The relationship between audit components and audit market adaptability
| DOI | https://doi.org/10.1108/JFC-03-2020-0035 |
| Date | 08 May 2020 |
| Pages | 835-853 |
| Published date | 08 May 2020 |
| Author | Mahdi Salehi,Mahdi Saravani,Safoura Rouhi |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
The relationship between audit
components and audit
market adaptability
Mahdi Salehi
Department of Economics and Administrative Sciences,
Ferdowsi University of Mashhad, Mashhad, Iran
Mahdi Saravani
Department of Economics and Administrative Sciences,
Imam Reza International University, Mashhad, Iran, and
Safoura Rouhi
Department of Economics and Administrative Sciences, Khayyam University,
Mashhad, Iran
Abstract
Purpose –This study aims to study the relationshipbetween audit components and collusion in the audit
market.
Design/methodology/approach –The statistical population of the study includes 130 listedfirms on
the TehranStock Exchange from 2012-2017. The data tested usingmultivariate regression.
Findings –The findings of the study indicate thatthere is a positive and significant relationship between
Rank A audit firms, competitionand audit fees and audit market adaptability. The relationshipstandard fees
and audit market adaptability, however,is negative and significant. Moreover, the results of the study show
that there is no significant relationship between opinion shopping, type of audit report, audit market
concentration,and agency costs with audit market adaptability.
Originality/value –The current study fills the gap in this area, and the results of the study may give
directionto researchers and policy makers.
Keywords Audit fee, Agency costs, Audit firms, Type of audit report, Audit market adaptability,
Audit market concentration, Audit market competition, Opinion shopping
Paper type Research paper
1. Introduction
After the separation of management from ownership, the demandfor high-quality financial
reports has increased drasticallyto lower the information asymmetry between manager and
owner (Bushman and Smith, 2003). The need for assurance, which is made through
surveillance and auditing, is obvious in cases where ownership is separated from
management (Xu, 2007). The role of an independent auditor is to show that financial
statements are providedbased on authorized accounting principles. Auditor or audit quality
is not tangible intrinsically, and evaluating that is a cumbersome, time-consuming and
costly (De Angelo, 1981). Hence, De Angelo (1981) defines the size of audit firm as a
representative for audit quality, based on which the quality of presented audit services by
large audit firms is more than that of the smaller ones. Although there are various
regulatory groups for the audit market, audit firmsmay prefer to reach an agreement to set
Audit
components
835
Journalof Financial Crime
Vol.27 No. 3, 2020
pp. 835-853
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-03-2020-0035
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
prices higher than normal (Government Accountability Office (GAO),2003, 2008; Financial
reporting council, 2009; Comisi
on Europea, 2010;CompetitionCommission, 2013). There are
several pieces of evidence for high concentration in the market that may cause the audit
firms to ask for higher costs from their customers.As such firms have complete dominance
on the market, they are more likely to benefit from market power to reach their objectives
(Hay et al.,2006;Fergusonand Scott, 2014). One of the aspects with the most interest among
theorists of industrial organizations is the probability that certain firms with relative
significance in the market may use their influence to incur some costs more than what is
existing in competitive structure of the market, which is referred to as the market power.
The underlying hypothesis is that marketcompetition level relies on high-number presence
of competitors and the amount of similarity of theirshare in the market. This indicates why
in exclusive markets of goods, wherea group of firms gather a relatively high proportion in
the market, the pioneer firms prefer to collaborate with each other instead of competing.
Such agreements cause the market power to be sized by firms. Thus,firms that are present
in such space receive all resultant incomes from their exclusive rights. The collaboration
hypothesis has studied experimentally in different projects to assess the relationship
between market concentrationlevels and costs (Maudos, 2001).
The use of structural evaluations, however, like concentration, is the main objective of
experimental and theoretical criticisms (Dedman and Lennox, 2009). Theoretically, there is
no solid conceptual support to show why concentrated markets motivate pioneer firms to
collaborate with them. There are some empirical evidence showing that high level of
concentration is not compatible with fierce competition among pioneering firms. In other
words, severe competition is identified among highly concentrated pioneering firms, and
this will cause the outbreak of skepticism whether concentration in the market can be
considered as an appropriate scalefor firm capacity for collaborationor not.
Accordingly, the other branch of the theory of industrial organization emphasizes on the
significance of evaluating competition in concentrated structures, like monopoly in limited
companies, and persists on the integrity of dynamic evaluations of adaptability based on
change in audit firms’rank in the market as a method for assessing the nature of
competition (Koster et al., 2010). This research branch suggests that market adaptability is
the result of competition among firms, so it reflects the current behavior in the market and
competition among firms. The result of this branch is that in highly concentrated markets,
where a group of firms collect a relatively higher share, the pioneer firms prefer to
collaborate with one anotherinstead of competing to maximize their own profit, so their best
choice in monopoly may be signing collaboration or cooperation agreements (Scherer and
Ross, 1990).
In the previous studies, concentration has been used for measuring such collaboration,
but because the variable of “concentration”may not be a good agent for collaboration
behavior. In this paper, in contrast to other studies, we use market adaptability to assess
competition and signing collaboration (collusion) contracts. Hence, considering the
significance of the above said facts, we assess whetherthere is a relationship between audit
components, including audit firm rank, opinion shopping, type of audit report, audit fee,
standard fee, competitionin the audit market, audit market concentration, and agencycosts
and audit market adaptabilityor not.
2. Theoretical framework, literature review and hypothesis development
2.1 Audit market adaptability
High-quality financial reports provide useful information for sound decision-making and
investment. Although differentfactors contribute to financial reporting quality, auditing by
JFC
27,3
836
To continue reading
Request your trial