This study examines the relationship between managerial tone and audit outcomes. We employ 42,250 firm-year observations from United States non-financial firms from 2000 through 2020. Our results show that firms with a more positive managerial tone in their 10-K filings tend to experience more favorable audit outcomes. This is evidenced by fewer financial restatements, fewer adverse opinions on the strength of internal controls, lower audit fees, less audit effort, and fewer going concern opinions. We also find that such favorable impacts are more pronounced in financially non-distressed firms, thereby reinforcing the credibility of the positive managerial tone as perceived by auditors. Our main findings are robust across various sensitivity tests and alternative variable approaches. Our analysis also suggests that the relationship between managerial tone and audit outcomes is more pronounced for firms with a poorer quality information environment and weaker governance monitoring. Finally, our findings suggest that a positive managerial tone is negatively associated with both earnings management and the likelihood of whistleblowing, which in turn have a positive influence on audit outcomes. Overall, our study contributes to the literature and practice by demonstrating the significant role that client-firm managerial tone plays in audit outcomes.
This study examines the impact of board gender diversity on carbon emissions performance, focusing on Scope 3 emissions, and assesses how cultural environments moderate this relationship. Using a robust econometric approach, we analyze data over a 15 year period from 336 multinational companies listed among the top 500 firms in the 2020 Forbes Global 2000. The findings reveal that board gender diversity significantly enhances carbon emissions performance by reducing Scope 3 emissions, with the effect being more pronounced in jurisdictions with higher levels of board diversity. The study also indicates that a higher critical mass of female directors is necessary for substantial reductions in Scope 3 emissions, compared to Scope 1 and 2 emissions. Additionally, the study's findings show that cultural factors play a pivotal role in the impact of board gender diversity on carbon emissions performance. The positive effect of gender-diverse boards on emissions reduction is more substantial in cultures characterized by high uncertainty avoidance, long-term orientation, and indulgence. Overall, the study underscores the importance of culturally tailored approaches to corporate governance that account for the moderating influence that national culture plays on the effectiveness of gender-diverse boards in meeting sustainability targets.
International Financial Reporting Standards 9 (IFRS 9) marks a significant shift in the accounting for financial asset impairment. Leveraging the staggered adoption of IFRS 9 in China and adopting a difference-in-differences (DID) design, this paper examines its impact on corporate information environment of non-financial listed firms. We find that IFRS 9 adoption enhances accounting conservatism, particularly among firms audited by more experienced auditors and those with lower managerial opportunism. Increased conservatism is associated with a reduction in the cost of debt. Moreover, there is a rise in the frequency of management earnings forecasts and a decline in forecast bias. By focusing on non-financial firms, this study extends the literature on IFRS 9 beyond the banking sector and underscores the critical roles of auditors and managers in implementing principle-based standards. We also offer practical insights for standard-setters and regulators.
We explore whether the market perceives audit partners narcissism, as measured by the size of their signatures, by analyzing the reaction to their client firms listed on the Shanghai Stock Exchange. Our results indicate that client firms audited by more narcissistic review audit partners experience heightened cumulative abnormal returns, suggesting a positive market response to their involvement. Furthermore, we find that this market response is more pronounced in situations where the audit partner’s work is likely influenced by narcissistic traits, specifically in cases of reduced auditor independence, increased audit complexity, and extended audit client negotiation periods. This evidence supports the view that the market recognizes and responds to the influence of such traits. Our findings contribute to the literature on narcissism and international accounting by providing stock-market evidence from a major emerging market. They also have implications for corporate boards, investors, and policymakers.
This paper examines the impact of institutional investors’ corporate site visits (CSVs) on audit report delays. Using data from publicly listed firms on the Shenzhen Stock Exchange (SZSE) in China, we find that firms receiving more CSVs experience shorter audit report delays. These results remain robust across multiple sensitivity tests and alternative estimation methods addressing potential endogeneity concerns. Further analysis suggests that CSVs reduce audit delays without compromising audit quality by mitigating audit task complexity with an improved information environment and enhanced corporate governance at visited firms. Cross-sectional analysis reveals that the effect is more pronounced in manufacturing firms, firms with higher inherent risk, weaker corporate governance, lower institutional shareholding, companies audited by non-Big 4 auditing firms, and companies that have auditors with shorter tenure. Our findings offer valuable insights and important implications for practitioners, investors, and policymakers.
We hypothesize that institutional investor cliques synchronize their investees’ financial reporting practices. Using a sample of Chinese firm pairs, we find an increase in financial statement comparability among firm pairs whose largest institutional owners are from the same clique, yielding a 1.6% lower difference in total accruals. This effect arises mainly from conformity in discretionary reporting choices, revealing a distinct “clique style” of reporting. Cross-sectional analyses show that the impact is stronger in low-competition industries, non-state-owned enterprises, and firms with higher agency costs, and is more pronounced when cliques are composed of local or active institutional investors. However, this harmonization entails costs because cliques reduce accrual differences even among economically unrelated firms, which suggests excessive standardization. Moreover, clique-connected firms experience limited improvement in their information environments and diverge in reporting practices from unaffiliated industry peers. Collectively, our findings suggest that in an emerging market, institutional cliques may foster a form of comparability that offers limited usefulness to financial statement users.
This study investigates the impact of auditors’ attributes at both firm and partner levels, including industry specialization, tenure, and switching, on audit effectiveness and the likelihood of accounting errors. Drawing on specialization theory and learning curve theory, we apply logistic regression analysis to a carefully curated dataset of 266 Australian companies listed on the ASX 300 over an 11-year period. Our findings indicate that audit firm– and partner-level industry specialization is associated with a reduced probability of accounting errors, even after we control for other determinants of misstatements. Additionally, longer audit firm and partner tenure is negatively related to accounting errors, whereas partner-level auditor switching increases the likelihood of misstatements. We further determine that strong governance and effective audit committees mitigate accounting errors, reinforcing the role of firm- and partner-level expertise in enhancing audit quality. These results have important implications for policymakers and regulators seeking to strengthen audit effectiveness at both firm and partner levels. Our findings are robust to additional analyses and sensitivity tests, confirming the significance of auditor expertise in improving financial reporting reliability.
This study investigates whether employee share ownership programs (ESOPs) enhance banks’ disclosure of climate risks by acting as an internal governance mechanism. Using panel data on listed European banks from 2006 to 2022, we find that banks with ESOPs are 43.2% more likely to integrate climate risks into annual management discussions and 36.5% more likely to conduct climate stress tests. This effect is especially pronounced in jurisdictions with stronger supervisory regimes, highlighting the complementarity between internal incentives and external oversight, but it does not differ significantly between global systemically important banks and other banks. Drawing on prospect theory, we argue that employee-shareholders’ dual exposure to wages and equity heightens sensitivity to downside risks, strengthening the demand for transparency even for low-probability but high-impact events. As a supplementary step, we explore potential channels and find that banks with stronger whistleblower protection and unionized banks are more likely to incorporate climate-related risks into management discussions and conduct climate stress tests.
We expect that country risk affects a country's audit risk. Hence, audit price in a country, represented by average hourly audit fee, should be positively associated with country-specific audit risk. We identify a small sample of companies listed on the Tel Aviv Stock Exchange (Israel) that use auditors in different countries. As these companies must disclose total audit fees and hours of engagement, we compiled a novel dataset that includes both fees and hours in 25 different countries for 10 years in order to compute the average hourly audit fee per country. We use the Corruption Perception Index (CPI), published annually by Transparency International, as the primary measure of country risk for each country. We expect and find a positive association between perceived corruption and average hourly audit fee normalized by a country's per-capita Gross Domestic Product. We use several alternative measures of country risk with similar results. However, we find no association between audit hours and any country-specific risk measures, including corruption. Our results are consistent with the argument that auditors in more corrupt countries charge higher hourly audit rate for their services, but we do not find simultaneously an increase in audit effort in terms of total hours.
We contribute to the existing literature on corporate governance and the circular economy (CE) by exploring CE reporting in the food industry and examining the role of female executives in promoting circularity and disseminating CE information. Using an international sample from the world’s leading 100 food and beverage companies, our results show a positive association between female executive presence and the extent of CE reporting. Specifically, our study focuses on the four primary CE principles: R1 (reduce), R2 (reuse), R3 (recycle), and R4 (recover). We provide descriptive insights into how CE is reported across firms and across R strategies, revealing that reporting is often uneven, with R3, recycle, receiving the most detailed attention. Our findings highlight the significant role of female executives in enhancing CE disclosures, especially in relation to recycling. Additional analysis shows that this effect is more pronounced in firms with lower environmental, social, and governance (ESG) practices, as well as in countries with weaker progress toward the United Nations’ Sustainable Development Goal 12. Finally, our results hold for potential endogeneity concerns. Overall, this study advances the CE reporting literature by providing granular firm-level evidence from a key sector and contributes to the debate on gender dynamics in corporate sustainability. It also offers important implications for stakeholders and policymakers interested in promoting circular practices in the food industry.
Tax avoidance remains a critical area of research, particularly in understanding its determinants and developing reliable detection models. This study introduces a novel approach to measuring tax avoidance through tax efficiency, calculated using Stochastic Frontier Analysis. By comparing firms with similar inputs, the tax efficiency metric captures variations in tax compliance. This addresses limitations of traditional measures such as the Effective Tax Rate and Book-Tax Differences, which fail to account for concealed revenues and fictitious expenses. The research utilizes financial data from Slovak retail firms to examine the relationship between tax efficiency and various determinants, including firm size, ownership structure, and social responsibility proxies. Key findings reveal that firms with foreign ownership, larger management teams, and robust capital exhibit higher tax efficiency, while smaller firms and those with fragmented ownership structures are more prone to tax avoidance. Furthermore, compared to traditional proxies, this tax efficiency measure demonstrates superior performance in distinguishing between tax-reliable and tax-unreliable firms. The study also highlights the impact of external shocks, such as the COVID-19 pandemic, on reducing tax efficiency. The proposed tax efficiency metric provides a comprehensive tool for identifying tax avoidance behavior and offers practical implications for improving risk-based tax audit selection processes.
Using a unique dataset of fraud firms in the United States over a 15 year-period (2005-2019), this study investigates whether compensation for the board of directors has an association with Financial Statements Fraud (FSF). It further investigates which components of the compensation package could be more amenable to this association. We find a positive association between the incidence of FSF and directors' stock-based compensation. Considering the remedy mechanism for FSF, we find a negative association between FSF and the average age of directors. Additionally, Chief Executive Officer (CEO) duality, size/type of auditor, institutional ownership, accounting returns, and firm size all significantly influence the incidence of FSF. We contribute to the accounting, governance, and accountability literatures, while critiquing agency theory in advancing an alternative view that stock-based compensation for directors should be used with caution, as it may provide an incentive for FSF. This research has implications for businesses and regulators regarding the design of directors' compensation packages.
Tax practitioners are uniquely placed to influence the tax compliance behavior of their clients. While credited with assisting clients in meeting their various payment and filing responsibilities, they also often stand accused of undermining the integrity of tax systems by designing highly contrived structures that allow their clients to avoid taxation. When strictly legal, this activity is still frequently labelled as unethical by governments and civil society. Moreover, some accounting firms have been prosecuted for not complying with tax legislation. This study seeks potential remedies for this concern by drawing on the concept of employee voice to examine the factors that influence tax practitioners from speaking up when they encounter unethical behavior at work. Interviews were conducted with Irish tax practitioners across all levels of seniority in Big 4 accounting firms. The findings reveal that the voice decision in tax is the product of powerful professional level factors and, to a lesser extent, a series of organizational level ones. We conclude that professional bodies, as well as management at the Big 4 firms themselves, need to take steps to re-emphasize to their members the importance of always reporting suspected unethical behavior in the workplace.
This study investigates the price contagion effect of a specific fraudulent event on foreign (non-Taiwanese) firms listed on the Taiwan Stock Exchange (TWSE) and registered in the Cayman Islands (KY), commonly referred to as KY firms. This fraudulent event involved Pharmally International Holding Co. (hereafter, Pharmally). Using an event study of 1,673 Taiwanese firms, our analysis reveals lower cumulative abnormal returns for KY firms than for domestic Taiwanese firms. This finding suggests that investor apprehension extends from fraudulent firms to non-fraudulent foreign entities. Furthermore, the price contagion effect on KY firms is more pronounced when they are audited by the same firm and engagement partners involved in a Pharmally fraudulent event. Our findings also provide evidence supporting the notion that corporate governance plays a role in reducing the price contagion effect. These results have important implications for investors and regulators.
This paper presents a systematic literature review of 37 studies published until 2024, offering a pioneering analysis of the role of identity in auditing. The findings reveal a growing scholarly interest in identity within auditing, particularly professional identity, which exerts both direct and moderating effects on key audit outcomes (KAOs) such as audit quality, judgment, objectivity, and professional skepticism. Additionally, the review examines client, organizational, individual, team, ethnic, and gender identities, revealing their interconnections and collective influence on auditing outcomes. Despite advancements in this field, several aspects of identity remain underexplored and present significant opportunities for further research. This study identifies key gaps, proposes a structured research agenda, and offers actionable insights for audit firms, policymakers, and regulators. By addressing both theoretical and practical concerns, this paper positions identity as a crucial determinant of auditing outcomes, contributing to the ongoing discourse in the field and providing a solid foundation for advancing academic inquiry and professional practice.
This study reveals a paradox regarding corporate taxation in Brazil. We analyze 4,720 firms and 29,677 firm-year observations from 2014 to 2020 using multiple linear regression techniques and exclusive Brazilian Federal Revenue Service data. Our findings show that although tax audits initially reduce tax avoidance, this effect diminishes over time and tax avoidance increases notably over the long term. This counterintuitive discovery suggests that the temporal dynamics are more complex than previously assumed. Furthermore, audit frequency modulates the impact of the cumulative amount of tax adjustments requested in the tax enforcement process, adding another layer of complexity to the relationship between tax enforcement and the corporate tax strategy. We provide consistent evidence that although managers reduce tax avoidance immediately after an audit, they then gradually begin to lower their tax expenses by managing discretionary accruals. There is also evidence that they eventually begin managing actual tax payments if no other audits occur. However, the results indicate that repeated audits consistently reduce tax avoidance. This study not only clarifies the poorly understood aspects of tax interactions in Brazil but also paves the way for future research, offering valuable insights for scholars, policymakers, and tax regulators. These insights may improve our understanding of the impact of tax enforcement policies on corporate tax behavior.
This study investigates the impact of mandatory public country-by-country reporting (CbCR) on European banks’ engagement in tax and regulatory havens characterized by financial secrecy. Employing a difference-in-differences approach, we find that following the introduction of CbCR, European banks reduced their number of tax haven subsidiaries by approximately one-third compared to insurers, which were exempt from the disclosure requirement. Further analysis reveals that this decline is primarily driven by withdrawals from economically insignificant “dot tax havens” and from countries that serve as both tax and regulatory havens. Additionally, we observe that banks with low exposure to reputational risk prior to the reform are more likely to reduce their presence in bank havens. These results reveal that public CbCR prompts withdrawals from low-tax locations but only under specific conditions. Public CbCR curtails tax haven presence when both financial secrecy and reputational concerns are at play, but on its own may not curb tax haven use. These insights contribute to ongoing tax policy debates by highlighting the limitations and conditional effectiveness of transparency-driven regulations.
This study investigates the impact of climate risk governance and green transformation initiatives on carbon mitigation performance. Using a sample of 276 compliant, carbon-sensitive, non-financial United Kingdom (UK) listed firms from 2011 to 2020, we find that climate risk governance mechanisms and green transformation initiatives improve carbon performance by minimizing actual carbon emissions. Our results also reveal that the joint effect of climate risk governance and green transformation initiatives, an indication of the quality of sustainable transformation aimed at addressing climate change, helps achieve sustained carbon mitigation performance. The results remain consistent after a battery of robustness tests and identification strategies. This study has important implications for management, policymakers, and other stakeholders concerning governance structure reforms and green transformation.
