Long-Term Impact of Economic Conditions on Auditors' Judgment

He, Xianjie; Kothari, S.P.; Xiao, Tusheng; Zuo, Luo

doi:10.2308/accr-52009

Cited by 100 publications

(76 citation statements)

References 72 publications

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“…Misstatements happen for 6.93 percent of all the client-year observations, and 6.66 percent of observations receive a modified audit opinion. The relatively low frequency of these two outcomes are consistent with prior research (He, Kothari, Xiao and Zuo 2018). 57 percent of observations belong to the post-merger period, and 18 percent of observations belong to the treatment group.…”

Section: 2research Designsupporting

confidence: 86%

“…8 In the above simple example, firm B's clients in the mining industry belong to the treatment group, while all other clients belong to the control group. 9 We employ a difference-in-difference approach and examine whether the audit quality for the treatment group improves after the merger (three-year post-merger versus three-year pre- 7 The existence of individual heterogeneity within the same audit firm is well documented in prior research (e.g., Libby 1981;Bonner and Lewis 1990;Libby and Tan 1994;Gibbins and Swieringa 1995;Bonner 2008;Nelson 2009;Gul, Wu and Yang 2013;Aobdia, Lin and Petacchi 2015;Ke, Lennox and Xin 2015;Knechel, Vanstraelen, and Zerni 2015;Li, Qi, Tian and Zhang 2017;He, Kothari, Xiao and Zuo 2018;Lennox and Wu 2018). 8 Archival auditing research commonly uses industry market share to measure expertise and generally finds consistent evidence (DeFond and Zhang 2014).…”

Section: Introductionmentioning

confidence: 99%

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Knowledge Transfer in Audit Firms

Kothari

Xiao

et al. 2018

SSRN Journal

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We utilize the setting of the rapid audit market consolidation in China over the past twenty years to study knowledge transfer in audit firms. We employ a difference-indifference approach and examine whether industry-specific knowledge transfer occurs after a merger of two audit firms with different levels of expertise in a particular industry. For clients in an industry audited by both merging audit firms, those audited by the less competent audit firm in that industry belong to the treatment group, while all other clients belong to the control group. Consistent with the existence of knowledge transfer, we find an economically significant improvement in audit quality (as reflected in a reduction in misstatements and an increase in modified audit opinions) for the treatment group relative to the control group in the same merged audit firm.

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Section: 2research Designsupporting

confidence: 86%

Section: Introductionmentioning

confidence: 99%

Knowledge Transfer in Audit Firms

Kothari

Xiao

et al. 2018

SSRN Journal

Self Cite

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“…The auditor's report in China is signed by an engagement auditor, who directs the audit in the field, and a review auditor, who oversees the job with ultimate authority and responsibility (Chinese Ministry of Finance 2001; Chen et al 2016). The review auditor is usually more senior and experienced than the engagement auditor (Lennox et al 2014;He et al 2018). The signature of the review auditor is placed above that of the engagement auditor, thus allowing us to identify the two roles.…”

Section: Auditor Narcissismmentioning

confidence: 99%

The Role of Auditor Narcissism in Auditor‐Client Negotiations: Evidence from China

Church

Dai

Kuang

et al. 2020

Contemporary Accting Res

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This paper reports the results of three studies (archival, experimental, and qualitative) designed to examine the effects of auditor narcissism on auditor‐client negotiations in China. We contend that narcissistic characteristics fuel auditors' competitiveness and embolden them to stand firm in negotiations, potentially lengthening the negotiation process but leading to more conservative negotiation outcomes. As predicted, our archival results suggest that auditor narcissism is positively associated with audit delay and negatively associated with clients' absolute and positive discretionary accruals. Our experimental results document that narcissistic auditors are more likely to be involved in negotiations that reach an impasse or take longer to resolve and that narcissistic auditors negotiate reported asset values that reflect less aggressive reporting choices. Our qualitative results from field interviews with practicing audit partners corroborate our archival and experimental findings. Overall, the data collected using three different research methods yield consistent results in support of our theory. Our findings shed light on factors that influence audit efficiency and quality in China. We discuss the key cultural and contextual differences between China and the West as well as the implications of these differences for future research.

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“…The recent literature also shows individual auditors with different styles exert their own influences on audit outcomes (Lennox and Wu [2018]). We expect that, at the firm level, larger audit firms are likely to be more responsive to rich listings because they have more to lose in case of audit failures (DeAngelo [1981]); at the individual level, engagement auditors with more conservative styles will be more sensitive to rich listings because partners that are inherently conservative will be alert to any audit-risk increase (He et al [2018]). Being more sensitive to risks, an audit firm or engagement auditor may choose stringent audit reporting, sound audit pricing, or a combination of both.…”

Section: Cross-sectional Variation In the Effects Of Rich Listingsmentioning

confidence: 99%

Public Attention and Auditor Behavior: The Case ofHurun Rich Listin China

Qing

2020

J of Accounting Research

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Adverse client publicity can entail regulatory scrutiny over audited financial statements and impose political costs on auditors. We use the changes in client publicity caused by their controlling owners' presence on the Hurun Rich List (the rich listing) in China to test the hypothesis that auditor conservatism increases with client publicity. Our evidence indicates auditors issue more adverse audit opinions to clients and charge higher fees following the rich listing events. Moreover, we observe that auditors strategically respond to clients with different attributes-for clients whose owners accumulated wealth in a more questionable manner, auditors choose more stringent audit reporting to better defend themselves from regulatory scrutiny; for clients without such attributes, auditors primarily rely on increasing audit fees to cope with any post-listing increase in audit risks. Our analyses also suggest the impacts of rich listings tend to be concentrated among large audit firms with stronger reputation concerns or among engagement auditors with more conservative reporting styles. By showing how auditors manage political risks associated with heightened public scrutiny, we contribute to both the auditing and political cost literature. JEL codes: D72; L82; L84; M42

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Long-Term Impact of Economic Conditions on Auditors' Judgment

Cited by 100 publications

References 72 publications

Knowledge Transfer in Audit Firms

Knowledge Transfer in Audit Firms

The Role of Auditor Narcissism in Auditor‐Client Negotiations: Evidence from China

Public Attention and Auditor Behavior: The Case ofHurun Rich Listin China

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