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Audit Fees, Auditor Independence and Audit Quality

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Audit Fees, Auditor Independence and Audit Quality AUDITING AND EARNINGS MANAGEMENT IN NEW ZEALAND by LE HOAI NAM A thesis submitted to the Victoria University of Wellington in fulfilment of the requirements for the degree of Doctor of Philosophy Victoria University of Wellington 2014 ACKNOWLEDGEMENTS The journey I have undertaken to complete this PhD has been made possible with the support of my supervisors, funding bodies, colleagues, friends, and my family. I would like to express my sincerest thanks to my supervisors, Professor Mark Tippett (Sydney University, Australia) and Dr Thu Phuong Truong, for their devoted academic guidance and support throughout the process of my PhD study. I am also indebted to Professor Tony van Zijl and Dr Carolyn Cordery for their assistance during the period of my study at Victoria University of Wellington. My gratitude also goes to the staff of the School of Accounting and Commercial Law and PhD colleagues in Victoria University, who have given me invaluable encouragement and advice regarding my thesis. In particular, discussions with Dimu Ehalaiye which sometimes lasted right through the night, were both a joyful experience and helped to resolve many issues and problems that arose during the writing up of this thesis. I also wish to express my gratitude to the Vietnamese Government and Victoria University of Wellington for providing me with the PhD scholarship for four years. Special thanks go to Auditor General of State Audit of Vietnam (SAV) and especially Mr Dao Van Dung, the head of General Affairs Department of SAV, who has supported my professional development in many ways. My special acknowledgement is to my family; in particular, my Mum, Dad, brother, sister and my beloved children, Le Hoang Minh and Le Ngoc Mai. I also express special thanks to my love, Doan Thanh Nga, who provided an impetus like no other to complete the thesis. i And foremost, thank you, Mark Tippett, not only have you gone far beyond your duties as a supervisor, but have also been a most dedicated, patient and inspirational mentor for my life. ii STATEMENT OF ORIGINAL AUTHORSHIP I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of materials which have been accepted for the award of any other degree or diploma at Victoria University of Wellington or any other educational institutions, except where due acknowledgement is made in this thesis. Any contribution made to the research by others, with whom I have worked at Victoria University of Wellington or elsewhere, is explicitly acknowledged in this thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project’s design and conception or in style, presentation and linguistic expression is acknowledged. Signature: Le Hoai Nam iii TABLE OF CONTENTS ACKNOWLEDGEMENTS ..................................................................................................... i STATEMENT OF ORIGINAL AUTHORSHIP.............................................................. iii TABLE OF CONTENTS ............................................................................................... iv LIST OF TABLES AND FIGURES ..............................................................................vii GLOSSARY AND ABBREVIATIONS ........................................................................... x ABSTRACT .................................................................................................................... 1 CHAPTER 1 INTRODUCTION ................................................................................ 3 1.1. Introduction ............................................................................................................... 3 1.2. Fundamental Research Questions ............................................................................. 4 1.3. Research Methodology and Data .............................................................................. 7 1.4. Summary of Main Findings ...................................................................................... 8 1.5. Structure of the Thesis ............................................................................................ 10 CHAPTER 2 LITERATURE REVIEW .................................................................... 14 2.1. Earnings Management ............................................................................................ 16 2.1.1. Definitions of Earnings Management ............................................................. 16 2.1.2. Incentives for Earnings Management ............................................................. 18 2.1.3. The Methods of Earnings Management .......................................................... 26 2.1.4. Measuring Earnings Management ................................................................. 30 2.2. Audit Factors and Earnings Management ............................................................... 47 2.2.1. Big N Auditor and Earnings Management ..................................................... 47 2.2.2. Audit firm’s Office Location and Earnings Management .............................. 48 2.2.3. Audit Busy Season and Earnings Management .............................................. 49 2.2.4. Auditor Change and Earnings Management .................................................. 50 2.2.5. Audit Opinion and Earnings Management ..................................................... 52 iv 2.2.6. Non-audit Fees and Earnings Management ................................................... 53 2.3. The Influence of Earnings Management on the Level of Audit Fees ....................... 56 2.4. Conclusion .............................................................................................................. 59 CHAPTER 3 RESEARCH SETTING IN NEW ZEALAND ..................................... 61 3.1. New Zealand Audit Market .................................................................................... 61 3.1.1. Overview of New Zealand Economy ............................................................... 61 3.1.2. New Zealand Audit Market Characteristics ................................................... 63 3.2. Auditing Legislation Environment in New Zealand ............................................... 65 3.3. Audit Regulations in New Zealand ......................................................................... 67 3.3.1. Provision of Non-Audit Services in New Zealand .......................................... 81 3.3.2. The Appointment and Replacement of Auditors in New Zealand ................... 91 3.3.3. Audit Fee Negotiation in New Zealand .......................................................... 92 3.3.4. Audit Opinions in New Zealand...................................................................... 93 3.4. New Zealand Stock Exchange ................................................................................ 96 3.5. Conclusion .............................................................................................................. 97 CHAPTER 4 HYPOTHESES DEVELOPMENT ...................................................... 99 4.1. The Impact of Audit Factors on the Level of Discretionary Accruals .................. 100 4.1.1. The Relationship between Big 4, Audit firm’s Office Location and Discretionary Accruals ................................................................................................. 100 4.1.2. The Relationship between Audit Busy Season and Discretionary Accruals...... 103 4.1.3. The Relationship between Non-audit Fees and Discretionary Accruals ...... 104 4.1.4. The Relationship between Auditor Change and Discretionary Accruals ..... 105 4.1.5. The Relationship between Audit Opinion and Discretionary Accruals ........ 107 4.2. The Relationship between Discretionary Accruals and Audit Fees ...................... 108 4.3. Conclusion ............................................................................................................ 112 v CHAPTER 5 DATA AND RESEARCH METHODOLOGY .................................. 114 5.1. Data Collection ..................................................................................................... 114 5.2. The Measurement of Discretionary Accruals ....................................................... 118 5.3. Empirical Regressions .......................................................................................... 120 5.3.1. Audit Fee Model ........................................................................................... 121 5.3.2. Discretionary Accruals Model...................................................................... 125 5.4. Conclusion ............................................................................................................ 128 CHAPTER 6 EMPIRICAL RESULTS ................................................................... 129 6.1. Descriptive Statistics ............................................................................................. 129 6.2. Multivariate Tests ................................................................................................. 135 6.2.1. The Impact of Audit Factors on Discretionary Accruals.............................. 135 6.2.2. The Impact of Current Discretionary Accruals on Next Year’s Audit Fee ..... 139 6.3. Robustness and Sensitivity Tests .......................................................................... 142 6.3.1.
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