The European Public Audit Oversight Reform. Which Effect Does it Have on Audit Quality?

Table of Contents

I. INTRODUCTION

II. BACKGROUND

THE PIONEER – PUBLIC AUDIT OVERSIGHT IN THE U.S.

THE FOLLOWER – PUBLIC AUDIT OVERSIGHT IN THE EU

THE VOLUNTEERS – PUBLIC AUDIT OVERSIGHT AT AN INTERNATIONAL LEVEL

THE INTENTION – ENHANCEMENT OF AUDIT QUALITY

AUDIT QUALITY

LINKING PUBLIC AUDIT OVERSIGHT TO AUDIT QUALITY

III. LITERATURE REVIEW AND DEVELOPMENT OF HYPOTHESES

RESEARCH ON SELF-REGULATED PEER REVIEWS

RESEARCH ON INDEPENDENT INSPECTIONS

IV. DATA AND RESEARCH METHOD

SAMPLE AND DESCRIPTIVE STATISTICS

EMPIRICAL MODEL

THE MODIFIED JONES MODEL

ABNORMAL WORKING CAPITAL ACCRUALS

DEPENDENT VARIABLE

INDEPENDENT VARIABLES

CONTROL VARIABLES

V. EMPIRICAL RESULTS

VI. SENSITIVITY TEST

VII. ROBUSTNESS TEST

VIII. CONCLUSION

IX. REFERENCES

X. Appendix

Research Objectives and Key Topics

This study investigates the impact of the European public audit oversight reform, specifically Directive 2006/43/EC, on audit quality, measured through earnings management. It further examines whether the choice of different national public oversight models—full-time inspection versus a peer review system—leads to variations in audit quality across European jurisdictions.

• Impact of the European regulatory reform on audit quality.
• Comparison of full-time inspection models versus modified peer review models.
• Analysis of discretionary accruals and earnings management as proxies for audit quality.
• The relationship between public audit oversight and investor confidence.
• Cross-jurisdictional analysis of audit oversight effectiveness within the EU.

Excerpt from the Book

Summary of Chapters

I. INTRODUCTION: Outlines the research motivation regarding public audit oversight, the U.S. regulatory transition following accounting scandals, and the research questions concerning the European context.

II. BACKGROUND: Provides a historical overview of public audit oversight evolution, contrasting U.S. and European approaches and defining the dual oversight models implemented in the EU.

III. LITERATURE REVIEW AND DEVELOPMENT OF HYPOTHESES: Synthesizes existing research on self-regulated peer reviews and independent inspections, leading to the formulation of two primary research hypotheses.

IV. DATA AND RESEARCH METHOD: Details the sample selection criteria, the construction of empirical models using discretionary and working capital accruals, and the identification of control variables.

V. EMPIRICAL RESULTS: Presents the statistical findings regarding the shift in earnings management levels pre- and post-reform and compares the effectiveness of different oversight models.

VI. SENSITIVITY TEST: Evaluates the robustness of the empirical findings by analyzing the influence of specific country data on the overall results.

VII. ROBUSTNESS TEST: Implements alternative models (Dechow and Dichev) to verify the consistency of the initial results regarding audit quality improvement.

VIII. CONCLUSION: Summarizes the study’s findings, acknowledging the complexities of regulatory impact and suggesting directions for future research.

Keywords

audit quality, public audit oversight, earnings management, discretionary accruals, Directive 2006/43/EC, SOX, PCAOB, peer review, full-time inspection, financial reporting, corporate governance, investor confidence, audit reform, accrual quality, financial markets

Frequently Asked Questions

What is the primary focus of this research paper?

The paper examines whether the European public audit oversight reform, initiated by Directive 2006/43/EC, has successfully improved audit quality by reducing earnings management practices among firms in the European Union.

Which central themes are explored in this work?

The work centers on the transition from self-regulatory to independent public oversight, the efficacy of different inspection models (full-time versus peer review), and the resulting impact on the reliability of financial disclosures.

What is the core research question?

The research asks if the European regulatory reform led to a significant decrease in abnormal accruals and whether the choice of a specific national oversight model correlates with higher audit quality.

Which scientific methods are applied?

The author uses empirical quantitative methods, specifically the Modified Jones Model and the Dechow and Dichev model, to calculate abnormal accruals as proxies for earnings management and audit quality.

What does the main body address?

The main body reviews the historical context of audit scandals, synthesizes literature on peer reviews versus independent inspections, details the research design and sample selection, and presents the results of regression analyses testing the defined hypotheses.

Which keywords define this work?

Key terms include audit quality, public audit oversight, earnings management, discretionary accruals, and the specific European and U.S. regulatory frameworks discussed.

Why were France and Slovakia excluded from the sample?

They were excluded because they implemented a hybrid approach (a combination of both oversight models), which hindered the comparative analysis between the two specific models identified in the research design.

What is the significance of the year 2006 in this study?

The year 2006 is treated as a transition year because it marks the establishment of Directive 2006/43/EC, representing a period where both pre-reform and post-reform managerial behaviors were observed.

How is audit quality proxied?

Audit quality is proxied by the level of earnings management, specifically through the absolute values of modified Jones model discretionary accruals and abnormal working capital accruals.