Clive S Lennox

Public accounting firms are owned by all equity partners, but day-to-day management is generally delegated to a team of leaders. Using data from China, this study examines which equity partners are selected to the firm’s national leadership team, and whether firmwide audit quality is related to leadership attributes. We find that a partner is more likely to be selected as a leader if the partner is more experienced in public company auditing and has attracted more new clients to the firm. Firmwide audit quality is higher when leaders are more experienced in public company audits or have a past record of larger audit adjustments, and is lower when leaders have attracted more high-risk new clients to the firm. Leadership attributes exhibit a relatively strong(weak) association with audit quality at the headquarters (branch offices). Moreover, audit quality is higher when a firm has more leaders in an audit-quality role.

The past 25 years have seen an exponential growth in the number of China studies in the leading accounting journals. The rise in China-related research mirrors the country’s increased importance on the global stage and a growing appreciation of the economic importance of Chinese institutions. We organize our review of the China literature around three central themes:1) political and regulatory institutions, 2) China’s relationships with foreign investors, and 3) the availability of novel data and regulatory shocks. The former two themes address research questions that are more China-centric, while the third exploits the China setting to examine questions that are more universal. We highlight the contributions that China studies have made to the broader accounting literature, the limitations of the current literature, and we offer suggestions for future research directions.

We hypothesize that companies in the same product market avoid sharing the same audit partner when they are concerned about possible information spillovers. Consistent with our hypothesis, we find that product market rivals are less likely to share the same partner when they perceive that information spillovers are more costly. While concerns about information spillovers significantly reduce the likelihood of product market rivals sharing the same audit partner, we find that such concerns do not deter them from sharing the same audit office. Lastly, when companies are unconcerned with information spillovers, our results suggest that partner sharing can be beneficial because it can result in lower audit fees and fewer accounting misstatements.

Standard-setters worldwide have passed new audit reporting requirements aimed at making audit reports more informative to investors. In the UK, the new standard expands the audit reporting model by requiring auditors to disclose the risks of material misstatement (RMMs) that had the greatest effect on the financial statement audit. Using short window tests, prior research indicates that these disclosures are not incrementally informative to investors (Gutierrez et al. in Review of Accounting Studies 23:1543–1587, 2018). In this study, we investigate three potential explanations for why investors do not find the additional auditor risk disclosures to be informative. First, using long-window tests, we find no evidence that the insignificant short-window market reactions are due to a delayed investor reaction to RMMs. Second, using value relevance tests, we show that the insignificant market reactions are not due to auditors disclosing irrelevant information. Finally, we provide evidence suggesting that RMMs lack information content because investors were already informed about the financial reporting risks before auditors began disclosing them in expanded audit reports.

This study examines whether audit adjustments are a mechanism that links the effect of mandatory internal control audits (MICAs) on financial reporting quality. We argue that the requirement for auditors to publicly disclose internal control weaknesses exacerbated auditor-client conflicts and that this resulted in auditors being less likely to detect (and correct) misstatements in their clients’ pre-audit financial statements. Consistent with this argument, we find significant reductions in audit adjustments following the staggered introduction of MICAs using data from China. We find the reductions in audit adjustments are associated with significant increases in material misstatements following the introduction of MICAs. In contrast, we find that the introduction of MICAs led to a significant reduction in material misstatements among clients that did not experience reductions in audit adjustments. Overall, the two effects offset each other, which explains why financial reporting quality did not improve, on average, following the introduction of MICAs.