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We examine whether and how auditors incorporate rollover risk in assessing a client's risk. Rollover risk is the risk associated with long-term debt maturing in 1 year, which has to be refinanced or settled shortly. Debt has two counteracting effects on firms' riskiness: increased liquidity risk and increased monitoring. The finance literature suggests that rollover risk is an apparent risk factor because it results in high liquidity risk but only a weak (or limited) monitoring benefit. Consistent with that literature, we show that auditors increase audit fees, exhibit a higher likelihood of issuing a going-concern opinion, and terminate relations with their clients more frequently as rollover risk increases. Our study is the first in the audit research literature to document that auditors factor rollover risk in their pricing, going concern, and client portfolio decisions. [ABSTRACT FROM AUTHOR]

We examine the relation between institutional investors' horizons and bank transparency. The novelty of this research is to consider three important aspects of transparency: disclosure quality, private information gathering and auditor fees. We find strong evidence indicating that banks dominated by long‐term (short‐term [ST]) institutional shareholders exhibit higher (lower) levels of disclosure quality. However, there is no evidence that investor horizon has a differential effect on private information gathering and audit pricing. The study employs alternative proxies and estimations such as two‐stage least squares and propensity score matching to address endogeneity. We also document that banks with higher ST institutional shareholding are associated with lower crash risk. These findings are particularly significant because poor bank transparency has been identified as a contributing factor to the 2007–2009 financial crisis. [ABSTRACT FROM AUTHOR]

We examine whether audit quality inputs are related to the conformity of financial statements to Benford's law. We find that overall financial statement conformity increases with audit fees, nonaudit fees, and audit report lag, and decreases with audit firm tenure. We also find that these audit quality inputs are more strongly associated with income statement conformity than with cash flow statement conformity. Our findings document the role that auditing plays in enhancing the conformity of financial statements to Benford's law. [ABSTRACT FROM AUTHOR]

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We examine the effects of audit quality on earnings management and cost of equity capital for two groups of Chinese firms: state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs). The differences in the nature of the ownership, agency relations and bankruptcy risks lead SOEs to have weaker incentives than NSOEs to engage in earnings management. As a result, the effect of audit quality in reducing earnings management will be greater for NSOEs than for SOEs. In addition, investors’ pricing of information risk as reflected in the cost of equity capital will be more pronounced for NSOEs than for SOEs with high and low audit quality. We find empirical evidence consistent with these hypotheses. Our findings indicate that (1) while high-quality auditors play a governance role in China, that role is limited to a subset of firms, and (2) even under the same legal jurisdiction, the effects of audit quality (in the form of lower earnings management and cost of equity capital) vary across firms with different ownership structures. Our study extends prior research by focusing on the economic consequences of SOEs’ and NSOEs’ auditor choices and underscores the importance of controlling for ownership type when conducting audit research [ABSTRACT FROM AUTHOR]

SUMMARY: Using data from the Chinese market where related party transactions (RPTs) are particularly prevalent, we examine how the independent auditor responds to the potentially heightened risk of RPTs and the efficacy of the auditor's response. First, we find that the auditor is more likely to issue a modified audit opinion that specifically discusses RPTs (RPTMAO) to firms reporting higher related sales or related lending, but not to firms reporting higher RPTs of other categories (i.e., related purchases, related borrowing, and related assets/equity transactions). These findings suggest that the auditor alerts investors to the possibility of earnings management and/or expropriation risk from related sales or related lending through audit opinions. The positive relation between related sales and RPTMAO is driven by related sales with nonmarket-based or undisclosed pricing policy and related sales above the industry average. Second, RPTMAO has robust predictive power for future RPT-related restatements, and the predictive power is greater than that of modified opinions that do not specifically discuss RPTs, suggesting that the auditor is effective at communicating the risk associated with RPTs through opinion modifications, especially RPTMAOs. JEL Classifications: M49 Data Availability: Data used in this study are available from public sources. [ABSTRACT FROM AUTHOR]

Using an international sample of firms from 31 countries, we study the relation between auditor quality and corporate tax aggressiveness. Employing an indicator variable for tax aggressiveness when the firm's corporate tax avoidance measure is within the top quintile of each country-industry combination, we find strong evidence that auditor quality is negatively associated with the likelihood of tax aggressiveness, even after controlling for other institutional determinants such as home-country tax system characteristics. We also find that the negative relation between auditor quality and the likelihood of tax aggressiveness is more pronounced in countries where investor protection is stronger, auditor litigation risk is higher, the audit environment is better, and capital market pressure is higher. [ABSTRACT FROM AUTHOR]

We identify two research design issues that explain the inconsistency between the theoretically predicted negative relation between audit effort and misstatements (measured using restatements) and empirical findings. First, auditor risk adjustment behavior induces an upward bias in the association between audit effort and restatements. Second, the theoretical prediction applies only to audited financial reports (i.e., annual reports) and not to unaudited reports (i.e., interim quarterly reports). Comingling restatements of audited with unaudited reports introduces an additional upward bias in the association between audit effort and restatements. After correcting for these two sources of bias, we find a robust negative association between audit effort and annual report restatements. [ABSTRACT FROM AUTHOR]