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Amsterdam Business School
Master Thesis:
Does joint auditing improve the quality of auditing? A comparative analysis
between the Netherlands and France
Name: Iswerdew Jagesar Student number: 10699597
MSc Accountancy & Control, Accountancy Word count: 12.633
Supervisor: Dr. S.W. Sanjay Bissessur
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Statement of Originality
This document is written by Iswerdew Jagesar who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Abstract
This study tests the relation between joint audit and audit quality in the research period 2013-2015. Further on it investigates the efficiency of joint audit in terms of audit fees. Using two dataset of firms of France and the Netherlands, the results of the OLS regressions shows that joint audit does not improve audit quality. Furthermore, the results show that audit quality is not reduced by non-audit service (NAS) fees. Finally the study shows that audit fees are not higher for companies audited by joint audit than for companies audited by a single auditor.
4 Table of contents 1. Introduction 6 2. Literature 9 2.1 Literature review 9 2.1.1 Joint audit 9 2.1.2 Audit quality 11
2.1.3 Auditor independence and audit quality 13
2.2 Audit fees 15
2.3 Hypothesis development 16
3. Research methodology 19
3.1 Sampling selection 19
3.2. Research approach 20
3.2.1 Model of abnormal accruals 20
3.2.2. Model of audit fees and NAS fees 22
4. Results 23
4.1 Descriptive statistics 23
4.1.1. Descriptive statistics for control variables for the abnormal accruals for Netherlands and France 23
4.1.2 Descriptive statistics for control variables for the audit and NAS fees for Netherlands and France 24
4.1.3 Correlation matrix 26
4.2 Regression results 30
4.2.1 Regression of abnormal accruals 30
4.2.2 Regression for audit and NAS fees 31
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5. Conclusion and discussion 33
5.1 Limitations and recommendations for future research 35
5.2 Theoretical implications 35
5.3 Practical implications 36
5.4 Conclusion 36
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1 Introduction
The recent financial crisis has raised many questions about the role and effectiveness of an independent auditor. Furthermore, there is a constant questioning of the interest in the introduction of the joint audit. Recently, the European commission has raised this topic in its Green paper, arguing that it may be a way to increase audit quality after the financial crisis (Leasage et. Al 2011).
The main issue of the role of an auditor during the financial crisis was the quality of the audit work. The question was raised how it was possible for companies to go bankrupt in a certain year if the auditor had given an unmodified opinion the previous year. These events raised questions about the quality of audit work. In recent years, there has also been increased concern regarding auditor independence, a necessity for audit quality. Calls for more regulation and governance to improve auditor independence have been made, with the ultimate goal of restoring trust in the quality of financial statements audits (Eilifsen and Willehems, 2008).
In Europe, to restore the trust in the accounting profession, the European Commission (EC) introduced a new way of auditing. In October 2010 the EC (2010) published a Green Paper with the proposal to introduce mandatory joint audit, thus giving mid-tier offices the opportunity to compete with the “Big Four” (i.e. KPMG, Pricewaterhouse Coopers, Ernst &Young and Deloitte). The proposal also included the introduction of mandatory audit firm rotation, which will be implemented in the Netherlands. The EC (2010) requested the introduction of the audit firm rotation; because they argue that an auditor should act independently from his clients. Audit firm rotation implies that the client changes auditor every six years. This would prevent the auditor and client of becoming dependent
The purpose of this research is to examine whether the practice of using two audit engagement partners is related to audit quality and audit fees. According to Kim Ittonen (2010) and per Christen Tronnes (2015), compared to a situation involving one engagement partner, two partners working together are likely to have more technical expertise to make judgments and audit complex reporting frameworks or businesses. Also, an engagement with two partners is likely to benefit from the broader networks and geographical coverage that are important when auditing diversified clients. Since the EU 8th directive currently requires engagement partners
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rotation (rather than firm rotation), the appointment of two engagement partners would also provide a way to mitigate the loss of knowledge when rotating partners. Consequently, if employing two partners is a less costly, more clearly organized, and more efficient with similar benefits, then this practice may help improve audit quality and therefore provide an alternative. Therefore, the following research question will be investigated in this study:
RQ: Does joint auditing improve the quality of auditing?
Prior research on the effects of joint audit on audit quality is rare and the empirical findings of these studies are mixed (Gonthier-Besacier & Schatt, 2007). Prior research on joint auditing in Europe has been done in France, Sweden, United Kingdom and Denmark. Lesage et al. (2012) for example examine whether joint audit impacts audit quality in the Danish setting. Their findings show insignificant coefficients on the abnormal accrual measures for either period. Hence, their findings confirm that joint audits do not have an impact on audit quality, as measured by the level of abnormal accruals, in Denmark. Ittonen & Tronnes (2015) examined whether voluntarily appointing two auditors is associated with audit quality, as measured by total accruals, abnormal accruals, the probability of reporting profit, and timely recognition of economic losses. They showed that joint audit improves audit quality on the dimensions of abnormal accruals and timely recognition of economic losses, but not on the dimensions of total accruals and the probability of reporting profit.
The relationship between audit fees and joint audits is another important issue to examine for the feasibility of possible introduction of joint audit. A number of empirical studies about this issue exist. The most recent study was published in April 2010 (André, Broye, Pong, & Schatt, 2010). In this study, the audit fees paid by French listed companies, with joint audit, in 2007, 2008, 2009, were compared with audit fees paid by Italian and British companies. The outcome of this study was that the audit fees paid in France were significantly higher than in Italy and the United Kingdom and therefore they conclude that joint audits lead to significantly higher audit fee.
The results of my research show that there is a significantly negative association between joint audit and abnormal accruals in comparison between France and the Netherlands. Furthermore, the regression results show that the association between JOINT and Audit fees also negative but not significant, which means that Audit fees are not significantly higher for companies audited by joint audit than for companies audited by a single audit. Finally, results from the regressions
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between the variables JOINT and NAS fee is negative but also not significant, which means that NAS fees are not significantly higher for companies audited by a single auditor than a company audited by joint audit. Joint audit does not improve audit quality and does not increase the cost of audit.
This study contributes to the literature in the following ways. At first it is the first study that examines audit quality in a comparison between France and the Netherlands. Several prior studies have researched the effect of joint audit on audit quality in comparison between France, Denmark, UK and Germany. As far as I know this is the first study between the Netherlands and France. Secondly this study confirms the results of prior studies in audit quality and joint audit that joint audit does not improve the audit quality, In contrast with prior studies this study shows that in the context of the Netherlands and France audit fees is not significantly higher for companies audited by joint audit than for companies audited by a single auditor.
This paper is organized as follows: Chapter two describes joint audits. It also includes the theoretical influence on audit quality and audit costs and the hypothesis development for this research. Chapter three will be about the data and method of this research. The research question and the research method will be described in detail. Chapter four includes the analysis of the empirical part of my thesis. Finally, chapter five contains the conclusion of this research and answers my mail question including some possibilities for further research.
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2 Literature
This literature section is divided into two parts. Part one is a literature review, which will provide a theoretical background to show what already is known about the different topics covered in this paper. In part two, the hypotheses will be developed based on this theoretical background.
2.1 Literature review
2.1.1 Joint audit
Deng et al. (2012) define joint audit as: “Two audit firms simultaneously and yet separately audit a company to sign a common audit report”. This does not mean both accounting firms audit the entire financial statement separately. To the contrary, there is a distribution of the work between the two accounting firms. Each accounting firm does its assigned work.
Proponents of joint audit argue that joint audits enhance auditor independence, because it is more costly for a company to impair the independence of two audit firms in a joint audit than one single firm in a single audit. The audit report in a joint audit must be co-signed by both firms, which is also a condition for it to be released. Thus, as the company would have to bribe two audit firms instead of one, it is more costly for the company to compromise auditor independence (Deng et al., 2012).
The predominant argument in favor of joint audits is that they increase audit quality because joint auditors have the potential to address two underlying principles of audit quality: auditor competence and independence. Firstly, the audit procedure decisions and judgments of partners are expected to be of higher quality when they are benchmarked against a jointly-liable partner, whereas in single audits there is less pressure to justify one’s judgments and decisions to others. Furthermore, prior research generally shows that experience and expertise are associated with improved performance (Brown and Johnstone 2009; Chin and Chi 2009). If the experience and expertise of the two engagement partners complement each other, then the quality of judgments and decisions might increase Kim Ittonen (2011).
Auditor independence is also an important determinant of audit quality (DeAngelo 1981; Ashbaugh et al. 2003; Myers et al.2003; Carcello and Nagy 2004). Independence may be higher in joint audits
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since it is conceivable that joint auditors can resist aggressive accounting treatments, dismissal threats and opinion shopping (Mazars 2011).
According to Haapamäki et al (2012) opponents of mandatory joint audits present two main arguments that joint audits do not increase audit quality. First, joint audits may suffer from a potential ―free-rider problem. This problem may occur if one of the auditors attempts to ‗shirk‘and rely on the other auditor‘s effort during the audit. Second, it may be difficult for two competitive audit firms to cooperate closely while conducting the audit, resulting in insufficient information exchange. Competition between auditors aiming to acquire a larger share of the business in the upcoming years may hinder cooperation and even compromise audit quality because of insufficient information exchange. Moreover, accounting standards containing considerable discretion can make cooperation difficult and lead to conflicts (Neveling 2007). Thinggaard and Kiertzner (2008) report that after the abolition of the mandatory two-auditor system in Denmark in 2004, 15 of the 63 (23.8%) companies investigated retained two auditors in the next year.
Joint audits are generally allowed in countries in the European Union (EU), but are not mandatory in these countries, with the exception of France. At present time, France is the only country in Europe where joint audit has been mandatory since 1966. The reason for France to accept joint audit is because joint audit may lead to a reduction in costs and an increase in the quality of the audit. In addition to that, it is argued that mandatory joint audit offers the possibility to compete with the Big Four.
Joint audits are also used internationally, including in India, South Africa and the UK. In South Africa, a joint audit is mandatory for firms operating in the financial services sector. In the United States, joint audits are performed by the Internal Revenue Service (IRS) by using various specialists and agents simultaneously in a single tax audit Kim Ittonen (2011) .
Joint audit is not mandatory in the Netherlands. The AFM (Authorities Financial Market), which is responsible for auditing in the Netherlands, suggests that in join auditing in practice, tasks and activities will be distributed, therefore none of the parties will have a complete overview and none of the parties will be charged with the full responsibility for the quality of the entire control.
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Prior research on joint auditing in Europe has been done in France, Sweden, United Kingdom and Denmark. As to my knowledge, there has been no prior study on joint auditing in Netherlands. Prior research has compared single and joint audit in one country. This research will make a comparison in two different countries.
2.1.2 Audit quality
Following on the definition of joint audit in the prior chapter, in this chapter the term audit quality will defined, which dependent variable in this research is. The term audit quality is used to describe the relationship between the auditor and his client, the effectiveness of the auditor-client relationship and the mandatory auditor rotation. Therefore, audit quality is used in accounting research (Leasage et al 2012).
In the past, there were several attempts to define audit quality. None of these definitions have succeeded in becoming a universally recognized and accepted definition. Hereby one can see that describing audit quality is rather difficult. That is why I will use here different definitions. I will emphasize the relation between audit quality and the joint audit later in this chapter.
There is a vast body of literature relating to audit quality and its measurement. Despite the extent of that literature, no single generally accepted definition or generally accepted measure of audit quality has emerged. According to Hassan Yahia Kikhia (2014), much of the audit quality literature derives from DeAngelo’s definition. He defines audit quality as ‘the joint probability that an auditor will both discover and report a breach in the client’s accounting system. The discovery of a misstatement measures quality in terms of auditor’s knowledge and ability, while reporting the misstatement depends on the auditor’s incentives to disclose DeAngelo (1981).
There are also several other studies done on audit quality. Hameed, (1995) found that the most important factors that affect auditing quality are auditor's experience, honesty, and the knowledge in accounting and auditing standards. Alqam and Alrajabi (1997), in their research in public Jordanian companies, found that auditor rotation is affected by three categories; firm specific factors such as management replacement, auditing office specific factors such as auditing quality, and factors related to international auditing standards and auditing ethics. Also, Abbott and Parker (2000) investigated auditor changes, and found that the presence of active and independent audit committees is associated with increases in audit quality at the time of auditor
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changes. Dunn et al., (2000) found a positive association between industry-specialized audit firms and analysts' rankings of disclosure quality in unregulated industries, but no relation in regulated industries. Abbott et al., (2000) argued that independent and active audit committees demand a higher level of audit quality due to concerns about monetary or reputation losses arising from financial misstatements.
Wong (2001) found that the use of computer assisted audit techniques instead of traditional data mining contributes to the success of auditing task. Brown et al., (2006) found that auditor independence does not, by itself, materially degrade the quality of financial disclosures. Khasharmeh (2002) found that the auditor must be selected objectively and not based on the interrelationships between board of directors and the auditor.
Prior researches documented a positive association between audit quality and some factors such as internal control. Other studies have employed more direct measures, such as the outcomes of quality control, firm size, audit fees, auditor independence, auditor reputation, industry specialization, auditor qualifications and proficiency. This research considers abnormal accruals and auditor independence as audit quality factors.
Several studies have analyzed the effect joint audit regulations might have on audit quality. Holm and Thinggaard (2011) examine whether joint audits impacts audit quality in the Danish setting. They find insignificant coefficients on their audit quality measures (abnormal accruals), suggesting that joint audits are not better able to constrain earnings management than single audits. Lesage et al. (2012) also examine whether joint audit impacts audit quality in the Danish setting. Their findings show insignificant coefficients on the abnormal accrual measures for either period. Hence, their findings confirm that joint audits do not have an impact on audit quality, as measured by the level of abnormal accruals, in Denmark. (Velte & Azibi, 2015) examined the effect of joint audit on the level of abnormal accruals and discretionary accruals, as proxies of audit quality. Using a sample of 307 German and French listed companies during the period 2008 through 2012, (Velte & Azibi, 2015) documented that joint audit has no significant impact on the level of abnormal accruals or discretionary accruals in both countries. In another study, Lesage and Ratzinger-Sakel (2012) consider a matched French- German sample and
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attempt to disentangle the effect of mandatory joint audit in France. As Germany is a country where voluntary joint audits are carried out, the German sample is restricted to companies with a single audit to adequately test the impact of mandatory joint audit in France. The authors test whether joint audit is associated with an increase in audit quality, measured by several abnormal accrual measures. Their findings show no impact of joint audit on the abnormal accrual measures, which means that the level of earnings management in France is not significantly different from that in Germany. This suggests that joint audits have no impact on audit quality, as measured by the level of abnormal accruals.
Zerni et al. (2012) examine the impact of the voluntary joint audit on audit quality in the Swedish setting for the 2001-2007 periods. The authors consider a sample of listed non-financial Swedish companies (1,257 observations) and a sample of privately held Swedish companies (between 848 and 1,160 observations depending on the test). The findings suggest that companies opting voluntarily for joint audits have a higher degree of earnings conservatism, lower abnormal accruals (both are proxy measures for audit quality), better credit ratings and lower risk forecasts of becoming insolvent within the next year than other firms (both are proxy measures for perceived audit quality). In the same context, (Ittonen & Tronnes, 2015) examined whether voluntarily appointing two auditors is associated with audit quality, as measured by total accruals, abnormal accruals, the probability of reporting profit, and timely recognition of economic losses. Using a sample of Finnish and Swedish listed companies during the period 2005 through 2010, (Ittonen & Tronnes, 2015) showed that joint audit improves audit quality on the dimensions of abnormal accruals and timely recognition of economic losses, but not on the dimensions of total accruals and the probability of reporting profit.
2.1.3 Auditor independence and audit quality
Auditor independence is one of the five fundamental principles of the accounting profession. According to Warren and Alzola (2008), auditor independence is mostly described as a conflict of interest that develops when an auditor is having conflicting professional or personal interests. It is the duty of an auditor to resist corporate influences, pressures from the auditing firm and client because the auditor has a fundamental role in the functioning of the economic system. The standard of the International Federation of Accountants (IFAC) Ethics Committee defines
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independence in two ways, namely as (1) Independence of mind and (2) Independence in appearance (www.ifac.org). Independence in mind can be defined as the state of mind that allows to draw conclusions that are unaffected by influences that compromise professional judgment. Independence in appearance is about the avoidance of circumstances from which a well-informed third party might conclude that professional judgment is compromised. Independence in mind can be seen as real independence and independence in appearance is the perceived independence by other parties. De Angelo (1981) argues that audit quality can be reduced by impaired auditor independence. Auditor independence is important because it has an impact on audit quality. De Angelo (1981) suggests that audit quality is defined as the probability that (a) the auditor will uncover a breach and (b) report the breach. If auditors do not remain independent, they will be less likely to report irregularities, thereby impairing audit quality. Auditor independence could be impaired by an economic bond and a social bond between an auditor and its client (De Angelo, 1981). An economic bond arises from audit fees and NAS fees. The economic bond threat and social bond threat can be divided into four main threats to auditor independence, namely client importance, NAS, auditor tenure and client affiliation with audit firms (Tepalagul & Lin, 2015). Auditors get paid by their clients. If a payment is higher, the client plays a larger role in the portfolio of the auditor and will be more important to the auditor. Therefore, the auditor has more intention to retain that client, which could be harmful for the independence of the auditor. The auditor independence is less likely to be challenged in a joint audit due to NAS fees because the audit is carried out by two audit firms.
Auditors have also an economic incentive to provide NAS to their audit clients, as NAS are usually viewed as being more profitable. Dopuch and King (1991) find that restricting the joint provision of audit and NAS may result in auditors choosing NAS over audit. Simunic (1984) contends that the joint provision of audit and NAS may result in knowledge spillovers, thereby reducing engagement risk and increasing audit quality (Beck & Wu, 2006). Some studies find a positive association between audit fees and either the provision or magnitude of NAS (e.g., Simunic, 1984), other studies suggest no relation (e.g, Raghunandan, 2003).
Clients of external auditors have incentives to also purchase NAS from them, due to cost savings and higher quality service (Public Oversight Board, 1979). Nevertheless, not all clients prefer to
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obtain NAS from their external auditors. Companies need independent audits to reduce agency costs. Clients with high agency costs may be less willing to obtain NAS from their auditors because doing so may result in reduction in perceived independence and audit quality (Parkash & Venable, 1993). Firth (1997) confirms that firms with higher agency costs purchase fewer NAS from their external auditors.
Many studies use accruals as a surrogate for financial reporting quality. Some find that higher NAS fees are associated with lower accrual quality (e.g., Frankel, Johnson, & Nelson, 2002; Srinidhi & Gul, 2007). Other studies suggest no relation (e.g., Ashbaugh, LaFond, & Mayhew, 2003; Chung & Kallapur, 2003; Mitra, 2007).
Most U.S. studies find no evidence that NAS impair actual audit quality, based on examining auditors’ reporting decisions. However, a German study reports that Big 4 auditors 112 Journal of Accounting, Auditing & Finance is less likely than non–Big 4 counterparts to issue GCOs to clients with high NAS fees (Ratzinger-Sakel, 2013).
2.2 Audit Fees
Here I will introduce the definition of audit cost and the relation of audit cost with joint audit. Previous research Simunic (1980) has shown that audit fees usually give a good picture of the costs that firms are willing to make to audit their financial statements. According to Simunic (1980) external audit fees are simply a market clearing quantity and price, where quantity represents labor hours and price represents an average hourly billing rate. Further on according to Simunic (1980) audit fees are determined by: the size of the auditee, principal industry of the auditee, complexity of the auditee’s operations, receivables and inventories which is stated as a risk and finally whether the auditee is a public or closely held company.
Walid El- Gammal defined audit fees as the amounts of fees (wages) charged by the auditor for an audit process performed for the accounts of an enterprise (audited), the determination of the audit fees is based on the contract between the auditor and the audited in accordance with time spent on the audit process, the service required, and the number of staff needed for the audit process. It should be mentioned that audit fees are normally determined before starting the audit process. Hoitash et al. (2005) further argues that the total of audit fees are the amount of all fees
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covered for auditor. The amount of the fee is normally varied, depending on client size and the complexity of the auditing process (Lyon and Maher, 2005). Choi et al. (2009) further claims that audit fees are determined, among others, by deployment risks, the complexity of the audit, client size and the complexity of the clients. Turkey et al. (2005) states that there are three factors contributing to the establishment of fees, i.e. the size of an auditee, complexity, and risk.
Kinney and Libby, (2002) suggested that the threat to auditor independence could be as strong when the audit fee is large. Several studies that have empirically examined the relationship between audit quality and audit fee; Francis and Simon, (1987) assume that audit services are quality-differentiated and that in a competitive market, quality differences are reflected in fees. However, since audit fees have a number of determinants, they are a noisy proxy for quality. A previous study which examines whether, in an Australian setting, the existence of an audit committee, audit committee characteristics and the use of internal audit are associated with a higher level of audit fees concludes that a higher audit fee implies higher audit quality Francis, (2004).
Thinggaard and Kiertzner (2008) evidence a negative association between mandatory joint audit and audit fees in year 2002 in Danisch context. This result is confirm by Ittonen and Peni (2011) who show that the voluntary joint audit is associated with lower audit fees in Denmark, Finland and Sweden on the years 2005-2006. However (André, Broye, Pong, & Schatt, 2010) show in his study that the audit fees paid by French listed companies, with joint audit, in 2007, 2008, 2009, which were compared with audit fees paid by Italian and British companies were significantly higher and therefore they conclude that joint audits lead to significantly higher audit fee.
2.3 Hypothesis development
Deng et al. (2012) have shown that there is more discussion between the two companies on the audit findings in joint audit. The quality of the discussions is highly valued and useful for the audit committee. The purpose of an auditor is to reduce this information asymmetry between the parties. Gold, Lindscheid, Pott & Watrin (2011) argue that an auditor has to gather information about the client and industry. This will lead to a decrease in information asymmetry. If an auditor decreases information asymmetry, the audit quality increases. Holm &
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Thinggaard (2011) have investigated the influence of joint audits on audit quality for Danish companies. They did not find significant differences between Danish companies before and after the abolition of mandatory joint audit. I therefore state my first hypothesis:
H1: Joint audits are not significantly associated with audit quality
Prior studies show that joint audits can lead to an improvement of the audit quality. The auditor’s opinion is mostly based on the auditor’s satisfaction on the truth and fair view of the financial statement. The auditors make use of risk analyses and many other judgments for his work. When two auditors are assigned on one audit, the judgment can be more accurate. This can lead to a more accurate audit than a single audit.
The relationship between audit fees and joint audits is another important issue. A number of empirical studies about this issue exist. The most recent study was published in April 2010 (André, Broye, Pong, & Schatt, 2010). In this study, the audit fees paid by French listed companies, with joint audit, in 2007, 2008, 2009, were compared with audit fees paid by Italian and British companies. The outcome of this study was that the audit fees paid in France were significantly higher than in Italy and the United Kingdom and therefore they conclude that joint audits lead to significantly higher audit fee. Simunic (1980) has shown that audit fees usually give a good picture of the costs that firms are willing to make to audit their financial statements. My second hypothesis is stated as follows:
H2: Audit fees are significantly higher for companies audited by joint audit than for companies audited by a single audit.
The second hypothesis must be seen as a question of the feasibility to use joint audit, if the H1 suggests that this improves the audit quality. Firms and regulators will be more likely to be supportive to joint audit when the audit fees are not significantly higher than single audits. Previous research has concluded that joint audit leads to an increase in audit fees. In my opinion, an effectively planned and conducted joint audit will have the same audit fee as a single audit. Therefore I will used in this research listed companies in France and the Netherlands with the approximately the same level of balance total, revenue and industry to reach a conclusion.
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My third hypothesis is about the auditor independence related to the NAS fees. As stated in paragraph 2.2.3, the auditor independence is less likely to be challenged in a joint audit due to NAS fees, because the audit is carried out by two audit firms. To test if auditors earn more by NAS fees in a single audit, my third hypothesis is formulated as follows:
H3: NAS fees are significantly higher for companies audited by a single auditor than a company audited by joint audit.
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3 Research methodology
In this section, first the research approach and sample collection are described. After this, the models of abnormal accruals and auditor fees are shown. Furthermore, the proxies and measures of the dependent variable, the independent variable and the control variables are described.
3.1 Sample selection
The financial statement information needed for this research is partly obtained from Compustat and Audit Analytics. The data for the audit – and NAS fees are hand collected from the financial statements of the companies. In order to perform this research a sample of listed firms is collected from the Netherlands and France. Joint audit is mandatory in France for all legal entities which are obliged to publish consolidated accounts, will it is voluntarily in the Netherlands. I have selected firms from France with mandatory joint audit and firms of the Netherlands with single audit.
The sample of the firms will meet further the following criteria:
1. Dutch firms majority listed on the AEX and AMX stock markets in Amsterdam (excluding the firms with voluntarily join audit)
2. France firms majority listed on CAC 40 3. The period to be research is 2013-2015
Firms with missing data related to control variable and abnormal accruals is deleted from the total population. The breakdown of the population for the abnormal accruals and auditor fees is given in table 1. The research period of 2013-2015 is used, because it includes the most recent period of available data for the calculation of the abnormal accruals. I have also used the data from the years before 2013 in order to calculate the abnormal accruals. All the selected firms have been audited by a big 4 firm. A Big 4 auditor is more likely to report a breach when he discovers one, than a non-big4 auditor (Francis et al., 1999). According to Khurana and Raman (2004), Big 4 auditors provide higher quality audits than non-Big 4 auditors, because of their reputation.
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Table 1 Data selection for the sample Panel A: Sample selection for accruals
Sample selection for accruals
France Netherlands Number of firms (initial selection) from Comp stat 3.544 2.290 Less: missing data related to control variables 2.481 1.603 Less: missing data related to abnormal accruals 990 617
73 70
Panel A: Sample selection for audit – and NAS fees Sample selection for audit fees and NAS fees
France Netherlands
Number of firms from audit analytics 78 138
Less: missing data related to control variables 43 77
35 61
3.2 Research approach
3.2.1 Model of abnormal accruals
According to Lesage et al. (2011), abnormal accruals are the best proxy for audit quality. Despite the fact that abnormal accruals are criticized due to their limited predictive accuracy and power to detect earnings management, abnormal accruals continue to be used as a measure of earnings quality and therefore to identify differences in audit quality by investigating the accruals properties of audit firm clients (Francis & Wang 2008; Francis et al. 2009).
Lesage et al. (2011) follow Francis & Wang's (2008) methods of research and use signed abnormal accruals instead of absolute accruals. The reason they do not use absolute accruals is because Hribar & Nichols (2007) argue that signed abnormal accruals are a better measure of earnings quality than the absolute or unsigned value of accruals.
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As already discussed in this chapter, there are several studies that tried to solve the problem of understanding the relationship between audit quality and other variables by using a proxy for audit quality (Dang, 2004).This research will use the model of Lesage et al. (2011). The following linear model will be used for the abnormal accruals:
ABN_ACC= Y 0 + Y1joint + ACCCOUNTROLk + Fixed effects +
The abnormal accrual (ABN_ACC) is the independent variable in this model. The test variables for the H1 is JOINT and equals to 1 when the firm is audited by at least two auditors, zero otherwise. The control variables for the accruals model are assets, CFO, LEV, growth PPE and SALE, LOSS and BIG. These variables are explained in detail in chapter 3.3. The coefficient on assets, CFO and big is expected to be negative and the coefficient on LEV, GROWTH on PPE and SALE and LOSS to be positive. The abnormal accruals are calculated as follows for this research:
At first I have calculated the predicted accruals (PRED_ACC) in year t as:
PRED_ACC t = (SALES t*(CUR_ACCt-1/SALESt-1)/ASSETSt-1
ABN_ACC in year t are defined as the difference between the firm’s total accruals (TOT_ACC) in year t and PRED_ACC for year t:
ABN_ACC t = TOT_ACC t – PRED _ACC t
TOT_ACC in year t are calculated as firms’ net income (NET_INCOME) in year t minus firm’s cash flow from operating activities (CFO) in year t scaled by lagged assets (ASSESTS t).
TOT_ACCt = (NET_INCOMEt-CFOt)/ASSETSt-1
Further on I got the firm’s current accruals (CUR_ACC) by taking the sum between TOT_ACC in year t and depreciations and amortizations (DEP_AMO):
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3.2.2 Model of audit fees and NAS fees
To test the hypothesis of audit fees and NAS fees, I will calculate the fees that are paid to auditors, between two countries France and the Netherlands.
The following regression is used for the audit and NAS fees model:
LNFEE = β0 + β1 JOINT + FEECONTROL + FIXEDEFFECTS + €
LNFEE is defined as the natural logarithm of audit fees and NAS fees in euros. This model contains two control variables which control for: audit costs (size & complexity) and the risk of loss that can occur in the future (Simunic 1980; Francis 1984; Hay et al 2006). The firm specific variables here are ASSETS and INVR. Furthermore, this model also includes other control variables such as LOSS, ROA and BIG. These variables are explain in detail here below:
The dependent and test variables for the abnormal accruals in this research are:
ABN_ACC: Signed value of abnormal accruals scaled by lagged assets Joint: 1 if a firm uses at least 2 audit firms, otherwise zero
For the audit - and NAS fees models the following dependent variables are used:
Aud_fee: Log of audit fee in thousands of euros NAS_fee: Log of NAS fee in thousands of euros
Joint: 1 if a firm uses at least 2 audit firms, otherwise zero
The control variables for audit and NAS fees and abnormal accruals are:
Asset: Log of total assets in thousands of euros
INVR: The sum of inventories and receivables divided by total sales LOSS: 1 if a firm reports loss in year t, and zero otherwise
LEV: The ratio of year-end total debt to total assets ROA: Return on assets
LIQUID: The ratio of current assets to current liabilities
PEAK: 1 if a firms fiscal year-end is 31 th December, otherwise zero BIG: 1 if a firm uses one of the big four auditors, otherwise zero CFO: Operating cash flow divided by beginning total assets
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GROWTH PPT: growth rate of PPE between t-1 and t GROWTH SALE: growth rate of sale between t-1 and t
The next step is to perform the multivariate analysis using the regression model to decide whether there is a relationship between the audit and NAS fees and the joint audit. The test variable for H2 is JOINT with a variable of 1 when the firm is audited by at least two auditors and otherwise zero.
4 Results
The results will be discussed in this chapter. First, the descriptive statistics are discussed followed by the correlation between the variables used in the models. Furthermore, the results of the regression analyses will be shown and explained. This chapter will end with a summary of the results.
4.1 Descriptive statistics
4.1.1 Descriptive statistics for control variable for the abnormal accruals the Netherlands and France
In table 2 the descriptive statistics for the abnormal accruals (ABN_ACC) and the control variables for the selected firms from France and the Netherlands are shown. From the table we see that the selected companies are audited by the big four in both countries. The mean of the assets is 7.7 for both countries with a maximum of 10.3 and a minimum of 6.7. The selected companies in the dataset for the Netherlands are in comparison bigger than the companies in France. The mean of the variable LOSS is 0.22 with a maximum of 1 and a minimum of 0. Dutch companies have reported far more losses in the research period than France companies. The ROA has a mean of 2.1 with a minimum of -86.3 and a maximum of 42.3. The lowest ROA is negative because some firms have reported negative net income during the research period. The variable INVR and LIQUID have a mean of 1.8 versus 1.9. The maximum for INVR is 37.6 and for LIQUID are 29.7. The minimum for both variables are 0.0. The selected firms have approximately the same level of inventory and current assets and liability on the balance sheet. The variable LEV has a mean of 0.70 with a minimum of 0.0 and a maximum of 4.3. A mean of 0.70 for leverage tells us that the average level of firms have not high level of debt on the balance sheet. Further on the mean of the variable CFO is 0.0 with a minimum of -1.2 and a
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maximum of 9.4. The minimum variable of negative -1.2 suggests that some firms have a negative operating cash flow. The mean of the variable ABN_ACC is – 1.5 with a minimum of -29.8 and a maximum of 4.2. This tells us that a majority of the firms in the population does not have abnormal accruals on the balance sheet. The mean of the variable JOINT is 0.49 with a minimum of 0 and a maximum of 1. This suggests that the half of the firms in the population is audited by joint audit. The other half of the firms is audited by a single auditor.
Table 2 Descriptive statistics control variables and abnormal accruals
Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
PEAK 143 0 1 0.83 0.381 BIG 143 1 1 1.000 0.000 Growth Sale 143 -0.968 13.381 0.241 1.536 Growth PPT 143 -0.906 8.101 0.278 1.217 NLF 143 0 1 0.490 0.502 INVR 143 0.006 37.664 1.865 5.660 Total assets 143 6.768 10.305 7.734 .7720 LEV 143 0.003 4.390 0.705 0.568 LOSS 143 0 1 0.220 0.418 CFO 143 -1.245 9.424 0.024 0.182 ROA 143 -86.360 42.340 2.155 15.603 LIQUID 143 .010 29.780 1.982 3.751 ABN_ACC 143 -29.812 4.230 -1.536 3.929 JOINT 143 0 1 0.490 0.502
4.1.2 Descriptive statistics audit fees and NAS fees and the control variable
In table 3 the descriptive statistics for audit- and NAS fees and the control variables for the selected firms from France and the Netherlands are shown. The variable BIG with a mean of 0.94 shows how much of the firms of the population are audited by a big 4 auditor. The mean of the assets is 9.6 with a minimum of 7.3 and a maximum of 11.7. The NAS FEES has a mean of 4.9 with a minimum of 0.0 and a maximum of 7.2. The AUDIT FEES has a mean of 6.6 with a minimum of 5.1 and a maximum of 7.7. The mean of the AUDIT FEES is relative 68 % of the mean of the TOTAL ASSETS and the mean of NAS FEES is relative 51% of the mean of TOTAL ASSETS. This tells us that the firms paid more on AUDIT FEES than NAS FEES in the
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research period. The mean of the variable LOSS is 0.11 with a minimum of 0.0 and a maximum of 1.0. This suggests that some firms of the population have reported losses in the research period. Further on the mean of the variable ROA is 4.80 with a minimum of -38.83 and a maximum of 70.62. The negative minimum variable again tells us that some firms reported losses in the research period. The variable INVR and LIQUID have a mean of 37.67 versus 2.23. The maximum for INVR is 880.10 and for LIQUID are 21.22. The minimum for both variables are 0.0. This suggests that the selected firms have more inventories than current assets and liabilities on the balance sheet. Further on the mean of the variable LEV is 0.78 with a minimum of 0.00 and a maximum of 4.04. A mean of 0.78 for leverage tells us that the average level of firms have not high level of debt on the balance sheet. The mean of the variable JOINT is 0.64 with a minimum of 0 and a maximum of 1. This suggests that more than the half of the firms in the population is audit by joint audit. The other part of the firms is audited by a single auditor.
Table 3 Descriptive statistics variables for audit – and NAS fees
Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
PEAK 96 0 1 0.820 0.384 Audit fees 96 5.188 7.781 6.614 .726 NAS fees 96 .000 7.266 4.986 2.212 Total fees 96 5.219 7.724 6.630 .662 Big 96 0 1 0.94 0.243 Total Assets 96 7.354 11.710 9.666 1.192 Loss 96 0 1 0.110 0.320 ROA 96 -38.830 70.620 4.801 11.735 NLF 96 0 1 0.640 0.484 INVR 96 0.000 880.1050 37.675 137.718 LEV 96 0.000 4.040 0.780 0.881 LIQUID 96 0.094 21.229 2.239 2.902 JOINT 96 0 1 0.64 0.484
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4.1.3 Coloration matrix
Table 4 discloses the correlation matrix for the abnormal accruals and de independent variables. The dependent variable abnormal accruals (ABN_ACC) is negatively significantly correlated at 5% with joint audit (JOINT). Further on we see that the control variables LEV and LIQUID are negatively significantly correlated at 1% to the abnormal accruals. The control variables PEAK, Growth PPE, INVR, LOSS, CFO, ROA and LIQUID are also negatively correlated (not significant) to the abnormal accruals. There is further a positive correlation (not significant) between the dependent variable abnormal accruals and the independent variables Growth Sale and Total Assets. The matrix further shows that there is a high correlation within the independent variables mutually. For example the variables LOSS and LEV, ROA and CFO are significantly positively correlated at 1% mutually.
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Table 4: Coloration matrix abnormal accruals
Correlations
PEAK Growth Sale Growth PPT INVR Total assets LEV LOSS CFO ROA LIQUID ABN_ACC JOINT
PEAK 1 0.067 0.056 0.069 -0.057 0.012 0.070 -0.146 -0.170* 0.021 -0.041 0.230** Growth Sale 0.067 1 0.112 -0.083 0.149 0.024 0.187* -0.063 -0.111 -0.033 0.018 0.116 Growth PPT 0.056 0.112 1 -0.050 -0.038 -0.078 0.013 0.029 -0.003 -0.006 -0.008 0.066 INVR 0.069 -0.083 -0.050 1 0.023 -0.098 -0.050 -0.003 -0.003 -0.009 -0.026 0.327** Total assets -0.057 0.149 -0.038 0.023 1 0.043 0.035 -0.022 -0.032 -0.056 0.058 -0.007 LEV 0.012 0.024 -0.078 -0.098 0.043 1 0.311** -0.518** -0.573** -0.168* 0.300** -0.275** LOSS 0.070 0.187* 0.013 -0.050 0.035 0.311** 1 -0.461** -0.600** 0.097 -0.091 0.280** CFO -0.146 -0.063 0.029 -0.003 -0.022 -0.518** -0.461** 1 0.915** 0.030 -0.065 -0.042 ROA -0.170* -0.111 -0.003 -0.003 -0.032 -0.573** -0.600** 0.915** 1 0.032 -0.077 -0.086 LIQUID .0021 -0.033 -0.006 -0.009 -0.056 -0.168* 0.097 0.030 0.032 1 -0.986** 0.238** ABN_ACC -0.041 0.018 -0.008 -0.026 0.058 0.300** -0.091 -0.065 -0.077 -0.986** 1 -0.335** JOINT 0.230** 0.116 0.066 0.327** -0.007 -0.275** 0.280** -0.042 -0.086 0.238** -0.335** 1 N 143 143 143 143 143 143 143 143 143 143 143 143
*. Correlation is significant at the 0.05 level (2-tailed) **. Correlation is significant at the 0.01 level (2-tailed).
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Table 5 discloses the correlation matrix of the dependent variables audit fee and NAS fee and the whole set of independent variables. The matrix shows that the dependent variables audit fee NAS fee are negatively correlated to the joint audit (JOINT). The variable audit fee is significantly (negative) correlated at 1% to the joint audit. The control variables PEAK, BIG and ASSETS are also positively correlated with audit fee. The assets are also significant (positive) correlated at 1% to the audit fee. Further on, the remaining control variables LOSS, ROA, INVR, LEV and LIQUID are negatively correlated to the audit fee. The variables INVR and LIQUID are significantly (negatively) correlated at 5% with the audit fee. For the NAS fee, the variables PEAK, BIG and ASSETS are positively correlated, from which the ASSETS are significantly correlated at 1% to the NAS fee. The remaining control variables LOSS, ROA, INVR, LEV and LIQUID are all negatively correlated with the NAS fee. Furthermore we can see in table that there is a high positive significant correlation at 1% within the dependent variables audit fee and NAS fee.
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Table 5: Coloration matrix audit – and NAS fees
PEAK Audit fees NAS fees Big Assets Loss ROA NLF INVR LEV LIQUID JOINT PEAK 1 0.088 0.009 0.106 -0.005 -0.261* 0.060 -0.125 0.128 -0.335** 0.037 -0.125 Audit fees 0.088 1 0.626** 0.163 0.718** -0.090 -0.070 -0.268** -0.203* -0.140 -0.238* -0.268** NAS fees 0.009 0.626** 1 0.120 0.504** -0.109 -0.029 -0.112 -0.152 -0.123 -0.157 -0.112 Big 0.106 0.163 0.120 1 0.123 -0.448** .0367** -0.017 0.071 -0.389** 0.037 -0.017 Assets -0.005 0.718** 0.504** 0.123 1 -0.145 -0.071 0.014 -0.138 -0.187 -0.186 0.014 Loss -0.261* -0.090 -0.109 -0.448** -0.145 1 -0.465** -0.135 -0.099 0.391** -0.087 -0.135 ROA 0.060 -0.070 -0.029 0.367** -0.071 -0.465** 1 0.226* -0.048 -0.081 0.050 0.226* INVR 0.128 -0.203* -0.152 0.071 -0.138 -0.099 -0.048 -0.355** 1 -0.196 0.022 -0.355** LEV -0.335** -0.140 -0.123 -0.389** -0.187 0.391** -0.081 0.129 -0.196 1 -0.073 0.129 LIQUID 0.037 -0.238* -0.157 0.037 -0.186 -0.087 0.050 00.009 0.022 -0.073 1 0.009 JOINT -0.125 -0.268** -0.112 -0.017 0.014 -0.135 0.226* 1.000** -0.355** 0.129 0.009 1 N 96 96 96 96 96 96 96 96 96 96 96 96
*. Correlation is significant at the 0.05 level (2-tailed) **. Correlation is significant at the 0.01 level (2-tailed).
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4.2 Regression results
4.2.1 Regression of abnormal accruals
Table 6 presents regression results of the accruals model. The expectation here was that there is no association between abnormal accruals and joint audit. The correlation between JOINT and Abnormal accruals is negative and significant (p-value of 0.000 < 0.05) which is not consistent with H1, which states that Joint audits are not significantly associated with audit quality. There is a significant association between joint audit and abnormal accruals in comparison between France and the Netherlands.
Table 6: Regression abnormal accruals
ABN_ACC Variable Unstandardized B Coefficients STD. Error T SIG PEAK -0.412 0.33 -1.246 0.220 Growth Sale 0.017 0.049 0.346 0.731 Growth PPE -0.011 0.009 -1.133 0.262 INVR -0.05 0.048 -1.028 0.310 Total assets -0.01 0.011 -0.938 0.354 LEV 0.091 0.041 2.243 0.030** LOSS 0.506 0.092 5.519 0.000*** CFO 0.116 0.077 1.507 0.140 ROA 1.296 0.462 2.805 0.008*** LIQUID -0.002 0.005 -0.389 0.699 JOINT -0.975 0.009 -105.323 0.000*** N 143 R2 0.998 Adj. R2 0.998
Years effect Included
** and * denote significance level at respectively p<0,01 and p<0,05
With: ABN_ACC= Signed abnormal accruals scaled by lagged assets calculated via a model adopted from DE Fond and Park (2001). JOINT = 1 if firms uses at least two auditors, and 0 otherwise. ASSETS = Log of total assets in thousands of Euros; LOSS = 1 if a firm reports a loss in a year and 0 otherwise; CFO = operating cash flow scaled by total assets; LEV = the ratio of the year-end total debt to total assets; GROWTH SALE = difference between sales in year t and sales in year t-1 scaled by sales in year t-1; GROWTH PPE = growth rate of property, plant and equipment; difference between PPE in year t and in year t-1 scaled by PPE in year t-1; PEAK; 1 if a firms fiscal year-end is 31 th December, otherwise zero; LIQUID = The ratio of current assets to current liabilities; INVR = The sum of inventories and receivables divided by total sales and ROA = Return on assets; net income divided by total assets.
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4.2.2 Regression of audit fees and NAS fees
Table 7 presents the regression results for the Audit fees model. The expectation was that the audit fees are higher for companies audited by a joint audit than a single audit. The correlation between JOINT and Audit fees from the regression results is negative but not significant (0.862 > 0.05) which does not confirm H2: Audit fees are significantly higher for companies audited by joint audit than for companies audited by a single audit. Table 8 shows the regression results for the NAS fees. The expectation here was that NAS fees are higher for companies audited by a single auditor than a company audited by joint audit. The p value of 0.629 between the variables JOINT and NAS fee from the regression results means a negative non-significant correlation between them, but does not confirms H3: NAS fees are significantly higher for companies audited by a single auditor than a company audited by joint audit. The p value of 0.629 is higher than 0.05.
Table 7: Regression audit fees
Audit fees Variable Unstandardized B Coefficients STD. Error T SIG PEAK -0.083 0.226 1.334 0.202* Big 0.424 0.278 -0.37 0.717* Total Assets 0.567 0.064 1.523 0.149* Loss 0.154 0.343 8.807 0 ROA 0.007 0.012 0.449 0.66* INVR 0 0 0.563 0.582* LEV 0.032 0.108 -0.293 0.773* LIQUID 0.004 0.021 0.294 0.773* JOINT -0.398 0.143 0.177 0.862* N 96 R2 0.915 Adj. R2 0.863
Years effect Included
** and * denote significance level at respectively p<0,01 and p<0,05
With: AUDIT FEES = log of audit fees in thousands of Euros; JOINT = 1 if firms uses at least two auditors, and 0 otherwise. TOTAL ASSETS = Log of total assets in thousands of Euros; LOSS = 1 if a firm reports a loss in a year and 0 otherwise; LEV = the ratio of the year-end total debt to total assets; PEAK; 1 if a firms fiscal year-end is 31 th December, otherwise zero; LIQUID = The ratio of current assets to current liabilities; INVR = The sum of inventories and receivables divided by total sales BIG = 1 if the firms uses a big 4 auditor and, 0 otherwise; and ROA = Return on assets; net income divided by total assets.
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Table 8: Regression NAS fees
NAS fees Variable Unstandardized B Coefficients STD. Error T SIG PEAK -0.597 1.432 -2.497 0.025** Big 2.654 1.767 -0.417 0.682* Total Assets 1.321 0.409 1.503 0.154* Loss 3.322 2.174 3.232 0.006 ROA 0.002 0.078 1.528 0.147* INVR 0.004 0.003 0.02 0.984* LEV 0.043 0.687 1.504 0.153* LIQUID -0.064 0.13 0.062 0.951* JOINT 1.978 0.904 -0.494 0.629* N 96 R2 0.72 Adj. R2 0.552
Years effect Included
** and * denote significance level at respectively p<0,01 and p<0,05
With: NAS FEES = log of NAS fees in thousands of Euros; JOINT = 1 if firms uses at least two auditors, and 0 otherwise. TOTAL ASSETS = Log of total assets in thousands of Euros; LOSS = 1 if a firm reports a loss in a year and 0 otherwise; LEV = the ratio of the year-end total debt to total assets; PEAK; 1 if a firms fiscal year-end is 31 th December, otherwise zero; LIQUID = The ratio of current assets to current liabilities; INVR = The sum of inventories and receivables divided by total sales BIG = 1 if the firms uses a big 4 auditor and, 0 otherwise; and ROA = Return on assets; net income divided by total assets.
4.3 Summary of results
In this chapter I have shown the result from the conducted research on the hypothesis. For this research I have formulated three hypotheses:
H1: Joint audits are not significantly associated with audit quality.
H2: Audit fees are significantly higher for companies audited by joint audit than for companies audited by a single audit.
H3: NAS fees are significantly higher for companies audited by a single auditor than a company audited by joint audit.
The regression result show that joint audits are negative significantly associated with audit quality. This was not as expected. Therefore the first hypothesis is rejected. Further on I had
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expected that audit fees are significantly higher for companies audited by joint audit than for companies audited by a single auditor. The regression result does not support this expectation. Therefore the second hypothesis is also rejected. Finally the expectations with my third hypothesis were that NAS fees are significantly higher for companies audited by a single auditor than a company audited by joint audit. The regression result show that this is not the case, therefore this hypothesis is rejected. Overall all the three hypotheses are rejected in this research. Joint audit does not improve audit quality and does not increase the cost of audit.
5 Conclusion and discussion
The purpose of this study was to examine whether the practice of using two audit engagement partners is related to audit quality and audit fees. To measure the audit quality I have uses the abnormal accruals and the NAS fees. According to Lesage et al. (2011), abnormal accruals are the best proxy for audit quality. Despite the fact that abnormal accruals are criticized due to their limited predictive accuracy and power to detect earnings management, abnormal accruals continue to be used as a measure of earnings quality and therefore to identify differences in audit quality by investigating the accruals properties of audit firm clients (Francis & Wang 2008; Francis et al. 2009). De Angelo (1981) argues that audit quality can be reduced by impaired auditor independence. Auditor independence is important because it has an impact on audit quality. Auditor independence could be impaired by an economic bond and a social bond between an auditor and its client (De Angelo, 1981). The economic bond threat and social bond threat can be divided into four main threats to auditor independence, namely client importance, NAS, auditor tenure and client affiliation with audit firms (Tepalagul & Lin, 2015).
For the sample I have uses two different populations of firms from the Netherlands and France. To examine the effect of abnormal accruals on joint audit and single audit I had selected 73 firms from France and 70 firms from the Netherlands. For the examination of NAS fees and the audit fees I had selected 35 firms of France and 61 firms from the Netherlands. The research period of this study was 2013-2015. With the selected data OLS regressions were executed to test the three formulated hypothesis. Joint audits are not significantly associated with audit quality (H1), audit fees are significantly higher for companies audited by joint audit than for companies
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audited by a single audit (H2) and NAS fees are significantly higher for companies audited by a single auditor than a company audited by joint audit (H3).
The results of the regression showed that there is significant negative association between joint audit and abnormal accruals in comparison between France and the Netherlands. Therefore the first hypothesis (Joint audits are not significantly associated with audit quality) is rejected. As expected from prior research in Danish context, Holm & Thinggaard (2011) have investigated the influence of joint audits on audit quality for Danish companies. They did not find significant differences between Danish companies before and after the abolition of mandatory joint audit. Further on the regression results show that the correlation between JOINT and Audit fees from the regression results is negative but not significant (0.862 > 0.05) which does not confirm H2: Audit fees are significantly higher for companies audited by joint audit than for companies audited by a single audit. Therefore the second hypothesis (H2) is also rejected. As expected (André, Broye, Pong, & Schatt, 2010) examined that the audit fees paid by French listed companies, with joint audit, in 2007, 2008, 2009, compared with audit fees paid by Italian and British companies, that the audit fees paid in France were significantly higher than in Italy and the United Kingdom and therefore they conclude that joint audits lead to significantly higher audit fee. The results from the regression from this thesis are in contrast with this paper. Finally we have seen from the regressions that the p value of 0.629 between the variables JOINT and NAS fee is negative non-significant, but does not confirms H3: NAS fees are significantly higher for companies audited by a single auditor than a company audited by joint audit. The p value of 0.629 is higher than 0.05. Therefore the third hypothesis (H3) is rejected. My expectations from prior studies, auditor independence could be impaired by an economic bond and a social bond between an auditor and its client (De Angelo, 1981). An economic bond arises from audit fees and NAS fees. The economic bond threat and social bond threat can be divided into four main threats to auditor independence, namely client importance, NAS, auditor tenure and client affiliation with audit firms (Tepalagul & Lin, 2015). The regression result for H3 is in contrast with my expectation. Overall two of the three hypotheses are rejected in this research. Joint audit does not improve audit quality and does not increase the cost of audit. Prior research concerning this topic showed same results, Lesage et al. (2011), for example, state that joint audit does not imply an increase of fees, nor an increase in audit quality.
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As expected most of the control variables also shows a positive correlation with the dependent variables.
5.1 Limitations and recommendations for future research
This study is subject to a number of limitations. For this research I have used the proxy abnormal accruals and NAS fees for audit quality. In a lot of prior research also the same proxies have been used. Although these proxies give enough information for the measurement of audit quality, other proxies may be used for future research. For example the AFM reports of the audit quality in the accounting firms. A limitation hereby is that these reports are not available for research purposes. Further on I have uses a limited numbers of firms (143 firms for the accruals) in this research because of the calculations that have to be made for the abnormal accruals. This is time consuming. Future research can be done with much larger samples. The sample for the audit – and NAS fees is hand in collected for this research. Future research can be done with larger set of data for audit – and NAS fees. To examine the hypothesis I have compare the firms in France (joint audit) with the firms in the Netherlands (single auditor). As we know joint audit is mandatory in France. Future research can be done in comparison with voluntary joint audit firms. For example joint audit is not anymore mandatory for Danish firms, but a number of the firms there are still audited by joint audit.
5.2 Theoretical implications
This study contributes to the literature in many ways. At first it is the first study that examines audit quality in a comparison between France and the Netherlands. Several prior studies have researched the effect of joint audit on audit quality in comparison between France, Denmark, UK and Germany. As far as I know this is the first study between the Netherlands and France. Secondly this study confirms the results of prior studies in audit quality and joint audit that joint audit does not improve the audit quality, In contrast with prior studies this study shows that in the context of the Netherlands and France audit fees is not significantly higher for companies audited by joint audit than for companies audited by a single auditor.
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5.3 Practical implications
The results of this study could be practically useful to regulators, firms and institutions like AFM and SEC. Prior research in Danish context, Holm & Thinggaard (2011) have investigated the influence of joint audits on audit quality for Danish companies. They did not find significant differences between Danish companies before and after the abolition of mandatory joint audit. This research also did not find any evidence that joint audit improves the audit quality. For regulators the results is useful to determine whether or not to apply mandatory joint audit in a country. For firms and several institutions the results van be useful to decide whether or not to apply voluntary joint audit using the perspective of audit quality.
5.4 Conclusion
This study concludes joint audits are significantly negative associated with audit quality. Further on this research shows that audit fees are not significantly higher for companies audited by joint audit than for companies audited by a single auditor. Finally the results show that NAS fees are not significantly higher for companies audited by a single auditor than a company audited by joint audit. Overall the conclusion of this research is that joint audit does not improve the audit quality in a comparative setting of companies of France and the Netherlands.
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