Audit Failure of New Zealand Finance Companies – An Exploratory Investigation

42 Pages Posted: 26 Jan 2017

See all articles by Humayun Kabir

Humayun Kabir

Auckland University of Technology

Li Su

Auckland University of Technology

Asheq Rahman

Auckland University of Technology - Faculty of Business & Law

Date Written: August 19, 2016

Abstract

Purpose – The setting of private finance companies failing in New Zealand during 2006-12 was characterised by weaker corporate governance and enforcement of securities law. This paper explores audit failure in this setting and examines whether auditors erred in their audits of the failed finance companies and whether the audit failure rate of Big N auditors was different from that of non-Big N auditors.

Design/methodology/approach – This paper adopts the archival research method, and utilises three sets of evidence to assess audit failure – the frequency of going-concern opinion (GCO) prior to failure, misstatements in the last audited financial statements, and the violation of the Code of Ethics.

Findings – The study found that only 41% of the sample companies received the GCO in their last audit prior to failure, and provides evidence of material misstatements in the financial statements of a number of failed finance companies that received clean audit opinions prior to failure, and breaches of the Code of Ethics by a number of auditors. These results strongly indicate audit failure for a number of failed finance companies. The audit failure rate, however, appears less for Big N auditors than for non-Big N auditors.

Practical implications – The study draws the attention of the stock market regulator and the accounting profession to an area, the audit of private finance companies, that needs better quality audits.

Originality/value – This paper provides systematic evidence of audit failure in failed finance companies in New Zealand. It also furnishes preliminary evidence of Big N auditors compensating for weaker corporate governance.

Keywords: Audit Failure, Audit Quality, Finance Companies, Institutional Environment

JEL Classification: G34, M41

Suggested Citation

Kabir, Humayun and Su, Li and Rahman, Asheq, Audit Failure of New Zealand Finance Companies – An Exploratory Investigation (August 19, 2016). Pacific Accounting Review, Vol. 28, No. 3, 2016, Available at SSRN: https://ssrn.com/abstract=2826351

Humayun Kabir (Contact Author)

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand
+64 21 08309355 (Phone)

Li Su

Auckland University of Technology

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand

Asheq Rahman

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
113
Abstract Views
1,318
rank
330,172
PlumX Metrics