The Effect of Auditing Regulations Changes on Audit Quality in the Australian Auditing Market

Abstract

Accountants and auditors have often faced accusations of failures that contributed to the collapse of corporations across different domains. In response to these corporate collapses, the government revised auditing and corporate governance regulations to minimise the recurrence of such crises. This study examines the most notable modifications to audit regulations in Australia—the Australian Securities Exchange Corporate Governance Council’s (ASX CGC) Principles of Good Corporate Governance and Best Practice Recommendations of 2003 (ASX CGC, 2003), the Corporate Law Economic Reform Program Act of 2004 and the ASX CGC Corporate Governance Principles and Recommendations of 2010 (ASX CGC, 2010)—and examines how these changes affect the quality of audit practices in publicly listed firms by considering the opinions of auditors on the financial health of Australian firms and the firms’ management of earnings over an extended period. This analysis is necessary to confirm whether recent auditing and corporate governance reforms aimed at improving the quality of auditors’ work and auditor independence increase the quality of their opinions and reported earnings. Hypotheses were formulated based on prior literature and the agency theory framework, and data were gathered between 1 January 2001 and 31 December 2015, culminating in 12,401 firm-year observations. The study finds that certain changes made by ASX CGC 2003, especially those concerning financial expertise, are significantly and negatively associated with earnings management, while changes made by ASX CGC 2010 are significantly and positively associated with auditors’ opinions. Several sensitivity and robustness tests lend a degree of support to these core findings to an extent. This research adds value to the existing literature by presenting new empirical evidence regarding the current status of auditors’ opinions and earnings management in Australian firms, as well as the state of regulations designed to improve the quality of audits and corporate governance practices. More than just providing insights, the results of this study may prompt a reevaluation of current practices. They propose the potential impacts of audit regulation changes on auditors’ opinions and earnings management. This could lead to a more nuanced understanding and may suggest modifications to existing practices or regulatory approaches. These implications hold substantial relevance not just for investors, corporate management, auditors, and regulators, but also for capital market participants and scholars. As such, they should be considered tentatively pending further investigation and confirmation.