An empirical analysis of accounting errors and audit quality in Australia

Abstract

This research investigates the nature of and reasons for earnings restatement. It expands the accounting literature in relation to whether audit quality is associated with the occurrence of earnings restatement arising from accounting errors following the adoption of the International Financial Reporting Standards (IFRS). The Australian Accounting Standards Board (AASB) required adoption by all Australian firms of the Australian equivalents to the International Financial Reporting Standards (A-IFRS) from 1 January, 2005. Accordingly, all listed firms issued their financial statements following the AIFRS from 31 December, 2005. For this study, the total sample is 266 Australian firms from among the firms listed on the Standard & Poor/Australian Securities Exchange (S&P/ASX) 300 Index. Daske et al. (2008) suggest that the application of the IFRS has enhanced financial reporting quality and investors’ benefit. This study contributes to the “cost” side of the IFRS in the earnings restatement context which has not been adequately addressed in the accounting literature. This current study has employed five hypotheses that are related to industry specialisation, accounting expertise, auditor tenure, auditor switching and audit committee meeting frequency which are derived from prior research, and three complementary theories: specialisation (Smith, 1776), experiential learning (Kolb, 1971) and the learning curve, (Ebbinghaus, 1885). From the current research, significant findings are drawn on the characteristics of earning restatement and error firms. Research has found that total of 31 accounting errors from a total of 75 restatements of which 60% are considered as earnings overstated. The results of the univariate analysis are aligned with the logistic regression output to some extent (with the exception of audit partner industry specialisation and audit committee meeting frequency). This research has found that audit committee meeting frequency; audit partner industry specialisation, audit partner long tenure, Big 4 audit firm, board independence, and company age are negatively associated with accounting errors, whereas audit partner switch is positively associated with accounting errors. Accounting expertise of an audit committee member does not show any significance either the logistic regression or the univariate analysis. In addition, the mean difference of Big 4 audit firm, board independence, price-to-book value, audit partners short tenure, audit partners switch and audit firm switch are reported as significant. Overall, this research contributes to the corporate governance characteristics of Australian firms: these findings seek to boost these firms’ performance as well as strengthening the weaker performance of corporate governance mechanisms that may cause of accounting errors and irregularities.