Auditor selection and retention: the Australian mining IPO market

May Sze Khoo

Research output: ThesisDoctoral Thesis

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Abstract

This thesis investigates the relationship between client firm characteristics and auditor selection for companies undergoing initial public offering (IPO) in the Australian mining industry. Focusing on the importance of auditors acting as a signalling mechanism in IPO offerings, this thesis firstly examines the influence of client firm size, risk, complexity, corporate governance structure and mining IPO regulations on auditor selection and retention in the Australian mining IPO setting. Further, by extending the analysis to the first annual reporting period following IPO, this thesis then explores the link between auditor selection at IPO and auditor retention for the first annual reporting period following IPO.

This thesis focuses on one industry; specifically, the mining industry in Australia. The mining IPOs provide a unique environment where information asymmetry is significant, highlighting the signalling role of auditors. The mining sector also provides a well-defined industry segment for researchers to study industry specialist auditor arguments, with the advantage of the low ‘noise’ and reasonably consistent firm characteristics that exist within this industry.

Industry specialisation of auditors is analysed at three levels: national, city and audit partner. This thesis seeks to provide additional evidence regarding the subject of national-level versus city-level industry specialisation and also builds a foundation for comparison to individual audit partner-level analysis. Further, studying auditor retention in the mining IPO environment adds to the existing literature, providing further evidence about the signalling role of auditors.

The results for audit firm selection analysis generally support the hypotheses developed for this thesis. IPO issue size is positively related to the selection of audit firms in general. The decision to select national-level or city-level industry specialist auditors supports the hypothesis that client firms with lower firm risk are more likely to engage better quality auditors to signal their positive insider value. Empirical tests studying the effect of corporate governance structure on the audit firm selection process during an IPO event support the hypothesis that client firms with good corporate governance are more likely to engage audit firms with brand name reputation, national-level or city-level industry specialisation. There is also support for the argument that mining IPO firms adhering to mining IPO regulations are also more inclined to engage high quality audit firms.

The empirical results for audit partner selection analysis contrast to those of audit firm selection. There is little support for the hypotheses when the focus is on individual audit partners. Higher risk client firms and client firms exhibiting poorer corporate governance are more likely to hire better quality audit partners. This variation was unexpected and provides an important topic for future research. In conclusion, the results of this thesis reinforce the client firm characteristics that influence the choice of quality auditors.

The results for auditor retention analysis mirror those of auditor selection analysis. The results for audit firm retention analysis contrast with those of audit partner retention analysis. While the results for audit firm retention analysis support the hypotheses, no empirical evidence was found for audit partner retention analysis to support the auditor retention hypotheses. The results for audit firm retention analysis show that larger IPO issues are less likely to retain IPO audit firms for the first annual reporting period following IPO. There is also a higher likelihood for mining IPO firms with good corporate governance to retain IPO audit firms in the first annual reporting period following IPO. In contrast, higher risk mining IPO firms are more likely to retain their IPO audit partners for the first annual reporting period following IPO.
Original languageEnglish
QualificationDoctor of Philosophy
Awarding Institution
  • The University of Western Australia
Award date17 Jun 2016
Publication statusUnpublished - 2016

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