Pappert, Nicolas (2023)
Empirical Studies on Auditor Independence and Audit Quality.
Technische Universität Darmstadt
doi: 10.26083/tuprints-00023269
Dissertation, Erstveröffentlichung, Verlagsversion
Kurzbeschreibung (Abstract)
The key function of the statutory audit is to enhance the credibility of financial information by giving an opinion on whether the financial statements of an audited company convey a true and fair view in accordance with the generally accepted accounting principles. In order to fulfill this function, appropriate audit quality is necessary. Audit quality is determined by the probability that the auditor will detect material misstatements in the client’s annual financial statements (i.e., competence) and report on them (i.e., independence). Consequently, high-quality audits secure trust and market confidence, contribute to investor protection and reduce companies’ cost of capital. However, auditing is a credence good, meaning that essential elements of the underlying services are not observable to the addressees of audited financial statements. Therefore, it is not sufficient that the auditor provides a high factual audit quality; it must also be perceived as high by the users of audited financial statements. Accounting scandals, such as the recent ones involving Wirecard in Germany or Carillion in the United Kingdom, lead to a loss of confidence in the statutory audit. Consequently, regulatory interventions are undertaken, such as under Regulation (EU) No. 537/2014 in the EU or the Financial Market Integrity Strengthening Act of 2021 in Germany. Although numerous measures have already been implemented, such as mandatory audit firm rotation, banning the provision of certain non-audit services (NAS), or extending the auditor’s report, the latest precedents once again demonstrate the need for further reforms. Moreover, many of the measures discussed and already implemented lack empirical evidence of their impact. Against this background, this dissertation identifies, on the one hand, further potential and innovative instruments, and examines their suitability for strengthening auditor independence and increasing audit quality. On the other hand, the effects of already implemented measures are examined. The findings are set out in five empirical studies, summarized in eight articles. The first study is a survey of auditors, non-professional investors, and bankers, on potential measures for fostering statutory auditor independence for audits of public interest entities (PIEs) and non-PIEs. Survey participants were asked to assess the suitability of different instruments for strengthening auditor independence. The results are published in four articles and reveal that auditors are particularly in favor of establishing audit committees, improvements in professional supervision, and stricter sanctions for violating the principle of independence. Non-professional investors and bankers also advocate the latter two categories. In addition, both groups are also in favor of increased auditor liability. Concerning the differences in the perceptions of measures for PIE and non-PIE audits, the patterns are similar for all three subject groups. On an experimental basis, the second study examines how non-professional investors and bankers evaluate potential instruments for increasing audit quality perceptions. These are a non-provision of NAS (either by pure audit firms, or a non-provision of NAS to audit clients) and a statutory fee schedule for audit services. The results indicate that the non-provision of NAS and a statutory fee schedule for audit services significantly positively affect participant audit quality perceptions. This finding is also revealed for perceived auditor independence, although no effect on the participants’ perceived competence can be determined. Furthermore, the results indicate that a complete non-provision of NAS (both for audit and non-audit clients; pure audit firms) seems unnecessary. The third study addresses whether the mandatory audit firm rotation of PIEs introduced by Regulation (EU) No. 537/2014 affects the audit quality of engagements in the first year, during the transition period from a voluntary to a mandatory audit firm rotation system. The results, based on a regression analysis of German listed companies, illustrate that anticipated rotations in the transition period between 2014 (enactment of the regulation) and 2020 (start of mandatory rotations for non-financial companies) lead to higher factual audit quality, but only for companies that are not listed in the CDAX. These findings are crucial for assessing the effects of the regulation, both before the actual application and for pending analyses during the application period that is now beginning. Whether there are similarities and “boilerplates” in the disclosure of key audit matters (KAMs) in the auditor’s reports of German DAX 30 companies is the subject of the fourth study. The auditor’s report was fundamentally revised and expanded with the EU audit market reform in 2014. The primary objective of the reform was to increase the quality of the statutory audit. Therefore, the information content of the auditor’s report, and thus audit transparency was increased. The results show that although auditor’s reports are more client-specific, similar wording is often used. Exceptionally high text similarities are found for KAMs on the same issue, reported by the same auditor on a client level. For some KAMs, there is even 100% text similarity. For different clients of the same auditor, the similarity rate decreases significantly, although high levels of similarity can be found in some cases. The similarity rate is lowest when there is an auditor change. Therefore, it is questionable whether this reporting practice really improves the informational value of the auditor’s report and, accordingly, addressee perceptions of audit quality. The fifth and final study builds on the findings of the fourth study. It examines the KAM sections in the auditor’s reports of German HDAX companies between 2017 and 2019, focusing on text similarities for KAMs on the same issue reported in consecutive periods by the same or a different auditor at a client level. Furthermore, potential determinants of resulting text similarities are investigated using a regression analysis. In terms of text similarity, it is found that auditors often use similar wording when disclosing a KAM on the same issue at the client level in consecutive years. These results confirm the findings of the fourth study. Furthermore, the similarity rate is found to be significantly negatively correlated with a change of audit firm, and positively correlated to companies that have a stable financial position measured by a high portion of equity. Again, whether this reporting practice is appropriate for increasing information value and audit quality perceptions of relevant addressees is questionable.
Typ des Eintrags: | Dissertation | ||||
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Erschienen: | 2023 | ||||
Autor(en): | Pappert, Nicolas | ||||
Art des Eintrags: | Erstveröffentlichung | ||||
Titel: | Empirical Studies on Auditor Independence and Audit Quality | ||||
Sprache: | Englisch | ||||
Referenten: | Quick, Prof. Dr. Reiner ; Schiereck, Prof. Dr. Dirk | ||||
Publikationsjahr: | 2023 | ||||
Ort: | Darmstadt | ||||
Kollation: | XVII, 113 Seiten | ||||
Datum der mündlichen Prüfung: | 3 März 2023 | ||||
DOI: | 10.26083/tuprints-00023269 | ||||
URL / URN: | https://tuprints.ulb.tu-darmstadt.de/23269 | ||||
Kurzbeschreibung (Abstract): | The key function of the statutory audit is to enhance the credibility of financial information by giving an opinion on whether the financial statements of an audited company convey a true and fair view in accordance with the generally accepted accounting principles. In order to fulfill this function, appropriate audit quality is necessary. Audit quality is determined by the probability that the auditor will detect material misstatements in the client’s annual financial statements (i.e., competence) and report on them (i.e., independence). Consequently, high-quality audits secure trust and market confidence, contribute to investor protection and reduce companies’ cost of capital. However, auditing is a credence good, meaning that essential elements of the underlying services are not observable to the addressees of audited financial statements. Therefore, it is not sufficient that the auditor provides a high factual audit quality; it must also be perceived as high by the users of audited financial statements. Accounting scandals, such as the recent ones involving Wirecard in Germany or Carillion in the United Kingdom, lead to a loss of confidence in the statutory audit. Consequently, regulatory interventions are undertaken, such as under Regulation (EU) No. 537/2014 in the EU or the Financial Market Integrity Strengthening Act of 2021 in Germany. Although numerous measures have already been implemented, such as mandatory audit firm rotation, banning the provision of certain non-audit services (NAS), or extending the auditor’s report, the latest precedents once again demonstrate the need for further reforms. Moreover, many of the measures discussed and already implemented lack empirical evidence of their impact. Against this background, this dissertation identifies, on the one hand, further potential and innovative instruments, and examines their suitability for strengthening auditor independence and increasing audit quality. On the other hand, the effects of already implemented measures are examined. The findings are set out in five empirical studies, summarized in eight articles. The first study is a survey of auditors, non-professional investors, and bankers, on potential measures for fostering statutory auditor independence for audits of public interest entities (PIEs) and non-PIEs. Survey participants were asked to assess the suitability of different instruments for strengthening auditor independence. The results are published in four articles and reveal that auditors are particularly in favor of establishing audit committees, improvements in professional supervision, and stricter sanctions for violating the principle of independence. Non-professional investors and bankers also advocate the latter two categories. In addition, both groups are also in favor of increased auditor liability. Concerning the differences in the perceptions of measures for PIE and non-PIE audits, the patterns are similar for all three subject groups. On an experimental basis, the second study examines how non-professional investors and bankers evaluate potential instruments for increasing audit quality perceptions. These are a non-provision of NAS (either by pure audit firms, or a non-provision of NAS to audit clients) and a statutory fee schedule for audit services. The results indicate that the non-provision of NAS and a statutory fee schedule for audit services significantly positively affect participant audit quality perceptions. This finding is also revealed for perceived auditor independence, although no effect on the participants’ perceived competence can be determined. Furthermore, the results indicate that a complete non-provision of NAS (both for audit and non-audit clients; pure audit firms) seems unnecessary. The third study addresses whether the mandatory audit firm rotation of PIEs introduced by Regulation (EU) No. 537/2014 affects the audit quality of engagements in the first year, during the transition period from a voluntary to a mandatory audit firm rotation system. The results, based on a regression analysis of German listed companies, illustrate that anticipated rotations in the transition period between 2014 (enactment of the regulation) and 2020 (start of mandatory rotations for non-financial companies) lead to higher factual audit quality, but only for companies that are not listed in the CDAX. These findings are crucial for assessing the effects of the regulation, both before the actual application and for pending analyses during the application period that is now beginning. Whether there are similarities and “boilerplates” in the disclosure of key audit matters (KAMs) in the auditor’s reports of German DAX 30 companies is the subject of the fourth study. The auditor’s report was fundamentally revised and expanded with the EU audit market reform in 2014. The primary objective of the reform was to increase the quality of the statutory audit. Therefore, the information content of the auditor’s report, and thus audit transparency was increased. The results show that although auditor’s reports are more client-specific, similar wording is often used. Exceptionally high text similarities are found for KAMs on the same issue, reported by the same auditor on a client level. For some KAMs, there is even 100% text similarity. For different clients of the same auditor, the similarity rate decreases significantly, although high levels of similarity can be found in some cases. The similarity rate is lowest when there is an auditor change. Therefore, it is questionable whether this reporting practice really improves the informational value of the auditor’s report and, accordingly, addressee perceptions of audit quality. The fifth and final study builds on the findings of the fourth study. It examines the KAM sections in the auditor’s reports of German HDAX companies between 2017 and 2019, focusing on text similarities for KAMs on the same issue reported in consecutive periods by the same or a different auditor at a client level. Furthermore, potential determinants of resulting text similarities are investigated using a regression analysis. In terms of text similarity, it is found that auditors often use similar wording when disclosing a KAM on the same issue at the client level in consecutive years. These results confirm the findings of the fourth study. Furthermore, the similarity rate is found to be significantly negatively correlated with a change of audit firm, and positively correlated to companies that have a stable financial position measured by a high portion of equity. Again, whether this reporting practice is appropriate for increasing information value and audit quality perceptions of relevant addressees is questionable. |
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Alternatives oder übersetztes Abstract: |
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Status: | Verlagsversion | ||||
URN: | urn:nbn:de:tuda-tuprints-232693 | ||||
Sachgruppe der Dewey Dezimalklassifikatin (DDC): | 300 Sozialwissenschaften > 330 Wirtschaft | ||||
Fachbereich(e)/-gebiet(e): | 01 Fachbereich Rechts- und Wirtschaftswissenschaften 01 Fachbereich Rechts- und Wirtschaftswissenschaften > Betriebswirtschaftliche Fachgebiete 01 Fachbereich Rechts- und Wirtschaftswissenschaften > Betriebswirtschaftliche Fachgebiete > Fachgebiet Rechnungswesen, Controlling und Wirtschaftsprüfung |
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Hinterlegungsdatum: | 06 Mär 2023 13:53 | ||||
Letzte Änderung: | 07 Mär 2023 06:18 | ||||
PPN: | |||||
Referenten: | Quick, Prof. Dr. Reiner ; Schiereck, Prof. Dr. Dirk | ||||
Datum der mündlichen Prüfung / Verteidigung / mdl. Prüfung: | 3 März 2023 | ||||
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