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2020B07 – The Institutional Context in and Conditions under which auditors deliver quality
Project Number – 2020B07
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2020B07 – The Institutional Context in and Conditions under which auditors deliver quality

What?

What?

The institutional context in and conditions under which auditors perform their work are important determinants of audit quality. However, the relative effect sizes of the various institutional conditions and (potential) interventions on audit quality are widely unknown.

This PhD project aims to focus on (1)  quality-oriented audit firm culture and (2) the extend selection and hiring mechanism of auditors (audit firms) influence audit quality. Furthermore, this project investigates (3) which Audit Quality Indicators (AQI’s) currently under-utilized (despite its potential availability) are informative of audit quality, especially compared to the currently suggested AQIs considered to influence audit quality.

Why?

The project consists of three separate studies. In the first study we investigate the importance of audit firm culture on audit quality in a longitudinal study. In the second study we exploit a quasi-experimental setting to study the potential role of self-selection between auditors (audit firms) and their clients on audit quality (auditors hiring and selection mechanism). We study whether it matters who selects and engages a (local) component auditor in a group audit setting. In the third and final study we investigate the information  value of audit quality indicators (AQI’s) that are currently not well developed (despite its potential value) and test which of these AQI’s are most informative of audit quality.

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Auditors are selected and paid for by the organizations they audit. Policymakers are concerned that this structure influences auditor independence which, in turn, impairs quality. Accordingly, policymakers consider whether audit quality is enhanced if the auditor is appointed by an external (independent) party. The authors study the working of such a model in a natural setting for local subsidiary audits conducted by the big-4 as part of group audits, where the local auditor is either assigned to the subsidiary through parent firm management or self-selected by the subsidiary. The authors find that audit partners assigned to subsidiaries receive less information from the auditee, issue fewer going concern opinions, identify fewer control deficiencies, identify and correct fewer misstatements, and are less likely to constrain earnings management compared to self-selected auditors. Some further preliminary evidence the authors collect suggests that assigned auditors produce lower audit quality through effort reduction.
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Accountability Under Pressure: Auditor Going Concern Reporting and Bankruptcy in the Netherlands
This study investigates the reporting behaviour of Dutch organizations under statutory audit requirements in the three years preceding bankruptcy. Using unique nationwide audit data (2012–2020), 572 bankruptcies of organizations subject to mandatory audits were identified. The results reveal widespread non-compliance with filing obligations, indicating weak accountability among firms nearing insolvency. In the year before bankruptcy, only a minority files audit opinions, and many fail to disclose material going concern uncertainties. Although bankruptcies of audited firms are rare (0.31% of audits), they inflict substantial societal harm, largely due to a few major failures. Delayed or missing filings thus serve as important early warning signals. Moreover, the results challenge the notion of a strong self-fulfilling prophecy effect of GCOs.
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The governance of a quality oriented culture – In search of congruence
This article sets out to demystify the three most important myths of behavioral and cultural governance by asking the (sometimes obvious) questions that you might expect a well-informed executive to readily be able to answer: What is culture – and what is it not? What does it do – and not do – and why? Can it be managed at all? Rather than blindly following the obviously well intended, but fairly ineffective, instrumental approach of contemporary governance frameworks in managing a “quality oriented culture”, this article calls for and provides concrete recommendations for a more realistic and sustainable organization ecological approach to governance of culture and behavior.
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Leveranciers en andere belanghebbenden rekenen erop dat bedrijven hun jaarrekeningen deponeren bij de Kamer van Koophandel. Vele ondernemingen laten deponering achterwege waardoor het onduidelijk is hoe verstandig het is met de betrokken bedrijven zaken te doen.   Accountancy van Morgen
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88% of bankrupt organizations fail to file their financial statements or a 403 declaration for the last fiscal year within the statutory deadline. This is one of the key findings from the report by the Continuity Working Group—a collaboration between the NBA, SRA, and audit firms—on the auditor’s role in business continuity.
Researchers also found that 71% of the financial statements filed in the year prior to bankruptcy do not include an explicit management disclosure about uncertainty regarding continuity. As a result of not filing financial statements, 88% of bankruptcies also lack an audit opinion for the fiscal year preceding the year of bankruptcy. Among the audit opinions that are available, 63% do not include a material uncertainty paragraph (going concern statement) or a voluntary explanatory section. The review of available (international) academic literature on continuity revealed that it is highly unlikely that a going concern statement becomes a self-fulfilling prophecy. The literature also shows that stakeholders rely more on confidential information obtained from the organization than on publicly available information.
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Note: this audit opinion falls outside AFM supervision (MAB)
According to the AFM Monitor, approximately 19,333 statutory audit opinions were issued in the Netherlands in 2019. However, which organizations received these opinions for which reports, and whether this information is publicly available, has not yet been systematically mapped. At the same time, there is a growing need for information about audit quality for the market as a whole. For financial statement users, policymakers, and other stakeholders, it is not always clear which audits fall under the Audit Firms Supervision Act (Wta) and thus under AFM oversight. In this descriptive article, we estimate the number of Wta audits and whether these are publicly accessible. Of all statutory audits, 18,311 opinions (95%) are publicly available through various sources, such as the Chamber of Commerce.
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The team studied the reporting behavior of Dutch organizations subject to statutory audit in the three years prior to their bankruptcy. They found that only 12 percent of companies file timely audited financial statements or an exemption in the year prior to bankruptcy, 56 percent (64) in year two (three) before the bankruptcy. Second, management discloses discontinuity risks in just 29 percent of the pre-bankruptcy filing. And third, only 11 percent of organizations have a filed audit opinion for the fiscal year prior to bankruptcy. However, for the majority (63 percent or 39 instances out of 62) of audit opinions issued for the fiscal year before the insolvency, the auditor did not include a material uncertainty relating to going concern (GCO) in its audit opinion and therefore constitute a type-II GCO error (error of omission). They estimate the total GCO type-II (I) error rate at 0.03 (99.26) percent of audit opinions issued.
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The measurement of audit quality in the Netherlands
This paper includes several recommendations and lessons learned from the data gathering efforts of the FAR to inform on the availability of audit quality data and measurement of potential AQIs in practice. This paper is also of interest to those audit practitioners managing and designing the quality control (monitoring) systems of audit firms, those involved in preparing the transparency reports, and policymakers and regulators in their considerations of AQI’s.  
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Project info

Project Lead

Tjibbe Bosman

Research team

Tjibbe Bosman
Jan Bouwens
Olof Bik

Involved University

University of Amsterdam (UvA)
University of Groningen
Project Number – 2020B07

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