In the early 2000s, the world of accounting was rocked by two major scandals that effectively reshaped how US companies are audited. Reports of widespread fraud within energy company Enron and telecommunications company WorldCom led to the establishment of the 2002 Sarbanes-Oxley Act and the Public Company Accounting Oversight Board, both of which changed how auditors and their clients interact.
At the time, Kogod professor of accounting Yinqi Zhang was pursuing her PhD at Temple University. Fascinated by the changes to auditing and the resulting discussion around the significantly stricter rules, Zhang chose to follow up in her research in the years to come.
“The effectiveness of certain provisions, such as the prohibition of auditors providing certain non-audit services to their audit clients and the mandatory cooling-off period before auditors could join client companies, was debated,” she explained. “Intrigued by these developments, I centered my summer research papers and PhD dissertation on evaluating the impact of these regulations on audit quality.”
The route that Zhang took during her PhD studies led her to a broader interest in audit quality that informs her work today. Her published research tackles topics such as auditing fees, perceptions of audit quality, and auditor independence, all providing insights into how companies are evaluated and what goes into a trustworthy audit. Along the way, she learned that outside perception has more of an impact on how audits are received than she originally anticipated.
“My dissertation revealed a disconnect between perceived and actual audit quality, especially with investor perceptions,” Zhang said. “Investors tend to diminish their response to a company’s earnings report if that company hires financial executives who were recently employed by its auditing firm. However, my research did not indicate any tangible decrease in the quality of earnings as a result of such hiring practices.” In other words, a deeper connection between auditors and audited companies can make that company’s investors suspicious—is the audit accurate, or is it clouded by the positive relationship the auditor seems to have with the company? Either way, how people view and trust the audit matters just as much as the audit itself, and managing perceptions is important in these cases.
With that in mind, Zhang works hard to ensure that Kogod’s accounting graduates know both how to analyze data and what that data’s place is in the field. She encourages her students to listen to podcasts that shed light on various industries and their challenges, both to broaden their horizons and to better understand the role of an accountant in many of these same industries.