Essays on audit partner characteristics and audit market competition.

In the first chapter of the disseration we study whether the similarity between a pair of clients located in the same market segment is associated with the likelihood of choosing the same audit firm and whether this affects audit market competition. As we use archival data to investigate audit firm selection and only observe supply and demand forces in the equilibrium, we keep supply-side factors as constant as possible to be able to attribute audit firm selection to the level of client similarity. More specifically, we only focus on Big 4 audit firms as they have enough resources to audit clients of any size and complexity. Furthermore, we only study market segments where all Big 4 auditors are present which allows us to avoid market segments where some audit firms are not present due to their strategic choices as well as market segments dominated by a monopolist. We contribute to the existing literature by conducting a pairwise-comparison of clients within a market segment, which allows for a much more detailed study of client preferences compared to the prior studies of Dunn et al. (2011), Hogan and Jeter (1999), Krishnan (2005) and Kwon (1996) that only examine aggregated industry-level parameters such as the four-firm client concentration ratio assuming the same degree of competition for all clients within a market segment. Furthermore, prior studies investigating audit firm choice focus on product similarity between clients (Bills, Cobabe, Pittman, and Stein, 2019) and similarity in textual financial disclosures (Brown and Knechel, 2016), while our study demonstrates that the similarity in financial characteristics of clients also play a role in the audit firm selection.In chapter two we focus on the association between individual characteristics of audit partners and audit quality as well as audit fees. We study general experience, industry specialization, portfolio size and gender as these characteristics are mainly significantly related to various audit outcomes in prior research (e.g. Cahan and Sun, 2015; Gul, Ma, and Lai, 2017; Hardies, Breesch, and Branson, 2015; Zerni, 2012). However, audit partner research faces significant challenges. First, audit partners and clients are not randomly assigned to each other and the reported findings may thus be driven by client heterogeneity rather than partner characteristics, and unobservable partner characteristics may also affect the reported associations. Second, most of these partner characteristics vary over time and the impact of within-partner changes in these characteristics over time might be different from the impact of between-partner differences due to audit partner switches within the same client. Therefore, in this chapter we study whether the documented association between various audit partner characteristics and audit quality as well as audit fees is driven by within-partner or between-partner variations in the partner characteristics. We also aim to disentangle the effects of partner attributes from unobservable client characteristics. We contribute to the literature by demonstrating that the effect of the within-partner variations in individual characteristics on audit quality and audit fees differs from the between-partner variations confirming the importance of controlling for unobservable and time-invariant client and audit partner characteristics in future research.Finally, in chapter three we study the association between individual reputation of audit partners and audit fees. While audit firm reputation has been extensively studied in prior research that reports higher audit quality and higher fees for reputable audit firms (Benston, 1985; Craswell, Francis, and Taylor, 1995; Irani, Tate, and Xu, 2015; Moizer, 1997), audit partner reputation studies have been limited to the effects of audit partner industry specialization (Nagy, 2012; Zerni, 2012). However, audit partners' individual reputation is likely not solely driven by their perceived industry knowledge as good reputation in one industry might spillover to other industries. Furthermore, partner industry specialization is not easily observable by the market and the used proxies may be subject to considerable measurement error. Therefore, we use an alternative proxy for individual reputation measuring it as a participation of audit partners in public institutions that consult and educate audit partners (e.g., AICPA in the USA, ACCA in the UK, NBA in the Netherlands, IBR in Belgium etc.). Our proxy thus captures the individual reputation of audit partners which can transcend across industries and audit engagements and may also serve as a clear signal of the partner's extensive knowledge and expertise to the market as public institution participation is publicly available information in our setting. Apart from developing a new measure for individual reputation, we also demonstrate the association between audit partner reputation and audit fees is conditional on the audit firm's reputation. Furthermore, we study audit reputation in a low litigation setting, which was unexplored before.

Jaar van publicatie:2020

Toegankelijkheid:Closed