Editorial: Opportunities for innovative auditing research

• Published date: 01 November 2018
• Author: Annette Köhler,Reiner Quick
• DOI: http://doi.org/10.1111/ijau.12141
• Date: 01 November 2018

EDITORIAL

Editorial: Opportunities for innovative auditing research

*

The role of audits in a global economy is unquestioned. Particularly in

light of accounting scandals and the consequences of the financial cri-

sis, the European Commission once more aimed at strengthening the

audit function and, even more so, the factors that the Commission

considered to be key drivers of audit quality.

One cornerstone of European legislation in this context is the EU

Regulation 537/2014 on specific requirements regarding statutory

audits of public‐interest entities (European Union, 2014), which came

into force in 2016. The new requirements are supposed to enhance

audit quality, and they introduced a series of restrictions for the stat-

utory auditors of public‐interest entities to reduce risks of familiarity

threats and potential conflicts of interest and to encourage profes-

sional skepticism. Its main objective is to:

…enhance the integrity, independence, objectivity,

responsibility, transparency and reliability of statutory

auditors and audit firms carrying out statutory audits of

public‐interest entities, contributing to the quality of

statutory audits in the Union, thus to the smooth

functioning of the internal market, while achieving a

high level of consumer and investor protection

(European Union, 2014, note (3)).

To achieve these objectives the regulation addresses a number of

issues. Important examples are introducing the black‐list of prohibited

nonaudit services and the requirement of pre‐approval by the audit

committee for the provision of other nonaudit services; the nonaudit

service fee cap of 70% of the audit fees earned on the audit engage-

ment; and mandatory audit firm rotation after 10 years. Such a sub-

stantially changed regulatory environment opens up numerous new

research opportunities. First, there is a need to revisit prior research

topics, because we cannot assume that results remain stable after

such an enormous regulatory reform. This was demonstrated by

Eilifsen, Quick, Schmidt, and Umlauf (2018), who showed that capital

market reactions to nonaudit service fees were reversed after the

financial crisis, which may also be caused by an anticipation of stricter

rules. Moreover, it is quite possible that the environmental setting

under which research is conducted impacts the results. Thus, first, it

is worthwhile reanalyzing well‐researched topics in a different setting,

as done by Raffournier and Schatt (2018) with regard to audit fees in

Switzerland. Second, it is of course worth investigating the effect of

the regulatory changes on, for example, audit quality, auditor indepen-

dence, auditor choice, and audit market concentration. Third, it

increases the necessity to perform intertemporal analyses. Mandatory

audit firm rotation implies that audit firms will have to pursue selling

nonaudit services to their prior audit clients after they had to rotate

off. This increases the likelihood that the incumbent auditors' indepen-

dence is threatened by expected future nonaudit service fees. Fourth,

in contrast to a directive, which must be transformed into national law,

the regulation is binding and directly applicable without any transfor-

mation. Thus, it came into force in all member states at the same date.

This makes cross‐country studies more promising. Fifth, research

should consider whether EU Regulation 537/2014 offers new and

maybe better proxies for audit quality. Audit quality proxies applied

by prior research are often criticized due to inherent weaknesses,

because they are, for example, only indirectly related to the audit

(like earnings quality), not widely applicable (like going‐concern

opinions, which refer to financially distressed firms), or related to rare

events (like liability cases in Continental European countries). One

important element of the regulation is the expansion of the audit

report (e.g., by key audit matters). Thus, the audit report could be used

as a potentially more powerful audit quality proxy, although only in

cases in which boilerplate language is avoided.

Another promising stream of innovative audit research emerges

as a consequence of digitalization. The automatization and standardi-

zation of audit procedures together with the use of data analytics

and artificial intelligence in the audit domain can be regarded as impli-

cations of the so‐called digitalization of the audit. Again, this develop-

ment provides a number of research opportunities. First, theoretical

work is necessary because risk assessment as part of the audit

approach is about to change. One reason for that is the reinforced role

of internal controls. Internal controls are an integral part of a

company's value chain. Since digitalization also affects these value

chains by automatizing decision‐making and integrating control mech-

anisms, the role of internal controls, and hence audit procedures

related to internal controls, become more important. Furthermore,

digitalization fundamentally challenges current business models and

the business risks of companies. This is particularly the case if so‐

called disruptive technologies emerge or events occur. As a result,

the drivers and components of the risk‐oriented approach and their

relationship will change, and risk assessment has to be adapted

accordingly.

Second, research has to pick up issues arising from the use of

data analytics. The use of data analytics is ubiquitous. Data analytics

*Editor's note: This editorial accompanies papers from the EARNet Conference

2017 published in the special section in this issue and in an earlier issue.

Received: 25 July 2018 Revised: 7 August 2018 Accepted: 15 August 2018

DOI: 10.1111/ijau.12141

Int J Audit. 2018;22:329–331. © 2018 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/ijau 329