Main Article Content
Research Aim: This study reviews the literature to find whether financial statement insurance can be substituted for the current external auditing system.
Design/ Methodology/ Approach: This article reviews how financial statement insurance (FSI) advances external audit independence, reduces audit failure, boosts audit quality, and increases the reliability of financial statements.
Research finding: This study shows that the FSI system assists in mitigating the monetary relationship between auditors and the audited companies by forcing companies to purchase insurance for their financial statements. Accordingly, FSI protects investors against any losses due to any misrepresentation instead of having them audited. In this system, companies hire insurance companies, and insurance companies hire external auditors to assess the insurance premiums and policy coverages through auditing financial reports. Also, it guarantees a lack of any misrepresentation or omission in them.
Theoretical contribution/ Originality: This study contributes to the literature by concluding that financial statements insurance can be an alternative to a current audit system and investigates its usability from the perspectives of the components of the system
Practitioner/ Policy implication: The study results can be useful for investors in the capital markets, companies, audit firms, and insurance companies.
Keywords: External Auditors; Investors; Insurance Companies; Financial Statement Insurance
Type of article: Literature Review
JEL Classification: M41, M42, G22
The Asian Journal of Accounting Perspectives (AJAP) articles are published under a licence equivalent to the Creative Commons Attribution-NonCommercial-NoDerivs License (CC BY-NC-ND). The licence allows users to copy, distribute, and transmit an article as long as the author is attributed. The article is not used for commercial purposes. The work is not modified or adapted in any way.
Authors are required to sign the Exclusive License to Publish agreement upon publication in the AJAP. The agreement grants the Publisher (Faculty of Business and Accountancy, Universiti Malaya) to publish and disseminate the articles.
Articles published in the AJAP are digital, online, free of charge, and free of most copyright and licensing restrictions.
Article Processing Charge
Articles publish in AJAP is free submission, production and publication charges. However, all accepted articles are required for language editing. The AJAP officially appointed and outsourced proofreader will conduct this process, and the authors will cover the cost. AJAP does not profit from this process and transaction.
Acemoglu, D., & Gietzmann, M.B. (1997). Auditor independence, incomplete contracts and the role of legal liability. European Accounting Review, 6(3), 355-375. https://doi.org/10.1080/713764727
Alles, M., Brennan, G., Kogan, A., & Vasarhelyi, M.A. (2018). Continuous Monitoring of Business Process Controls: A Pilot Implementation of a Continuous Auditing System at Siemens. In Chan, D.Y., Chiu, V., & Vasarhelyi, M.A. (Ed.) Continuous Auditing (Rutgers Studies in Accounting Analytics) (pp. 219-246), Emerald Publishing Limited. https://doi.org/10.1108/978-1-78743-413-420181010
Arwinge, O. (2014). Internal control in the financial sector: A longitudinal case study of an insurance company [Doctoral dissertation]. Uppsala Universitet.
Anam, C. (2020). Study of Internal Factors and External Factors of Insurance Companies Towards Company Value (Study on Indonesia Stock Exchange). In SHS Web of Conferences (Vol. 86). EDP Sciences. https://doi.org/10.1051/shsconf/20208601010
Baker, J.D. (2016). The purpose, process and methods of writing a literature review. AORN Journal, 103(3), 265-269. https://doi.org/10.1016/j.aorn.2016.01.016
Bartlett, R. W. (1991). A heretical challenge to the incantations of audit independence. Accounting Horizons, 5(1), 11-16.
Becker, C. L., DeFond, M. L., Jiambalvo, J., & Subramanyam, K. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1-24. https://doi.org/10.1111/j.1911-3846.1998.tb00547.x
Beiragh, R. G., Alizadeh, R., Kaleibari, S. S., Cavallaro, F., Zolfani, S. H., Bausys, R., & Mardani, A. (2020). An integrated multi-criteria decision making model for sustainability performance assessment for insurance companies. Sustainability, 12(3), 789. https://doi.org/10.3390/su12030789
Cumming, D. J., & Johan, S. A. (2013). Venture capital and private equity contracting: An international perspective. Academic Press.
Cunningham, L. A. (2003). Facilitating auditing's new early warning system: Control disclosure, auditor liability, and safe harbors. Hastings LJ, 55, 1449.
Demiris, G., Oliver, D. P., Washington, K. T. (2019). Behavioural Intervention Research in Hospice and Palliative Care. In The Foundations of Behavioural Intervention Research in Hospice and Palliative Care (pp. 17-25). Academic Press. https://doi.org/10.1016/B978-0-12-814449-7.00002-8
Dontoh, A., Ronen, J., & Sarath, B. (2013). Financial statements insurance. Abacus, 49(3), 269-307. https://doi.org/10.1111/abac.12012
Drake, P. P., & Fabozzi, F. J. (2012). Analysis of financial statements (Vol. 204). John Wiley & Sons.
Faboyede, O. S., & Mukoro, D. O. (2012). Financial statement insurance: Restoring investor confidence in Nigerian banks. Research Journal of Finance and Accounting, 3(4), 140-150.
Fan, J. P., & Wong, T. J. (2005). Do external auditors perform a corporate governance role in emerging markets? Evidence from East Asia. Journal of Accounting Research, 43(1), 35-72. https://doi.org/10.1111/j.1475-679x.2004.00162.x
Eilifsen, A., Messier, W. F., Glover, S. M., & Prawitt, D. F. (2014). Auditing & assurance services - international edition. McGraw-Hill.
Gelter, M., & Gurrea-Martínez, A. (2020). Addressing the auditor independence puzzle: Regulatory models and proposal for reform. Vanderbilt Journal of Transnational Law, 53(3), 787-827. Research Collection School of Law. Available at: https://ink.library.smu.edu.sg/sol_research/3253
Gillan, S. L. (2006). Recent Developments in Corporate Governance: An Overview. Journal of Corporate Finance, 12(3), 381-402. https://doi.org/10.1016/j.jcorpfin.2005.11.002
Hatherly, D. J. (1995). The case for the shareholder panel in the UK. European Accounting Review, 4(3), 535-554. https://doi.org/10.1080/09638189500000031
Healy, P. M., & Palepu, K. G. (1993). The effect of firms' financial disclosure strategies on stock prices. Accounting Horizons, 7(1), 1-11.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Keyser, J. D. (2020). A Historical Assessment of a Key Auditor Independence Policy: Auditing Your Own Work. Accounting Historians Journal, 47(2), 11-20. https://doi.org/10.2308/AAHJ-19-011
Knechel, W. R., Thomas, E., & Driskill, M. (2020). Understanding financial auditing from a service perspective. Accounting, Organizations and Society, 81, 101080. https://doi.org/10.1016/j.aos.2019.101080
Lin, C., Hsu, S., Chou, P. L., Chao, Y. Y., & Li, C. W. (2019). The Effects of Directors’ and Officers’ Liability Insurance on Key Auditing Matters. Emerging Markets Finance and Trade, 56(5), 977-1002. https://doi.org/10.1080/1540496X.2019.1705782
Mala, R., & Chand, P. (2015). Judgment and decision‐making research in auditing and accounting: Future research implications of person, task, and environment perspective. Accounting Perspectives, 14(1), 1-50. https://doi.org/10.1111/1911-3838.12040
Meuwissen, R., & Quick, R. (2019). The effects of non-audit services on auditor independence: An experimental investigation of supervisory board members’ perceptions. Journal of International Accounting, Auditing and Taxation, 36, 100264. https://doi.org/10.1016/j.intaccaudtax.2019.05.004
Moore, D. A., Loewenstein, G., Tanlu, L., & Bazerman, M. H. (2003). Auditor independence, conflict of interest, and the unconscious intrusion of bias. Division of Research, Harvard Business School.
Moore, D. A., Tetlock, P. E., Tanlu, L., & Bazerman, M. H. (2006). Conflicts of interest and the case of auditor independence: Moral seduction and strategic issue cycling. Academy of Management Review, 31(1), 10-29. https://doi.org/10.5465/amr.2006.19379621
Murray, A. (1998). Minority report, report on the company law review bill, 1997, Parliamentary Joint Committee on Corporations and Securities, The Parliament of the Commonwealth of Australia. Available at: http://www.aph.gov.au/senate/committee/corporations_ctteompleted_ inquiries/1996-99/company law/report/d01.htm
Palepu, K. G., Healy, P. M., Wright, S., Bradbury, M., & Coulton, J. (2020). Business analysis and valuation: Using financial statements. Cengage AU.
Palmon, D., & Sudit, E. F. (2009). Commercial insurance of financial disclosure: Auditors’ independence, and investors’ protection. Group Decision and Negotiation, 18(1), 27-40. https://doi.org/10.1007/s10726-008-9120-3
Peng, J., Shan, X. G., Gao, Y., Kesete, Y., Davidson, R. A., Nozick, L. K., & Kruse, J. (2014). Modeling the integrated roles of insurance and retrofit in managing natural disaster risk: A multi-stakeholder perspective. Natural Hazards, 74(2), 1043-1068. https://doi.org/10.1007/s11069-014-1231-3
Prawitt, D. F., Sharp, N. Y., & Wood, D. A. (2012). Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes‐Oxley Get It Wrong? Contemporary Accounting Research, 29(4), 1109-1136. https://doi.org/10.1111/j.1911-3846.2012.01141.x
Ramsarghey, K., & Hardman, S. G. (2020). The auditing profession's role in terms of accountability: a South African perspective. Southern African Journal of Accountability and Auditing Research, 22(1), 39-49.
Rezaee, Z. (2004). Corporate Governance Role in Financial Reporting. Research in Accounting Regulation, 17, 107-149. http://doi.org/10.1016/s1052-0457(04)17006-9
Ronen, J. (2002, March 8). A market solution to the accounting crisis. New York Times, available at https://www.nytimes.com/2002/03/08/opinion/a-market-solution-to-the-accounting-crisis.html
Ronen, J. (2014). Post-enron reform: financial statement insurance, and GAAP re-visited. In Accounting and Regulation (pp. 31-58). Springer, New York, NY.
Ronen, J., & Cherny, J. (2002). Can insurance solve the auditing dilemma. National Underwriter, 106(29), 12-14.
Ronen J. (2003). Financial Statement Insurance. Journal of Forensic Accounting, 4(1), 1-9.
Roszkowska, P. (2020). Fintech in financial reporting and audit for fraud prevention and safeguarding equity investments. Journal of Accounting & Organizational Change. https://doi.org/10.1108/JAOC-09-2019-0098
Salehi, M., Bayaz, M. L. D., Mohammadi, S., Adibian, M. S., & Fahimifard, S. H. (2020). Auditors’ response to readability of financial statement notes. Asian Review of Accounting. https://doi.org/10.1108/ARA-03-2019-0066
Shapiro, A. (2004). Who pays the auditor calls the tune?; Auditing regulation and clients’ incentives. Cornell Law School Legal Studies Research Paper Series, Paper No. 04-014, Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=587972
Sharma, D. S., & Sidhu, J. (2001). Professionalism vs commercialism: The association between non‐audit services (NAS) and audit independence. Journal of Business Finance & Accounting, 28(5‐6), 563-594. https://doi.org/10.1111/1468-5957.00386
Skipper, H. D., & Klein, R. W. (2000). Insurance regulation in the public interest: The path towards solvent, competitive markets. The Geneva Papers on Risk and Insurance-Issues and Practice, 25(4), 482-504. https://doi.org/10.1111/1468-0440.00078
Tarus, E. K. (2014). The relationship between executive compensation and financial performance of insurance companies in Kenya [Doctoral dissertation]. Egerton University.
Tepalagul, N., & Lin, L. (2015). Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), 101-121. https://doi.org/10.1177/0148558X14544505
Turnbull, S. (2002). Corporate Watchdogs: Past, present and future? Present and Future. http://dx.doi.org/10.2139/ssrn.608244
Ugwu, J. I., & Okoli R.C. (2018). Accountability in governance and challenges of peace building in Nigeria. International Journal in Management and Social Science, 6(1), 1-13.
Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory (1st ed.). Prentice-Hall Inc.
Yates, J. (2005). Structuring the information age: Life insurance and technology in the twentieth century. JHU Press.
Yukcu, S., Ozkaya, H. (2008). Can Financial Statements Insurance Be the Future Auditing System? https://www.academia.edu/858143/Can_Insurance_of_Financial_Statements_Be_the_Future_Auditing_System