Audit Firms’ Mergers and Audit Report Lag: Examining Contradictory Arguments

Document Type : Research Paper

Authors

1 faculty

2 Faculty of Management and Accounting,, College of Farabi, University of Tehran,, Qom, Iran

3 College of Farabi, University of Tehran

Abstract

Introduction
The emergence of audit firms’ mergers in Iran and the positive perception of Iranian regulators about the mergers, unlike other countries (Torkani et al., 2022), motivate us to examine the consequences of the mergers. In addition, disclosing audited financial statements in a timely manner to maintain the information’s usefulness (Almosa and Alabbas, 2008) is an important issue as well. Therefore, the present study examines the effect of Iranian audit firms’ mergers on audit report lag (ARL).
 
 
Research question or hypothesis
 
Based on the extant theories about audit firms’ mergers and by taking to account the Iranian audit market attributes (Greenwood et al.,1993) as well as the emergence of symbolic audit firms` mergers in Iran (Torkani et al.2022), two scenarios are developed based on “symbol over substance” view and two contradictory theories are employed in accordance with the scenarios. The first theory is economics of scale, which is consistent with the substantive merger scenario (desired by the regulators). According to this theory, audit firms achieve synergy through merging (Kim and Singal, 1993) and consequently reduce ARL (Lai, 2019). The second theory is commercialism, which is consistent with the symbolic merger scenario. According to this theory, audit firms only seek to increase their market share and do not pay attention to improving their performance (e.g., efficiency); as a result, there is no decrease in ARL (Gendron and Spira, 2010; Ciconte et al., 2019). Thus, with regards to the competing scenarios and theories, we predict that audit firms’ mergers are associated with ARL.
 
 
Methods
 
Data on audit firms’ mergers, ARL and the characteristics of client firms were collected manually from the annual reports of firms listed on the TSE between 2011 and 2020 (946 firm-years observations). Electronic copies of annual reports are available on the website of CODAL[1]. Then, using the in-sample Propensity Score Matching (PSM) approach, we have matched the observations of merged and non-merged firms and reached the final sample for model estimation. In the model of this research, based on previous research and the prevailing attributes of the Iranian auditing market, the variables affecting ARL were controlled. Finally, the research hypothesis is tested based on the nature of the merger process using the Difference-in-Difference (DID) method, which considers the merger method incidentally and as an external shock to the client firms.
 
 
Results
 
The results of the descriptive statistics in accordance with previous studies indicates long delay in issuing audit reports in Iran, which has not changed significantly after audit firms merging period. The results of the model estimation using the main sample and different sub-samples indicate that audit firms’ mergers do not affect ARL. This result is robust for several sensitivity tests.
 
 
Discussion and conclusion
 
This study shows that mergers between Iranian local audit firms (where international audit firms are not allowed to operate), follow the symbolic mergers and are attributable to the commercialism. Hence, the mergers do not improve audit efficiency and only lead to the classification of merged firms into the first-class group of trusted audit firms and take  advantage of the merged audit firms. The inconsistence between the results of this study and previous studies shows the differences between the consequences of mergers between Big and Non-big audit firms. This research is a rich avenue for future studies in the area of audit firms’ mergers differences and consequences for the case of non-big audit firms with different environmental attributes. The findings of this study also draw legislators’ attention to the real consequences of mergers and help them to provide appropriate privileges and incentives for mergers to improve the efficiency and effectiveness of merged audit firms.
 
 
 
 
 

Keywords

                                                               

Abadie, A. (2005). Semiparametric difference-in-differences estimators. The Review of Economic Studies, 72(1), 1-19.

Almosa, S. A., & Alabbas, M. (2008). Audit delay: Evidence from listed joint stock companies in Saudi Arabia. Working paper, King Khalid University, Abha, Saudi Arabia.

Bazerman, M. H., Morgan, K. P., & Loewenstein, G. F. (1997). The impossibility of auditor independence. Sloan Management Review, 38(4), 89-94.

Berkovitch, E., & Narayanan, M. P. (1993). Motives for takeovers: An empirical investigation. Journal of Financial and Quantitative analysis, 28(3), 347-362.

Blankley, A. I., Hurtt, D. N., & MacGregor, J. E. (2014). The relationship between audit report lags and future restatements. Auditing: A Journal of Practice and Theory, 33(2), 27-57.

Bonabi Ghadim, R., Vaez, S. (2021). The Effect of Information Risk on the Relationship between Abnormal Audit Report Delays and Abnormal Stock Returns. Journal of Accounting Advances, 13(1), 31-66.

Cahan, S., Hay, D., & Li, L. Z. (2021). Audit firm merger and the strategic response by large audit firms. The British Accounting Review, 53(3), 100941.‏

Chang, H., Kao, Y. C., Mashruwala, R., & Sorensen, S. M. (2018). Technical inefficiency, allocative inefficiency, and audit pricing. Journal of Accounting, Auditing and Finance, 33(4), 580-600.

Choi, J. H., Kim, S., & Raman, K. K. (2017). Did the 1998 merger of Price Waterhouse and Coopers & Lybrand increase audit quality?. Contemporary Accounting Research, 34(2), 1071-1102.

Ciconte, W., Leiby, J., & Willekens, M. (2019). Practice Note: How is auditor commercialism related to audit quality?. Foundations for Auditing Research (FAR), FAR Project 2017B06.

Craswell, A. T., Francis, J. R., & Taylor, S. L. (1995). Auditor brand name reputations and industry specializations. Journal of Accounting and Economics, 20(3), 297-322.

DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183-199.

Davis, G. F., & Stout, S. K. (1992). Organization theory and the market for corporate control: A dynamic analysis of the characteristics of large takeover targets, 1980-1990. Administrative Science Quarterly, 605-633.

DeFond, M. L., Wong, T. J., & Li, S. (1999). The impact of improved auditor independence on audit market concentration in China. Journal of Accounting and Economics, 28(3), 269-305.

DePamphilis, D. (2010). Mergers, acquisitions, and other restructuring activities: An integrated approach to process, tools, cases, and solutions. Elsevier Academic Press.

Ding, R., & Jia, Y. (2012). Auditor mergers, audit quality and audit fees: Evidence from the Pricewaterhouse Coopers merger in the UK. Journal of Accounting and Public Policy, 31(1), 69-85.

Faraji, O., Kashanipour, M., MohammadRezaei, F., Ahmed, K., & Vatanparast, N. (2020). Political connections, political cycles and stock returns: Evidence from Iran. Emerging Markets Review, 45(C), 100766.

Ferguson, A., & Stokes, D. (2002). Brand name audit pricing, industry specialization, and leadership premiums post‐Big 8 and Big 6 mergers. Contemporary Accounting Research, 19(1), 77-110.

Filesrafili, M. (2015). An introduction to propensity score matching method in finance, economics and accounting research, Economics Journal, 15 (5-6), 5-22.

Gendron, Y., & Spira, L. F. (2010). Identity narratives under threat: A study of former members of Arthur Andersen. Accounting, Organizations and Society, 35(3), 275-300.

Gong, Q., Li, O. Z., Lin, Y., & Wu, L. (2016). On the benefits of audit market consolidation: Evidence from merged audit firms. The Accounting Review, 91(2), 463-488.

Greenwood, R., Hinings, C. R., & Brown, J. (1994). Merging professional service firms. Organization Science, 5(2), 239-257.

Habib, A., & Bhuiyan, M. B. U. (2011). Audit firm industry specialization and the audit report lag. Journal of international accounting, auditing and taxation, 20(1), 32-44.

Habib, A., Bhuiyan, M. B. U., Huang, H. J., & Miah, M. S. (2019). Determinants of audit report lag: A meta‐analysis. International Journal of Auditing, 23(1), 20-44.

Hanlon, G. (1996). “Casino Capitalism” and the Rise of the “Commercialised” Service Class-an Examination of the Accountant. Critical Perspectives on Accounting, 7(3), 339-363.

Healy, P., & Lys, T. (1986). Auditor changes following Big Eight mergers with non-Big Eight audit firms. Journal of Accounting and Public Policy, 5(4), 251-265.

Heckman, J. J. (1998). Comment on eissa: Labor supply and the economic recovery act

of 1981. In: M. Feldstein and J. Poterba (eds.): Empirical Foundations of Household

Taxation, 5–38.

Hopkins, H. D. (1991). Acquisition and divestiture as a response to competitive position and market structure. Journal of Management Studies, 28(6), 665-677.

Jiang, J., Wang, I. Y., & Wang, K. P. (2019). Big N auditors and audit quality: New evidence from quasi-experiments. The Accounting Review, 94(1), 205-227.

Keyhani, H. (2020). Audit firm mergers: Where? How? Why? And its barriers. Journal of Cerfied Accountnants. 50. 27-31.

Khanna, T., Kogan, J., & Palepu, K. (2006). Globalization and similarities in corporate governance: A cross-country analysis. Review of Economics and Statistics, 88(1), 69-90.

Kim, E. H., & Singal, V. (1993). Mergers and market power: Evidence from the airline industry. The American Economic Review, 549-569.

Kitto, A. (2021). The effects of non-big 4 mergers on audit efficiency and audit market competition. Available at SSRN 3401509.

Lai, K. W. (2019). Audit report lag, audit fees, and audit quality following an audit firm merger: Evidence from Hong Kong. Journal of International Accounting, Auditing and Taxation, 36, 100271.

Lawrence, J. E., & Glover, H. D. (1998). The effect of audit firm mergers on audit delay. Journal of Managerial Issues, 10(2), 151-164.

Maksimovic, V., Phillips, G., & Prabhala, N. R. (2011). Post-merger restructuring and the boundaries of the firm. Journal of Financial Economics, 102(2), 317-343.

McMeeking, K. P., Peasnell, K. V., & Pope, P. F. (2007). The effect of large audit firm mergers on audit pricing in the UK. Accounting and Business Research, 37(4), 301-319.

Mehrani, K., Nazari, H., ghasemi fard, M. (2020). Managerial Ability and Financial Reporting Timeliness. Journal of Accounting Advances, 12(1), 323-351.

Mirshekary, S., & Saudagaran, S. M. (2005). Perceptions and characteristics of financial statement users in developing countries: Evidence from Iran. Journal of International Accounting, Auditing and Taxation, 14(1), 33-54.

Mitra, S., Song, H., & Yang, J. S. (2015). The effect of Auditing Standard No. 5 on audit report lags. Accounting Horizons, 29(3), 507-527.

Moayedi, V., & Aminfard, M. (2012). Iran's post‐war financial system. International Journal of Islamic and Middle Eastern Finance and Management, 5(3), 264 – 281.

Mohammadrezaei, F., & Faraji, O. (2019). The dilemma of audit quality measuring in archival studies: critiques and suggestions for Iran’s research setting. Journal of Accounting and Auditing Review, 26(1), 87-122.

MohammadRezaei, F., & Mohd‐Saleh, N. (2018). Audit report lag: the role of auditor type and increased competition in the audit market. Accounting and Finance, 58(3), 885-920.

MohammadRezaei, F., Mohd-Saleh, N., & Ahmed, K. (2018). Audit firm ranking, audit quality and audit fees: Examining conflicting price discrimination views. The International Journal of Accounting, 53(4), 295-313.

Mohammadrezaei, F., Tanani, M., & Aliabadi, A. (2018). Audit failure: Audit report lag and moderating role of family ownership. Accounting and Auditing Review, 25(1), 51-70.

Momeni, A., & Hosseini, S. Z. (2020). Investigating the Effect of Audit Report Lag and Audit Fees on Audit Quality Following an Audit Firm Merger Providing Services to Companies Listed on the Tehran Stock Exchange. Jounral of New Research Approach in Management and Accounting, 4 (36), 48-62.

Moore, D. A., Tetlock, P. E., Tanlu, L., & Bazerman, M. H. (2006). Conflicts of interest and the case of auditor independence: Moral seduction and strategic issue cycling. Academy of Management Review, 31(1), 10-29.

Nikbakht, M., Tanani, M. (2010). Test of Factors Influencing Financial Audit Fees. Journal of Financial Accounting Research, 2(2), 111-132.

Pong, C. K. (1999). Auditor concentration: a replication and extension for the UK audit market 1991–1995. Journal of Business Finance and Accounting, 26(3‐4), 451-475.

Roudaki, J. (2008). Accounting Profession and Evolution of Standard Setting in Iran. Journal of Accounting, Business and Management, 15(1), 33-52.

Torkani, S., MohammadRezaei, F., & Yaghoubnezhad, A. (2021). Types of Audit firm mergers in Iran: Substantive vs. Symbolic, Journal of Audit Scinence, 21 (84), 349-381.

Sullivan, M. W. (2002). The effect of the Big Eight accounting firm mergers on the market for audit services. The Journal of Law and Economics, 45(2), 375-399.

 

 

 

References

                                                          
Abadie, A. (2005). Semiparametric difference-in-differences estimators. The Review of Economic Studies, 72(1), 1-19.
Almosa, S. A., & Alabbas, M. (2008). Audit delay: Evidence from listed joint stock companies in Saudi Arabia. Working paper, King Khalid University, Abha, Saudi Arabia.
Bazerman, M. H., Morgan, K. P., & Loewenstein, G. F. (1997). The impossibility of auditor independence. Sloan Management Review, 38(4), 89-94.
Berkovitch, E., & Narayanan, M. P. (1993). Motives for takeovers: An empirical investigation. Journal of Financial and Quantitative analysis, 28(3), 347-362.
Blankley, A. I., Hurtt, D. N., & MacGregor, J. E. (2014). The relationship between audit report lags and future restatements. Auditing: A Journal of Practice and Theory, 33(2), 27-57.
Bonabi Ghadim, R., Vaez, S. (2021). The Effect of Information Risk on the Relationship between Abnormal Audit Report Delays and Abnormal Stock Returns. Journal of Accounting Advances, 13(1), 31-66.
Cahan, S., Hay, D., & Li, L. Z. (2021). Audit firm merger and the strategic response by large audit firms. The British Accounting Review, 53(3), 100941.‏
Chang, H., Kao, Y. C., Mashruwala, R., & Sorensen, S. M. (2018). Technical inefficiency, allocative inefficiency, and audit pricing. Journal of Accounting, Auditing and Finance, 33(4), 580-600.
Choi, J. H., Kim, S., & Raman, K. K. (2017). Did the 1998 merger of Price Waterhouse and Coopers & Lybrand increase audit quality?. Contemporary Accounting Research, 34(2), 1071-1102.
Ciconte, W., Leiby, J., & Willekens, M. (2019). Practice Note: How is auditor commercialism related to audit quality?. Foundations for Auditing Research (FAR), FAR Project 2017B06.
Craswell, A. T., Francis, J. R., & Taylor, S. L. (1995). Auditor brand name reputations and industry specializations. Journal of Accounting and Economics, 20(3), 297-322.
DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183-199.
Davis, G. F., & Stout, S. K. (1992). Organization theory and the market for corporate control: A dynamic analysis of the characteristics of large takeover targets, 1980-1990. Administrative Science Quarterly, 605-633.
DeFond, M. L., Wong, T. J., & Li, S. (1999). The impact of improved auditor independence on audit market concentration in China. Journal of Accounting and Economics, 28(3), 269-305.
DePamphilis, D. (2010). Mergers, acquisitions, and other restructuring activities: An integrated approach to process, tools, cases, and solutions. Elsevier Academic Press.
Ding, R., & Jia, Y. (2012). Auditor mergers, audit quality and audit fees: Evidence from the Pricewaterhouse Coopers merger in the UK. Journal of Accounting and Public Policy, 31(1), 69-85.
Faraji, O., Kashanipour, M., MohammadRezaei, F., Ahmed, K., & Vatanparast, N. (2020). Political connections, political cycles and stock returns: Evidence from Iran. Emerging Markets Review, 45(C), 100766.
Ferguson, A., & Stokes, D. (2002). Brand name audit pricing, industry specialization, and leadership premiums post‐Big 8 and Big 6 mergers. Contemporary Accounting Research, 19(1), 77-110.
Filesrafili, M. (2015). An introduction to propensity score matching method in finance, economics and accounting research, Economics Journal, 15 (5-6), 5-22.
Gendron, Y., & Spira, L. F. (2010). Identity narratives under threat: A study of former members of Arthur Andersen. Accounting, Organizations and Society, 35(3), 275-300.
Gong, Q., Li, O. Z., Lin, Y., & Wu, L. (2016). On the benefits of audit market consolidation: Evidence from merged audit firms. The Accounting Review, 91(2), 463-488.
Greenwood, R., Hinings, C. R., & Brown, J. (1994). Merging professional service firms. Organization Science, 5(2), 239-257.
Habib, A., & Bhuiyan, M. B. U. (2011). Audit firm industry specialization and the audit report lag. Journal of international accounting, auditing and taxation, 20(1), 32-44.
Habib, A., Bhuiyan, M. B. U., Huang, H. J., & Miah, M. S. (2019). Determinants of audit report lag: A meta‐analysis. International Journal of Auditing, 23(1), 20-44.
Hanlon, G. (1996). “Casino Capitalism” and the Rise of the “Commercialised” Service Class-an Examination of the Accountant. Critical Perspectives on Accounting, 7(3), 339-363.
Healy, P., & Lys, T. (1986). Auditor changes following Big Eight mergers with non-Big Eight audit firms. Journal of Accounting and Public Policy, 5(4), 251-265.
Heckman, J. J. (1998). Comment on eissa: Labor supply and the economic recovery act
of 1981. In: M. Feldstein and J. Poterba (eds.): Empirical Foundations of Household
Taxation, 5–38.
Hopkins, H. D. (1991). Acquisition and divestiture as a response to competitive position and market structure. Journal of Management Studies, 28(6), 665-677.
Jiang, J., Wang, I. Y., & Wang, K. P. (2019). Big N auditors and audit quality: New evidence from quasi-experiments. The Accounting Review, 94(1), 205-227.
Keyhani, H. (2020). Audit firm mergers: Where? How? Why? And its barriers. Journal of Cerfied Accountnants. 50. 27-31.
Khanna, T., Kogan, J., & Palepu, K. (2006). Globalization and similarities in corporate governance: A cross-country analysis. Review of Economics and Statistics, 88(1), 69-90.
Kim, E. H., & Singal, V. (1993). Mergers and market power: Evidence from the airline industry. The American Economic Review, 549-569.
Kitto, A. (2021). The effects of non-big 4 mergers on audit efficiency and audit market competition. Available at SSRN 3401509.
Lai, K. W. (2019). Audit report lag, audit fees, and audit quality following an audit firm merger: Evidence from Hong Kong. Journal of International Accounting, Auditing and Taxation, 36, 100271.
Lawrence, J. E., & Glover, H. D. (1998). The effect of audit firm mergers on audit delay. Journal of Managerial Issues, 10(2), 151-164.
Maksimovic, V., Phillips, G., & Prabhala, N. R. (2011). Post-merger restructuring and the boundaries of the firm. Journal of Financial Economics, 102(2), 317-343.
McMeeking, K. P., Peasnell, K. V., & Pope, P. F. (2007). The effect of large audit firm mergers on audit pricing in the UK. Accounting and Business Research, 37(4), 301-319.
Mehrani, K., Nazari, H., ghasemi fard, M. (2020). Managerial Ability and Financial Reporting Timeliness. Journal of Accounting Advances, 12(1), 323-351.
Mirshekary, S., & Saudagaran, S. M. (2005). Perceptions and characteristics of financial statement users in developing countries: Evidence from Iran. Journal of International Accounting, Auditing and Taxation, 14(1), 33-54.
Mitra, S., Song, H., & Yang, J. S. (2015). The effect of Auditing Standard No. 5 on audit report lags. Accounting Horizons, 29(3), 507-527.
Moayedi, V., & Aminfard, M. (2012). Iran's post‐war financial system. International Journal of Islamic and Middle Eastern Finance and Management, 5(3), 264 – 281.
Mohammadrezaei, F., & Faraji, O. (2019). The dilemma of audit quality measuring in archival studies: critiques and suggestions for Iran’s research setting. Journal of Accounting and Auditing Review, 26(1), 87-122.
MohammadRezaei, F., & Mohd‐Saleh, N. (2018). Audit report lag: the role of auditor type and increased competition in the audit market. Accounting and Finance, 58(3), 885-920.
MohammadRezaei, F., Mohd-Saleh, N., & Ahmed, K. (2018). Audit firm ranking, audit quality and audit fees: Examining conflicting price discrimination views. The International Journal of Accounting, 53(4), 295-313.
Mohammadrezaei, F., Tanani, M., & Aliabadi, A. (2018). Audit failure: Audit report lag and moderating role of family ownership. Accounting and Auditing Review, 25(1), 51-70.
Momeni, A., & Hosseini, S. Z. (2020). Investigating the Effect of Audit Report Lag and Audit Fees on Audit Quality Following an Audit Firm Merger Providing Services to Companies Listed on the Tehran Stock Exchange. Jounral of New Research Approach in Management and Accounting, 4 (36), 48-62.
Moore, D. A., Tetlock, P. E., Tanlu, L., & Bazerman, M. H. (2006). Conflicts of interest and the case of auditor independence: Moral seduction and strategic issue cycling. Academy of Management Review, 31(1), 10-29.
Nikbakht, M., Tanani, M. (2010). Test of Factors Influencing Financial Audit Fees. Journal of Financial Accounting Research, 2(2), 111-132.
Pong, C. K. (1999). Auditor concentration: a replication and extension for the UK audit market 1991–1995. Journal of Business Finance and Accounting, 26(3‐4), 451-475.
Roudaki, J. (2008). Accounting Profession and Evolution of Standard Setting in Iran. Journal of Accounting, Business and Management, 15(1), 33-52.
Torkani, S., MohammadRezaei, F., & Yaghoubnezhad, A. (2021). Types of Audit firm mergers in Iran: Substantive vs. Symbolic, Journal of Audit Scinence, 21 (84), 349-381.
Sullivan, M. W. (2002). The effect of the Big Eight accounting firm mergers on the market for audit services. The Journal of Law and Economics, 45(2), 375-399.
 
 
 

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History

  • Receive Date: 13 April 2022
  • Revise Date: 14 August 2022
  • Accept Date: 20 August 2022

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