Paul N Michas

Interests

Research

Auditing (audit quality, emerging markets, global auditing, industry expertise)Financial Reporting (earnings quality, International Financial Reporting Standards, international development aid, investment bias)

Teaching

Auditing. International Accounting.

Courses

Scholarly Contributions

Journals/Publications

• Cheng, L., Jaggi, J., Michas, P. N., & Schatzberg, J. W. (2023). Auditor Communication Provisions in Private Loan Agreements: Do They Matter?. Auditing: A Journal of Practice & Theory, 1-29. doi:10.2308/ajpt-2021-059
  More info

  SUMMARY We examine auditor communication provisions (ACPs) in private loan agreements, which are private contracting mechanisms establishing communication between lenders and their borrowers’ auditors. We provide evidence that lenders value auditor communications and often specify different types of ACPs that facilitate lender monitoring. With predictable variation across the different ACP types, ACPs are associated with larger loans, longer maturities, larger loan syndicates, more financial covenants, and greater slack in financial covenants. In examining audit effort implications for borrowers, we find that ACPs are associated with higher audit fees and longer audit report lags. This is consistent with auditors responding to the litigation risk ACPs impose. In samples where the risk of third-party litigation is greater, the association between ACPs and audit effort proxies is heightened, suggesting the increased litigation risk brought about by ACPs interacts with other audit client-specific risk factors. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42; D82; G21; G30; K40.
• Michas, P. N., Russomanno, D., & Zhao, M. (2022). The Opportunity for Partner Industry Knowledge Sharing within Audit Offices and Audit Quality. Review of Accounting Studies. doi:10.2139/ssrn.4069529
• Michas, P. N., Docimo, W. M., Gunn, J. L., & Li, C. (2021). Do Foreign Component Auditors Harm Financial Reporting Quality? A Subsidiary‐Level Analysis of Foreign Component Auditor Use*. Contemporary Accounting Research, 38(4), 3113-3145. doi:10.1111/1911-3846.12699
• Docimo, W. M., Gunn, J. L., Li, C., & Michas, P. N. (2020). A Subsidiary and Parent Level Analysis of Foreign Component Auditor Usage and Audit Quality. Contemporary Accounting Research. doi:10.2139/ssrn.3526388
  More info

  We hypothesize and find that financial reporting quality at the foreign subsidiaries of U.S. multinational corporations (MNCs) is higher when the MNC’s principal auditor engages a component auditor to audit the foreign subsidiary on its behalf. An important innovation of this study is that we focus on comparing financial reporting quality of equivalent subsidiaries with and without component auditor work. Our approach contrasts with extant studies that examine the consequences of variation in the total amount of component auditor work at the MNC level. Our results are important for two reasons. First, we provide an alternative view on the consequences of component auditor use compared to the emerging literature in this area, which typically finds a negative association between the extent of component auditor use and financial reporting quality at the MNC level. Thus, we show that a different research design, conducted at the level at which component auditors actually perform their work, yields different inferences. Second, we demonstrate that using component auditors on U.S. MNC group audits is an avenue through which U.S. auditing institutions can affect financial reporting quality in foreign locations. We also reconcile our subsidiary-level results to the MNC-level by introducing a new MNC-level component auditor “coverage” variable. Overall, we highlight that the best way to audit a foreign subsidiary is likely to be with a component auditor in the local country, which informs the debate surrounding recently proposed PCAOB guidance.
• Michas, P. N., Dhaliwal, D., Naiker, V., & Sharma, D. (2020). Greater Reliance on Major Customers and Auditor Going‐Concern Opinions. Contemporary Accounting Research, 37(1), 160-188. doi:10.1111/1911-3846.12551
• Dhaliwal, D. S., Michas, P. N., Naiker, V., & Sharma, D. S. (2019). Greater Reliance on Major Customers and Auditor Going Concern Opinions. Contemporary Accounting Research. doi:10.2139/ssrn.3402521
  More info

  In this study we predict and provide evidence that distressed firms that rely more heavily on major customers for sales have a comparatively higher incidence of receiving going concern opinions (GCOs). Moreover, we find that the effect of increased reliance on major customers is driven by firms that are more distressed. We also theorize that variations in key characteristics of the relationship between distressed firms and their largest major customer are incrementally linked to GCOs, and present evidence consistent with this. Specifically, we find that the effect of greater reliance on major customers is driven by firms that are relatively smaller than their largest major customer. Additionally, we find that greater reliance on major customers is positively (negative) associated with GCOs when firms are in a shorter (longer) relationship with their major customer and when firms have a different auditor to (same auditor as) the largest major customer. Overall, our study indicates that supply-chain relationships are relevant business risks associated with auditors’ going concern assessments.
• Gunn, J. L., Kawada, B. S., & Michas, P. N. (2019). Audit market concentration, audit fees, and audit quality: A cross-country analysis of complex audit clients. Journal of Accounting and Public Policy. doi:10.1016/j.jaccpubpol.2019.106693
  More info

  Regulators around the world are concerned about the potentially harmful effects of high audit market concentration on audit pricing and quality. However, results in the overall literature have failed to reach consensus on this issue. We contribute to this debate by arguing that the audit market is segmented and that concentration in the Big 4 segment of the market leads to higher audit pricing. Accordingly, our analyses use international data and focus on concentration within the Big 4 group of firms across countries. We find that audit fees are increasing in our concentration measure for clients where the barriers to entry by competing auditors are higher, as proxied by client size, international operations, and IFRS use. Finally, we find evidence that audit quality is decreasing in Big 4 market concentration for these types of engagements. This indicates a wealth transfer from shareholders to audit firms when auditor concentration is high because these complex clients are charged more, but receive audits that are of lower quality.
• Russomanno, D., Ashraf, M., Michas, P. N., Michas, P. N., Ashraf, M., & Russomanno, D. (2019). The Impact of Audit Committee Information Technology Expertise on the Reliability and Timeliness of Financial Reporting. The Accounting Review, 95(5), 23-56. doi:10.2308/accr-52622
  More info

  We examine whether information technology expertise on audit committees impacts the reliability and timeliness of financial reporting. We find a reduction in the likelihood of material restatements...
• Michas, P. N. (2018). The contagion effect of office-level audit failures. The Accounting Review. doi:10.32469/10355/15783
  More info

  Title from PDF of title page (University of Missouri--Columbia, viewed on October 19, 2012).
• Michas, P. N., & Gunn, J. L. (2017). Auditor Multinational Expertise and Audit Quality. The Accounting Review, 93(4), 203-224. doi:10.2308/accr-51925
• Velury, U. K., Rowe, S., Roush, P. B., Rezaee, Z., Michas, P. N., Causholli, M., & Abernathy, J. L. (2016). Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Concept Release on Audit Quality Indicators, No. 2015-005, July 1, 2015. Current Issues in Auditing, 10(1), C11-C27. doi:10.2308/ciia-51316
  More info

  This commentary summarizes the contributors’ views and recommendations on the Public Accounting Oversight Board's (PCAOB) Audit Quality Indicators (ACIs).
• Michas, P. N., Lamoreaux, P. T., & Schultz, W. L. (2014). Do Accounting and Audit Quality Affect World Bank Lending?. The Accounting Review, 90(2), 703-738. doi:10.2308/accr-50865
• Chen, L., Jones, K. H., Lisic, L. L., Michas, P. N., Pawlewicz, R., & Pevzner, M. (2012). Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the IAASB Proposal:Improving the Auditor's Report. Current Issues in Auditing. doi:10.2308/ciia-50336
  More info

  SUMMARY Recently, the International Auditing and Assurance Standards Board (IAASB) solicited public comments on its proposal to improve the current format of the auditor's report under International Auditing Standards. This commentary summarizes the contributors' views on the various alternatives proposed in the IAASB proposal, entitled, Improving the Auditor's Report. The invitation to comment (which invited comments through October 8, 2012), with links to the proposal, is available at: http://www.ifac.org/publications-resources/improving-auditor-s-report. Our comments submitted to the IAASB appear below.
• Francis, J. R., Michas, P. N., & Yu, M. D. (2012). Office Size of Big 4 Auditors and Client Restatements. Contemporary Accounting Research. doi:10.2139/ssrn.2135803
  More info

  Francis and Yu (2009) and Choi, Kim, Kim, and Zang (2010) report evidence that Big 4 audits are of higher quality when the engagement office is of larger size: specifically, client earnings quality is higher and auditors in larger offices are more likely to issue going concern audit reports. We extend this line of research to test if larger Big 4 offices have fewer client restatements. A client restatement provides more direct evidence of a low-quality audit than earnings quality metrics or going concern reports, because a restatement indicates the client’s auditor did not effectively enforce the correct application of GAAP at the time the original financial statements were issued. We analyze 2,557 firm-year restatements in a sample of 23,190 financial statements originally issued by U.S. firms in 2003-2008. We find that Big 4 office size is associated with fewer client restatements after controlling for innate client characteristics that may affect restatements (client size, financial performance, industry membership, non-financial measures, off-balance sheet activities, and market-related measures), and a set of controls for other auditor factors such as fees and industry expertise. The study raises important questions about the ability of smaller offices to deliver high-quality audits for SEC registrants.
• Lamoreaux, P. T., Michas, P. N., & Schultz, W. (2012). The Impact of Accounting and Audit Quality on World Bank Lending Decisions. The Accounting Review. doi:10.2139/ssrn.2200958
  More info

  We investigate the role of accounting and audit quality differences across countries in the allocation of international development aid. Such aid is crucial to developing countries and enables them to improve governance functions, infrastructure, and create more efficient business and capital markets. The accounting and audit environment in a country is a major characteristic that, if relatively strong, can provide donors with some confidence that development aid is being used for its intended purpose rather than being subverted for personal or political gain. We find that development loan aid (as a percentage of a country's GDP) is higher in countries with higher accounting quality. We also find that this relationship exists both before and after a country adopts International Financial Reporting Standards, but less so in the post-IFRS adoption period. Further, we find that loan aid is higher in countries where the audit environment provides a foundation for higher-quality auditing, both in countries that use IFRS as well as countries that use their own domestic accounting standards. Finally, we find that grant aid that does not require repayment by the recipient is not associated with accounting or audit quality. In these cases, the possibility that higher accounting and audit quality is able to prevent the diversion of aid away from its intended targets is overwhelmed by the importance of providing support that is often targeted directly towards saving lives.
• Michas, P. N. (2012). Does Audit Market Concentration Harm the Quality of Audited Earnings? Evidence from Audit Markets in 42 Countries*. Contemporary Accounting Research. doi:10.1111/j.1911-3846.2012.01156.x
  More info

  Abstract Audit regulators around the world have expressed concern over market dominance by Big 4 accounting firms and the potential adverse effect it may have on the quality of audited financial statements. We use cross‐country variation in the audit market structure of 42 countries to examine two separate aspects of Big 4 dominance: (1) Big 4 market concentration as a group relative to non–Big 4 auditors; and (2) concentration within the Big 4 group in which one or more of the Big 4 firms is dominant relative to the other Big 4 firms. We find that in countries where the Big 4 (as a group) conduct more listed company audits, both Big 4 and non–Big 4 clients have higher quality audited earnings compared to clients in countries with smaller Big 4 market shares. In contrast, in countries where there is a greater concentration within the Big 4 group, we find that Big 4 clients have lower quality audited earnings compared to countries with more evenly distributed market shares among the Big 4. Thus concentration within the Big 4 group appears to be detrimental to audit quality in a country and of legitimate concern to regulators and policymakers. However, Big 4 dominance per se does not appear to harm audit quality and is in fact associated with higher earnings quality, after controlling for other country characteristics that potentially affect earnings quality.
• Michas, P. N., & Francis, J. R. (2012). The Contagion Effect of Low-Quality Audits. The Accounting Review, 88(2), 521-552. doi:10.2308/accr-50322
• Khurana, I. K., & Michas, P. N. (2011). Mandatory IFRS Adoption and the U.S. Home Bias. Accounting Horizons. doi:10.2139/ssrn.1872239
  More info

  This paper examines whether mandatory IFRS adoption at the country level lowers U.S. investors’ propensity to overweight domestic stocks in their common stock portfolios (generally referred to as home bias). We find that, on average, U.S. home bias decreases for countries that mandate IFRS adoption, after controlling for country-fixed effects. We also find that the reduction in the U.S. home bias after the mandatory adoption of IFRS is greater for countries with larger differences between IFRS and their domestic accounting standards, for countries with a stricter rule of law and a common law legal origin, and in countries with greater incentives to report high-quality financial information. Overall, our results indicate that a common set of global accounting standards matter for portfolio holdings of U.S. investors and that U.S investors regard the enforcement of standards to be a key factor in making investments outside the U.S.
• Michas, P. N. (2011). The Importance of Audit Profession Development in Emerging Market Countries. The Accounting Review, 86(5), 1731-1764. doi:10.2308/accr-10097
• Michas, P. N. (2011). The Importance of Audit Profession Development in Emerging Market Countries. The Accounting Review. doi:10.2139/ssrn.1728149
  More info

  This study investigates the country-level development of the audit profession in emerging market countries and whether this development is associated with audit quality and auditor choice. I find that audit quality is higher for client companies located in countries with a more developed audit profession, after controlling for rule of law and investor protection. Specifically, Big 4 client companies’ total and abnormal accruals are both lower, and earnings are more conservative in countries with stronger Audit Profession Development (APD). However, these results hold only for companies audited by a Big 4 auditor. Results also indicate that stronger audit profession development is associated with a greater likelihood a client company hires a Big 4 auditor. My findings contribute to the literature that explores differences in audit quality and determinants of auditor choice, the literature that explores cross-country differences in audit professions, and research on the characteristics and effectiveness of audit institutions in emerging market economies.

Presentations

• Michas, P. N. (2022, January). Auditor Office Reputation Damage and their Audit Clients' Voluntary Disclosure

  . Financial Accounting and Reporting Section Conference of the American Accounting Association. Online: American Accounting Association.

• Michas, P. N. (2022, January). Cross Country Research in Accounting and Auditing Panel Member. International Accounting Section of the American Accounting Association. Online: American Accounting Association.
• Michas, P. N. (2022, January). Panel Presentation to Doctoral Consortium. International Accounting Section of the American Accounting Association. Online: American Accounting Association.
• Michas, P. N. (2022, January). The Opportunity for Partner Industry Knowledge Sharing within Audit Offices

  . Auditing Section of the American Accounting Association. Las Vegas, NV: American Accounting Association.

• Michas, P. N. (2022, January). The Opportunity for Partner Industry Knowledge Sharing within Audit Offices

  . International Accounting Section of the American Accounting Association. Online: American Accounting Association.

• Michas, P. N., Russomanno, D., Chen, J., & Zhuang, W. (2022). United State Air Pollution and Audit Quality

  . AAA Auditing Conference.

• Michas, P. N. (2021, January). Auditor Office Reputation Damage and their Audit Clients' Voluntary Disclosure

  . Auditing Section of the American Accounting Association. Las Vegas, NV: American Accounting Association.

• Michas, P. N. (2021, October). Auditor Office Reputation Damage and their Audit Clients' Voluntary Disclosure

  . Brigham Young University Accounting Research Conference. Provo, UT: Brigham Young University.

• Michas, P. N. (2021, October). Auditor Office Reputation Damage and their Audit Clients' Voluntary Disclosure

  . Public Company Accounting Oversight Board Conference on Auditing and Capital Markets. Online: Public Company Accounting Oversight Board.

• Michas, P. N., Cheng, M., & Zhao, M. (2021). Auditor Office Reputation Damage and their Audit Clients' Voluntary Disclosure

  . AAA Annual Conference.

• Michas, P. N., Russomanno, D., Chen, J., & Zhuang, W. (2020). United State Air Pollution and Audit Quality

  . AAA Western Regional Conference.

• Michas, P. N., Cheng, L., Schatzberg, J. W., & Jaggi, J. (2019). Auditor Communication Provisions in Private Loan Agreements: Do They Matter?

  . AAA Financial Accounting and Reporting Conference.

• Michas, P. N., Docimo, W., Gunn, J., & Li, C. (2019). Do Foreign Component Auditors Harm Financial Reporting Quality? A Subsidiary-Level Analysis of Foreign Component Auditor Use

  . Singapore Management University Accounting Department.

• Michas, P. N., Docimo, W., Gunn, J., & Li, C. (2019). Do Foreign Component Auditors Harm Financial Reporting Quality? A Subsidiary-Level Analysis of Foreign Component Auditor Use

  . University of Pittsburgh Accounting Department.

• Michas, P. N., Russomanno, D., & Ashraf, M. (2019). The Impact of Audit Committee Information Technology Expertise on the Reliability and Timeliness of Financial Reporting

  . AAA Auditing Conference.

• Michas, P. N., Russomanno, D., & Ashraf, M. (2019). The Impact of Audit Committee Information Technology Expertise on the Reliability and Timeliness of Financial Reporting

  . AAA Financial Accounting and Reporting Conference.

• Michas, P. N. (2018, Spring). The Impact of Audit Committee Information Technology Expertise on the Reliability and Timeliness of Financial Reporting. University of Texas. University of Texas-Austin: University of Texas-Austin.
• Michas, P. N., Cheng, L., Schatzberg, J. W., & Jaggi, J. (2018). Auditor Communication Provisions in Private Loan Agreements: Do They Matter?

  . AAA Annual Conference.

• Michas, P. N., Russomanno, D., & Ashraf, M. (2018). The Impact of Audit Committee Information Technology Expertise on the Reliability and Timeliness of Financial Reporting

  . University of Texas.

• Michas, P. N. (2014, April). Major Customer Reliance and Auditor Going Concern Decisions. Research presentation to accounting department at the University of Miami (Miami, FL). Miami, FL: University of Miami.
• Michas, P. N. (2014, January). Major Customer Reliance and Auditor Going Concern Decisions. Audit section of the American Accounting Association Annual Conference. San Antonio, TX.