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Effects of regulatory enforcement style and audit firm remedial actions on investors' perceptions of audit quality

Effects of regulatory enforcement style and audit firm remedial actions on investors' perceptions... We examine how investors perceive audit quality when regulators adopt different enforcement styles to communicate audit inspection findings, and when the audit firm responds to the inspection findings. We employed a 2 × 3 between‐subjects experimental design, with regulatory enforcement style (critical or supportive) and audit firm response (defensive actions or remedial actions or control) as the independent variables. We find that investors perceive a relatively high level of audit quality when the audit firm chooses to take remedial actions, regardless of regulators' enforcement styles. In contrast, investors perceive a relatively low level of audit quality when the audit firm chooses to take defensive actions in response to regulators that impose a critical enforcement style. Additional analyses show that investors' perception of audit quality mediates the joint effects of regulatory enforcement styles and audit firm response on willingness to invest. Our findings suggest implications for the ways that regulators adopt different enforcement styles, which should be of interest to audit practitioners and regulators, as the findings show the potential consequences of different firm response strategies to inspection findings. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Auditing Wiley

Effects of regulatory enforcement style and audit firm remedial actions on investors' perceptions of audit quality

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Publisher
Wiley
Copyright
© 2022 John Wiley & Sons Ltd
ISSN
1090-6738
eISSN
1099-1123
DOI
10.1111/ijau.12295
Publisher site
See Article on Publisher Site

Abstract

We examine how investors perceive audit quality when regulators adopt different enforcement styles to communicate audit inspection findings, and when the audit firm responds to the inspection findings. We employed a 2 × 3 between‐subjects experimental design, with regulatory enforcement style (critical or supportive) and audit firm response (defensive actions or remedial actions or control) as the independent variables. We find that investors perceive a relatively high level of audit quality when the audit firm chooses to take remedial actions, regardless of regulators' enforcement styles. In contrast, investors perceive a relatively low level of audit quality when the audit firm chooses to take defensive actions in response to regulators that impose a critical enforcement style. Additional analyses show that investors' perception of audit quality mediates the joint effects of regulatory enforcement styles and audit firm response on willingness to invest. Our findings suggest implications for the ways that regulators adopt different enforcement styles, which should be of interest to audit practitioners and regulators, as the findings show the potential consequences of different firm response strategies to inspection findings.

Journal

International Journal of Auditing – Wiley

Published: Oct 1, 2022

Keywords: audit quality; investor judgement; regulatory enforcement; remedial action

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