Literature Review for Hypothesis 1 and 2

Running Head: LITЕRАTURЕ RЕVIЕW FОR НYРОTHЕSIS 1 АND 2 1

Literature Review for Hypothesis 1 and 2

Literature Review for Hypothesis 1 and 2

Hypothesis 1: “Ceteris Paribus, the Negative Association between Big FourAudits and Financial Reporting Fraud is Stable over Time in Recent Years.”

To answer the question of if Big Five audit worth persists over time, various literatures are reviewed (research articles). In a research by Lennox & Pittman (2010), the univariate examinations disclose that the relations between the Big Five Audits were negative all years between the year1981 and year 1995. The range in years is statistically substantial at 0.05 level or it can be best in most years (Lennox & Pittman, 2010).

Besides, the report revealed that there was a rapid transformation after the year 1995 with the similarity between the fraud and the Big Five Audits that became suggestively positive in 2001. The relation suggested that clients of the Big Five Audit Firms were most likely to obligate fraud than the customers of non-Big five companies in year earlier to passageway of “SOX.” In conclusion, article highlights that the univariate indication validates claim that the Big Five Audits was no longer in association with lower occurrence in accounting scheme of the years before 2002 (Wang & Yang, 2012).

Besides, in an article reported by Gray & Debreceny (2014), the underlying reasons behind the negative relation are unravelled. The article states that endogeneity in accountant selection is liable for the negative relationship amid Big Five fraud and audits. It adds that mostly the “Big Five Auditors” in general reduce occurrence of an accounting fraud. Wang & Yang (2012) states that the Big Five Companies might ‘‘screen out’’ their customers and opt to per take accounting fraud. Moreover, an audit can reject accepting an engagement of a corporation which break up accepted accounting values, or quit from appointment if a greater risk of material misstatements arises (Wang & Yang, 2012). Furthermore, (Cao, Chychyla, & Stewart, 2015), states that there maight be a ‘‘chosing’’ effect within corporations which are determined to be attractive in fraudulent financial reportage hesitating in choosing Big Five Audit corporations.

Hypothesis 2: “Ceteris paribus, the negative association between Big Five audits and accounting fraud stems from endogeneity in auditor choice.”

Latest investigation offers a suggestion that Big 5 Auditors do not offer raised audit quality compared to some auditors. The case is in line of regulating endogenous selection of auditor (Kim, Jang, & Cheung, 2016). In an article by Gray & Ratzinger (2010), the re-examination of this issue was conducted by use of a propensity-score. The same process identical to that used by latest research to control customers’ endogenous selection on auditor was selected. The finding revelled that customers of Big 4 Audit organizations are less likely to subsequently subject an accounting restatement than are customers of other auditors (Kim, Jang, & Cheung, 2016). In additional tests of the study, the author states that the study finds weak outcome. This is an indication that customers of the Big 4 auditors are likely to be less subject to accounting endorsements than are consumers of auditors (Gray & Ratzinger, 2010). He summarised that in engaging together, the study indication proposes that Big 4 auditors execute higher quality audits.

According to Carmona, Momparler, & Lassala (2015), they identify two research design issues. The issues explain the inconsistency between the theoretically predicted negative relation among audit effort and misstatements (measured using restatements) and empirical findings (Lennox & Pittman, 2010). First, the theoretical prediction applies only to audited financial reports and not to unaudited reports. Second, auditor risk adjustment behaviour induces an upward bias in the association between audit effort and restatements (Elfouzi, 2010). The study find that comingling restatements of audited with unaudited reports introduces an additional upward bias. This is in the association between audit effort and restatements. It then concludes that after correcting for these two sources of bias, we find a robust negative association between audit effort and annual report restatements (Wang & Yang, 2012).

In another research by Kim, Jang, & Cheung (2016), Big 4 auditors are believed. The trust is due to the fact that they are larger in size
and have better training programs. The trust provide higher audit quality compared to other auditors. Moreover, in additional analyses, results show that customers of the Big 4 Auditors are significantly less likely to be sanctioned by the SEC for an ”Accounting and Auditing Enforcement Release”
(AAER) than are customers of other auditors (Lennox & Pittman, 2010). However, he reviles that firms select their auditors and auditors decide if they
will accept the firm as their client. The authors also construct a matched sample of Big 4 and small auditors. It is seen that the clients of minor auditors are significantly more likely to subsequently matter office restatement than are customers of the Big 4 (Wang & Yang, 2012). In his study, the authors choose an audit quality proxy, which they believe good captures even if the client engaged in non-GAAP reporting. Proxy is likelihood of a firm offering an accounting restatement (Lennox & Pittman, 2010).

References

Cao, M., Chychyla, R., & Stewart, T. (2015). Big Data Analytics in Financial Statement Audits. Accounting Horizons, 29(2), 423-429. http://dx.doi.org/10.2308/acch-51068

Carmona, P., Momparler, A., & Lassala, C. (2015). The relationship between non-audit fees and audit quality: dealing with the endogeneity issue. J. Of Service Theory Practice, 25(6), 777-795. http://dx.doi.org/10.1108/jstp-07-2014-0163

Elfouzi, N. (2010). Reactions of the Tunisian capital market to audit reports: a comparison between reports established by the Big Four and No-Big Four auditors. IJMFA, 2(4), 344. http://dx.doi.org/10.1504/ijmfa.2010.035637

Gray, G. & Debreceny, R. (2014). A taxonomy to guide research on the application of data mining to fraud detection in financial statement audits. International Journal Of Accounting Information Systems, 15(4), 357-380. http://dx.doi.org/10.1016/j.accinf.2014.05.006

Gray, G. & Ratzinger, N. (2010). Perceptions of preparers, users and auditors regarding financial statement audits conducted by Big 4 accounting firms. International Journal Of Disclosure And Governance, 7(4), 344-363. http://dx.doi.org/10.1057/jdg.2010.15

Kim, E., Jang, J., & Cheung, J. (2016). The Effects of Non-audit Services on Audit Quality, Audit Fee, and Audit Hour with Controlling for Endogeneity. Korean Management Review, 45(2), 365. http://dx.doi.org/10.17287/kmr.2016.45.2.365

LENNOX, C. & PITTMAN, J. (2010). Big Five Audits and Accounting Fraud*. Contemporary Accounting Research, 27(1), 209-247. http://dx.doi.org/10.1111/j.1911-3846.2010.01007.x

Wang, X. & Yang, B. (2012). International Differences Between Big Four Auditors and Their Smaller Counterparts in Monitoring Earnings Management. Ijafr, 2(2). http://dx.doi.org/10.5296/ijafr.v2i2.2086