Impact of regulation on audit quality and financial reporting

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The Research School of Accounting (RSA) plays an important role in informing the regulations and standards of auditing and financial reporting in Australia and abroad. Through research that analyses the impact and efficacy of these policies, regulatory bodies can get a better understanding of the consequences of these changes.

Financial reporting

Associate Professor Mark Wilson has examined the relationship between changes in financial reporting regulations and the effect they have on behaviour. In the early 2000s, Australia passed several reforms to make it harder for firms to purposefully misclassify elements of their financial statements. However, when Australia later adopted the International Financial Reporting Standards in 2005, it effectively reversed the earlier regulations. Mark used this period as a case study to see if the regulations had a positive effect during this time.

This research highlighted the potential for undesirable spill-over effects from regulation that is designed to reduce management’s influence over the composition and structure of the income statement. Managers have a variety of ways to influence stakeholder perceptions of the underlying profitability of the firm. This work contributes to the public policy debate surrounding the level of discretion given to managers when measuring and reporting income to stakeholders.

Audit quality and audit firm tenure

Professor Greg Shailer has undertaken recent research on the relationship between audit quality and audit firm tenure in Iran, where government policies create intense competition for clients amongst small audit firms. Since 2011, Iranian regulations require listed companies to rotate their auditors every four years. Although this was intended to improve quality, this research uncovers factors related to the immaturity of the Iranian market that make this less effective.

These findings have implications for policymakers, auditors, and users of financial reports. With the surge of interest in investment in the Iranian Economy that resulted from lifting US sanctions in 2016 and the Iranian Government's initiatives to attract foreign investors, the Iranian stock market began receiving attention from international investors. An important issue for investors entering foreign capital markets is how the auditors and audit quality affect information quality and asymmetry.

These are two examples of the relevant and impactful research being done in RSA, and evidence of the value this work has for regulatory bodies and audit firms around the world.