And we compare these measures in the financial statements of client companies (auditees) audited by sanctioned and non-sanctioned auditors between 1995 and 2007.
When using the likelihood of loss reporting as an indicator of earnings quality, the difference in audit quality between the sanctioned and the non-sanctioned auditors is higher for small firms.
Sanc_Aud 1 if the financial statements were audited by a sanctioned auditor in any year of the pre-sanction period, and 0 otherwise.
Endogeneity constitutes a key concern in the relationship between external sanctions and audit quality.
Guideline implementation strategies – e.g., education, academic detailing, audit and feedback, administrative sanctions – need not necessarily involve computers [ 25].
Another easily carried out reform would deal with confidential letters -- known as S.A.S.-50 letters after an auditing rule that sanctions them -- that auditing firms now provide to justify innovative accounting.
More specifically, we explore (a) the efficacy in identifying low quality auditors and (b) the effectiveness in enhancing the quality of subsequent statutory audits of the sanctioned auditors.
20 In addition, some of the benefits that have been found to be associated with checklist usage, such as enhanced team building and nurses speaking up, are likely to be negated if compliance audits lead to sanctions.
Ernst & Young has escaped being suspended from doing audit work in California, a sanction that could have caused a severe problem for the firm, and instead has agreed to accept three years of probation as a consequence of its relationship with PeopleSoft, which it audited at the same time it had business relationships with the company.
In order for disciplinary sanctions to spur an increase in audit quality, then, it is expected that sanctioned auditors must be bad auditors auditors who engage in generalized auditing misconduct which, we approach through the permissiveness toward accounting manipulation.
Our results highlight the role of government sanctions in assuring audit quality and have important practical implications to help international audit firms – and businesses more generally – successfully compete in China.
