Mandatory joint audit and audit quality in the context of the European blue chips
Abstract
This study investigates audit quality under joint and single audit regimes with a sample of large European firms. Both, the economic relevance of these companies, and the fact that the impact of joint audit on audit quality should be stronger when the audited company is a blue-chip firm motivate the study. If mandatory joint audit were positively associated with audit quality, French firms, under mandatory joint audit since 1966, should present higher audit quality compared to their European peers. The results do not indicate this to be the case. Specifically, similar levels of discretionary accruals are observed for French and other European firms. Furthermore, for the first time in the literature, evidence is reported indicating that French firms may even present lower audit quality than their European peers, when audit quality is measured by the likelihood of just beating earnings benchmarks. These results are expected to inform the ongoing debate in several countries about joint audits.
Keyword : mandatory joint audit, audit quality, discretionary accruals, earnings benchmarks, Standard and Poor’s 350 Europe,, audit firm type
How to Cite
Garcia-Blandon, J., Castillo-Merino, D., Argilés-Bosch, J. M., & Ravenda, D. (2021). Mandatory joint audit and audit quality in the context of the European blue chips. Journal of Business Economics and Management, 22(5), 1378-1395. https://doi.org/10.3846/jbem.2021.14959
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and Finance. Journal of Political Economy, 106(6), 1113–1155. https://doi.org/10.1086/250042
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Menon, K., & Williams, D. D. (2004). Former audit partners and abnormal accruals. The Accounting Review, 79(4), 1095–1118. https://doi.org/10.2308/accr.2004.79.4.1095
Nurunnabi, M., Donker, H., & Jermakowicz, E. (2020). Joint audits and mutual ties of audit firm networks. Business Horizons, 63(4), 435–449. https://doi.org/10.1016/j.bushor.2020.03.013
Quick, R., & Schmidt, F. (2018). Do audit firm rotation, auditor retention, and joint audits matter? An experimental investigation of bank directors’ and institutional investors’ perceptions. Journal of Accounting Literature, 41, 1–21. https://doi.org/10.1016/j.acclit.2018.01.003
Ratzinger-Sakel, N. V. S., Audousset-Coulier, S., Kettunen, J., & Lesage, C. (2013). Joint audit: Issues and challenges for researchers and policy makers. Accounting in Europe, 10(2), 175–199. https://doi.org/10.1080/17449480.2013.834725
Siddiqui, J. (2019). Are four eyes better than two? An examination of recent empirical evidence on the impact of joint audits. University of Manchester. https://assets.publishing.service.gov.uk/media/5c63fcd840f0b676d487d06b/dr_javed_siddiqui_response_to_update_paper.pdf
André, P., Broye, G., Pong, C., & Schatt, A. (2016). Are joint audits associated with higher audit fees? European Accounting Review, 25(2), 245–274. https://doi.org/10.1080/09638180.2014.998016
Aobdia, D. (2019). Do practitioner assessments agree with academic proxies for audit quality? Evidence from PCAOB and internal inspections. Journal of Accounting and Economics, 67(1), 144–174. https://doi.org/10.1016/j.jacceco.2018.09.001
Ball, R., Kothari, S. P., & Robin, A. (2000). The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics, 29(1), 1–51. https://doi.org/10.1016/S0165-4101(00)00012-4
Bédard, J. (2012). Discussion of “Audit Partner Specialization and Audit Fees: Some Evidence from Sweden”. Contemporary Accounting Research, 29(1), 341–348. https://doi.org/10.1111/j.1911-3846.2011.01153.x
Bédard, J., Piot, C., & Schatt, A. (2014). An evaluation of the French experience with joint auditing. https://doi.org/10.2139/ssrn.2165595
Carey, P. J., & Simnett, R. (2006). Audit partner tenure and audit quality. The Accounting Review, 81(3), 653–676. https://doi.org/10.2308/accr.2006.81.3.653
Castillo-Merino, D., Garcia-Blandon, J., & Martinez-Blasco, M. (2020). Auditor independence, current and future NAS fees and audit quality: Were European regulators right? European Accounting Review, 29(2), 233–262. https://doi.org/10.1080/09638180.2019.1577151
Competition and Markets Authority. (2019). Statutory audit services market study (Final report 18 April 2019). https://assets.publishing.service.gov.uk/media/5d03667d40f0b609ad3158c3/audit_final_report_02.pdf
DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183–199. https://doi.org/10.1016/0165-4101(81)90002-1
DeFond, M., & Park, C. W. (2001). The reversal of abnormal accruals and the market valuation of earnings surprises. The Accounting Review, 76(3), 375–404. https://doi.org/10.2308/accr.2001.76.3.375
DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2–3), 275–326. https://doi.org/10.1016/j.jacceco.2014.09.002
Deng, M., Lu, T., Simunic, D. A., & Ye, M. (2014). Do joint audits improve or impair audit quality? Journal of Accounting Research, 52(5), 1029–1060. https://doi.org/10.1111/1475-679X.12060
European Commission. (2010). Green paper: Audit policy: Lessons from the crisis (COM(2010) 561 final). Publications Office of the European Union. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52010DC0561&from=EN
European Parliament. (2014). Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission decision 2005/909/EC. Publications Office of the European Union. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014R0537
Financial Times. (2020, February 19). Watchdog threatens audit firms with extra reforms. https://www.ft.com/content/10a77c5a-5260-11ea-8841-482eed0038b1
Francis, J. R., & Wang, D. (2008). The joint effect of investor protection and Big 4 audits on earnings quality around the world. Contemporary Accounting Research, 25(1), 157–191. https://doi.org/10.1506/car.25.1.6
Francis, J. R., Richard, C., & Vanstraelen, A. (2009). Assessing France’s joint audit requirement: Are two heads better than one? Auditing: A Journal of Practice & Theory, 28(2), 35–63. https://doi.org/10.2308/aud.2009.28.2.35
Garcia-Blandon, J., Argilés-Bosch, J. M., & Ravenda, D. (2020). Audit firm tenure and audit quality: A cross-European study. Journal of International Financial Management & Accounting, 31(1), 35–64. https://doi.org/10.1111/jifm.12098
Holm, C., & Thinggaard, F. (2018). From joint to single audits–audit quality differences and auditor pairings. Accounting and Business Research, 48(3), 321–344. https://doi.org/10.1080/00014788.2017.1381910
Hoos, F., Pruijssers, J. L., & Lander, M. W. (2019). Who’s watching? Accountability in different audit regimes and the effects on auditors’ professional skepticism. Journal of Business Ethics, 156(2), 563–575. https://doi.org/10.1007/s10551-017-3603-6
Institute of Chartered Accountants in England and Wales. (2019). Shared and joint audits: Are two auditors better than one? ICAEW, London. https://www.icaew.com/-/media/corporate/files/technical/ audit-and-assurance/the-future-of-audit/shared-and-joint-audits.ashx
International Federation of Accountants. (2020). Joint audit: The bottom line – No clear evidence. IFAC, New York. https://www.ifac.org/system/files/publications/files/IFAC-Joint-Audit-The-Bottom-Line.pdf
Kermiche, L., & Piot, C. (2018). The audit market dynamics in a mandatory joint audit setting: The French experience. Journal of Accounting, Auditing & Finance, 33(4), 463–484. https://doi.org/10.1177/0148558X16680716
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and Finance. Journal of Political Economy, 106(6), 1113–1155. https://doi.org/10.1086/250042
Lesage, C., Ratzinger-Sakel, N. V. S., & Kettunen, J. (2017). Consequences of the abandonment of mandatory joint audit: An empirical study of audit costs and audit quality effects. European Accounting Review, 26(2), 311–339. https://doi.org/10.1080/09638180.2016.1152558
Lobo, G. J., Paugam, L., Zhang, D., & Casta, J. F. (2017). The effect of joint auditor pair composition on audit quality: Evidence from impairment tests. Contemporary Accounting Research, 34(1), 118–153. https://doi.org/10.1111/1911-3846.12244
Menon, K., & Williams, D. D. (2004). Former audit partners and abnormal accruals. The Accounting Review, 79(4), 1095–1118. https://doi.org/10.2308/accr.2004.79.4.1095
Nurunnabi, M., Donker, H., & Jermakowicz, E. (2020). Joint audits and mutual ties of audit firm networks. Business Horizons, 63(4), 435–449. https://doi.org/10.1016/j.bushor.2020.03.013
Quick, R., & Schmidt, F. (2018). Do audit firm rotation, auditor retention, and joint audits matter? An experimental investigation of bank directors’ and institutional investors’ perceptions. Journal of Accounting Literature, 41, 1–21. https://doi.org/10.1016/j.acclit.2018.01.003
Ratzinger-Sakel, N. V. S., Audousset-Coulier, S., Kettunen, J., & Lesage, C. (2013). Joint audit: Issues and challenges for researchers and policy makers. Accounting in Europe, 10(2), 175–199. https://doi.org/10.1080/17449480.2013.834725
Siddiqui, J. (2019). Are four eyes better than two? An examination of recent empirical evidence on the impact of joint audits. University of Manchester. https://assets.publishing.service.gov.uk/media/5c63fcd840f0b676d487d06b/dr_javed_siddiqui_response_to_update_paper.pdf