The role of audit styles in financial statement comparability: South African evidence

Abstract

This study investigates the role of audit styles at different levels on financial statement comparability in South Africa, a setting where firms report under International Financial Reporting Standards (IFRS), the institutional environment is strong and the audit environment is dominated by the Big 4 audit firms. An output‐based comparability measure is used to consider the association between audit styles at a firm level, audit office level and individual auditor level and financial statement comparability. Evidence of audit style effects on financial statement comparability is found at the three different levels—the audit firm, the audit office and the individual auditor. The study further finds some evidence that audit office style dominates audit firm style and individual auditor style dominates audit office style. This finding suggests that even in countries where internal (within the audit firm) and external (country regulations) control mechanisms are strong, the audit style of the individual auditor is present and associated with increased financial statement comparability. Using a setting where firms report under IFRS further suggests that in a principles‐based environment, despite strong internal controls and in‐house working rules by audit firms, individual auditors continue to have some level of autonomy in the interpretation and application of the accounting principles and in‐house working rules.

Do auditors change their individual style? Examining the effects of client importance and competition on auditors' influence on earnings comparability in China

“…First, our study contributes to the growing body of research that shows higher earnings comparability for client firms that share common individual auditors. This phenomenon was initially documented in China by Chen et al (2020) and has been observed in other international settings as well (Ahn & Sonu, 2021;Smith, 2022). Subsequent studies using the Chinese context have provided additional insights by demonstrating that individual auditor style is persistent over time (Li et al, 2021) and is influenced by auditor personal traits such as education and experience (Jiu et al, 2020;Shi et al, 2021).…”

“…Given that our study utilizes the unique characteristics of the Chinese audit market, our paper is subject to the usual caveat that our findings may not be generalizable to other audit markets. Prior studies (e.g., Ahn & Sonu, 2021;Smith, 2022) find the presence of individual auditor style in countries such as South Korea and South Africa. We leave it to future research to investigate whether economic bonding affect individual auditor style, as reflected as earnings comparability of client firms, in these international settings.…”

“…The closeness of two firms' reported earnings is due to the consistency with which accounting standards are applied across client firms by the same individual auditor exercising his or her own judgement and decision‐making during the audit engagement (Nelson & Tan, 2005). Recent studies (Ahn & Sonu, 2021; Chen et al, 2020; Jiu et al, 2020; Li et al, 2021; Shi et al, 2021; Smith, 2022) find individual auditors display an individual style by having a significant impact on client firms' earnings comparability that is incremental to audit firm style arising from each firm's unique audit approaches and internal working rules. Specially, Chen et al (2020) find that the effect is more pronounced for larger audit firms and signing auditors that are more senior and have more teamwork experience 6 .…”

“…If individual audit partners exercise their own autonomy consistently when interpreting, implementing, and enforcing the internal working rules across their client firms, this could lead to individual auditors displaying a style of their own that is incremental to the audit firm style that arises from each audit firm's standardized audit methodology. While prior studies (e.g., Gul et al, 2013, among others) find the individual engagement partners are systematically linked to audit quality and audit fees, recent studies document that two client firms audited by the same individual auditors have more comparable earnings than two client firms audited by different individual auditors within the same audit firm, suggesting the presence of individual auditor style in China (Chen et al, 2020; Jiu et al, 2020; Li et al, 2021; Shi et al, 2021) and other international settings (Ahn & Sonu, 2021; Smith, 2022). 2…”

“…To mitigate concerns about nonrandom selection of client firms by audit firms and partners in recent studies on individual auditor style (Ahn & Sonu, 2021; Chen et al, 2020; Jiu et al, 2020; Li et al, 2021; Shi et al, 2021; Smith, 2022), we adopt a propensity score matching (PSM) approach and a one‐to‐one matched sample in all our analyses to address issues of endogeneity and sample skewness. Unlike prior studies, which only require a common signing auditor in both client firms to classify the firm pair as having the same auditor (e.g., Chen et al, 2020), we use a more stringent criterion of requiring both client firms to have identical audit teams (i.e., the same set of engagement partner and review partner) to minimize the impact of team dynamics on earnings comparability.…”