British Accounting Review最新文献

Our study explores the association between social trust and private firms' choices to provide audited financial statements. By exploring an international sample from emerging markets, we find that private firms in countries with higher social trust are less likely to provide audited financial statements. This finding arises because social trust helps address contracting imperfections, substituting for audited financial statements in mitigating agency problems. Our study suggests that social trust renders private firms rely less on audited financial statements to facilitate contracting. We contribute to the literature on private firms’ financial reporting choices and the role of social trust in shaping economic decisions.

The extant literature focuses on the economic effect of significant changes that activist hedge funds enact, but shows mixed findings about the effect on the information environment. We investigate the informational effect on the third party — namely, the auditor — and argue that the potential significant changes in target firms heighten the complexity and uncertainty of the information environment, potentially increasing the workload or risk for auditors. We find that auditors react to hedge fund intervention by increasing audit fees. This relationship holds in a battery of identification tests that address endogeneity, including difference-in-differences analysis with propensity score matching, coarsened exact matching, entropy balancing, and a placebo test. Further analysis supports our conjecture that information complexity and uncertainty increase in target firms, leading to higher audit fees. Moreover, auditors increase their effort after intervention but do not seem to incur greater audit risk. This finding suggests that the information risk arising from the potential post-intervention changes is within auditors’ threshold of risk tolerance, consistent with the corporate governance effect of hedge fund activism.

We investigate how disclosure of key audit matters (KAMs) and related management footnote disclosures on a subjective accounting estimate relating to fair value in the financial statement footnotes affect auditors' perceptions of their accountability and their subsequent adjustment decisions. In relation to accountability, a substitution effect is found between KAMs disclosures and footnotes. That is, auditors believe that they are less accountable either when they can report on the fair value estimates in KAMs disclosures, or when management has provided expanded fair value related footnotes. However, we find that when the fair value disclosure is considered by both KAMs and expanded footnotes it results in the auditor recommending a more conservative fair value adjustment decision. Overall, our results show that the requirement to disclose KAMs does make a real difference and interacts with management's disclosures to affect auditors' perceptions of accountability and their adjustment decisions.

Despite the volume of auditing research over the last decade, relatively little is known about how auditors apply specific codified requirements. We use organisational routines as a schematic and Power's (2003) distinction between the front and backstage of an audit to explore the link between the broad prescriptions in ISA 701 and the micro-level performances of individual auditors to report key audit matters (KAMs). Interviews with 42 senior staff from large and mid-tier audit firms reveal how the ostensive elements of auditing routines result in coercive, normative and mimetic forces. These forces regulate and coordinate how audit procedures are executed to yield a frontstage representation of technical and procedural rigour. Yet, at the performative level experience, professional judgement and dynamic operating environments counter isomorphic forces. The messier backstage of activities provides an opportunity for minor modifications to audit procedures which can accumulate and impact the routine at the ostensive level. That the responsibility for the reporting KAMs vests with engagement leaders increases the opportunity for variability as they exercise professional judgement to modify the routine. Overall, our paper adds to the literature on how auditing is socially constructed and reveals how technical concepts are “transmitted” among individual practitioners to illuminate an understudied aspect of auditing. The study provides an original action-orientated perspective of how routines work in professional settings. It complements the largely inferential work on KAM determinants and should be relevant for standard-setters conducting a post-implementation review of ISA 701 and regulators monitoring KAM reporting.

This study examines the usefulness of new expanded audit report key audit matters (KAM) disclosures in assessing the level of financial distress present at a client firm. Using six years of KAM disclosures for U.K. Premium-listed firms beginning in 2013, we investigate the relation between firm financial distress and the number, risk level, financial statement impact, and individual nature of auditor-disclosed KAMs. We expand on literatures examining audit report disclosures in gauging financial distress assessments as well as the utility of expanded audit reporting. We find the greater the number of KAMs disclosed, the higher a firm's financial distress level. Additionally, results show entity-level KAMs, account-level KAMs with a primary impact on profitability and solvency, and certain types of individual KAMs are more likely to be disclosed when client firms face higher levels of financial distress. The results are robust to alternative measures of financial distress and to endogeneity tests. Our findings also indicate KAMs have predictive ability in assessing subsequent periods' financial distress levels. In all, evidence from this study suggests a way financial statement users can use independent auditor disclosures to assess one of the main risks associated with a firm - the risk of failure.

Decentralized finance (DeFi), which executes financial transactions using blockchain without an intermediary, has attracted over US$250 billion in total value locked (TVL) at its peak. However, little is known about how DeFi protocols assure users of the safety of their investments. This paper provides the first empirical evidence on DeFi audit services that check and verify the smart contracts underlying these protocols. Using data on 316 of the largest protocols, we find that those vetted by more smart contract auditors and by higher quality auditors have higher TVL and that these protocols have higher market capitalization (native token values). Using an event study approach, we document that TVL and token values significantly increase after a protocol's first audit, especially those involving a high-quality auditor. We also find that protocols with more auditors and higher audit quality exhibit a smaller drop in TVL and token values after the collapse of the TerraUSD stablecoin, which reduced aggregate DeFi TVL by almost 65%. Overall, our findings suggest that DeFi users and investors perceive audits as providing assurance regarding the safety of their deposits and investments.

Although the detrimental impact of traffic congestion on firm operations and human health is widely acknowledged, it is unclear whether auditors perceive traffic congestion as a risk factor. We posit and find that the traffic congestion levels in audit clients' domicile cities are positively associated with audit fees. Using a structured equation model, we identify and illustrate several channels that explain the effect of traffic congestion on audit fees. We also find evidence of audit fee increases after events that expose clients to higher levels of traffic congestion. Finally, the effect of traffic congestion on audit fees is more pronounced when clients have higher operation concentration near their headquarters or when auditors' offices are located near clients’ headquarters. Collectively, our findings suggest that auditors view traffic congestion as a risk factor that is priced into audit fees.

Using unique and detailed data on audit partners, this study examines how audit firms make human resource allocation decisions. The empirical results show that clients with higher risks (i.e. tax, legal, and asset valuation risks) are more likely to be audited by partners with corresponding domain-specific expertise, and these partner–client matches are more likely to happen when audit firms have strong incentives to reduce engagement risks or have a favourable information environment to gain client-specific knowledge. The results are robust to different model specifications and alternative measures. We also list several reasons to support that the ‘client preference effect’ is less likely to be an alternative explanation. Finally, we find that audit firms' partner–client matches help reduce engagement risks and improve audit quality. This paper sheds light on audit firms' human resource allocation decisions and extends the literature on auditor expertise by investigating audit experts on tax, legal issues, and asset valuation that differ from the industry experts predominantly examined in the prior literature.

We investigate whether corporate adoption of blockchain technology is associated with a change in firms' financial reporting behavior. On one hand, the features of blockchain technology (immutability, decentralized consensus, and real-time data sharing) can enhance data integrity, suggesting corporate blockchain adoptions may reduce earnings management. However, despite fast growth in blockchain adoptions, it remains unclear whether improved financial reporting quality or reduced accounting manipulation is a motivating factor in firms' blockchain adoption as firms vary in how they implement this new technology. On the other hand, the hype and/or increased expectations associated with blockchain adoptions, as well as the market's misperception that blockchain adoption could increase data integrity, may incentivize and provide opportunity for firms to upwardly manage earnings. We conduct our tests in the setting of the supply chain, as prior work establishes that shocks to one firm can impact linked firms through customer-supplier relationships. Our empirical evidence supports the latter prediction, as we find robust evidence that supplier firms' earnings management increases after their customers adopt blockchain. This result holds with numerous robustness tests. We provide direct evidence consistent with hype/increased expectations and reduced monitoring of supplier firms. Our findings suggest unintended consequences of blockchain adoption on financial reporting.

In our case study of a Finnish bank, we found that the role identity of management accountants is becoming fluid, i.e., it is constantly adjusting to accommodate shifting role expectations and changing context-specific demands. Digitalization and information technology (with such tools as artificial intelligence and robotic process automation) are key drivers of change. Furthermore, banking is also a regulated field with an increasing amount of data to be interpreted. The combination of these rather different trends is challenging for management accountants as they strive to cope with multiple pressures. We explore the role identity of management accountants (called ‘controllers’ in our case), and we find varying and fluid roles, including the roles discussed in the existing accounting literature, including the traditional ‘bean counter’ role and the ‘business partner’ role, as well as new, typically IT-related, specialist roles. We suggest that their fluid role identity enables controllers in our case to cope with continuously evolving tasks, and with changing role expectations. In this context, controllers are increasingly working in agile teams with specialists with diverse educational backgrounds and expertise.