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Audit quality, joint or single audit regimes: An empirical study of the consequence of Joint
audit abandonment in Denmark
Zahra Shahrokhshahi
Dr. Josep Garcia Blandon
May 2019
Joint audit
Joint audit associates with audit task accomplished by two separated auditors in which both of them are responsible for the final report
In Denmark:
Obligatory joint audit regulation in Denmark was abandon in 2005 because of,
1. Lack of evidence for higher audit quality in joint audit regime
2. commonly accepted higher audit fees in joint audit regime
In Europe:
Green Paper of European Community (European Commission, 2010) propose joint audit to improve audit market in Europe
The current legislation persuade firms to apply voluntary joint audit by extension of audit rotation period from 10 to 24 years (European Commission, 31 May, 2016)
Hypothesis development 1. Does Joint audit affect audit quality? Theoretical evidences
Joint audit potentially could affect two components of independence and competence of audit quality
Auditor competence:
Pros,
1. Four eyes expected to have more detecting ability than two eyes
2. During auditor rotation, the remained auditor will keep the gained knowledge and expertise in the company
3. In joint audit, both auditors attempt to control each other to protect their reputation
Cons,
1. When two auditors co-audit several companies, their extensive knowledge of each other result in cross review procedures and diminish their scrutiny
2. Auditors have potential to prevent the exchange of adequate information with their co-auditor to preserve their competitive capability
Hypothesis development 2. Does Joint audit affect audit quality? Theoretical evidences
Auditor independence:
Pros,
1. Joint audit distributes audit fee between co-auditors
2. Two independent auditors are more difficult to be bribed by the client
Cons,
1. Competition between the two audit parties motivate them to please the client to achieve higher share of the work by opinion sopping
Any other issue?
• Free rider problem decrease auditor’s effort and audit quality
• However, perhaps individual auditor in a co-working environment is aware of the free rider problem and increase her/his effort
Hypothesis development Does Joint audit affect audit quality? Theoretical evidences
• The scarce empirical studies suggest no difference in audit quality as a consequence of joint audit
1. No shift in accrual based audit quality of Danish companies during 2002-2010 (Lesage et al. 2017)
2. Joint audit in Danish public firms dose not provide better accrual based audit quality, studying post regulation change (Holm, Thinggaard, 2018)
3. Comparison of audit quality between France with mandatory joint audit regime, and UK and Italy with single audit regime represent no change in accrual based measures (Andre et al. 2016)
4. Comparison between joint audit regime in France with single audit in 350 S&P European companies, no accrual based difference in audit quality observed. Although joint audited firms show higher audit quality based on measure of meeting market target (Blandon et al.2018)
Hypothesis
There is no difference between audit quality of mandatory joint audit and single audit regimes
What needs to be improved?
Main concerns about previous studies:
1. The comparison between two or more countries may suffer from differences in regulations and audit environment
2. The comparison in one country but between two different periods of time perhaps is subject to omitted variable issue
3. Audit quality measure mostly limited to accrual based substitutes
The current research:
Applying Dif-in-Dif methodology based on Danish change of audit regulation in 2005
1. Provide the chance to compare two audit regimes in the same country
2. Dispel the endogeneity problem (omitted variable issues and Simultaneity)
3. Extra analysis that show joint audit regime provides higher audit quality based on restatement
Research design
• First control group: Finland, Norway, Sweden
• Second control group: France
Change of 2005
2003-2004 2005-2006
First control group Single audit regime Single audit regime
Treatment group Mandatory joint regime Single audit regime
Second control group Mandatory joint regime Mandatory joint regime
First analysis
Second analysis
Model
Audit Quality = α + β Interaction + λ controls + firm effects + year effects
Dependent variable:
Audit quality which is substituted for
Abnormal discretionary accruals in signed, absolute, positive and negative values
Working Capital accruals in signed, absolute, positive and negative values
Variable of interest:
First analysis: Interaction= Pre-Treatment * Treated
Second Analysis: Interaction= Post-Treatment * Treated
The model contains firm and year fixed effects and the error term is clustered based on industry
Sample selection and validating assumption
Sample selection:
Panel data of publicly traded companies in Denmark, Finland, Sweden, Norway and France
During period of 2003-2006 that contains change in regulation of 2005
For each individual analysis, the initial sample is matched based on various control variables
Validating assumption:
Treatment and control groups should share a parallel trend before (after) the change in regulation
Panel A: Matched Nordic sample in comparison with treatment group during (2005-2006)
Treated First control Differences P-value N. Obs
AAC -0.001 0.004 -0.005 0.522183
166
ABAAC 0.045 0.051 -0.005 0.341183
166
POSAAC -0.044 -0.049 0.005 0.57495
79
NEGAAC 0.046 0.052 -0.006 0.45488
87
AWAC -0.058 -0.589 0.53 0.247179
165
ABAWAC -0.058 -0.589 0.533 0.246179
165
POSAWAC 0.075 0.081 -0.005 0.873112
89
NEGAWAC -0.282 -1.373 1.091 0.32467
76
Panel B: Matched French sample in comparison with treatment group during (2003-2004)
Treated Second control Differences P-value N. Obs
AAC 0.001 -0.006 0.007 0.311181
139
ABAAC 0.041 0.048 -0.008 0.169181
139
POSAAC -0.041 -0.052 0.011 0.16987
87
NEGAAC 0.04 0.042 -0.002 0.76694
52
AWAC -0.592 1.21 -1.806 0.769180
134
ABAWAC 9.055 3.915 5.139 0.399180
134
POSAWAC 9.288 4.91 4.37 0.62182
70
NEGAWAC -8.86 -2.82 -6.03 0.47898
64
Results-1First analysis Nordic countries
Signs AAC ABAAC POSAAC NEGAAC
Interaction ? -0.011 -0.006 -0.016 -0.015 0.002 -0.016 -0.017 -0.001
(0.601) (0.757) (0.429) (0.447) (0.965) (0.687) (0.608) (0.973)
Cross- 0.055** -0.398* -0.04*** -0.131 0.106 0.308 -0.001 -0.07
Leverage +/- 0.001 0.001 0.001* 0.001* -0.000 0.000 0.000 0.001
Loss +/- -0.002 -0.006 0.004 0.003 -0.007 0.017 0.002 0.011
Inst-shareholder - 0.001 -0.003** -0.001*** -0.001 -0.001 -0.005 -0.000 -0.001**
Twobig4joint - -0.000 0.004 -0.004 0.003 0.012 -0.005 -0.02 -0.013
Onebig4joint - 0.002 0.001 0.008 0.007 0.007 0.026* 0.013 -0.004
Big4joint - -0.001 0.005 -0.001 0.003 0.014 -0.009 0.009 0.011
Size - 0.072* 0.017 0.012 0.019
Cash operation +/- -0.86*** 0.032 -0.93*** -0.605***
ROA +/- 0.013*** 0.001 0.014*** 0.008**
Growth opportunity +/- 0.003 0.004 0.003 0.001
PPE growth +/- -0.025 -0.013 0.001 -0.021
Age + -0.182* 0.036 -0.04 -0.042
MTB+ 0.002 0.005* -0.011 0.012*
F-shareholder ? -0.024** 0.01 -0.029 0.002***
N.obs 522 517 522 517 251 249 271 268
Overall R-squared 0.576 0.814 0.675 0.687 0.82 0.911 0.742 0.832
Results-2First analysis Nordic countries
Sign AWAC ABAWAC POSAWAC NEGAWAC
Interaction ? -2.372 -2.35 0.197 0.915 -0.008 0.072 0.193 -1.487
(0.569) (0.551) (0.93) (0.733) (0.954) (0.646) (0.986) (0.925)
Cross - -0.356 -1.22 2.17** 3.49 -0.009 -4.767 -2.41 -6.086*
Leverage +/- -0.103 -0.102 -0.04 -0.035 0.005 0.002 -0.009 0.049
Loss +/- 0.328 0.323 -0.138 0.022 -0.017 -0.105 2.417 4.24
Inst-shareholder - 0.059 0.167 0.013 0.047 -0.001 -0.014 4.97 0.068
Twobig4joint - -3.987 -3.66 -0.982 -0.566 -0.267* -0.22*** 1.328 0.241
Onebig4joint - 0.085 0.359 -0.499 -0.356 -0.024 -0.098 3.176 2.55
Big4joint - -2.658 -2.25 1.51 2.28 -0.067 -0.075 -2.698 -3.328
Size - -0.257 -4.571 0.862 1.74
Cash operation +/- -1.78 -0.57 0.018 -3.66
ROA +/- 0.171 -0.053 -0.011 0.531
Growth opportunity +/- -1.59 -2.044 0.015 1.61
PPE growth +/- -0.332 -3.275 -0.342 3.11
Age + 2.63 -2.696 0.085 -1.288
MTB + -0.061 0.215 0.028* 0.259
F-shareholders ? 2.84** -2.23*** 0.245 -1.585
N.obs 520 515 520 515 313 311 207 204
Overall R-squared 0.965 0.966 0.987 0.989 0.999 0.999 0.992 0.995
Results- 3Second analysis France
Signs AAC ABAAC POSAAC NEGAAC
Interaction ? -0.011 -0.001 -0.01 -0.008 -0.001 0.000 -0.033 -0.038**
(0.572) (0.521) (0.355) (.459) (0.982) (0.997) (0.148) (0.025)
Cross - 0.066 0.023 0.038 1.548***
Leverage +/- 0.001 0.001 0.001 0.001* 0.001 0.000 0.001 0.001**
Loss +/- -.009 -0.005 0.015 -0.032
Inst-shareholder - -0.005 -0.016** 0.004 -0.304***
Twobig4joint - -0.005 0.005 -0.007 -0.001 0.017 0.021 -0.024 -0.001
Onebig4joint - 0.001 0.007 -0.003 -0.001 0.008 0.019 0.003 0.001
Big4joint - 0.005 0.014 -0.01 -0.004 0.024 0.022 0.006 0.022
Size - 0.04 0.003 0.025 -0.075*** 0.083***
Cash operation +/- -0.88*** 0.109 -0.72*** -0668
ROA +/- 0.014*** 0.001 0.008** 0.011*
Growth opportunity +/- -0.005 0.004 0.009 0.06
PPE growth +/- -0.03*** -0.021 0.001 -0.003 0.01 0.004 -0.003 -0.009
Age + -0.012 0.033 -0.066* 0.033*** 0.028*
MTB + 0.003 0.001 0.003 0.006
F-shareholder ? 0.009 0.021** 3.78* 0.438***
N.obs 542 542 542 542 298 298 244 244
Overall R-squared 0.675 0.856 0.785 0.793 0.887 0.933 0.85 0.934
Results- 4Second analysis France
Sign AWAC ABAWAC POSAWAC NEGAWAC
Interaction ? 2.32 2.172 -2.26 -2.197 -0.005 0.052 6.744 6.88
(0.315) (0.377) (0.345) (0.376) (0.953) (0.608) (0.371) (0.379)
Cross - -3.55** 4.014 -1.826 -3.72
Leverage +/- 0.002 0.005 0.001 -0.004 0.002 0.002 0.031 0.025
Loss +/- -0.000 0.013 -0.05 1.135
Inst-shareholder - 0.233*** 0.003 -0.03 -2.291
Twobig4joint - -0.174 -0.785 0.463 0.734 -0.202*** -0.181*** 0.739 1.105
Onebig4joint - 0.074 -0.088 -0.123 -0.038 -0.022 -0.026 1.859 2.155
Big4joint - -2.274 -2.57 2.212 2.361 -0.011 -0.013 -2.779 -2.728
Size - 0.002 1.25** -0.387 -0.595 0.668 0.392 3.85 4.44
Cash operation +/- 2.537 -3.671 -0.016 -0.919
ROA +/- -0.013 0.032 -0.012 0.093
Growth opportunity +/- -1.266 0.349 0.152 0.264
PPE growth +/- 0.027 0.219 -0.132 -0.192 -0.195 -0.196 2.12 2.52
Age + 0.178 0.08 -0.48 -2.177
MTB + -0.163* 0.141 0.018 0.134
F-shareholders ? -0.044 0.026 4.065
N.obs 540 540 540 540 331 331 209 209
Overall R-squared 0.995 0.995 0.995 0.996 0.906 0.9 0.998 0.997
Additional analysis 1. RestatementNordic countries
sign Restatement
Interaction ? -6.02*** -5.78***
(0.000) (0.000)
Cross - -3.84 2.52*
Leverage +/- -0.008 0.027
Loss +/- 0.598 0.94
Inst-shareholder - 0.011 0.113*
Twobig4joint - 0.119 0.378
Onebig4joint - 2.147 1.829
Big4joint - -4.22*** -3.68***
Size - -2.57***
Cash operation +/- 2.68
ROA +/- 0.208*
Growth opportunity +/- -0.329
PPE growth +/- -0.626
Age + 0.438
MTB + -0.408
Fa- shareholders ? -0.028
N.obs 337 335
Additional analysis 1. RestatementFrance
sign Restatement
Interaction ? 1.7** 1.768**
(0.038) (0.037)
Cross - -2.318
Leverage +/- 0.012 0.022
Loss +/- 1.252
Inst-shareholder - 0.051
Twobig4joint - -0.235 -0.214
Onebig4joint - -0.246 -0.337
Big4joint - -3.961*** -4.411***
Size - -4.488*** -1.388
Cash operation +/- 0.703
ROA +/- 0.24**
Growth opportunity +/- -2.28*
PPE growth +/- -0.105 -0.275
Age + 0.479
MTB + -0.355
F- shareholders ? -0.165
N.obs 326 326
Additional analysis 2. Drop voluntary joint audit Nordic countries
Signs AAC ABAAC POSAAC NEGAAC
Interaction? -0.023 0.025 -0.047 0.01
(0.25) (0.175) (0.161) (0.834)
Cross - -0.014 0.005 3.11*** 0.03***
Leverage +/- 0.001 0.001 0.001 0.001
Loss +/- -0.004 0.007 -0.01 0.004
Inst-shareholder - 0.002*** 0.000*** -0.084*** 0.001***
Twobig4joint - -0.004 -0.014 0.022 -0.019
Onebig4joint - 0.001 -0.002 -0.013 0.006
Big4joint - -0.024 0.025* -0.018 0.015
N.obs 346 346 163 183
Overall R-squared 0.593 0.705 0.939 0.744
Additional analysis 2. Drop voluntary joint audit Nordic countries
Signs AWAC ABAWAC POSAWAC NEGAWAC
Interaction ? -2.734 2.731 -0.189 -1.565
(0.416) (0.563) (0.175) (0.837)
Cross - -1.128 -0.198 -0.144 0.327
Leverage +/- -0.149 -0.027 0.008 0.094
Loss +/- 4.146 -0.613 -0.274** 3.491
Inst-shareholder - -0.043 -0.01 -0.004*** -0.041
Twobig4joint - -4.305 -1.578 -0.384*** 4.203
Onebig4joint - 1.968 -1.959 -0.129** 2.045
Big4joint - -2.647 2.565 -0.21*** -4.678
N.obs 344 344 210 134
Overall R-squared 0.381 0.875 0.999 0.869
Additional analysis 3. Short term effect Nordic countries
Signs AAC ABAAC POSAAC NEGAAC
Interaction ? -0.001 -0.011 -0.023 -0.01
(0.966) (0.635) (0.466) (0.904)
Cross - 0.097 -0.013 0.084 0.024
Leverage +/- 0.001* 0.001 0.001 0.001
Loss +/- 0.001 0.001 0.017 -0.02
Inst-shareholder - 0.001 -0.001*** -0.000 -0.001
Twobig4joint - -0.02 -0.029 0.61 -0.011
Onebig4joint - -0.027 -.015 0.012 -0.001
Big4joint - -0.017 -0.011 -0.022 0.005
N.obs 340 340 163 177
Overall R-squared 0.771 0.806 0.893 0.834
Additional analysis 3. Short term effect Nordic countries
signs AWAC ABAWAC POSAWAC NEGAWAC
Interaction ? -2.972 -0.315 0.167 1.99
(0.612) (0.924) (0.656) (0.792)
Cross - -3.547 1.71 0.194 1.88
Leverage +/- -0.18 -0.035 0.012 0.022
Loss +/- -2.441 -0.407 0.067 -1.76
Inst-shareholder - -0.011 -0.026* -0.001 -0.004
Twobig4joint - 1.579 0.543 -0.682 -4.78
Onebig4joint - 2.261 -0.645 -0.291 -0.177
Big4joint - -0.508 2.145 -0.203 -4.675
N.obs 338 338 218 120
Overall R-squared 0.963 0.995 0.999 0.999
Additional analysis
4. Unmatched sample
Matching process supposed to provide results based on more comparable treatment and control groups, but considerably limit the number of observations
The result is almost consistent with previous findings for the both analysis
5. New control group of Finland and Sweden
The control group for the first analysis contains Norway
is not a European Union member
Dose not have voluntary joint audit observation
The results is consistent with previous findings
Conclusion
Main findings:
Audit quality of joint audit and single audit regime is similar by accrual based measures
Firms with joint audit have lower chance of reporting financial restatement by 0.027 times
Confirms previous findings, however provide supports European audit directives
Limitation:
The results is based on Danish audit market experiment and dose not necessarily generalizable