Discussion of: The Effect of Sharing a Common Auditor with Customers on Accounting Misstatement by Supplier Firms

Transcription

1 Discussion of: The Effect of Sharing a Common Auditor with s on Accounting Misstatement by Firms W. Robert Knechel, Director International Center for Research in Accounting and Auditing

2 Disclaimer The views expressed in this discussion do not represent the official views of Auditing: A Journal of Practice & Theory

3 Disclaimer The views expressed in this discussion do not represent the official views of Auditing: A Journal of Practice & Theory and I probably won t remember what I said next week, let alone in six months.

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5 Overview Very interesting and unique research question. Examine whether a common auditor in a pairwise supply chain relationship (supplier-customer) reduces the risk of material misstatements by a supplier? Adds a new dimension to audit expertise debate. Interesting empirical phenomena: A company with low analyst following or few institutional investors that has an auditor in the same office and firm as one of its three largest publicly-listed, US-based customers is less likely to report a revenue-related restatement than a control sample of firms that do not share an auditor with a customer regardless of industry or type of misstatement.

6 The Nature of a Supply Chain A B C P F W X Y Z

7 Logic: Common Auditor Restatement Supply chain relationship is established. and have a common auditor in period N. Undiscovered (why?) error in supplier statements in N. Information spills over between audits (somehow). Can NOT share information about clients. CAN share industry or general knowledge. Information spills over time (across x periods). Auditor (same one?) detects and reports a restatement in N+x why now? Possible breaks in the chain: Error may not relate to supply chain at all. Error may not relate to the customer with the common auditor.

8 The Nature of a Supply Chain A B C P F W X Y Z

9 The Nature of a Supply Chain A B C P F W X Y Z

10 The Nature of a Supply Chain A B C P F W X Y Z

11 The Nature of a Supply Chain A B C P F W X Y Z

12 The Nature of a Supply Chain W X Y Z

13 The Nature of a Supply Chain W X Y Z

14 The Nature of a Supply Chain W X Y

15 The Nature of a Supply Chain Auditor A W Auditor B X Auditor C Y Auditor D

16 The Nature of a Supply Chain Auditor A Common Auditor W Auditor A X Auditor C Y Auditor D

17 Complexities to Consider How does a common auditor occur? Which firm had the auditor first? What about auditor switches? Do they have a common auditor in both N and N+x? Other customers? Diversity of industries in the major customer base? Auditors of other customers? Non-B4? Specialists? Relative size of customers to each other? Who is customer s major supplier? How integrated are customer and supplier? Shared systems? Operational personnel? Product design? SAS 70 audits?

18 The Results: What s Really Going On? All Rev NonRev Same Diff Common auditor neg neg neg neg neg Nlead pos! pos pos Log audit fees log NAS fees pos pos neg neg B4 neg neg Log Mkt pos pos pos pos Lev pos pos ROA pos ROAL pos LOSS pos pos pos pos CFO pos pos BTM pos pos pos Accruals neg neg Growth neg neg Altman neg neg ExtFin pos pos StdEarn pos pos Firm age neg pos pos neg neg

19 The Results: What s Really Going On? All Rev NonRev Same Diff Common auditor neg neg neg neg neg Nlead pos! pos! pos Log audit fees log NAS fees pos pos neg neg B4 neg neg Log Mkt pos pos pos pos Lev pos pos ROA pos ROAL pos LOSS pos pos pos pos CFO pos pos BTM pos pos pos Accruals neg neg Growth neg neg Altman neg neg ExtFin pos pos StdEarn pos pos Firm age neg pos pos neg neg

20 The Results: What s Really Going On? All Rev NonRev Same Diff Common auditor neg neg neg neg neg Nlead pos! pos! pos! Log audit fees log NAS fees pos pos neg neg B4 neg neg Log Mkt pos pos pos pos Lev pos pos ROA pos ROAL pos LOSS pos pos pos pos CFO pos pos BTM pos pos pos Accruals neg neg Growth neg neg Altman neg neg ExtFin pos pos StdEarn pos pos Firm age neg pos pos neg neg

21 Other Issues (1) Wording of hypotheses: negatively associated the likelihood of an accounting misstatement leading to a restatement Poor example: Round trip sales suggests collusion and would be a problem for both companies. Why would this not show up for the customer too? Why are cost of goods sold and inventory considered to be revenue-related? They are just as (more?) likely to be production related. Is the issue really operationalrelated? Role of corporate governance? What about internal control weaknesses post-2004?

22 Other Issues (2) presence of common auditor is associated with 2.97% lower likelihood of misstatements should be restatement. Is 2.97% significant relative to audit risk model? (Meaning of Footnote % error rate is not clear given way sample is constructed.) Propensity score matching Debatable whether it works for common auditor. Odds of having one common auditor among three customers if auditors are randomly assigned is over 50%. Table 8A: High inst. ownership (ns), Size (pos)/low inst. ownership (neg), size (ns) Table 8B: High analyst follow. (ns), Size (pos)/low analyst follow. (neg), size (ns)

23 THANK YOU!