls variables (e.g., size, risk, year and firm fixed effects).

The Benefits and Burden of Joint Audits: Do They Improve Audit Quality?

“…They concluded that a non-Big audit firm cannot replicate an audit conducted by a Big 4 as the later control larger market shares and they retain superior audit technologies, which allow them to perform audit with high quality at relatively lower costs. In addition, other researchers (Marmousez, 2009;Francis and Yu, 2009;Paugam and Casta 2012;Alfaraih and Alanzei 2012;Audousset-Coulier, 2012;Chihi and Mhirsi 2013;Alsadoun and Aljaber 2014;Lobo et al, 2017 andBeck et al, 2019) found that companies audited by two Big 4 audit firms tend to have lower abnormal accruals. Similar results were found by Francis and Yu (2009) who indicated that companies with less ownership structure concentration and lower rates of family ownership are more likely to appoint at least one Big 4 audit firm.…”

“…Such prior studies had a mixed results and findings. Some studies focused on whether joint audit improves or impairs audit quality and some found a positive association between them (Francis and Yu., 2009;Marmousez 2009;Holm and Thinggaard, 2010;Lesage et al 2012 and2017;Alanzei et al, 2012;Paugam and Casta, 2012;Chihi and Mhiris, 2013;Alsadoun and Aljabr, 2014;Deng el al, 2014 andVelte andAzibi, 2015). Other researchers found that the relationship between the joint audit and audit quality is contingent on the type of joint audit regime and the mix of joint auditors appointed (Francis and Yu 2009;Marmousez, 2009;Lesage et al, 2012;Lobo et al, 2013;and Andrѐ et al, 2016).…”

The Effect of Joint Audit on Audit Quality: Empirical Evidence from Companies Listed On the Egyptian Stock Exchange

“…In contrast, most of these studies (Marmousez, 2009;Paugam & Casta, 2012;Chihi & Mhirsi, 2013;Lobo et al, 2013) agree that companies audited by one big 4 auditor paired with one non-big 4 auditor are more conditionally and unconditionally conservative, more likely to record goodwill impairment (Paugam & Casta, 2012;Lobo et al, 2013), and to report abnormal accruals (Marmousez, 2009;Chihi & Mhirsi, 2013;Lobo et al, 2013) than companies audited by two big 4 auditors and companies audited by two non-big 4 auditors. Thus, a pair of big 4 auditor and non-big 4 auditor could result in higher audit quality, as unequal sharing of reputation risks between big and small audit firms could improve auditors' independence and, therefore, is likely to enhance audit quality (Lobo et al, 2013).…”

“…Fourth: Studies that found that the effect of joint audit on audit quality is affected by the mix of joint auditors appointed (Francis et al, 2009;Marmousez, 2009;Paugam & Casta, 2012;Chihi & Mhirsi, 2013;Lobo et al, 2013;Alsadoun & Aljaber, 2014). Some of these studies (Francis et al, 2009;Alsadoun & Aljaber, 2014) found that companies audited by two big 4 auditors tend to have lower abnormal accruals (Francis et al, 2009), lower cost of equity capital (Alsadoun & Aljaber, 2014), and are likely to be more compliant with IFRS-disclosure requirements than companies audited by one big 4 auditor paired with one non-big 4 auditor and companies audited by two non-big 4 auditors.…”

“…However, another stream of research documents that joint audit may result in a higher level of audit quality (Baldauf & Steckel, 2012;Zerni et al, 2012;Benali, 2013;Ittonen & Tronnes, 2015;Relvas & Pais, 2015). Furthermore, another stream of research concluded that the effect of joint audit on audit quality depends on the type of joint audit regimes (Voluntary versus Mandatory joint audit regimes) (Lesage et al, 2012;Alsadoun & Aljaber, 2014;Andre' et al, 2015), and by the mix of joint auditors appointed (two big 4 auditors, or two non-big 4 auditors, or one Big 4 auditor paired with one non-big 4 auditor) (Francis et al, 2009;Marmousez, 2009;Paugam & Casta, 2012;Chihi & Mhirsi, 2013;Lobo et al, 2013;Alsadoun & Aljaber, 2014).…”