The Relationship between the Audit Outputs and Managerial Entrenchment

Document Type : Original Article

Authors

1 Faculty of Economics and Administrative sciences, Ferdowsi University of Mashhad, Mashhad, Iran

2 Faculty of Economics and Administrative Sciences, Imam Reza International University, Mashhad, Iran

Abstract

The present study investigates the relationship between audit outputs (including audit quality, type of opinion, audit fee, and timeliness) and managerial entrenchment in firms listed on the Tehran Stock Exchange. The multivariate regression model is used for hypothesis testing, research hypotheses were tested using a sample of 678 listed observations on the Tehran Stock Exchange during 2012-2017, and the exploratory factor analysis of 12 variables (including CEO duality, financial expertise, and CEO industry, board compensation, managerial ownership, tenure, and CEO consistency, board independence, financial expertise, and board industry, correlation and board effort) is used for examining managerial entrenchment. As expected, the results show a significant relationship between audit outputs and managerial entrenchment, such that audit fee and audit quality are negatively associated with managerial entrenchment, and the relationship between report delay and type of opinion and managerial entrenchment is positive and significant. By adding new variables to measuring managerial entrenchment, the present study provides a better evaluation of this index. Moreover, it contributes to the field because the previous studies have benefited from limited proxies for this purpose. 

Keywords

References

  1. Abad, D. Sánchez‐Ballesta, J.P. and Yagüe, J. (2017). Audit opinions and information asymmetry in the stock market, Accounting and Finance, 57(2), 565-595. https://doi.org/10.1111/acfi.12175.
  2. Abdelsalam, O.H. and Street, D.L. (2007). Corporate governance and the timeliness of corporate internet reporting by the UK listed companies, Journal of International Accounting, Auditing and Taxation, 16(2), 111-130. org/10.1016/j.intaccaudtax.2007.06.001
  3. Afify, H.A.E. (2009). Determinants of audit report lag: Does implementing corporate governance have any impact? Empirical evidence from Egypt, Journal of Applied Accounting Research, 10(1), 56-86. org/10.1108/09675420910963397
  4. All sufy, F.J. Alambaideen, H.I.M. Alabbad, N.H and Makhlouf, M.H. (2013). Corporate governance and its impact on the quality of accounting in the industrial community shareholding Companies listed in Amman financial market-Jordan, International Journal of Humanities and Social Science, 3(2), 184-195. http://www.ijhssnet.com/
  5. AlQadasi, A. and   Abidin, S. (2018). The effectiveness of internal corporate governance and audit quality: the role of ownership concentration – Malaysian evidence, Corporate Governance: The International Journal of Business in Society, 18(2), 233-253, org/10.1108/CG-02-2017-0043
  6. Blankley, A.I. Hurtt, D.N. and MacGregor, J.E. (2014). The relationship between audit report lags and future restatements Auditing, A Journal of Practice & Theory, 33(2), 27-57. org/10.2308/ajpt-50667
  7. Casterella, J.R. and Francis, J. R. Lewis, B.L. and Walker, P.L. (2004). Auditor industry specialization, client bargaining power, and audit pricing, Auditing: A Journal of Practice and Theory, 23(1), 123-140.  org/10.2308/aud.2004.23.1.123
  8. Chan, K.H. Lin, K.Z. and Zhang, F. (2007). On the association between changes in corporate ownership and changes in auditor quality in a transitional economy, Journal of International Accounting Research, 6(1), 19-36. org/10.2308/jiar.2007.6.1.19
  9. Chen, H. Chen, J.Z. Lobo, G.J. and Wang, Y. (2011). Effects of audit quality on earnings management and cost of equity capital: Evidence from China, Contemporary Accounting Research, 28(3), 892-925. org/10.1111/j.1911-3846.2011.01088.x
  10. Choi, J.H. Kim, J.B. Liu, X. and Simunic, D.A. (2008). Audit pricing, legal liability regimes, and Big 4 premiums: Theory and cross‐country evidence”, Contemporary Accounting Research, 25(1), 55-99.   org/10.1506/car.25.1.2
  11. Cohen, J.R. Krishnamoorthy, G. and Wright, A. (2004),. The Corporate Governance Mosaic and Financial Reporting Quality, Journal of Accounting Literature, 23(1), 87-152.
  12. Davidson III, W.N. Jiraporn, P. Kim, Y.S. and Nemec, C. (2004). Earnings management following duality-creating successions: Ethno statistics, impression management, and agency theory, Academy of management journal, 47(2), 267-275. org/10.5465/20159577
  13. DeAngelo, L.E. (1981). Auditor size and audit quality, Journal of accounting and economics, 3(3), 183-199.
  14. Desender, K.A. Aguilera, R.V. Crespi-Cladera, R. and García Cestona, M.Á. (2013). When Does Ownership Matter? Board Characteristics and Behavior, Strategic Management Journal, 34(7), 823-842.  org/10.1002/smj.2046
  15. Diamond, D.W. and Verrecchia, R.E. (1991). Disclosure, liquidity, and the cost of capital”, The journal of Finance, 46(4), 1325-1359.‏
  16. Fama, E.F. (1980). Agency problems and the theory of the firm, Journal of political economy, 88(2), 288-307. 
  17. Farooq, U. Kazmi I. Uaman, M. and Latif, I. (2018). Corporate Governance and Audit Fees: Evidence from a Developing Country Pakistan, Journal of Commerce and Social Sciences, 12(1), 94-110.
  18. Felix, W.L. and Kinney, J.W.R. (1982). Research in the auditor's opinion formulation process: State of the art, Accounting Review, 57(2), 245-271.
  19. Gist, W.E. (1992). Explaining variability in external audit fees,” Accounting and Business Research, 12(89), 79-84.
  20. Givoly, D. and Palmon, D. (1982). Timeliness of annual earnings announcements: Some empirical evidence, Accounting review, 57(3), 486-508.
  21. Gul, F.A. Chen, C.J. and Tsui, J.S. (2003). Discretionary accounting accruals, managers' incentives, and audit fees, Contemporary accounting research, 20(3), 441-464. org/10.1506/686E-NF2J-73X6-G540
  22. Jensen, M.C. (1986). Agency costs of free cash flow, corporate finance, and takeovers, The American economic review, 76(2), 323-329.
  23. Jensen, M.C. (1993). The modern industrial revolution, exit, and the failure of internal control systems, The Journal of Finance, 48(3), 831-880.
  24. Jensen, M.C. and Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of financial economics, 3(4), 305-360. org/10.1016/0304-405X(76)90026-X
  25. Jiraporn, P. Chintrakarn, P. Tong, S. and Treepongkaruna, S. (2018). Does board independence substitute for external audit quality? Evidence from an exogenous regulatory shock, Australian Journal of Management, 43(1), 27-41. org/10.1177/0312896217712334
  26. Jizi, M. and Nehme, R.  (2018). Board monitoring and audit fees: the moderating role of CEO/chair dual roles, Managerial Auditing Journal, 33(2), 217-243, org/10.1108/MAJ-10-2016-1464
  27. Johl, S. Jubb, C.A. and Houghton, K.A. (2007). Earnings management and the audit opinion: evidence from Malaysia, Managerial Auditing Journal, 22(7), 688-715. org/10.1108/02686900710772591
  28. Kazan, E. (2016).  The impact of CEO compensation on firm performance in Scandinavia, Bachelor's thesis, University of Twente. http://purl.utwente.nl/essays/71332
  29. Klai, N. and Omri, A. (2011). Corporate governance and financial reporting quality: The case of Tunisian firms”, International Business Research, 4(1), 158-166. org/10.5539/ibr.v4n1p158
  30. Li, L. and Kuo, C.S. (2017). CEO equity compensation and earnings management: The role of growth opportunities, Finance Research Letters, 20, 289-295.org/10.1016/j.frl.2016.10.013
  31. Matsunaga, S.R. and Yeung, P.E. (2008). Evidence on the Impact of a CEO's Financial Experience on the Quality of the Firm's Financial Reports and Disclosures, Available at SSRN: org/10.2139/ssrn.1420182 (accessed 15 Sep 2010).
  32. McGee, R. and Yuan, X. (2012). Corporate governance and the timeliness of financial reporting: a comparative study of the People's Republic of China, the USA and the European Union, Journal of Asia Business Studies, 6(1), 5-16. org/10.1108/15587891211190679
  33. Naimi, M. Nor, M. shafie, R. and Wan Nordin, W.H. (2012). Corporate Governance and Audit Report Lag in Malaysia,  Asian Academy of Management Journal of Accounting and Finance, 6(2), 57-84.
  34. Rittenberg, L.E. Johnstone, K.M. and Gramling, A.A. (2012), Auditing: A business risk approach, 8th ed, South-Western CENGAGE Learning, Mason, OH. ASIN: B00A3FH1ZE
  35. Rusmin, R. and Evans, J. (2017). Audit quality and audit report lag: case of Indonesian listed companies, Asian Review of Accounting, 25(2), 191-210. org/10.1108/ARA-06-2015-0062
  36. Salehi, M. Lari Dasht Bayaz, M. and Naemi, M. (2018). The effect of CEO tenure and specialization on timely audit reports of Iranian listed companies, Management Decision, 56(2), 311-328. DOI: 1108/MD-10-2017-1018
  37. Samaha, K. and Khlif, H. (2017). Audit-related attributes, regulatory reforms and timely disclosure: Further evidence from an emerging market, Journal of Financial Reporting and Accounting, 15(2), 158-179. org/10.1108/JFRA-08-2015-0077
  38. Stanley, J.D. (2011). Is the audit fee disclosure a leading indicator of clients' business risk?, Auditing: A Journal of Practice & Theory, 30(30), 157-179.‏ https://doi.org/10.2308/ajpt-10049
  39. Susanto, Y.K. and Pradipta, A. (2017). Corporate governance and audit decision making, Corporate Ownership & Control, 15(1-2), 381-386. org/10.22495/cocv15i1c2p7
  40. Titman, S. and Trueman, B. (1986). Information quality and the valuation of new issues, Journal of accounting and economics, 8(2), 159-172. org/10.1016/0165-4101(86)90016-9
  41. Uzun, H. Szewczyk, S.H. and Varma, R. (2004). Board composition and corporate fraud. Financial Analysts Journal, 60(3), 33-43.
  42. Watts, R.L. and Zimmerman, J.L. (1986). Positive Accounting Theory, Prentice-Hall Inc.
  43. Whisenant, S. Srinivasan, S. and Kannan, R. (2003). Evidence on the joint determination of audit and non‐audit fees. Journal of accounting research, 41(4), 721-744. org/10.1111/1475-679X.00121
  44. Willenborg, M. (1999), Empirical analysis of the economic demand for auditing in the initial public offerings market, Journal of Accounting Research, 37(1), 225-238.‏

 

Send comment about this article
CAPTCHA Image

Files

Share

How to cite

Statistics