research
Publications
Auditors and Client Investment Efficiency: A Quasi‑replication and Further Insights from a Regulatory Change with Christopher Bleibtreu, Luciana Orozco and Zhenyang Shi
This study is a quasi-replication and extension of Bae et al. (2017), which examines the relationship between auditors’ characteristics and their audit clients’ investment efficiency. Whereas Bae et al. (2017) use U.S. public firm data, we draw a more general picture by using both public and private firm data from Norway. Overall, the results for Norwegian public and private firms are in line with those Bae et al. (2017) find for public U.S. firms. That is, audit clients invest more efficiently if their auditors have more knowledge and resources, measured by auditor market shares or whether a Big N audit firm performs the audit. Further, an auditor’s influence on its client’s investment efficiency is more pronounced when clients have a higher demand for information, proxied by client complexity. Finally, exploiting a regulatory change in 2011 that allowed small private Norwegian firms to opt out of previously mandatory auditing, we extend the study by Bae et al. (2017). We find that audits can increase investment efficiency for small private firms. Specifically, firms that dismiss their auditors tend to overinvest more than similar firms that are not eligible to opt out of auditing. Further, firms that voluntarily keep their auditor have an overall higher investment efficiency than similar firms that are not audited.
Bleibtreu, C., Erinc, M., Orozco, L., & Shi, Z. (2024). Auditors and client investment efficiency: a quasi-replication and further insights from a regulatory change. Journal of Business Economics, 1-38.
Link to an article on our paper
Working Papers
Auditor-Client Compatibility and Audit Quality with Tzachi Zach
We develop a new auditor-client fit metric that is based on topical compatibility between auditors and their clients by combining the results of PCAOB inspections with clients’ disclosures of their critical accounting policies. We show that auditor fit is negatively related to several traditional proxies of audit quality, including restatements, abnormal accruals, and Dechow-Dichev discretionary accruals. We document that the market reacts more strongly to the earnings of clients with greater auditor-client compatibility, providing more confidence in our new proxy. Moreover, we report that our new proxy performs better than traditional measures of auditor-client compatibility, such as over twenty versions of industry specialization. Finally, we document that auditor fit is positively associated with higher levels of real earnings management, consistent with stronger auditor oversight imposing higher costs on accrual earnings management. Our proxy demonstrates the importance of the results of PCAOB’s inspections, especially when combined with mandatory disclosures about companies’ critical accounting policies.
Auditing on the Edge: Spillover Effects of Having an Exposed Client with Stavriana Hadjigavriel
We investigate whether audit-clients that are under negative media exposure can cause negative spillover effects to other clients that share the same auditor as them. Using a sample of fraud-related events in the US between 2005-2020, we examine variations in the audit quality of the affected audit offices, i.e audit offices that have a client exposed to negative media coverage. We find that, if the accusation date of the exposed client falls within the fiscal year-end and the issuance of audit opinion of another client who shares the same auditor, then this client faces a drop in his audit quality in comparison to the other clients that belong to the same portfolio. Moreover; we show that the results are not more pronounced if the media accused clients trigger an SEC enforcement action (3.7% of the accused clients receive an SEC enforcement action), indicating that the results are not driven by the existence of fraud but rather by the media visibility. Results hold under a number of robustness checks.
Clients’ Financial Misconduct and Their Reactions to Auditors’ PCAOB Inspection Results
This study investigates the consequences of firms’ misconduct-related exposure to regulatory scrutiny driven by their auditors’ PCAOB inspection results. Using a text-based measure, I explore this exposure during the period of misconduct and the presence of exposure avoidance by clients. The findings point to some potential unintended consequences of increasing transparency in the audit industry.