International Journal of Accounting, Auditing and Performance Evaluation (7 papers in press)
The association between firm characteristics and the quality characteristics of the internal audit function in the UK: an agency perspective
by Hazem Ismael
Abstract: This study investigates firm characteristics that may affect the internal audit function's (IAF) quality characteristics: size, independence, methodology, and competence. Its motivation is that a firms agency costs and economic costs can affect its way to invest in the quality characteristics of the IAF. Specifically, this study examines the association between the IAFs characteristics and the firms size, complexity, internal and external agency costs, and the existence of an effective audit committee. To do so, the study used two different methods of data collection: (1) sending a postal questionnaire survey to the Head of Internal Audit (HIA) in 213 UK non-financial companies with in-source IAF; and (2) collecting archival data about the survey respondents from their companies annual reports. the survey was completed and returned by 109 HIAs, a response rate of 51%. The associated companies data were collected from the annual reports and matched to each response. The study used univariate tests, multinomial logistic regression, and OLS regression (as a robustness test) to investigate the predicted relationships. The study provides strong evidence that a firms size and the proportion of cash flows from its operations are positively associated with the IAFs quality characteristics, a suggestion that a high quality IAF is an important way of compensating for the direct loss of control and of managing internal agency risks. In addition, it found evidence that having a high quality IAF is a costly process; the level of debt had a significant negative association with the IAF quality characteristics. Furthermore, the results from the supporting OLS regression revealed also a positive significant association between the effectiveness of the audit committee and the quality characteristics of the IAF. This result may bring out the importance of having a quality IAF to help the audit committee to meet its governance duties. The results from this study have important implications on both practice and future research on internal auditing. It clarifies the factors that may affect the IAF characteristics, and provides a composite objective measure that can be used by future researchers to assess IAF quality characteristics. In addition, the governance regulations should explicitly focus more on highlighting the required characteristics of the IAF, and the IAFs organisational relationships, because these relationships significantly affect the quality of the IAF and hence its role as an internal governance mechanism.
Keywords: internal audit; corporate governance; audit committee; risk management; internal control; agency theory.
Auditor sanctions and the management of riskiness of audit client portfolios
by Hsiao-Lun Lin, AI-Ru Yen
Abstract: This study examines the effect of auditor sanctions imposed on the riskiness of auditors client portfolios. We identify auditors/audit firms that were subject to disciplinary actions by the China Securities Regulatory Commission (CSRC) and empirically examine the change in the riskiness of their client portfolios after the sanctions were imposed. The empirical results suggest a decrease in the overall clientele financial risk, measured by both aggregate bankruptcy measures and individual financial risk measures, after enforcement releases were issued. Moreover, we find that the decrease in client portfolios risk is greater when a disciplinary action is imposed in the period of higher legal liability than when it is imposed in the period of lower legal liability. This study contributes to prior studies on the effects of audit failure on auditors behavior by examining the association between auditor sanctions and the management of audit client portfolios risk.
Keywords: auditor sanction; legal liability; client risk; disciplinary action.
Manager`s misinterpretation of goodwill impairments: evidence from German listed companies
by Laurent Lazar
Abstract: This study investigates the reported goodwill of German listed companies between 2009 and 2014 and focuses on opportunistic behaviour by managers applying the Impairment Only Approach (IOA) in accordance with IAS 36. Contributing to the literature on goodwill accounting, this investigation examines changes of CEOs and companies financial situation, showing that the profit trend is an indicator of goodwill impairments. The results also indicate that new CEOs show a tendency for big bath accounting when taking office and therefore write off more goodwill than incumbent CEOs. Moreover, managers are more likely to impair goodwill when current earnings are negative, especially after decreases in earnings above the annual average. On the other hand, managers tend to avoid goodwill impairments when earnings decrease significantly but still remain positive.
Keywords: impairment only approach; goodwill; big bath accounting; income smoothing; earnings management.
Individual auditor competences and the pricing of audit services
by Irina Alexeyeva
Abstract: This study examines whether partner special competencies, such as industry expertise, public company expertise and client-specific expertise, are associated with a fee premium. It further investigates whether the association between partner competencies and audit fees is dependent on gender. Using a sample of 225 public Swedish companies audited from 2006-2015 (1461 firm-years) by 182 partners affiliated to Big 4 audit firms, partner industry expertise and client-specific expertise are found to be associated with higher audit fees. A further finding is that partners with special competencies are dominantly men. However, male public company specialists receive significantly lower audit fees than their female counterparts. This finding suggests that female auditors who are public company experts may have exceptional track records, which can strengthen their powers when negotiating audit price. Taken together, the results indicate that partner special competence is valued by clients.
Keywords: audit fees; industry expertise; public company expertise; tenure; engagement partner; gender.
The relationship between evidence characteristics and audit efficiency and effectiveness: evidence from Middle Eastern countries
by Osama A. E. Mah'd, Ghassan H. Mardini, Manal M. Ali
Abstract: This paper investigates the relationship between three evidence characteristics (namely, sufficiency, reliability, relevance) and audit quality. We employ a multimethod approach that is broken down into two tools; questionnaires and interviews with 103 external auditors working in Jordan, Saudi Arabia and the United Arab Emirates. The current study adopted the decision usefulness theory as a theoretical framework. The main finding of the study revealed that there is a significant relationship between sufficiency and audit quality (both the efficiency and effectiveness of the audit). Interestingly, the results show that reliability and relevance are associated with audit effectiveness, but did not show significant association with audit efficiency. The contribution of the current study that it increases awareness of the evidence characteristics and their impact on the audit quality. This kind of awareness aids the decision makers to have a better vision that enables them to take sufficient, relevant and reliable decisions.
Keywords: audit evidence; efficiency; effectiveness; sufficiency; reliability; and relevance; Middle East.
Performance and entrepreneurial orientation in SMEs: the case
of Abu Dhabi
by Mohamed Sherif, Laura Galloway, Hajer Zarrouk
Abstract: The paper explores Entrepreneurial Orientation (EO) in SMEs in the Middle Eastern state of Abu Dhabi in the United Arab Emirates. We hypothesise that emerging market context and unique UAE business structures will impact the expression and effects of the five dimensions of EO. Using OLS and GMM techniques, our study shows that innovation, risk taking, proactiveness and competitive aggressiveness do not correlate positively with performance, but autonomy does. By studying EO in a unique region and amongst SMEs we contribute to the implementation and development of theory in alternative business contexts. We suggest the EO dimensions co-depend, with autonomy a capstone dimension in SMEs upon which the others rely. At a local level, we suggest policy might take steps to encourage autonomy by reducing ownership restrictions, and improve the institutional environment to facilitate risk-taking and, in turn, the other EO dimensions.
Keywords: performance evaluation; entrepreneurial orientation; SMEs; emerging economy; Abu Dhabi; business structures.
Special Issue on: Contemporary Issues in Islamic Accounting and Finance Research
Ethical values in auditing from the Islamic perspective
by Hossein Sayyadi Tooranloo, Pedram Azizi
Abstract: This study aims to derive a model of ethical values that concern auditing from the Islam viewpoint using the Interpretative Structural Modelling (ISM) approach. ISM is a systematic and structured method for understanding the relationships between individually or collectively interdependent elements of a complex system. After reviewing the related literature and semi-structured interviews with auditing experts, 15 auditing-related ethical values from the Islamic perspective were identified. The ISM method was then used to determine the levels and priorities of identified values and their relationships with each other. Finally, a MICMAC diagram analysis was performed to determine the driving power and dependence power of the values. MICMAC analysis facilitates further examination of the domain of effect of each study variable based on the obtained driving and dependence powers. In the MICMAC analysis, the ethical value Independence was found to have a strong driving power (15) and a weak dependence power (6), and is thus recognised as the cornerstone of the audit profession. Auditor independence is an essential element of users trust in the analysis of financial statements, and neglecting it neutralises the effect of many other values. The value Objectivity in investigation and avoiding preconception was found to have a weak driving power (6) and a strong dependence power (15), reflecting a strong dependence on its lower levels. This suggests that neglecting other values severely undermines the objectivity of the audit.
Keywords: ethical values; audit; Islam; interpretative structural modelling.