The Influence of Audit Committee Financial Expertise on Earnings Quality: US Evidence

-- Bo Qin

An audit committee with financial expertise is expected to strengthen the firms' internal control system, and consequently, contribute to reliable and relevant financial reporting. The controversial definition of "financial expert" was intensively commented on before the Securities and Exchange Commission (SEC) stipulated the final rules. In this study, the author examines whether the impact of audit committee's financial expertise on earnings quality as measured by returns-earnings relation varies with the way the "financial expert" is defined.The results indicate that the firms with an accounting-literate professional serving on the audit committee are more likely to have high quality of reported earnings than others without such an expert. In addition, the size of the audit committee with accounting-related expertise has a positive impact on earnings quality. In contrast, the presence of a financial expert under SEC final definition is not significantly related to earnings quality. The results are robust with other influential factors, such as earnings growth, persistence, firm size, and industry specificity, taken into account.

© 2007 IUP . All Rights Reserved.

The Impact of Regulatory Sanctions to Auditor Independence: Some Evidence from Malaysia

-- Zulkarnain Bin Muhamad Sori,
Yusuf Karbhari and Mohamad Ali Abdul Hamid

This paper examines four issues relating to the impact of regulatory sanctions to auditor independence: peer review; risk of disciplinary action by professional bodies, risk of action by the investigation committee of the Malaysian Institute of Accountants (MIA) and effective enforcement measures. The majority of the auditors, loan officers and senior managers of Malaysian public-listed companies that participated in this study agreed that auditor independence would be safeguarded on the existence of peer review program and there are effective enforcement activities by the regulators. The risk of being referred to professional bodies' disciplinary committees and the Investigation Committee of the MIA has been regarded to safeguard independence.

© 2007 IUP . All Rights Reserved.

Reasonableness of Audit Expectation Gap: Possible Approach to Reducing

-- Mahdi Salehi

In recent years there has been considerable debate about the nature and scope of audit practices, and the so called, audit expectation gap—namely the differences between what auditors actually do and what third parties think auditors do or should do in conducting the audit practice. So far, three components of audit expectation gap have been identified. According to some researchers, the nature of the expectation gap may never be eliminated, but it may be reduced. In this paper, the author focuses on the reasonableness expectation gap and believes that for reducing such a gap, a possible way is through increased public awareness of the nature and limitation of audit.

© 2007 IUP . All Rights Reserved.

The Impact of Auditor-Client Relationships on the Reversal of First-time Audit Qualifications

-- Michael J Meyer, John T Rigsby and Jeff Boone

The purpose of this paper is to examine whether auditor-client relationships have an effect on the decision by an auditor to remove an audit qualification. The paper tracks the event history of a sample of firms from the issuance of a first time audit qualification for going concern and non-going concern contingencies (initial qualification issued between 1983 and 1987, all pre Statement of Auditing Standard (SAS 58) to the issuance of a clean opinion (up through 1995 when SAS 79 was issued). Attachment theory provides a theoretical framework for the variables analyzed and discrete time survival analysis is used as the statistical method in the analysis so as to evaluate each company year from the initial unclean opinion to the year a clean opinion is issued. It is found that interpersonal and interorganizational attachment has a significant impact on those opinion decisions that require more auditor judgment (i.e., going concern). This study examines the linkage between auditor tenure and audit quality in a broader context than has been examined to date. Using attachment theory for the foundation, auditor tenure can be viewed as one measure of the attachment between auditors and clients. In this study, a number of measures of both interpersonal and interorganizational attachment between auditors and clients are included. Further, auditor opinion judgments are examined as a determinant of auditor quality. Finally, discrete-time survival analysis is employed which allows the tracking of the entire event history from initial qualification to removal of the qualification, something not possible with most standard statistical techniques.

© 2007 Emerald Group Publishing Limited. This paper was earlier published in Managerial Auditing Journal, Vol. 22, No. 1, pp. 53-79. Reprinted with permission.