Assessing Financial Reporting Quality of Family Firms: The Auditors’ Perspective

Abstract: We provide unique insights by analyzing the pricing of audit engagements. Because financial reporting quality affects audit risk, which determines how auditors price engagements, we analyze audit fees to extract auditor’s professional assessment of family firms’ reporting quality. Relative to non-family firms, we find that audit fees are significantly lower for family firms, which suggests that auditors view family firms as having superior financial reporting quality (i.e. audit risk is low). Because a fee discount might also be attributable to lower litigation risk, we analyze litigation data and find no reliable difference in auditor lawsuits between family and non-family firms. Finally, we provide corroborating evidence on the financial reporting quality of family firms based on three audit risk tests. First, using a financial reporting metric for audit risk, we show that audit risk is lower for family firms. Second, we show that the fee discount is lower for family firms with high audit risk. Third, using audit report lag as a proxy for audit effort, we show that family firm auditors work less to provide the desired level of assurance. Our findings provide compelling evidence in favor of the explanation that auditors charge less from family firms because of superior reporting quality, which lowers audit risk and, therefore, the need for greater audit investments.

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Authors: Dr. Aloke Ghosh and Charles Y. Tang
Accepted for Publication in: Journal of Accounting and Economics

Auditor Resignations and Risk Factors
Abstract: This paper expands our understanding of the importance of the various risk factors in precipitation auditor resignations. Using publicly available information, we construct ex-ante summary indices for audit risk, business risk, and litigation risk and then examine the relevance and incremental importance of the three risk-based measures in precipitation auditor resignations.
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Authors: Dr. Aloke Ghosh and Charles Y. Tang
Accepted for Publication in: Accounting Horizons

Cross-listed Bonds, Information Asymmetry, and Conservatism in Credit Ratings
Abstract: Extending prior studies that concentrate on the contracting explanation for rating conservatism, we propose information asymmetry as an additional explanation for rating conservatism. Because information asymmetry is likely to be higher for cross-listed bonds than for U.S. bonds, we investigate whether cross-listed bonds are rated more conservatively than U.S. domestic bonds.
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Authors: Dr. Aloke Ghosh, Dr. Yigit Atilgan, Dr. Meng Yan, and Dr. Jieying Zhang
Accepted for Publication in:  The Journal of Money, Credit, and Banking