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Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

We examine whether the media has an indirect corporate governance effect on financial reporting quality (FRQ) that operates through auditors. This occurs because greater media coverage can magnify an auditor's business risk by exposing the auditor to more potential litigation and reputation damage if an audit failure occurs. We use a path analysis to examine the direct and indirect channels of media corporate governance. We find a positive association between media coverage and FRQ that is mediated by audit fees, and the results are stronger for firms with greater incentives to engage in earnings manipulation. In contrast, we find no evidence that the media has a direct corporate governance effect on FRQ. Our results show how the media's corporate governance reach can be extended by auditors who care about how media coverage impacts their risk level. [ABSTRACT FROM AUTHOR]

Prior research on audit experience focuses on behavioral studies that are conducted by running experiments. Although these studies provide evidence on the role of experience in completing specific audit tasks, they do not shed light on how experience affects a complete audit engagement. We conduct an archival study to examine the effect of audit experience on audit fees and audit quality. Using unique data from China, where the signees of the audit report can be identified and linked with a government database containing personal information about certified public accountants, we find that experience is positively associated with audit fees and negatively associated with absolute discretionary accruals. Furthermore, we extend the research on personal characteristics of audit partners by considering the incremental effects of gender, education, engagement tenure, industry specialization, and client importance after controlling for overall audit experience. Overall, our results suggest that the auditors’ personal characteristics may serve as a signal of the level of care that will be exercised during the audit process. Our results also have implications for China’s recently announced regulation that would require localization of Big 4 offices in China. [ABSTRACT FROM AUTHOR]

Prior literature finds evidence that clients of industry specialists have a lower level of discretionary accruals compared with nonspecialists. This finding suggests that industry specialists constrain the use of discretionary accruals. In addition to opportunistic reasons, however, managers also can use discretionary accruals to make earnings more informative. We examine the market pricing of discretionary accruals of clients of specialist and nonspecialist auditors. If industry specialists constrain opportunistic discretionary accruals but allow informative discretionary accruals, we expect a stronger relation between discretionary accruals and returns for clients of specialists. We use two different analyses based on Subramanyam (1996) and Tucker and Zarowin (2006) to investigate this issue. We find no evidence that the discretionary accruals of clients of industry specialists are more informative or more value relevant, although we do find that clients of specialists have more informative nondiscretionary accruals. [ABSTRACT FROM AUTHOR]

Audit clients' investment opportunity sets ( IOS) include firm-specific opportunities that are unique to the client, as well as opportunities generalizable to the client's industry and opportunities even more generically available to all firms. Prior research does not examine the variation in audit fees related to firm-specific IOS nor how firm-specific IOS affects the premiums charged by industry specialist auditors. We find that firm-specific IOS plays a distinct role in the pricing of audit services, leading to higher fees as the auditor demands compensation for increased audit risk. Further, we find that the ability of an industry specialist auditor to charge fee premiums is reduced in the case of clients that are highly differentiated based on firm-specific IOS, as the knowledge gleaned in auditing other clients within the industry is often not applicable to clients in more unique IOS environments. We contribute to the literature by showing that industry specialist premiums are not constant for firms in the same industry; rather, they reflect a trade-off between firm- and industry-specific knowledge. [ABSTRACT FROM AUTHOR]

We expand upon the traditional market share-based measure of industry specialization by auditors to address the following question: Are industry specialist auditors who obtain their market share by auditing varying proportions of clients in an industry similar in terms of product (audit) quality and price (audit fees)? Our analyses suggest that the audit market is characterized by a type of segmentation in which some specialists pursue product differentiation strategies, focusing more extensively on the acquisition of requisite expertise, while others pursue cost minimization strategies, producing lower cost, lower quality audits. We find that audit fees and quality are higher (lower) when the specialist gains significant market share by auditing a low (high) proportion of clients in that industry. Our evidence suggests that specialists pursue different strategies in different settings. In some cases, specialist auditors may actually be low-end producers, raising a question of whether the "specialist" label is even appropriate. [ABSTRACT FROM AUTHOR]

This study examines whether auditors adjust their effort and pricing decisions for political visibility. We argue, from the behavioural literature, that political visibility will create the need for more justification by auditors. Using data on actual audit fees, hours and billing rates for a sample of New Zealand public sector companies, we find that total audit fees are positively related to the number of press mentions (our proxy for political visibility). Consistent with our expectations we find that audit fees are monotonically related to audit fees. We also find that auditors increase the hours spent on the audit but not billing rates, which further suggests defensive bolstering by auditors. [ABSTRACT FROM AUTHOR]

Abstract: This study examines the association between the quality of audit committees on financial reporting quality and external audit fees in an environment where the formation of audit committees was unregulated. The study uses a sample of 87 New Zealand firms in 2001 when no regulations or listing rules existed for audit committees. The results show no significant association between the quality of an audit committee and the quality of financial reporting. These results are robust to alternative measures of earnings quality. Similarly, the quality of audit committees has little impact on the level of fees paid to external auditors. The results suggest that the benefits of ‘best practice’ audit committees may be less than anticipated by regulators and policymakers. [Copyright &y& Elsevier]

A report issued by the U.S. General Accounting Office (GAO) in 2003 identified auditors' industry expertise as a critical factor for firms choosing an auditor, and highlighted the extreme levels of auditor concentration in some industries. We posit that the investment opportunity set (IOS) plays a fundamental role in determining whether an industry is an attractive target for auditor specialization. When industry-specific IOS is high, specialist auditors make costly investments in industry-specific knowledge, allowing them to offer a differentiated product and to create entry barriers for other audit firms. When the IOS of firms within an industry is relatively homogeneous, auditors can transfer such knowledge across clients in the industry more easily, resulting in cost savings and scale economies. However, greater homogeneity of IOS in an industry can also increase a client's aversion to sharing an auditor with its competitors because of concerns about transfers of proprietary information, suggesting that industries with relatively homogeneous IOS are less likely to be dominated by a single auditor. We show that auditor concentration in an industry relates positively to both the level and homogeneity of IOS in the industry, while auditor dominance relates negatively to industry 105 homogeneity. Further, we find that audit fees are positively associated with both levels and homogeneity of industry IOS. [ABSTRACT FROM AUTHOR]

This study examines whether after Arthur Andersen's demise, successor auditors required more conservative accounting for their ex-Andersen clients in order to minimize litigation risk. We use unadjusted and performance-adjusted measures of abnormal accruals, and we examine the level of and changes in the abnormal accruals of ex-Andersen clients in 2002 relative to a control sample of clients that were audited by a Big 4 auditor in 2001 and 2002. We conduct univariate and multivariate tests. In our multivariate tests, we control for other factors that may affect litigation risk cross-sectionally. Our results indicate that the ex-Andersen clients had lower levels of and large decreases in abnormal accruals in 2002. This is consistent with auditor conservatism and suggests the successor auditors viewed an Andersen audit as a unique source of litigation risk. [ABSTRACT FROM AUTHOR]