Auditor attributes and its association with financial distress: An Australian context

ii ACKNOWLEDGEMENTS . iii DEDICATION . iv LIST OF TABLES . xii LIST OF FIGURES . xiv ABBREVIATIONS. xv CHAPTER ONE: INTRODUCTION . 1 1.1 BACKGROUND AND MOTIVATION . 1 1.2 RESEARCH QUESTIONS AND OBJECTIVES . 3 1.3 SIGNIFICANCE OF THE STUDY . 5 1.4 LIMITATIONS OF THE STUDY . 7 1.5 THESIS OUTLINE . 9 CHAPTER TWO: LITERATURE REVIEW . 11 2.1 OVERVIEW OF THE CHAPTER . 11 2.2 CAPITAL MARKETS . 11 2.2.1 Background and Introduction . 11 2.2.2 Determinants of Capital Structure . 13 2.2.2.1 The Modigliani and Miller theory . 13 2.2.2.2 The trade-off theory . 13 2.2.2.3 The signalling theory . 14 2.2.2.4 The pecking order theory. 14 2.2.3 Risk of capital structure . 15 2.3 FINANCIAL REPORTING QUALITY . 16 2.4 FINANCIAL DISTRESS . 17 2.4.1 Bankruptcy v/s Insolvency v/s Financial Distress . 17 2.4.2 Background and introduction to financial distress.18 2.4.3 Implications of financial distress . 19 2.4.3.1 Benefits of financial distress . 19 2.4.3.2 Costs of financial distress . 20 2.4.4 Financial distress / bankruptcy prediction models . 21 2.5 AUDIT QUALITY . 33 2.5.1 Concept and definition . 33 vi 2.5.2 Impact of auditor quality . 34 2.5.3 Determinants of auditor quality . 35 2.5.3.1 Big 4 auditor / auditor brand name . 36 2.5.3.2 Provision of non-audit services . 37 2.5.3.3 Audit tenure . 38 2.5.3.4 Audit fee . 39 2.6 SUMMARY OF THE CHAPTER . 41 CHAPTER THREE: THEORETICAL PERSPECTIVE AND HYPOTHESES DEVELOPMENT . 42 3.1 OVERVIEW OF THE CHAPTER . 42 3.2 THEORETICAL PERSPECTIVE – CORPORATE GOVERNANCE . 42 3.2.1 Agency theory . 42 3.2.6 A critical analysis of agency theory with other theoretical approaches . 43 3.2. 7 Theory selection . 46 3.3 KEY AUDITOR ATTRIBUTES AND IMPACT ON FINANCIAL DISTRESS 46 3.3.1 Big Firm auditor/auditor brand name: Big4 . 46 3.3.2 The provision of non-audit services . 47 3.3.3 Auditor tenure . 48 3.3.4 Audit fee . 49 3.3.5 Lagged auditor attributes . 50 3.3. 6 Composite auditor attributes and lagged composite auditor attributes . 51 3.4 CONCEPTUAL SCHEMA . 52 3.5 SUMMARY OF THE CHAPTER . 53 CHAPTER FOUR: RESEARCH METHOD . 54 4.1 OVERVIEW OF THE CHAPTER . 54 4.2 SAMPLE, DOCUMENTATION AND TIME PERIOD. 54 4.2.1 Selection justification . 54 4.2.2 Source documentation justification . 55 4.2.3 Time period selection . 56 4.3 MEASUREMENT OF THE DEPENDENT VARIABLE . 57 4.4 MEASUREMENT OF THE INDEPENDENT VARIABLES . 59 4.4.1 Big firm auditor/auditor reputation (BIG4it/Aud_Spec_30it) . 59 4.5 MEASUREMENT OF THE CONTROL VARIABLES . 63 4.5.1 Justification for inclusion of control variables . 63 4.5.1.1 Firm characteristics . 63 4.5.1.1.1 Firm’s size . 63 4.5.1.1.2 Firm’s risk . 63 vii 4.5.1.1.3 Firm’s complexity . 64 4.5.1.1.4 Firm’s maturity . 64 4.5.1.2 Accounting discretion and other auditor attribute . 64 4.5.1.2.1 Earnings quality. 65 4.5.1.2.2 Auditor opinion . 65 4.5.1.3 Firm corporate governance characteristics . 66 4.5.1.3.1 Board of directors . 66 4.5.1.3.2 Audit committee . 67 4.5.1.4 Industry effects . 67 4.5.1.5 Year effects . 68 4.6 STATISTICAL REGRESSION MODEL . 68 4.7 CLEANING OF THE DATA . 72 4.8 SENSITIVITY ANALYSIS . 73 4.9 SUMMARY OF THE CHAPTER . 73 CHAPTER FIVE: DESCRIPTIVE STATISTICS AND UNIVARIATE ANALYSIS . 77 5.1 OVERVIEW OF THE CHAPTER . 77 5.2 BASIC SAMPLE DESCRIPTIVE STATISTICS . 77 5.2.1 Sample selection process and industry breakdown . 77 5.2.2 Descriptive statistics . 79 5.3 CORRELATION ANA