M7 Academic Research

Huda Mousa
Chapter 12:

a. Purpose of the Study: The purpose of the study is to examine the effects of joint audits, with

an emphasis on the audit quality related to the impairment of goodwill. The study will look at

how different auditor pairs, including Big 4 auditors (BB pair) and a mix of Big 4 and non-Big 4

auditors (BS pair), affect audit quality, particularly in terms of impairment recognition,

disclosure reduction, transparency, and other financial reporting conservatism measures (Lobo et

al., 2015).

b. Design/Method/Approach: The study employs an empirical research design with a sample of

French listed firms. It utilizes a mix of statistical techniques, such as propensity score matching,

to tackle potential internal validity concerns associated with auditor pair selection. The study

focuses on a specific accounting measure, goodwill impairment, as a proxy for audit quality and

employs various tests such as impairment tests, transparency tests, and alternative audit quality

measures such as conditional conservatism and abnormal working capital accruals (Lobo et al.,

2015).

c. Primary Findings:

1. When low performance indicators indicate the need for impairment, firms audited by a

BB pair are less likely to recognize impairment or book smaller impairment losses than

firms audited by a BS pair. This indicates that the BS pair has a higher audit quality when

it comes to impairment recognition (Lobo et al., 2015).

2. When an impairment loss is booked, transparency, as measured by impairment-related

disclosures, is reduced for firms audited by a BB pair. When impairment is recognized,

firms audited by a BS pair make more impairment-related disclosures. This finding

 implies that the BB pair reduces the transparency of impairment loss disclosure when

compared to the BS pair (Lobo et al., 2015).

Summary

The study investigates the impact of joint auditor pairs on audit quality, focusing on the

recognition of goodwill impairment—a critical aspect of financial reporting. The research finds

that firms audited by two Big 4 auditors (BB pair) are less likely to recognize impairment and

disclose smaller impairment losses than firms audited by one Big 4 and one non-Big 4 auditor

(BS pair), especially during poor performance indicators. Notably, BB pairs have less disclosure

transparency. Additional tests based on alternative audit quality measures, such as conditional

conservatism and abnormal working capital accruals, back up the main findings. The study

challenges the conventional wisdom that having two Big Four auditors necessarily improves

audit quality, implying that using a BS pair may result in higher audit quality (Lobo et al., 2015).

Chapter 13:

a. Purpose of the Study: The purpose of the study is to thoroughly investigate the associations

between debt covenant violations and auditor actions. The emphasis is on understanding the

consequences of breaching debt covenants on various aspects such as audit fees, the likelihood of

receiving a going concern opinion, and the likelihood of an auditor resignation. The study aims

to shed light on the indirect costs associated with debt covenant violations and investigates

whether these consequences are limited to financially distressed firms (Bhaskar et al., 2016).

b. Design/Method/Approach: The study employs a large data sample to conduct a thorough

analysis of the relationships between debt covenant violations and auditor actions. The

methodology entails examining audit fees, going concern opinions, and auditor resignations for
firms with at least one debt covenant violation. Statistical analyses, regression models, and the

consideration of variables such as repeat violations, remediation, and the persistence of

consequences over time are all part of the design. The approach is quantitative, relying on

empirical evidence to draw conclusions about the impact of debt covenant violations on auditor

behavior and economic outcomes for the firms involved (Bhaskar et al., 2016).

c. Primary Findings:

1. Higher Audit Fees and Auditor Resignations for Repeat Violators: The study finds a

positive and marginally significant coefficient on repeat violations (REPEATVIOL) for

both the audit fee model and the auditor resignation model. Firms with multiple

violations, especially those that fail to remediate violations in consecutive years, face

higher audit fees and are more likely to face auditor resignations than first-time violators

(Bhaskar et al., 2016).

2. Persistence of Increased Audit Fees: The findings indicate a persistent increase in audit

fees for firms with debt covenant violations over the next ten years following a violation.

The findings suggest that the economic consequences of breaching debt covenants extend

into the future, emphasizing the long-term challenges that these firms face in terms of

auditing costs (Bhaskar et al., 2016).

Summary

The study investigates how auditors react to companies violating their debt agreements. It

discovers that companies with repeated violations pay higher audit fees and have a higher

likelihood of auditor resignations than first-time violators. Surprisingly, repeat violations do not

appear to affect the likelihood of receiving a going concern opinion. Furthermore, the study

found that higher audit fees can last up to ten years after a violation, indicating long-term
consequences. According to the study, debt covenant violations have significant and long-term

consequences for companies, extending beyond financially distressed firms to include financially

healthy ones. This insight is critical in the context of common and frequent violations, which

often stem from strict covenant terms rather than financial difficulties, emphasizing the broader

implications for auditing practices (Bhaskar et al., 2016).

Reference:

 Bhaskar, L. S., Krishnan, G. V., & Yu, W. (2016). Debt Covenant Violations, Firm

Financial Distress, and Auditor Actions. Contemporary Accounting Research, 34(1),

186–215. https://doi.org/10.1111/1911-3846.12241

 Lobo, G. J., Paugam, L., Zhang, D., & Casta, J.-F. (2015). The Effect of Joint Auditor

Pair Composition on Audit Quality: Evidence from Impairment Tests. SSRN Electronic

Journal. https://doi.org/10.2139/ssrn.2653412

 Lobo, G. J., Paugam, L., Zhang, D., & Casta, J. F. (2017). The effect of joint auditor pair

composition on audit quality: Evidence from impairment tests. Contemporary

Accounting Research, 34(1), 118-153

 Bhaskar, I. S., Krishnan, G. V., & Yu, W. (2017). Debt convenant violations, firm

financial distress, and auditor actions. Contemporary Accounting Research, 34(1) 186-

215