What Do We Know About Audit Failure so Far?

Accountancy Business and the Public Interest, 2020

30 Pages Posted: 18 Jun 2020

See all articles by Jahidur Md Rahman

Jahidur Md Rahman

Wenzhou-Kean University

Yuhan Ying

Wenzhou-Kean University

Linjie Zhu

Wenzhou-Kean University

Pengju Ji

Wenzhou-Kean University

Date Written: May 25, 2020

Abstract

This article presents a comprehensive review of academic research pertaining to audit failure. This literature review is based on auditing-related articles published in leading journals during the 1976-2019 period. We organize our review around three main groups, namely (a) proxy measures of audit failure, (b) causes of audit failure, and (c) effects of audit failure. We observe that the literature uses a variety of proxies to capture audit failure, such as auditors’ going concern opinions (GCOs), material misstatements, auditor communication, financial reporting quality, and perceptions. We find that there are three signals of audit failure: non-issuance of a GCO prior to a business failure, material misstatements in the last audited financial statements, and violation of the code issued by regulators. We find that audit failures reduce clients’ market value and the auditor’s ability to retain clients. There is also evidence that larger penalties for audit failure result in higher audit fees and overinvestment in audit effort and that increased liability decreases audit failure and reduces auditor shirking. A related objective of this paper is to shed light on audit failure by Big N and non-Big N auditors separately. We observe that the audit failure rate is lower for Big N auditors than for non-Big N auditors. Our findings have implications for government policies, regulators, auditors, investors, and academics.

Keywords: Audit failure, economic cycle, rule-checking mentality, going concern opinion, financial misstatement, and peer review report

Suggested Citation

Rahman, Jahidur Md and Ying, Yuhan and Zhu, Linjie and Ji, Pengju, What Do We Know About Audit Failure so Far? (May 25, 2020). Accountancy Business and the Public Interest, 2020, Available at SSRN: https://ssrn.com/abstract=3610239

Jahidur Md Rahman (Contact Author)

Wenzhou-Kean University ( email )

88 Daxue Rd
Ouhai
Wenzhou, Zhejiang
China
13857714151 (Phone)

Yuhan Ying

Wenzhou-Kean University ( email )

88 Daxue Rd
Ouhai
Wenzhou, Zhejiang
China

Linjie Zhu

Wenzhou-Kean University ( email )

88 Daxue Rd
Ouhai
Wenzhou, Zhejiang
China

Pengju Ji

Wenzhou-Kean University ( email )

88 Daxue Rd
Ouhai
Wenzhou, Zhejiang
China

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