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    Essays on international auditing : a thesis presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Accountancy at Massey University, Auckland, New Zealand
    (Massey University, 2021) Sun, Xuan Sean
    This research investigates the determinants of both audit fees and the purchase of non-audit services using multi-country data. In the current globalized economy and in an environment of increased labour mobility, auditors play a crucial role in assuring the quality of financial reporting. At the same time, auditors could provide certain professional non-audit services to their audit clients. Understanding the factors influencing the demand for, or the provision of, audit and non-audit services is of interest to standard setters, corporate governance participants, and both individual and institutional investors, among others. Furthermore, under the current globalized environment, the role played by country-level institutional factors is especially important. This thesis is organized into three essays: (i) workforce environment, labour market flexibility, and audit fees; (ii) a literature review of auditor-provided tax services (APTS, one type of non-audit services); and, finally, (iii) book-tax conformity and the demand for APTS. In Essay One, using a dataset from 30 countries over the period from 2002 to 2017, I examine the effects of audit clients’ workforce environment on audit fees as well as the role that national labour market flexibility plays in this relationship. I find evidence that audit fees are significantly lower for firms with a good workforce environment, suggesting that auditors perceive such clients as less risky; as a result, auditors expend less effort and/or charge a lower risk premium. Furthermore, I find this effect to be stronger for firms in countries with a more flexible labour market. My study contributes to the international audit fee literature by identifying employee welfare as a distinct audit pricing factor, above and beyond the effects of overall corporate social responsibility practices. Essay Two reviews the empirical literature on the determinants and consequences of APTS and provide some directions for future research. I first summarize two theoretical but competing perspectives on the provision of APTS, namely, the knowledge spillover effect and the impaired independence effect. I then review the evolution of APTS-related disclosures and regulations in selected jurisdictions. My review of the determinants of APTS suggests that such decisions are related to the cost-benefit trade-off. I then review the literature on the consequences of APTS. This strand of the literature in the U.S. supports the knowledge spillover effect, but the findings in non-U.S. settings are mixed. The market perceptions of APTS in both the U.S. and non-U.S. settings suggest that market participants react to APTS negatively during uncertain periods, whereas non-archival studies suggest that the perceptions of APTS vary between stakeholder groups and with the types of APTS provided. Finally, Essay Three examines the impact of different levels of required book-tax conformity on audit clients’ demand for APTS. Utilizing a sample from 11 European Union (EU) countries between 2013 to 2019, I find evidence that listed firms in EU countries with a high level of required book-tax conformity are less likely to purchase tax services from their incumbent auditors, and also tend to pay lower tax service fees. Furthermore, I find these effects to be weaker after the implementation of the APTS-related EU Regulation that became effective from 2016. My findings contribute to the APTS literature by identifying a country-level institutional characteristic, i.e., the required level of book-tax conformity, as a potential determinant of appointing incumbent auditors as tax service providers. I also provide preliminary evidence of the effect of relevant EU regulation on changes in the demand for APTS.
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    Auditor rotation and audit quality : a thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy at Massey University, Palmerston North, New Zealand
    (Massey University, 2020) Uthayapong, Thanida
    The thesis investigates the effect of mandatory audit partner rotation (MAPR) on audit quality of listed companies that underwent three rotation periods in the Thai capital market. MAPR is one of the requirements that regulators in many countries impose on auditors in order to enhance audit quality. The benefit of MAPR is in the incoming audit partner enhancing auditor independence and offering fresh insights to a client, which is expected to improve audit quality as evidenced by greater financial statements quality. On the other hand, the new lead audit partner can lack client-specific knowledge, which may impair audit quality. There are ongoing discussions about the benefits of MAPR in a number of countries but only a few studies have been conducted on the effects of MAPR in developing countries. This thesis therefore aims to fill this gap by examining the impact of MAPR on audit quality in a developing country, Thailand. This thesis is framed within the Agency Theory framework and also uses the IAASB (2014) framework for audit quality to identify the factors which have an impact on audit quality. A total of 417 firm-year observations between the years 2006 and 2017 are made of 286 non-financial Thai listed companies, all of which with experience of MAPR. The sample also includes multiple numbers of MAPR. The performance-matched discretionary accruals (DA) developed by Kothari, Leone, and Wasley (2005) are used to measure DA as a proxy for audit quality. The results in this thesis suggest that MAPR does not significantly improve audit quality and the relationship between MAPR and audit quality is weak. It is possible that an incoming lead audit partner lacks client-specific information, is disadvantaged by the gradual learning curve in understanding a client’s businesses, and may face challenges in communication within the audit team, all of which may not positively impact on audit quality. There is no strong evidence of an association between audit quality and other impacting factors, such as Big 4 audit firms, the audit firm industry specialist, the audit partner industry specialist, and the audit partner busyness. Results also present no evidence of significant improvement in audit quality in the first MAPR subsequent to voluntary rotation. However, MAPR does seem to improve audit quality under certain conditions, i.e. audit quality is improved depending on the number of rotation times, audit firm size and companies’/ clients’ size. Only listed companies with three MAPR audited by Big 4 audit firms and only larger listed companies with three MAPR have higher audit quality within the MAPR framework. Further, only listed companies with three MAPR that have a positive DA, are associated with higher audit quality. The overall results of this thesis suggest that MAPR requirement does not immediately lead to an improvement in audit quality, at least not in the Thai capital market.
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    The impact of corporate political connections and political instability on audit fees and earnings quality in Pakistan : a thesis presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Accountancy at Massey University, Albany, New Zealand
    (Massey University, 2018) Ahmad, Fawad
    This study investigates the impact of corporate political connections on audit fees and earnings quality. Prior literature reports that politically connected companies pay higher audit fees and have poor earnings quality. The key motivation of this study hinges on the argument that in some institutional settings, there can be multiple power sources with dissimilar degrees of resource allocation and decision making abilities. This will affect the costs and benefits accrued to politically connected companies. For example, Pakistan has two visibly distinct power sources, political institutions, and the military. Political institutions are fragile and politicians are prone to public, media, and judicial scrutiny. The military has emerged as a key power player enabling them to command the process of resource allocation. Based on this visible distinction of the power streams, this study segregates politically connected companies in Pakistan into two groups, companies connected to the political elites, termed as civil connected companies and military connected companies. This study also examines the impact of political instability on audit fees and earnings quality. Prior literature examining the impact of political instability reports that political instability results in higher business risk and poor economic performance. Prior auditing literature reports that auditors charge a price premium from high risk clients. Prior earnings quality literature reports that poor economic performance results in poor earnings quality. By combining these streams of literature, this study investigates the auditing and earnings quality implications of political instability. Essay 1 of this study investigates the political determinants of audit fees in the context of Pakistan. The results indicate that civil connected companies pay significantly higher audit fees while military connected companies pay significantly lower audit fees relative to non-connected companies. The findings for political instability indicate that political instability has a positive association with audit fees. Nonetheless, this positive association is weaker for military connected companies relative to non-connected companies. Results for the interaction effect for civil connected companies are not significant. Essay 2 of this study investigates the political determinants of earnings quality in Pakistan. Earnings quality is measured by the level of absolute magnitude of discretionary accruals and earnings persistence. The results indicate that civil connected companies report a significantly higher level of absolute magnitude of discretionary accruals indicating poor earnings quality, while the earnings persistence results are not significant for civil connected companies. The discretionary accruals results for military connected companies are not significant. Nevertheless, military connected companies have more persistent earnings indicating better earnings quality. Essay 2 also examines the impact of political instability on earnings quality. Results indicate a significant negative association between political instability and the level of absolute magnitude of discretionary accruals; and between political instability and earnings persistence. The interaction effects show that the negative association between political instability and the level of absolute magnitude of discretionary accruals is stronger for civil connected companies and not significant for military connected companies. The negative association between political instability and earnings persistence is weaker for military connected companies and not significant for civil connected companies. This study adds to the literature that aims to provide a deeper understanding of the relation between political connections, political institutions, and its auditing and earnings quality outcomes. The study adds to the existing political connections literature by identifying the military as a source of significant power. It also adds to the auditing and financial reporting literature by identifying political instability as a variable which significantly affects the audit fees and earnings quality.
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    Accounting standards complexity, audit fees and financial analyst forecasts in Australia : a thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy in Accounting at Massey University, Albany, New Zealand
    (Massey University, 2017) Miah, Muhammad Shahin
    While the beneficial effects of International Financial Reporting Standards (IFRS) on financial reporting quality, cost of capital, cross-country investment, corporate decision making and governance are well studied in the literature, there is relatively little research on the cost side of IFRS adoption and its impact on users. This thesis contributes by investigating the impact of IFRS complexity on two important groups of users of financial reports namely auditors and financial analysts. The hypotheses are built on the premise that principles-based standards are more complex than rules-based standards. This study examines the relationships between IFRS complexity, audit fees, and analyst forecast properties. IFRS is likely to require more of auditors in terms of professional expertise, time and effort, hence resulting in higher audit fees. Financial analysts may be similarly affected by the complexity of IFRS resulting in less accurate forecasts on key financial components. This thesis measures IFRS complexity based on individual IFRS standards specifically identified as having higher levels of complexity. Scores are then calculated to indicate the difference between these IFRS standards and their equivalent previous domestic accounting standards. The degree of complexity is also measured at aggregate level to indicate an overall complexity impact based on the combined score for all identified 'complex' IFRS standards. Findings indicate that aggregate IFRS complexity is positively and significantly associated with audit fees but that specific IFRS standards are identifiable as being paiticularly complex, hence explaining much of the positive relationship with audit fees. The results also reveal that the incremental effect of IFRS complexity on audit fees is more pronounced when finns are audited by city-level industly specialists as opposed to those audited by non­industly specialists. Furthermore, IFRS complexity is found to have a positive and significant association with analyst forecast properties (forecast errors, forecast dispersion, and forecast revision). Surprisingly some of the standards identified as being more complex for auditors (i.e., driving higher audit fees) do not appear similarly complex in relation to financial analyst forecast properties. Finally, this thesis investigates the moderating role of high quality audits (proxied by industry specialist auditors) on complexity and analyst forecast properties and finds that forecast errors decrease for firms which are exposed to higher levels of IFRS complexity if they are audited by city-level industly specialists. This study provides important insights for regulator regarding the complexity of specific IFRS standards. Findings may also be of benefit to countries which are in the process of adopting IFRS or planning to do so.
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    Audit committee independence and expertise, institutional ownership, and executive compensation as determinants of audit fees in the post-SOX era : a thesis presented in partial fulfilment of the requirements for the degree of Doctorate of Philosophy in Accounting at Massey University, Albany Campus, New Zealand
    (Massey University, 2011) Ananthanarayanan, Umapathy
    The objective of this dissertation is to examine the influence of firm-specific factors: audit committee independence and expertise, institutional ownership, and executive compensation, on audit fees in two different institutional settings in the post-Sarbanes Oxley Act (SOX) era. Prior studies on audit fee determinants examine the influence of these factors separately, from either the demand perspective or the supply perspective. These studies find inconsistent results. This dissertation examines the influence of all of these factors together considering both the demand and supply side perspectives. The enhanced requirements for audit under SOX increase the audit risk of auditors. SOX imposes requirements for more thorough audit processes, and the oversight of auditors. These requirements make auditors more susceptible to legal penalties. However, SOX also emphasizes better corporate governance arrangements for firms. The quality of a corporate governance arrangement can serve as a signal for the auditors concerning the audit risk associated with a firm. The better the corporate governance a firm enjoys the lower would be the level of audit risk. This lessens the need for more thorough audits and, thereby, reduces the audit fee for the audited company. This study uses the market perspective of price setting and regards audit fees as a price for audit services. While price could be regarded simply as an outcome of the quality of product demanded and supplied, there are many other factors that can influence price. Following the audit fee literature, this dissertation includes many determinants of audit fee including the firm-specific factors mentioned above. The study also looks at the influence of institutional settings on the price setting arrangements. In this regard, this study examines two different institutional settings, one a more regulated and highly litigious setting, and the other a less regulated and moderately litigious setting, to understand whether the variations in institutional settings influence the relation between the firm-specific variables and audit fees. The two institutional settings are those of the US and New iv Zealand audit markets, where the US market is more regulated and litigious than the New Zealand market. The study examines 4,490 US firm-years and 445 New Zealand firm-years from the years 2004 to 2008. The overall results suggest that the prevalence of independent audit committees and expertise has increased over the years in both countries. Therefore, no significant effect is found for the association between audit fees, and audit committee independence and audit committee expertise, except for the negative association for audit committee expertise in 2004. The result for institutional ownership is negative and significant for the US, whereas in New Zealand it is not significant. The likely reason for this difference is that financial institutions hold high levels of shares in US companies, whereas, in New Zealand the shareholdings of financial institutions is relatively small. Further analysis seems to suggest that, in New Zealand, corporate ownership in firms plays a stronger role in the audit fee setting process than institutional ownership. For executive compensation, the two countries observe different incentive arrangements. The US firms have large incentive-based salaries and stock option schemes, whereas the New Zealand firms mainly have base salaries. For all of these methods of compensation, the results show that when compensation is high, audit fee is also high suggesting that auditors perceive higher audit risk when executive compensations under these schemes are high. Further analyses of the above results reveal that the audit markets in both countries have supply-side market segmentation. Both countries seem to have three tiers of firms arising from the level of industry specialisation and the amount of audit fees charged. The level of audit fees varies between the tiers, and between the two countries for each tier. These variations suggest that the market for audit services has idiosyncrasies, and these idiosyncrasies vary across countries. The data of the two countries are re-examined using a pooled data test. The sample of this test comprises firms of similar size from each country. The results show that because of their stronger regulatory oversight environment, on a scale v relative to total assets, US firms have lower audit fees than New Zealand firms when audit committee expertise and basic executive compensation are higher. Taken as a whole, the findings of this dissertation provide strong support for the supply-side hypotheses of audit fee determination. The findings suggest that with better corporate governance arrangements in the post-SOX era, auditors perceive lower audit risk, which in turn, lowers audit fees. There is, however, some indication that strong regulations may have diminished the audit risk signalling capacity of audit committee independence and expertise.