Three essays on audit quality

  • Author / Creator
    Zhang, Wenjun
  • This thesis presents three essays on audit quality tied up by a common thread: the implication of closeness in auditor-client relationship on audit quality and beyond. In Chapter II, I investigate the implications of close auditor-client relationships arising as time passes on clients’ operating decisions. I find long auditor tenure constrains clients’ discretion in accrual reporting, which in turn prompts firms to resort to real activity management if they are under pressure to achieve earnings targets. For a given length of auditor tenure, the presence of auditor industry expertise does not affect the association between tenure and clients’ engagement in real activity management. These findings highlight an unintended consequence of long auditor tenure and therefore contribute to the on-going debate concerning the merits and shortcomings of mandatory audit firm rotation. In Chapter III and IV, we examine the implications of close auditor-client relationships arising from economic bonding on audit quality reflected from clients’ accrual reporting and auditors’ going-concern decisions. In Chapter III, we find a significantly positive association between fee dependence and abnormal accruals prior to the passage of the Sarbanes-Oxley Act (hereafter SOX), but not in the post-SOX period, suggesting that SOX has enhanced non Big-4’s ability to withstand client pressure arising from fee dependence. These results suggest strong economic bonding between auditors and clients may impair audit quality among smaller auditors, and tightening auditors’ external litigation exposures enhances small auditors’ abilities to withstand client pressure. In Chapter IV, we find that even for firms that are most targeted by SOX, auditors do not allow economic bonding to affect their going-concern decisions in either the pre- or the post-SOX period. These findings thus suggest potential litigation risks faced by auditors in the event of failures to warn the public about their clients’ severe financial distress prior to bankruptcy are high enough to deter auditors from compromising their independence in formulating going-concern decisions. In conclusion, audit quality is affected by closeness in the auditor-client relationship and regulatory intervene may be needed depending on specific setting in terms of auditor type and auditing decisions.

  • Subjects / Keywords
  • Graduation date
  • Type of Item
  • Degree
    Doctor of Philosophy
  • DOI
  • License
    This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.
  • Language
  • Institution
    University of Alberta
  • Degree level
  • Department
    • Faculty of Business
  • Supervisor / co-supervisor and their department(s)
    • Dr. Jennifer Kao (Faculty of Business, Accounting & Management Information Systems)
  • Examining committee members and their departments
    • Dr. Haifang Huang (Faculty of Arts, Economics)
    • Dr. Tom Scott (Faculty of Business, Accounting & Management Information Systems)
    • Dr. Jennifer Kao (Faculty of Business, Accounting & Management Information Systems)
    • Dr. Roy Suddaby (Faculty of Business, Strategic Management & Organization)
    • Dr. Srinivasan Sankaraguruswamy (Accounting, National University of Singapore )
    • Dr. Yao Tian ( (Faculty of Business, Accounting & Management Information Systems)