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SUMMARY Recent research suggests that insiders of distressed firms, fearing legal jeopardy, pressure auditors not to issue going concern opinions (GCOs) for periods in which they undertake abnormally large sales of their shares. We propose and evaluate an alternative explanation that managers anticipate GCOs and time their trades to avoid insider sales in the GCO year (hereafter, the timing hypothesis). Consistent with the timing hypothesis, we find that insider sales increase two to four years prior to the issuance of a GCO and then decline in the year of GCO. Additional analysis suggests that insiders' anticipatory trading is enabled, at least in part, by early communication between auditors and their most important clients regarding the likelihood of a GCO. These early communications appear to reduce the likelihood of dismissal when auditors do eventually issue a GCO.

The Big 4 have acquired numerous consulting firms since the late 2000s, and regulators are concerned that a focus on consulting practices could negatively affect audit quality through audit firm culture. Audit firms counter by arguing that expertise gained through consulting can improve knowledge brought to audits. Using a difference-in-differences design, restatements as an audit quality proxy, and enterprise resource planning- (non-enterprise resource planning-) related acquisitions as a proxy for audit- (non-audit-) related acquisitions, we find nuanced support for both positions, depending on acquisition type. Audit quality increases (decreases) at the local office level after the acquisition of consulting firms that provide services that relate (do not relate) to the audit. Semi-structured interviews of 17 highly-experienced audit practitioners suggest that consulting firm acquisitions positively (negatively) affect audit quality through expertise transfer (shifting the culture towards commercialism) when acquisitions are (are not) audit-related. Thus, the effect of consulting firm acquisitions on audit quality appears to depend on how closely the acquired services are related to the audit.

These data analyses have been co-submitted to Accounting, Organizations, and Society with the research article “The Revival of Large Consulting Practices at the Big 4 and Audit Quality ” [2]. The purpose of these data analyses is to assist readers of the research article in obtaining further detailed analyses performed therein regarding the channels through which audit quality is affected by consulting firm acquisitions. These analyses include 1) the timing of the effects of consulting firm acquisitions on audit quality; 2) the size of the consulting firm acquisition's effect on audit quality; 3) whether acquisitions differentially affect restatement breadth; 4) whether results are due to the PCAOB targeting offices that acquire consulting practices; and 5) whether consulting firm acquisitions affect national audit firm audit quality. These analyses can inform future research on audit quality by providing insights that may be useful in developing research ideas and performing extensions of these analyses. Some data used in these analyses are available via a subscription to the Wharton Research Data Service while other data are publicly available via search of Google, and, with subscription, via search of Factiva, and the Capital IQ database.

We examine how third party verification of internal controls over financial reporting (ICFR) affects bank supervision by exploiting a change in size thresholds for required FDICIA-related internal control audits. We document that affected banks have higher reported levels of non-performing loans after the removal of internal control audit requirements compared to unaffected banks. This increase in non-performing loans is not accompanied by increases in past due loans, indicating more forthcoming reporting by management rather than operational deterioration. Furthermore, we find that the effects are concentrated in periods of heightened regulatory scrutiny and in banks with less stringent oversight in the pre-period. Examiners increase the length of targeted examinations and downgrade regulatory ratings, indicating an increase in stringency after the elimination of third-party verification of internal controls over financial reporting. Our findings suggest that third-party verification of internal controls is an imperfect substitute for bank supervision and efforts to rely upon externally generated assurance may heighten bank risk.

This study examines the possibility of a nonlinear association between auditor-provided non-audit services (NAS) and audit quality. The effect of NAS on audit quality has been a long-standing debate among academics and regulators. One view is that NAS can potentially create economic bonding between the auditor and client, lowering audit quality. Another view is that NAS creates knowledge spillover, improving audit quality. Our unique approach provides evidence of a nonlinear association between NAS and audit quality, where client misstatement rates are higher for audit offices with both high and low levels of NAS. We also find a nonlinear association between NAS provision and both missed material weaknesses and meeting or beating analysts’ consensus forecast by a small amount. This study should be of interest to audit firms, audit committees, and regulators because it advances our understanding of the effects of NAS on audit quality.