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1.
Introduction
Between 2006 and 2012, more than 60 finance companies failed in New Zealand. According to one estimate, the amount and the number of deposits that were put to risk as a result of these failures were NZ$8.71 billion and 205,878, respectively[1]. Many of the directors of these failed companies were sentenced to jail and home detention[2]. The sheer number of failures and the magnitude of loss borne by investors outraged the investors, media commentators[3] and regulators, and prompted commentators and regulators to criticise external auditors of the failed finance companies for failing to warn investors (Gaynor, 2007; Harris, 2009). For example, the Registrar of Companies made the following observations on the quality of audit of failed finance companies (Harris, 2009, p. 11):
[...] audits of many of these finance companies lacked the rigour and analytical depth one would expect for entities managing substantial public investments. There is a view among receivers that if they had been rigorously audited, it is unlikely many of the failed finance companies would have continued in business for as long as they did.
While there have been allegations of audit failure in the case of failed finance companies, there is little systematic evidence on this. Therefore, the first objective of this paper is to inquire whether the auditors of the failed finance companies failed to perform their duties adequately. A related objective of this paper is to shed light on audit failure by Big N and non-Big N auditors, respectively. Given the allegation of audit failure in the audits of the failed finance companies, it is important to ask whether both Big N and non-Big N auditors failed equally in the case of the failed finance companies.
These companies provide a unique setting for exploring audit failure. They were private companies with poor corporate governance (Harris, 2009). Further, while New Zealand is a well-regulated common-law country, its securities law enforcement at the time of the finance company failures was weaker than that of other common-law countries (La Porta et al. , 2006). Such a context reduces the auditor's business risk by lowering the cost of poor quality audits, which may motivate the auditor to behave opportunistically (Causholli and Knechel, 2012; Francis, 2011). It is not clear, however,...