دانلود رایگان مقاله لاتین تعامل حسابرسی اولیه از سایت الزویر
عنوان فارسی مقاله:
پشتکار کمیته حسابرسی پیرامون تعامل حسابرسی اولیه
عنوان انگلیسی مقاله:
Audit committee diligence around initial audit engagement
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مقدمه انگلیسی مقاله:
1. Introduction
Auditor monitoring provides assurance to the financial statement users about the reliability of reported earnings. Accordingly, many studies document lower cost of capital (Hope, Kang, Thomas, & Yoo, 2009), greater reliance on reported earnings (Balsam, Krishnan, & Yang, 2003), and positive stock market response (Knechel, Naiker, & Pacheco, 2007) for firms whose auditors provide high audit quality. An auditor's quality of work, however, is not always uniform for all the clients in his or her portfolio. Several studies document that audit quality is affected by auditors' lack of familiarity of client's activities (Johnson, Kurana & Reynolds, 2002). At the same time, other studies document that the audit function works in concert with other financial reporting governance mechanisms within the firm (Ahmed, Rasmussen, & Tse, 2008). In this paper, I examine whether firms supplement periods of weak audit quality with an increased number of audit committee meetings, a governance mechanism argued to support auditor monitoring. Many extant scholars point out that an auditor's quality of work is affected due to a lack of familiarity with his or her client's operations. Johnson, Kurana, and Reynolds (2002) document an inverse (direct) relationship between the length of the auditor–client relationship and absolute levels of unexpected accruals (accrual persistence) in earnings. Geiger and Raghunandan (2002) focus on the relationship between auditor tenure and audit quality and find evidence indicating a greater incidence of audit reporting failures in the earlier years of the auditor/ client relationship than when auditors had served these clients for longer tenures. For similar reasons, many scholars and regulators opposed the idea of mandatory auditor rotation for US firms (U. S General Accounting Office, GAO, 2003). The argument for poor audit assurance is that the auditors rely more on management estimates and representations in the initial year of audit engagement. Consequently, many firms have raised doubts about auditors' ability to put forth the suffi- cient effort required to audit a new client (Dunham, 2002). One such occasion when the auditors lack familiarity of its client's activities is during the first year of auditor–client engagement. The lack of client familiarity in the initial year of audit engagement raises questions about the quality of audit assurance during this period (Beasley, Carcello, Hermanson, & Lapides, 2000). In the recent past, however, some studies have argued that the auditors' opinion in the initial year is not different from the outgoing auditors' final opinions (e.g. Krishnan, 1994; Krishnan & Stephens, 1995).1 Other studies focusing on reporting quality in the first year of auditor tenure have documented no evidence of reporting quality being compromised (Kraub, Quosigk, & Zulch, 2014). These studies, however, provide no possible reasons for the lack of association between poor reporting quality and initial auditor engagement. I extend these studies by examining whether supporting auditor monitoring with other monitoring tools explains why no association has been documented between poor reporting quality and auditor change. According to the literature that focuses on corporate governance, auditor monitoring is one of several mechanisms that exists in the firm (Azim, 2012). The other governance mechanisms that operate simultaneously within the firm to control agency conflict include monitoring by the board and monitoring by shareholders. The studies focusing on the interplay among the governance mechanisms argue that these governance mechanisms supplement each other. Ward, Brown, and Rodriguez (2009) focus on the relationship between internal and external monitoring mechanisms and argue that for poorly performing companies, the institutional investors can supplement the monitoring by the board of directors. More recently, Ahmed et al. (2008) document that monitoring of industry specialist auditors is less effective when alternative monitoring of board of directors and institutional investors is strong. In this paper, I examine whether audit committees meet more frequently to supplement auditor monitoring in the initial year of auditor engagement. I focus on audit committee monitoring because audit committee members have the knowledge to safeguard the quality of financial reports and are held responsible for reporting failure (Srinivasan, 2005). The literature on audit committees documents that audit committee can reduce the possibility of reporting failure by meeting more frequently (Abbott, Parker, & Peters, 2004). Furthermore an effective audit committee monitoring can reduce the demand for assurance from auditors (Stewart & Munro, 2007). To conduct the analyses, I use a sample of firms that switched auditors between 2006 and 2012.2 To test the audit committee diligence hypothesis, I regress audit committee meetings on auditor switch, which is a variable that takes value one for firm-years when there is an auditor switch. Consistent with my hypothesis, I find that the coefficient on Switch is positive and significant, thus indicating that audit committees become more active in the first year of audit engagement. The results hold after controlling for potential selection bias. Further analysis reveals that firms' past reporting behavior play a significant role in the demand for more audit committee meetings in the first year of auditor engagement. The results show that the audit committees of firms with a history of aggressive reporting are more likely to actively meet in the initial year of auditor–client engagement than the audit committees of firms that change auditors but report less aggressively. Lastly I examine whether the additional audit committee meetings in the initial year of auditor engagement affects the reporting quality. Using absolute discretionary accruals as a proxy for reporting quality, I find that the firms who switch auditors and whose audit committees meet more frequently in the initial year of auditor engagement have better reporting quality than firms who switched auditors but have fewer meetings. I make two contributions to the literature. First, I shed light on how firms respond to the needs for additional monitoring during the initial audit engagement. Although a considerable number of studies have examined the effect of auditor switches on financial reporting, none have focused on the tactics firms use to mitigate earnings management during initial audit engagement.3 Sankaraguruswamy and Whisenant (2009) examine the possibility of poor audit services in the year of auditor switch. Using restatement to proxy for audit quality, the authors find no significant association between restatement and initial audit pricing. Kraub et al. (2014) also focus on audit quality during the first year of audit engagement using German firms and find no evidence of reporting impairment. By focusing on the audit committee's diligence in monitoring, I provide explanations to the insignificant association between impairment in audit quality and initial year of audit engagement. Second, the findings answer the question raised by regulators and academicians about the audit committee's effectiveness. In the period prior to the passage of the Sarbanes–Oxley Act of 2002, questions were raised regarding the diligence of audit committee's monitoring role. In fact, several studies posit that audit committees exist only in appearance (Menon & Williams, 1994). As a result, reforms were passed to increase the audit committee's responsibility in ensuring that the financial reporting is reliable. The findings of this paper add to the postSarbanes–Oxley Act literature on audit committee effectiveness by documenting that they react proactively to possible reduced auditor monitoring by increasing their meeting frequency. The remainder of the paper is organized as follows. The next section presents the literature review, and Section 3 presents the hypothesis. Section 4 discusses the research design, and Section 5 explains the sample selection procedure. Sections 6 and 7 describe the results and conclusion, respectively
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