Dissertation > Economic > Economic planning and management > Audit > The audit organization and system

The Informativenss of Auditor Individual Reputation

Author ZhouZuo
Tutor LiuMingHui
School Dongbei University of Finance
Course Accounting
Keywords Auditor Individual Reputation Informativeness EarningsResponse Coefficient
CLC F239.2
Type Master's thesis
Year 2013
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In October2011, the US Public Company Accounting Oversight Board (PCAOB) recommended that the company should disclose the audit partner who carried out the audit services in the audit report, which could enhance the accountability and the transparency of audit report. The method was thought to motivate firms to improve audit quality. In China, auditor individuals (i.e., certified public accountants) were asked to sign the personal name on the audit report for its implementation and review, which is convenient for us to examine whether the proposal of the PCAOB has practical significance. The study of auditor reputation has been performed for a long time, but most of the research explain "auditor" as the accounting firm, examining whether the firm of high reputation represents higher audit quality, and gains an audit premium, or the market reaction after the damage of the reputation etc. In fact, according to Deangle’s (1981) definition of audit quality, we can conclude, fundamental factors that influence audit quality are the auditor individual’s professional competence and independence. Compared with the auditor reputation, auditor individual reputation is more important. Based on the decision-making usefulness, the study is designed to test whether the individual auditor reputation can affect audit service users to make decisions, which infers the auditor reputation has information content. This article examines the informativeness of individual auditor reputation mainly from the two directions, the auditees and investors. According to the signaling theory, the auditees transfer positive signals to investors high with the help of the auditor reputation, to improve the confidence of investors. And auditor individuals will remain consistent high quality to maintain their high reputation and avoid high loss due to reputation damage. This will make the auditees limit their earnings management behavior, improve the quality of accounting information, so as not to be issued of non-standard audit report, and be willing to pay higher audit fees as the market compensation for high auditor reputation. And investors are influenced by the auditor reputation to change their trust in the earnings quality, if investors believe that auditor individual of high reputation will provide high quality of audit service, the investors’response to an earnings surprise of perceived high reputation will be significant, which is represented by higher earnings response coefficients (ERC).This article will examine the information sent by the signature on the audit report, which would affect the auditees and investors’decision-making. Through the empirical test, I find that, the auditor individual with high reputation will influence the earnings quality and audit fees provided by the auditees, and the investors’ reaction is significant, which infers the auditor individual reputation may affect auditees and investors.This paper consists of six parts.In section Ⅰ, I had briefly presented the research background, the motivation, the research methods and the framework of the whole study. In section Ⅱ. I generalized the literature of auditor reputation at home and abroad. The review was mainly from three aspects, including the auditor reputation’influence on the earnings quality, the auditor reputation’influence on audit fees and the relationship between the auditor reputation and the capital market reaction. In sectionⅢ, I introduced the relative institutions in China, and theoretical basis for my study, also I made a clear definition of the auditor individual reputation, audit quality and earnings response coefficient. In section Ⅳ, I develop my hypotheses, proposing that, compared with other auditor individuals, the auditor individual with high reputation will provide higher quality of audit services, collect higher audit fees, and gain higher earnings response coefficient. In section Ⅴ, I carried on the empirical test, presented the description of the control variables and the empirical results. The sectionVI concluded and proposed some suggestions.The paper made some contributions. First, from the individual perspective, the paper examined auditor reputation’s influences on the earnings quality and audit fees. The auditor individual is the most fundamental factor that affects audit services, since personal characteristics could be carried with the audit process, and ultimately affected the audit result. Second, rather than studying the market reaction after the auditor reputation damage, the paper, from the positive point of view, examined the investors’ERC on perceived high auditor individual reputation, it provided a new angle for future research. However, there exist limitations that impact study results in this paper. The measurement of perceived high auditor individual reputation accords to my subjective adjustment, which may not be objective. Convenience for data collection, ERC measurement is very simple, which may affect the final empirical results. In conclusion, this paper is just a starting point for studying auditor individual reputation, further expansion and improvement is required for future research.

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