Auditing

Prior studies examine either CEO, CFO, or audit committee member gender as a determinant of audit quality. In contrast, this study makes the unique contribution of examining the interactive effects between a gender diverse CEO-CFO dyad and a gender diverse audit committee on audit quality. Further, prior studies examine the attribute of gender as a determinant of audit quality in isolation. I examine the effect of gender on audit quality in tandem with the potentially moderating effect of managerial overconfidence. In doing so, this study makes the unique contribution of examining whether the socialized construct of gender, or the cognitive bias of overconfidence, will weigh more heavily on decisions that relate to audit quality. Results supplement social role and role congruity theories which suggest female leaders are socialized to adopt a management style resulting in more transparent financial reporting and higher audit quality. Specifically, I find incrementally higher audit quality associated with a gender diverse CEO-CFO dyad and audit committee. Further, I find firms with overconfident female CFOs are associated with higher audit quality than firms with overconfident male CFOs. This implies the pressure to maintain the socialized gender role appears to constrain the female manager’s overconfident tendencies. Finally, in a subsample of overconfident CFOs, I find gender diverse audit committees temper female more than male overconfidence for effects on audit quality.

The addition of Key Audit Matters (KAM) to standard audit reports is one of the most significant changes to the audit report in decades. However, research on the informativeness of KAMs to investors is mixed. I add to this literature by examining whether variation in how goodwill impairment KAMs (GIKAM) are determined influence their informativeness. I first develop a determinants model to predict when an audit client would receive a GIKAM and find that auditor quality (Big 4) and auditor independence (fee ratio) are negatively associated with the likelihood a client receives a GIKAM. I then use this model to create measures of unexpected GIKAMs to test the relationship between unexpected GIKAMs and market outcomes (price and volume). Using annual report date and three-day cumulative abnormal returns and abnormal trading volume, I find no relationship between unexpected GIKAMs and price or volume reactions. In my third hypothesis, I predict and find that GIKAMs are positively associated with goodwill impairment recognition using pooled and propensity score matched samples. These findings contribute to the growing literature on the usefulness of expanded audit reports as well as audit literature in general.

In the period leading up to the early 2000s there were a series of large company failures attributed at least in part to audit failures. Consequently, the Sarbanes Oxley Act (SOX) was promulgated in July 2002 to restore confidence in public company financial reporting and the work of auditors. The Public Company Accounting Oversight Board (PCAOB) was established by SOX and appointed as the regulator of the accounting firms that audit the financial statements of public companies. The PCAOB is required to routinely inspect the operations of these accounting firms in an effort to satisfy its mandate to bring about an improvement in the audit quality of these companies. These inspections extend to the non-US auditors of companies that are cross-listed in the US. Despite various mainly US studies on inspections, there is limited evidence that the inspections have resulted in improved audit quality. ... I examine companies whose securities are cross-listed in the US in the periods before and after inspection in order to provide evidence on the benefits of inspections. I find some evidence that inspections improve the audit quality of companies that are cross-listed in the US. This suggests the audit quality of companies from countries that do not permit inspections may be positively affected should inspections be permitted.

The Sarbanes-Oxley Act made audit committees directly responsible for the appointment, compensation, and supervision of companies' auditors. Limited research in the auditor selection process and PCAOB inspections suggest that managers, not audit committees, may still be selecting the auditors, and that inspection reports are not useful. This study addresses both of these areas. This paper considers two theories of governance, Agency Theory and Institution Theory, to analyze the audit committee members' auditor selection process. The study examines whether Audit Committee Members use two specific types of audit quality indicators, other than managers' recommendation, in evaluating auditors. In a setting where the manager recommends the auditor, the auditors' inspection results (favorable/unfavorable) and a prior manager/auditor affiliation (absent/present) are manipulated in a between-subject research design, using financially literate professionals as a proxy for audit committee members. The study finds that audit quality perception and auditor selection are jointly determined. Inspection results are positively associated with audit quality perception and auditor selection. The nature of a manager-auditor affiliation is directly associated with audit quality perception and inversely related to auditor selection. Further, controlling for perception, audit committee members are more likely to recommend auditors with unfavorable inspection results, if a prior affiliation with management is present than if an affiliation is absent. Overall, the results indicate that audit committee members are diligent in evaluating auditors, and PCAOB inspection results are useful. The results of this study contribute to the audit committee effectiveness and PCAOB literature.