Sample

Currently, only listed companies with a fiscal year-end on or after 15 December 2016 are required to comply with all
the changes to the audit reporting standards. It is not mandatory for non-listed companies to disclose KAMs. However,
this requirement is likely to apply to non-listed entities over time as well. As such, this study starts with all New Zealand
publicly listed companies available on the Osiris database as of the data collection date 26 September 2017 (144). Data
related to the first year of adopting the new reporting requirements (t) and the pre-adoption period (t–1) are collected
for each firm. Of the 144 firms, 7 firms have outdated data on Osiris. In these cases, a manual collection of data from
the annual reports of these firms is performed to avoid further reduction in the small sample size. For the audit quality
analysis, 25 firms in the financial sectors (SIC Codes 6000-6999), and 8 firms in the utility sectors (SIC Codes 4900
and 4999) have been excluded. These firms are excluded in prior studies for several reasons. First relates to the different
operating and financial structures of these firms (Lo et al., 2017). Second, regulated firms are likely to face different
earnings management incentives than non-regulated firms (Ayers et al., 2006). After this filtering, eight firms are
excluded as they are not listed on the NZX, and 12 firms are excluded due to missing available data to ensure a balanced
panel of data in the pre-adoption and post-adoption period. This study ensures a balanced panel to allow the comparison
of firms in the pre-period to the same firms in the post-period. The final sample used in the audit quality analysis
comprises 91 firms (i.e. 182 firm-year observations).
For the audit fees analysis, the study starts with all 144 listed companies in New Zealand on the Osiris database
without screening out financial and utility firms. We were able to include a larger number of observations in this
analysis. The goal of the audit fees analysis is to explore the effect on audit fees before and after the firms have
implemented the new audit reporting requirements. Thus, while financial and utility firms may exhibit unique
features that may impact on the abnormal accrual analysis, it should not hinder the validity of the audit fee
analysis[9]. The sample for the audit fee analysis is constructed from excluding nine firms which are not listed
on NZX, and 14 firms with missing complete data either in the pre or post-implementation period. The final
sample of the audit fee analysis comprises 121 firms (i.e. 242 firm-year observations)[10]. Table I summarises
the sample selection process for the abnormal accruals and audit fee analyses.
As shown in Table I, the final samples in the abnormal accrual and audit fee analyses represent 57.2 and 76.1 per
cent of the total population of listed firms in the NZX, respectively. Panel C presents the industry representations of the
samples. With respect to the audit quality sample, the largest industry is in manufacturing (34.1 per cent) followed by
services (25.3 per cent). The smallest industry in the audit quality sample relates to mining and construction at 2.2 per
cent. With respect to the audit fee sample, the largest industry is also in manufacturing (25.6 per cent) followed by
transportation, communication, electric, gas and sanitary service at 20.7 per cent. Similar to the audit quality sample,
the smallest industry in the audit fee sample relates to mining and construction at 1.7 per cent. The financial services
sector makes up 17.4 per cent of the audit fee sample.

Results
5.1 Descriptive statistics and univariate analysis
Table II, Panel A presents the descriptive statistics for the firm-year observations. All continuous
variables are winsorised at the 1st and 99th percentiles. The average performance matched
absolute value of discretionary accruals is 0.210 for the sample. This value is similar to that
reported in a recent study performed in the New Zealand context (Sharma and Kuang, 2014).
The pre-post change in abnormal accruals is 54.2 per cent, indicating audit quality has
improved upon the adoption of the new audit reporting regime. The mean natural logarithm
of total audit fees for the sample is 5.203[11]. The pre-post change in audit fees is $36.8 (in
thousands), suggesting the adoption of the new audit reporting regime is more costly. The
sample firms tend to experience high growth as represented by an average market to book
ratio of 4.143 and an average one-year sales growth of 19.604 per cent. To my knowledge,
this study is the first to incorporate volatility of cash flow from operations and volatility of
sales in an abnormal accrual analysis in the New Zealand setting, and therefore no suitable
benchmark is available. The descriptive statistics of other variables and their distributions
are similar to previous studies (Hay et al., 2006a, 2006b; Zhang and Emanuel, 2008;
Knechel et al., 2012a, 2012b; Sharma and Kuang, 2014; Reid et al., 2016).
 Table II, Panels B and C compare the mean values of the variables used in each audit quality
and audit fee analysis for the pre-adoption period (POST = 0) and the post-adoption period
(POST = 1). The univariate results in Panel B indicate that the absolute value of mean abnormal
accruals is significantly lower in the post-period at 0.132 compared to the pre-period at 0.288 (p
< 0.001). This result provides initial evidence that the abnormal accruals have decreased after
the adoption of the new audit reporting requirements. There is no statistical difference in the
means of the control variables in the abnormal accrual analysis from the pre-

period to the post-period, except GROWTH. This result suggests that the sample firms do not have significant changes
during the sample period, apart from that in the post-period, the firms tend to have lower average sales growth (4.74
per cent) as compared to the pre-period (34.47 per cent). Overall, as proxied by the lower absolute value of abnormal
accruals, the univariate results offer some preliminary evidence that audit quality has improved from the year before
adopting the new audit reporting requirements to the first year of adoption.
Panel C shows the univariate results of the audit fee analysis. The results suggest that there is no significant
difference in audit fees from the year before implementing the new audit reporting requirements compared to
the post-implementation period. Additionally, none of the control variables for the audit fees analysis are
significantly different between the pre-period and the post- period.

5.2 Multivariate analysis

5.2.1 Abnormal accrual analysis. The results of the abnormal accrual analysis (Model 1) are presented in Table
III. In addition to our main response variable, absolute value of abnormal accruals (ABS_ACC), reported in
Column (A), we report the results using alternative measures of audit quality, namely, positive abnormal
accruals (POS_ACC) and negative abnormal accruals (NEG_ACC). The results for the regressions of
POS_ACC and NEG_ACC are reported in Columns (B) and (C), respectively.
2
With respect to Column (A), the adjusted R is 29.7 per cent, which is higher as compared to abnormal accrual
analyses in past literature (Carcello and Li, 2013; Reid et al., 2016). The coefficient on the experimental variable
(POST) is 0.143 with a p-value of < 0.001,

indicating that the absolute value of abnormal accruals is 0.143 lower on average upon the adoption of the new audit
reporting standards. This suggests that following the adoption of the new audit reporting standards, audit quality has
improved for New Zealand listed firms. The coefficients on the control variables are consistent with our predicted signs
and prior studies (Hribar and Nichols, 2007; Carcello and Li, 2013). Specifically, firms with greater profitability are
associated with higher earnings quality. Further, volatility of cash flows from operations, and volatility of sales are
correlated with unsigned earnings management measures. The results for the variable of interest, POST, in Columns
(B) and (C) are consistent with that of Column (A). Specifically, we find that the positive abnormal accruals are
significantly lower in the post-period (coefficient = 0.164, significant at the 5 per cent level), suggesting income-
increasing earnings management is lower. We also find that negative abnormal accruals are significantly lower in the
post-period (coefficient = 0.096, significant at the 5 per cent level), suggesting income-decreasing earnings management
is lower. Overall, the results of the multivariate regressions in Table III suggest that audit quality has significantly
improved after the adoption of the new audit reporting regime.
5.2.2 Audit fee analysis. Table IV presents the results of the audit fee analysis. The coefficient on POST (a1)
is 0.089 with a p-value of 0.007 based upon a robust t-statistics test adjusted for firm clustering (Petersen, 2009).
This indicates that audit fees are higher by 9.3 per cent upon the adoption of the new audit reporting requirements,
which is economically significant[12]. This increase in audit fees is consistent with the prediction of H2.
Consistent with prior studies (Hay et al., 2006a, 2006b), audit fees are higher for larger firms with foreign
operations, firms with a greater number of subsidiaries and total accounts receivables.
Taken together, the audit quality and audit fee analyses suggest that the new audit reporting requirements are
associated with an improvement in audit quality. However, the improvement does not come without a cost, as
this study also documents a significantly higher audit fees upon the adoption of the new audit reporting regime.
Additional were manually
analyses
Considerin
g that the
balanced
panel data
for the
main
analyses
may be
confounde
d by
temporal
changes
within firms
and
contempora
neous
events in
the sample
period, we
carry out
an
additional
cross-
sectional
analysis of
voluntary
adopters
versus non-
voluntary
adopters of
the new
audit
reporting
regime.
Before the
effective
date of the
new and
revised
audit
reporting
standards
(15
December
2016), 20
out of 144
listed firms
on the
Osiris
database
122 identified as voluntary adopters (See Appendix for the variable definition). T
Applying the same screening process for the main audit fees and audit a
quality analysis gives 13 voluntary adopters versus 78 non-voluntary
adopters for the additional abnormal accrual analysis and 20 voluntary b
adopters versus 101 non-voluntary adopters for the additional audit fee l
analysis. e
The empirical models for the additional analyses are similar to the I
models used for the primary analyses. The only difference is that POST is I
replaced with VOL_ADP in the Models (1) and (2). VOL_ADP takes a I
value of one for early voluntary adopters, which had issued an auditor’s .
report that includes at least one of the new audit reporting requirements H
before the requirements became mandatory on 15 December 2016. On the o
other hand, VOL_ADP takes on a value of zero for non-voluntary w
adopters. This additional test is not without limitations. First, there is only e
a small number of early voluntary adopters, and second, although some v
firm-level characteristics are controlled in the multivariate analysis, it is e
possible that the early adopters may exhibit other unique firm-level r
attributes that could potentially confound the results. Thus, the results ,
should be interpreted with caution. t
Table V, Panel A presents the descriptive statistics for the cross- h
sectional analysis. All continuous variables are winsorised at the 1st and e
99th percentiles. Panels B and C compare the means of the variables used e
in each audit quality and audit fees analysis for the non-voluntary adopters
x
t
(VOL_ADP = 0) and the voluntary adopters (VOL_ADP = 1). The
r
univariate results in Panel B indicate that the mean absolute value of
a
abnormal accruals is significantly lower for voluntary adopters of the new s
audit reporting standards at 0.134 compared to non-voluntary adopters at u
0.304 (p < 0.001). Regarding the control variables for the abnormal p
accrual analysis, the results suggest that voluntary adopters are larger and p
more profitable firms. Also, voluntary adopters tend to be firms that have o
relatively lower one-year growth in sales, and lower 3-year volatility in r
both sales and cash flow from operations, higher cash flows from t
operations, and are more likely to be audited by a Big 4 audit firm. The f
univariate results suggest that voluntary adopters have higher audit quality r
than non-voluntary adopters of the new audit reporting regime, which o
offers additional evidence that the adoption of the new audit reporting m
requirements improves audit quality. However, as there are distinct t
differences between voluntary adopters and non-voluntary adopters, a h
multivariate analysis that controls for other confounding factors is more i
reliable. s
Panel C shows the univariate results of the audit fee analysis. The a
results suggest that the audit fees of voluntary adopters are d
significantly higher than non-voluntary adopters. Again, voluntary d
i
adopters tend to be large, profitable firms that are more likely to be
t
audited by a Big 4 audit firm. The higher audit fees following the i
adoption of the new audit reporting standards is consistent with the o
results in Table IV. This relationship is further analysed in a n
multivariate analysis. a
Table VI, Panel A presents the multivariate regression results for l
the abnormal accrual analysis of voluntary adopters versus non- t
voluntary adopters. The coefficient on VOL_ADP (b 1) is 0.127 with e
a p-value of 0.131. The negative coefficient suggests that the abnormal s
accruals of voluntary adopters are lower than the abnormal accruals of t
non-voluntary adopters, consistent with the main regression results in o
 n audit quality is rather weak because the negative coefficient on
VOL_ADP is not statistically significant. Although this is likely to be Impact of the
Conclusion new auditor’s
New audit reporting standards require disclosure of KAMs and of the signing partner’s
name. This study investigates the impact of the reporting changes on audit quality and audit
report
cost (audit fees). Using a balanced sample of listed companies in New Zealand, we find that
upon the adoption of the new audit reporting regime, audit quality has improved (a lower
absolute abnormal accruals by 54.2 per cent). In addition, associated with this improvement
in audit quality is higher audit fees (by an average of $36.8, in thousands). These findings 125
support the argument that revisions to the audit reporting standards have achieved their
intended benefit of improved audit quality. However, the higher audit fees support the
argument that the implementation of the new audit standards may be costly (Vanstraelen et
al., 2011; KPMG, 2015).
We propose several explanations for the higher audit fees upon the implementation of
the new audit reporting regime. First, Mock et al. (2013) argue that it cannot be assumed
that public disclosures will increase audit fees substantially as the additional disclosures
include those that auditors have already examined or collected under existing professional
guidance. As such, the increase in audit fees may be potentially explained by the theory of
credence goods, which provides that auditors may act strategically to maximise their interest
(i.e. charge higher fees despite that the additional disclosures may not require a considerable
amount of additional audit effort). Second, the additional disclosures actually do require
substantial audit efforts which translate to increased audit fees. Third, the auditors may be
pricing the audit because of the potential for increased liability (since the new audit
reporting regime requires auditors to disclose more information). We suggest that future
research should examine the implications of the new audit reporting regime on auditor
liability.
This study is among the first to examine the post-implementation effects of the audit
reporting changes in New Zealand, which is of interest to users, practitioners and audit
regulators. The cost-benefit analysis of this study has significant implications for standard
setting, given that there are conflicting views as to whether additional disclosure
requirements such as the KAMs should be required for non-listed companies. Although
evidence suggests that the new audit requirements improve audit quality, it is uncertain
whether this benefit is likely to outweigh the corresponding increase in audit fees, especially
for smaller, non-listed entities. Nevertheless, the findings are likely to reveal the impact of
similar reporting changes adopted by other jurisdictions around the world.
This study is subject to several limitations. First, the difference in audit quality between
voluntary and non-voluntary adopters in the additional analysis is not significant, but this is likely
to be driven by the small sample size of voluntary adopters. Although the small sample size
offers a plausible explanation for the insignificant result, an alternative explanation may be that
the significant result of the main audit quality test is driven by contemporaneous events around
the adoption of the new audit reporting regime. As such, future research is recommended to
address this concern to more reliably determine the impact of the new audit reporting regime on
audit quality. Second, although this study is aimed at examining the general costs and benefits
associated with the new auditor reporting requirements, it has primarily focused upon whether
the new standards improve audit quality and whether implementation increases audit fees. Future
studies may also look at other costs (e.g. audit delay) and benefits (e.g. closing the audit
expectation gap, and readability) related to the new auditor reporting regime. Third, we have
used abnormal accruals as a proxy for audit quality. As there is no unified definition of audit
quality and that different measures of audit quality are subject to various weaknesses, future
studies may replicate this study by using a range of other audit quality measures. Fourth, there is
discretion over the breadth and nature of the additional
PAR disclosure requirements (e.g. KAMs) under the new audit reporting rules. As such, future
31,1 studies may examine how audit quality and audit fees differ amongst different types and
levels of disclosures. Finally, this study may not capture the true impact of the reporting
changes. As the new auditor reporting requirements have just became effective, it is possible
that firms are still adapting to the changes. Also, the French context provides evidence that
the additional disclosure requirements might become “boilerplate” again over time (Bédard
126 et al., 2014). Thus, it is uncertain whether the benefits or costs associated with the new audit
reporting requirements are going to persist in the long run.

Notes
1. The changes are in response to the “audit information gap”, the gap between the information users
“believe is needed to make informed investment and fiduciary decisions, and what is available to
them through the entity’s audited financial statements or other publicly available information”
(IAASB, 2011).
2. The new Auditor’s Reporting Standard, ISA (NZ) 701, requires listed companies to determine and
communicate KAMs in the audit report. These are matters in which the auditors believe are of
most significance in their audit (XRB, 2015b).
3. ISA (NZ) 700 requires the disclosure of the name of the engagement partner on financial
statements of listed issuers and FMC reporting entities with a high level of public accountability
unless such disclosure is reasonably expected to lead to a significant personal security threat (XRB,
2015c).
4. The IAASB refers to these matters as key audit matters (KAMs), and the PCAOB refers these
matters as critical audit matters (CAMs). The standard issued by IAASB and PCAOB are closely
aligned (IAASB, 2017), and while the UK standards are slightly different, the overall aim is
consistent with the other standards (IAASB 2016). As such, the impact of the standards under
different regulators are reviewed in aggregate, and for ease of exposition, this paper uses the term
“significant audit matters” for these disclosures in this section.
5. Defined in Section 6 of FMC Act 2013.
6. Defined by Section 461K of the Financial Markets Conduct Act 2013.
7. The residuals from this regression model equal abnormal accruals:

Total Assets ¼ f 0 þ f 1ð 1=LaggedTotalAssetsÞ

þ f 2ðDRevenue=LaggedTotalAssets

DReceivables=Lagged Total AssetsÞ

þ f 3ðPPE=Lagged Total AssetsÞ þ «:

Following Kothari et al. (2005), this study adopts a performance matched abnormal accruals. This
is achieved by taking the abnormal accruals from the above regression model minus the abnormal
accruals of a firm with the same one digit industry code and with the closest return on assets in the
same year. The absolute value of the abnormal accruals is the dependent variable in Equation (1),
ABS_ACC.
8. POST could be either 2015 vs 2016 or 2016 vs 2017, depending on whether the firm is an early
adopter. If a firm is a non-voluntary adopter, then POST equals 1 for FYE 2017, and 0 for FYE
2016. However, if a firm is a voluntary adopter, then POST equals 1 for FYE 2016, and 0 for
FYE2015
 9. The financial and utility firms include three financial services firms of the type that would normally be excluded from an audit fee
model. When these observations are removed from the data, the regression models provided very similar results.
10. The audit fees for three companies (Contact Energy, Fletcher Building and Spark New Zealand) appear to be misstated on the
Osiris database and are manually collected from annual reports.

11. The mean (median) audit fees paid by the sample firms (untabulated) is $296,202 ($180,500). This is reasonable compared to the
$270,240 ($120,610) reported by Wang and Hay (2013) using the 2011 audit fee data of New Zealand listed firms.
12. The economic significance is computed as exp(0.089)–1, which is consistent with the method used in “Basic Econometrics” by
Gujarati (2003).
13. We have also performed separate regressions of the positive and negative abnormal accruals for the additional tests. Untabulated
results show POST for the regressions of positive
abnormal accruals (coefficient = 0.185, t-statistic = 0.80) and negative abnormal accruals (coefficient = 0.49, t-statistic = 0.61) are
insignificant. We attribute the insignificant results to the small sample size.
14. The economic significance is computed as exp(0.243)–1, which is consistent with the method used in “Basic Econometrics” by
Gujarati (2003).

Notes: Most variables have been adopted from Reid et al. (2016) unless stated otherwise; aAlthough six of the firms has adopted partner
signing requirement prior to the effective date of 15th December 2016, these are not classified as voluntary adopters as the audit of these firms
have been appointed by the auditor general which requires the disclosure of the partners name regardless of the new audit reporting changes.
Additionally, although Air New Zealand and Genesis Energy Ltd are also appointed by the auditor general, these firms have been classified as
voluntary adopters as they have included the additional KAM paragraph prior to the mandatory date; bPrevious studies (Reid et al., 2016)
have used net income before extraordinary income instead of net income for the calculation of ROA. However, due to unavailable data on
extraordinary items (as it is not required under IFRS since 2002), this study adopted the net income to obtain the ROA ratio; cHribar and
Nichols (2007) used prior five years of data to compute volatility of sales and operating cash flows. This study uses data from past three years
to avoid further reduction to the small sample size in case of missing data