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 Of the 144 firms, 7 firms have outdated data on Osiris.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 analyses
Considerin temporal changes within firms and contemporaneous events in the sample period, we carry out
g that the an additional cross-sectional analysis of voluntary adopters versus non-voluntary adopters of
balanced the new audit reporting regime. Before the effective date of the new and revised audit reporting
panel data standards (15 December 2016), 20 out of 144 listed firms on the Osiris database were manually
for the
main
analyses
may be
confounde
d by
122 identified as voluntary adopters (See Appendix for the variable audi
definition). Applying the same screening process for the main audit fees ted
and audit quality analysis gives 13 voluntary adopters versus 78 non-
voluntary adopters for the additional abnormal accrual analysis and 20 by a
voluntary adopters versus 101 non-voluntary adopters for the additional Big
audit fee analysis.
4
The empirical models for the additional analyses are similar to the
audi
models used for the primary analyses. The only difference is that POST
t
is replaced with VOL_ADP in the Models (1) and (2). VOL_ADP takes
firm
a 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
The
before the requirements became mandatory on 15 December 2016. On
high
the other hand, VOL_ADP takes on a value of zero for non-voluntary
er
adopters. This additional test is not without limitations. First, there is
audi
only a small number of early voluntary adopters, and second, although
t
some firm-level characteristics are controlled in the multivariate analysis,
fees
it is possible that the early adopters may exhibit other unique firm-level
foll
attributes that could potentially confound the results. Thus, the results
owi
should be interpreted with caution.
ng
Table V, Panel A presents the descriptive statistics for the cross-
the
sectional analysis. All continuous variables are winsorised at the 1st and
ado
99th percentiles. Panels B and C compare the means of the variables
ptio
used in each audit quality and audit fees analysis for the non-voluntary
n of
adopters (VOL_ADP = 0) and the voluntary adopters (VOL_ADP = 1).
the
The univariate results in Panel B indicate that the mean absolute value of
new
abnormal accruals is significantly lower for voluntary adopters of the
audi
new audit reporting standards at 0.134 compared to non-voluntary
t
adopters at 0.304 (p < 0.001). Regarding the control variables for the
repo
abnormal accrual analysis, the results suggest that voluntary adopters are
rtin
larger and more profitable firms. Also, voluntary adopters tend to be firms
g
that have relatively lower one-year growth in sales, and lower 3-year
stan
volatility in both sales and cash flow from operations, higher cash flows
dard
from operations, and are more likely to be audited by a Big 4 audit firm.
s is
The univariate results suggest that voluntary adopters have higher audit
con
quality than non-voluntary adopters of the new audit reporting regime,
siste
which offers additional evidence that the adoption of the new audit
nt
reporting requirements improves audit quality. However, as there are
with
distinct differences between voluntary adopters and non-voluntary
the
adopters, a multivariate analysis that controls for other confounding
resu
factors is more reliable.
lts
Panel C shows the univariate results of the audit fee analysis. The
in
results suggest that the audit fees of voluntary adopters are
significantly higher than non-voluntary adopters. Again, voluntary
adopters tend to be large, profitable firms that are more likely to be
 Table IV. This relationship is further analysed in a multivariate reporting regime
analysis. on audit quality.
Table VI, Panel A presents the multivariate regression results for Second, although
the abnormal accrual analysis of voluntary adopters versus non- this study is
voluntary adopters. The coefficient on VOL_ADP (b 1) is 0.127 with aimed at
a p-value of 0.131. The negative coefficient suggests that the examining the
abnormal accruals of voluntary adopters are lower than the abnormal general costs and
accruals of non-voluntary adopters, consistent with the main benefits
regression results in Table III. However, the extra support from this associated with
additional test on audit quality is rather weak because the negative the new auditor
coefficient on VOL_ADP is not statistically significant. Although this reporting
is likely to be requirements, it
Conclusion has primarily
New audit reporting standards require disclosure of KAMs and of the signing partner ’s focused upon
name. This study investigates the impact of the reporting changes on audit quality and whether the new
audit cost (audit fees). Using a balanced sample of listed companies in New Zealand, we standards
find that upon the adoption of the new audit reporting regime, audit quality has improved improve audit
(a lower absolute abnormal accruals by 54.2 per cent). In addition, associated with this quality and
improvement in audit quality is higher audit fees (by an average of $36.8, in thousands). whether
These findings support the argument that revisions to the audit reporting standards have implementation
achieved their intended benefit of improved audit quality. However, the higher audit fees increases audit
support the argument that the implementation of the new audit standards may be costly fees. Future
(Vanstraelen et al., 2011; KPMG, 2015). studies may also
We propose several explanations for the higher audit fees upon the implementation of look at other
the new audit reporting regime. First, Mock et al. (2013) argue that it cannot be assumed costs (e.g. audit
that public disclosures will increase audit fees substantially as the additional disclosures delay) and
include those that auditors have already examined or collected under existing professional benefits (e.g.
guidance. As such, the increase in audit fees may be potentially explained by the theory of closing the audit
credence goods, which provides that auditors may act strategically to maximise their expectation gap,
interest (i.e. charge higher fees despite that the additional disclosures may not require a and readability)
considerable amount of additional audit effort). Second, the additional disclosures actually related to the new
do require substantial audit efforts which translate to increased audit fees. Third, the auditor reporting
auditors may be pricing the audit because of the potential for increased liability (since the regime. Third, we
new audit reporting regime requires auditors to disclose more information). We suggest have used
that future research should examine the implications of the new audit reporting regime on abnormal
auditor liability. accruals as a
This study is among the first to examine the post-implementation effects of the audit proxy for audit
reporting changes in New Zealand, which is of interest to users, practitioners and audit quality. As there
regulators. The cost-benefit analysis of this study has significant implications for standard is no unified
setting, given that there are conflicting views as to whether additional disclosure definition of audit
requirements such as the KAMs should be required for non-listed companies. Although quality and that
evidence suggests that the new audit requirements improve audit quality, it is uncertain different
whether this benefit is likely to outweigh the corresponding increase in audit fees, measures of audit
especially for smaller, non-listed entities. Nevertheless, the findings are likely to reveal the quality are
impact of similar reporting changes adopted by other jurisdictions around the world. subject to various
This study is subject to several limitations. First, the difference in audit quality between weaknesses,
voluntary and non-voluntary adopters in the additional analysis is not significant, but this is future studies
likely to be driven by the small sample size of voluntary adopters. Although the small sample may replicate this
size offers a plausible explanation for the insignificant result, an alternative explanation may be study by using a
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
range of other audit quality measures. Fourth, there is discretion over the breadth and nature of
the additional Impact of the
new auditor’s
report

125
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
126 over time (Bédard 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 signi ficant 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
 abnorma 2017, and 0 for FYE 2016. However, if a firm is a voluntary adopter, then POST equals 1 for
l FYE 2016, and 0 for FYE2015
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
abnorma
l
accruals
is the
depende
nt
variable
in
Equatio
n (1),
ABS_A
CC.
8. POST
could be
either
2015 vs
2016 or
2016 vs
2017,
dependi
ng on
whether
the firm
is an
early
adopter.
If a firm
is a non-
voluntar
y
adopter,
then
POST
equals 1
for FYE
 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).

a
Notes: Most variables have been adopted from Reid et al. (2016) unless stated otherwise; Although six of the firms has adopted partner
th
signing requirement prior to the effective date of 15 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
b
classified as voluntary adopters as they have included the additional KAM paragraph prior to the mandatory date; Previous 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
c
data on extraordinary items (as it is not required under IFRS since 2002), this study adopted the net income to obtain the ROA ratio; Hribar
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