Academic journal article International Management Review

The Auditing Quality and Accounting Conservatism

Academic journal article International Management Review

The Auditing Quality and Accounting Conservatism

Article excerpt

[Abstract]

This study aims at verifying that there is accounting conservatism in the financial reports issued by the industrial corporations listed on the Amman Stock Exchange (ASE) and testing the impact of auditing quality characteristics (the auditing firm size, contacts with other global auditing firms, client retention period, auditing fees and the specialty in client's industry) on the enhancement of the level of accounting conservatism. Towards realizing the objectives of the study, the relationship was estimated and examined through the Binomial Test to test the first hypothesis a One-Sample T-Test to test the second hypothesis, and multiple regressions of (Ordinary Least Squares OLS). Data of 39 companies of the industrial sector for the period 2001-2006 were arranged in a way that made it possible to apply the Pooled Data Regression. The study found significant results indicating a low level of accounting conservatism in the financial statements issued by the Jordanian industrial corporations. The results indicated that some of the characteristics of auditing quality are good, and some of audit quality characteristics have an impact on improving the level of accounting conservatism. Based on these results, we have provided recommendations to the interested parties.

[Keywords] auditing quality; accounting conservatism; Amman stock exchange (ASE); Jordanian company

(ProQuest: ... denotes formulae omitted.)

Introduction

Many of the accounting scandals and breakdowns in financial markets have emerged in recent years, but the most important results, which were not expected for these events, increased awareness of the importance of the role of auditing, and many of the parties realized the crucial role played by the audit in the performance of financial markets (Abu Ijela & Hamdan, 2010). On the other hand, the number of audit failures declared, as evidenced by the lawsuits and penalties imposed by the stock and Exchange Commission (SEC), are very small, having an annual failure rate close to zero (DeFond & Francis, 2005). These events led to increased calls for an increase of the quality and effectiveness of the auditing. However, there is no agreement on the concept of the auditing quality. Both of the International Federation of Accountants (IFAC), and American Institute of Certified Public Accountants (AICPA) failed to introduce an explicit concept of the auditing quality. However, there are several attempts to define the quality of the auditing, including the concept of auditing quality being defined as the external auditor detects an anomaly in financial statements and then revealing it to the users of these statements (DeAngelo, 1981).

Deis and Giroux (1992) argue that the auditing quality is the auditor's ability to detect weaknesses and gaps in the accounting system for the client and the reporting. However, Copley and Doucet, (1993) go in another direction by defining the auditing quality as the application of professional standards related to field work and reporting standards. The audit quality is a set of methods and techniques that work to reduce errors and fraud, which is supported through access to sufficient and convincing evidence in order to protect the interests of relevant parties (Abu Ijela & Hamdan, 2010). The probability of detection is a matter of competence, whereas the probability of revelation depends on the independence of the auditor, i.e., his/her willingness to face the pressure exerted by the producers of financial statements (Kot & Janin, 2005).

Many of the researchers examined the auditing quality and its ability to detect fraud in the financial statements and to assist the auditor in reaching the appropriate opinion about the fairness of the financial statements. This study attempts to provide additional evidence on the auditing quality in Jordan, and then study the ability of the auditing quality to increase the degree of Accounting Conservatism in the financial statements that are prepared by Jordanian industrial companies. …

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