Strategic Deviance Impact on Auditor Quality and Its Consequences in Companies Listed on the Tehran Stock Exchange

Document Type : Research Paper

Authors

1 Assistant Prof., Department of Accounting, Faculty of Management and Accounting, Allameh Tabataba'i University, Tehran, Iran.

2 MSc., Department of Accounting, Faculty of Management and Accounting, Allameh Tabataba’i University, Tehran, Iran.

Abstract

Objective: In the competitive business landscape, companies seek a distinctive competitive edge by diverging from conventional industry strategies and embracing alternative methods that prove more advantageous. This departure from traditional approaches is termed strategic deviation in accounting literature. According to this, our study aimed to investigate the relationship between strategic deviation and audit quality. In addition, the consequences of choosing high-quality auditors in firms with strategic deviation were investigated, too. In this research, the consequences of choosing high-quality auditors include investigating its effect on earning management, accumulation of capital in the hands of the institutional investors, cost of capital, and market value of listed firms.
Methods: The research methodology is characterized as descriptive and correlational, with a practical orientation in terms of its purpose. To test the hypotheses, the regression model was used. Based on this, the financial statements of listed firms for a 9-year period from 2012 to 2019 were examined. In this research, the statistical sample was selected by the systematic elimination method. According to this, 134 firms were selected based on the consolidated/combined data of the test and statistical analysis. For this purpose, five regression models were defined.
Results: Firms with high levels of strategic deviance were chosen quality auditors due to controlling the high level of agency conflict. This showed that firms with high levels of strategic deviation have most likely selected quality auditors. Therefore, based on agency theory, it seems that the high level of information asymmetry in firms with high levels of strategic deviation led firms to choose and employ quality auditors. In addition, in firms with strategic deviation, the selection of quality auditors has led to the reduction of the capital cost and the market value. Employing and selecting quality auditors was not found to be effective in limiting capital accumulation in the hands of major shareholders and earning management, especially in firms with high levels of strategic deviation, but audit quality was proved to be effective in explaining the status of firms’ earning management.
Conclusion: Firms with high levels of strategic deviation chose quality auditors due to the high level of agency conflict and reducing the firms’ capital costs. In addition, the selection of quality auditors led to a decrease in the market value of the firms. In other words, shareholders are also aware of the effect of strategic deviation of firms in competitive conditions and the possibility of more restrictions in such firms by highly qualified auditors. Also, in firms with strategic deviation, the selection of quality auditors led to limiting the amount of earning management, and the selection of quality auditors led to the reduction of the company's capital cost. In other words, auditor quality, along with strategic deviation, has been an effective factor in reducing a firm’s capital costs.

Keywords

Main Subjects

References

 
Abdulwase, R., Ahmed, F., Nasr, F., Abdulwase, A., Alyousofi, A. & Yan, S. (2020). The role of business strategy to create a competitive advantage in the organization. Open Access J Sci, 4(4), 135-138.
Ashbaugh, H. & Warfield, T. D. (2003). Audits as a corporate governance mechanism: Evidence from the German market. Journal of International Accounting Research, 2(1), 1-21.
Chen, S., Xiao, X. X., Yang, Y. & Zou, C. (2014). CEO Power, Strategic Differences and Firm Performance: A Regulatory Effect Based on Environmental Dynamics. Research in Finance and Trade, 25, 7-16.
Cornett, M. M., Marcus, A. J., Saunders, A. & Tehranian, H. (2007). The impact of institutional ownership on corporate operating performance. Journal of Banking & Finance, 31(6), 1771-1794.
Dong, X., Cui, Y. & Gao, J. (2021). Strategic deviance and auditor selection. China Journal of Accounting Studies, 9(1), 81-112.
Easton, P. D. (2004). PE ratios, PEG ratios, and estimating the implied expected rate of return on equity capital. The accounting review, 79(1), 73-95.
El Ghoul, S., Guedhami, O. & Pittman, J. (2016). Cross-country evidence on the importance of Big Four auditors to equity pricing: The mediating role of legal institutions. Accounting, Organizations and Society, 54, 60-81.
Elyasiani, E. & Jia, J. J. (2008). Institutional ownership stability and BHC performance. Journal of Banking & Finance, 32(9), 1767-1781.
Fan, J., Wang, L., Wu, G. & Zhang, Y. (2023, February). Deviant Strategy, Internal Control, and Stock Price Crash Risk: An Empirical Study from Panel Data of A-Listed Companies in China Based on Fixed Effect Models. In Proceedings of the 4th International Conference on Economic Management and Model Engineering, ICEMME 2022, November 18-20, 2022, Nanjing, China.
Fang, J., Pittman, J., Zhang, Y. & Zhao, Y. (2017). Auditor choice and its implications for group‐affiliated firms. Contemporary Accounting Research, 34(1), 39-82.
Fang, J., Pittman, J., Zhang, Y. & Zhao, Y. (2017). Auditor choice and its implications for group‐affiliated firms. Contemporary Accounting Research, 34(1), 39-82.
Guedhami, O. & Pittman, J. A. (2006). Ownership concentration in privatized firms: The role of disclosure standards, auditor choice, and auditing infrastructure. Journal of Accounting Research, 44(5), 889-929.
Guedhami, O., Pittman, J. A. & Saffar, W. (2014). Auditor choice in politically connected firms. Journal of accounting research, 52(1), 107-162.
Hassanabadi, M. (2019). Strategic Thinking, Organizational Foresight, and Strategic Planning in High-tech SMEs in the UK. Bangor University (United Kingdom).
He, X. & Yin, C. (2018). The impact of strategic deviance on analysts’ earnings forecasts: evidence from China. Nankai Business Review International, 10(3), 362-381.
Houston, J. F., Lin, C. & Xie, W. (2018). Shareholder protection and the cost of capital. The Journal of Law and Economics, 61(4), 677-710.
Jing, L. & Zhibin, C. (2020). Does Strategy Deviance Influence the Vitality and Function of Internal Capital Market-An Empirical Study on Chinese A-share Listed Companies. Management Review, 32(8), 269.
Kargar, H., Zanganeh, S. (2018). The impact of business strategy on the relationship between risk taking and company value. Journal of Accounting and Management Vision, 1(3), 14-27. (in Persian)
Kim, J. B., Lee, J. J. & Park, J. C. (2015). Audit quality and the market value of cash holdings: The case of office-level auditor industry specialization. Auditing: A Journal of Practice & Theory, 34(2), 27-57.
Lin, Z. J. & Liu, M. (2009). The impact of corporate governance on auditor choice: Evidence from China. Journal of International Accounting, Auditing and Taxation, 18(1), 44-59.
Mahdavi, G., and Manfard Maharloui, M., and Ebrahimi, F. (1390). Investigating the impact of the corporate strategic system on the size of the selected audit firm of the companies admitted to the Tehran Stock Exchange. Stock Exchange, 4(13), 135-155. (in Persian)
Mashayekhi, B., Omrani, H., Akhoundi, O. (2018). Auditor Industry Specialization and Audit Quality: The Role of Client Strategy. Empirical Research in Accounting, 8(4), 105-126. doi: 10.22051/jera.2018.16354.1726. (in Persian)
Meshki Miavagii, M., Kheradyar, S., Hasanzadeh, N. (2018). A study on the relationship between Cost leadership strategy, Market Competition, and earnings management in the Tehran Stock Exchange (TSE). Journal of Accounting Advances, 10(1), 218-243. doi: 10.22099/jaa.2018.26327.1599. (in Persian)
Moradi, M. & Yahyaei, M. (2020). Develop a Model for Selecting an Independent Auditor in Iran. Accounting and Auditing Review, 27(2), 258-287. (in Persian)
Moradi, M., sepahvandi, S. (2015). The Impact of Competitive Strategies on Stability of Financial Performance and Risk. Journal of Financial Accounting Research, 7(3), 90-75. (in Persian)
Namazi, M., and Bayzidi, A., and Jabarzadeh Kangarloui, S. (1390). Investigating the relationship between audit quality and profit management of companies listed on the Tehran Stock Exchange. Accounting and Auditing Research, 3(9), 4-21. (in Persian)
Rusmin, R., Astami, E. W. & Hartadi, B. (2014). The impact of surplus free cash flow and audit quality on earnings management: The case of growth triangle countries. Asian review of accounting, 22(3), 217-232.
Soroushyar, A. (2023). Auditor characteristics and the financial reporting quality: the moderating role of the client business strategy. Asian Journal of Accounting Research, 8(1), 27-40.
Tanani, M., Mohebkhah, M. (2014). The Relation of Business Strategy with Earnings Quality and Stock Return in Firms listed in TSE. Empirical Research in Accounting, 4(13), 105-127. doi: 10.22051/jera.2015.1886. (in Persian)
Tang, J., Crossan, M. & Rowe, W. G. (2011). Dominant CEO, deviant strategy, and extreme performance: The moderating role of a powerful board. Journal of Management Studies, 48(7), 1479-1503.
Tang, Y. J. (2011). Auditing quality vs signal display: Ultimate control, big shareholder governance strategy and auditor choice. Journal of Financial Research, 5, 139-155.
Wang, H. C., Zhang, X.P., Hou, C.R. & Li, X.Y. (2017). Corporate strategic deviance and equity capital costs: A research on the mediating effect based on operational risk and information asymmetry. Chinese Soft Science, (09), 99-113.
Wang, R. (2018). Strategic deviance and accounting conservatism. American Journal of Industrial and Business Management, 8(05), 1197.
Wolfe, J. & Sauaia, A. C. A. (2003). The Tobin q as a company performance indicator. In Developments in Business Simulation and Experiential Learning: Proceedings of the Annual ABSEL conference (Vol. 30).
Wu, P., Gao, L. & Gu, T. (2015). Business strategy, market competition and earnings management: Evidence from China. Chinese Management Studies.
Ye, K. T., Dong, X. Y. & Cui, Y. J. (2015). Corporate Strategic Positioning and the Choice of Accounting Earnings Management Behavior. Accounting Research, (10), 23-29.
Ye, K., Guan, J. X. & Zhang, B. (2021). Strategic Deviation and Stock Return Synchronicity. Journal of Accounting, Auditing & Finance, 36(1), 172-194.
Yuan, R., Cheng, Y. & Ye, K. (2016). Auditor industry specialization and discretionary accruals: the role of client strategy. The International Journal of Accounting, 51(2), 217-239.
Zhang, S., Ye, K., Cui, Y. & Zang, W. (2019). Large shareholder incentives and auditor choice. Auditing: A Journal of Practice & Theory, 38(3), 203-222.
Accounting and Auditing Review
Volume 30, Issue 3
2023
Pages 506-531

Files

Share

How to cite

Statistics