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  • Jennifer M Mueller-Phillips
    Antecedents to Unethical Corporate Conduct: Characteristics...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions, 04.06 Reporting Ethics Breaches – Self & Others 
    Title:
    Antecedents to Unethical Corporate Conduct: Characteristics of the Complicit Follower
    Practical Implications:

    The findings from these two studies illustrate that the susceptible follower problem associated with these characteristics is pervasive, influencing two steps within the ethical decision-making process. Furthermore, the results suggest that more than one in ten individuals are vulnerable in ethical dilemmas.  

    Citation:

    Mowchan, M., D. J. Lowe and P. M. J. Reckers. 2015. Antecedents to Unethical Corporate Conduct: Characteristics of the Complicit Follower. Behavioral Research in Accounting 27 (2): 95-126. 

    Keywords:
    ethics, toxic triangle, impulsivity and proactivity.
    Purpose of the Study:

    Despite the importance of ethical conduct in the accounting profession, many scandals in recent years have worked to shake public confidence in the ethics of the profession. Although the companies themselves, as well as members of the executive team, are often blamed for fraud, complicit fraudulent conduct by lower ranking accounting employees was also found in wrongdoing companies. Some court cases claim that if lower level staff accountants had refused to do as their supervisors asked and blown the whistle on the request, fraud could have been stopped entirely. Because of this, examining the characteristics of individuals at all levels of an organization to determine their impact on ethical conduct is important. The bulk of existing research has examined destructive leaders; very little research has centered on complicit followers. As such, the focus of this research is on complicit followers and, specifically, on three individual follower characteristics: impulsivity, authoritarianism/conventionalism, and proactivity. 

    Design/Method/ Approach:

    Two quasi-experiments were conducted among two separate groups of graduate accountancy students. 

    Findings:
    • The data show significant variations in the levels of these characteristics among master’s student participants.
    • The authors find that two of the characteristics individually, as well as two of the three interactions, have significant associations with intention for unethical complicity among subordinates and the ability to correctly identify ethical dilemmas in various accounting accruals earnings management and real earnings management contexts.
    • The authors find that low authoritarianism and high impulsivity, individually, lead to greater intention for unethical complicity among followers and reduced ability to identify ethical dilemmas.
    • The results reveal that individuals who are both low in authoritarianism and high in impulsivity are most willing to comply with supervisors’ requests for compliant misconduct and least able to identify ethical dilemmas.
    • The results reveal that willingness to resist requests for complicity in unethical conduct is strongest among individuals who are high in authoritarianism and high in proactivity.
    • The results reveal that the ability to identify ethical dilemmas is strongest among individuals who exhibit high authoritarianism and low proactivity.
    Category:
    Independence & Ethics
    Sub-category:
    Moral Development and Individual Ethics Decisions, Reporting Ethics Breaches - Self & Others
  • Jennifer M Mueller-Phillips
    Did the PCAOB’s Restrictions on Auditors’ Tax Services Imp...
    research summary posted September 13, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 04.0 Independence and Ethics, 04.03 Non-Audit Services 
    Title:
    Did the PCAOB’s Restrictions on Auditors’ Tax Services Improve Audit Quality?
    Practical Implications:

     This study serves the purpose of examining the PCAOB’s role as overseer of public company auditing, while separating from previous studies by targeting the PCAOB’s restrictions on auditors’ tax services, which have not been examined in the past. This study also examines whether APTS pose a threat to audit quality but again differentiates itself from previous literature by focusing on only the tax services that the PCAOB chose to ban and by utilizing the difference-in-differences design to address the limitation of the cross-sectional approach utilized by other studies in the past. After reviewing these findings, it is possible that the PCAOB restrictions did not fully accomplish their objective.

    Citation:

     Lennox, C. S. 2016. Did the PCAOB’s Restrictions on Auditors’ Tax Services Improve Audit Quality? The Accounting Review 91 (5): 1493-1512.

    Keywords:
    PCAOB, audit quality, and auditors’ tax services.
    Purpose of the Study:

    In 2005, the Permanent Subcommittee on Investigations of the U.S. Senate reported that audit firms were selling potentially abusive or illegal tax-planning strategies to audit clients and their top executives on a contingent fee basis. This concerned regulators for many reasons; consequently, the PCAOB adopted three new rules to address these potential threats to audit quality. First, Rule 3521 reaffirms the ban on contingent fees that existed under Rule 302 of the American Institute of Certified Public Accountants’ Code of Professional Conduct. Second, Rule 3522 bars audit firms from selling aggressive tax services to audit clients. Finally, Rule 3523 forbids audit firms from selling tax services to executives in a financial reporting role. These three rules became effective from October 31, 2006 onward. The PCAOB stated that the rules were intended to improve audit quality, and, by extension, the quality of financial reporting. The purpose of this study is to test whether the restrictions met this objective.

    Design/Method/ Approach:

    Because audit quality is not directly observable the author focuses on accounting misstatements, both misstatements that are tax-related and other types, and the issuance of going-concern opinions. The author separates companies into groups based upon the reduction of APTS purchases between July 26, 2005 and October 31, 2006. He then compares the differences in misstatements and going-concern opinions between the treatment and control groups and tests whether these differences change after the PCAOB imposed the restrictions on auditors’ tax services. 

    Findings:
    • The author finds that in the period before the restrictions, there is no difference in the incidence of going-concern opinions between the treatment and control companies; however, the treatment companies are more likely than the control companies to have accounting misstatements and tax-related misstatements. This supports the premise of regulators that the treatment companies had lower-quality auditing before the restrictions were introduced. 
    • The author finds no significant changes in misstatements, tax-related misstatements, or going-concern opinions subsequent to the APTS restrictions after using a difference-in-differences research design. In fact, the treatment companies continue to have significantly more accounting misstatements and more tax-related misstatements in the period subsequent to the APTS restrictions.
    • The author finds large and highly significant reductions in APTS fees when the restrictions were introduced. 
    Category:
    Independence & Ethics, Standard Setting
    Sub-category:
    Impact of PCAOB, Non-audit Services
  • Jennifer M Mueller-Phillips
    The Institutionalization of Commercialism in the Accounting...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.02 Impact of Fees on Decisions by Auditors & Management 
    Title:
    The Institutionalization of Commercialism in the Accounting Profession: An Identity-Experimentation Perspective
    Practical Implications:

    This paper synthesizes many theories of institutional experimentation and identifies work for advancing the understanding of commercialism in the accounting profession. It also contributes through the explication of identity experimentation as a key mechanism used by the accounting profession to institutionalize commercialism. The paper works to demarcate boundary work and practice work as two different types of identity experimentation. Finally, the paper delineates the difference between deriving an auditor identity from audit practice and deriving expert work from a versatile expert identity.

    Citation:

    Guo, K. 2016. The Institutionalization of Commercialism in the Accounting Profession: An Identity-Experimentation Perspective. Auditing: A Journal of Practice and Theory 35 (3): 99-118.

    Keywords:
    professionalism, commercialism, institutional work, institutional experimentation, identity experimentation, institutional logic
    Purpose of the Study:

    As the system of accounting stands today, auditors are hired by clients for a fee to examine and opine on their financial reports while maintaining independence from the client; however, it follows that the independence of the auditor could be questioned due to the financial dependence of the auditor on the client. In fact, many are beginning to believe that auditors have become more commercialistic (serving economic self-interest) than professional (serving the public interest) as a result of deregulation in the professional services area. The author chooses to investigate how the accounting profession, collectively, has become more committed to commercialism in the recent decades. The author separates his work from the work of previous researchers by truly focusing on the collective identity of the profession by developing an identity-experimentation framework. 

    Design/Method/ Approach:

    To develop the identity-experimentation framework, the author reviewed and synthesized many relevant studies in the accounting and management literature. Furthermore, he utilizes recent cases as examples to highlight the accounting profession’s efforts to institutionalize commercialism. 

    Findings:
    • The framework highlights two key identity-experimentation strategies: boundary work and practice work.
    • Boundary work has two different forms.
      • The first involves making identity claims about auditor expertise and traits and largely focuses on how auditor expertise and traits can claim to help achieve pragmatic ends.
      • The second involves the redefinition of the auditor boundary.
    • Practice work involves the creation of an expert-work identity; by reinventing the audit and tailor-making expert work for versatile experts, the accounting profession aims to achieve the taken-for-grantedness of “versatile experts doing expert work.”
    • The author finds that identity experimentation in the accounting profession can be viewed as an ongoing and trial-and-error process that involves what is termed as “constant jockeying” and aims to “fashion shared meanings and identities.”
    Category:
    Independence & Ethics
    Sub-category:
    Impact of Fees on Decisions by Auditors & Management
  • Jennifer M Mueller-Phillips
    The Influence of Mood on Subordinates’ Ability to Resist C...
    research summary posted August 30, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions, 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
    Title:
    The Influence of Mood on Subordinates’ Ability to Resist Coercive Pressure in Public Accounting
    Practical Implications:

     This study should give pause to investors, auditors and regulators about the potential willingness of subordinate auditors to acquiesce to a superior’s unethical request. As such, the accounting profession should make sure to have a better understanding of the nature of and solutions to the problem such as changes in firm/team culture, personnel placement, etc. Additionally, audit firms can better use this information to understand which employees may be most susceptible to such negative influence and preempt such events.

    Citation:

     Johnson, E. N., D. J. Lowe, and P. M. Reckers. 2016. The Influence of Mood on Subordinates’ Ability to Resist Coercive Pressure in Public Accounting. Contemporary Accounting Review 33 (1): 261-287.

    Keywords:
    Affect, Mood States, Unethical Acts, Obedience Pressure, Superior-Subordinate Relationships
    Purpose of the Study:

    This study examines the relationship between subordinate auditors’ various affective states (i.e. mood/emotion) and their effect on auditors’ willingness to comply with a superiors’ unethical directive in six common auditing scenarios.  The authors also employ more real-world event triggers and scenarios compared with previous research.  This study seeks to better refine and test the broad constructs of mood used in previous research.

    Design/Method/ Approach:

    Sample: 118 audit seniors from two large international public accounting firms

    Experiment: Create a broad distribution of arousal, fear and insignificance among participants by manipulating two aspects of the audit client CEO (high/low dominance and high/low prestige) and one aspect of the auditor (above/below average work-life history).

    Analyses: 2x2x2 between subjects ANOVA using median splits on each measured variable: fear, insignificance and arousal

    Findings:

    Regardless of affective state manipulations, the audit seniors express a high level of willingness to comply with a superiors’ unethical direction.  However, this willingness to comply is increased when auditors are made to feel more insignificant (i.e. weak/low power position relative to others) and fearful (i.e. elevated uncertainty and lower perceptions of control regarding future events and circumstances) but decreased when auditors are in an active, positive mood state (i.e. arousal).  Interestingly, these results obtain despite significant doubt by the firms’ senior management who reviewed the task that any of their subordinates would express willingness to engage in such behavior.  As such, auditors may be more willing to engage in or overlook unethical behavior than previously thought.  

    Category:
    Audit Quality & Quality Control, Audit Team Composition, Independence & Ethics
    Sub-category:
    Management/Staff Interaction, Moral Development and Individual Ethics Decisions, Staff Hiring - Turnover & Morale
  • Jennifer M Mueller-Phillips
    The Effect of Lame Duck Auditors on Management Discretion:...
    research summary posted August 30, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.07 Audit Firm Rotation, 14.0 Corporate Matters, 14.01 Earnings Management 
    Title:
    The Effect of Lame Duck Auditors on Management Discretion: An Empirical Analysis
    Practical Implications:

    These results should be of specific interest to regulators who have proposed rules to increase the accountability of auditors by more clearly aligning their reputations with assurance quality, as well as to regulators who have expressed concerns that pressures associated with future audit fee dependence could influence the extent to which auditors behave independently. This study is not meant to be used to influence discussion surrounding mandatory audit firm rotation, as the study focused on voluntary, not mandatory, terminations of the audit-client relationship.

    Citation:

    Cassell, C., L. Myers, T. Seidel, and J. Zhou. 2016. The Effect of Lame Duck Auditors on Management Discretion: An Empirical Analysis. Auditing: A Journal of Practice and Theory 35 (3): 51-73.

    Keywords:
    auditor independence, earnings management, discretionary accruals, management discretion, and mandatory audit rotation
    Purpose of the Study:

    This study focuses on the unique situation in which the auditor-client bond is severed for future reporting periods but continues for the current reporting period. The authors label the auditors in this situation “lame duck auditors,” borrowing the expression from the political realm. In the context of politics, lame duck politicians frequently act with greater freedom because they are not concerned about how their actions will affect their chances of re-election. This could mean a politician would vote for measures that are better for his constituents no matter the consequences, or he could more easily succumb to pressures from outside influences like lobbyists. Just like in the political setting, the term “lame duck”” should not necessarily convey a negative connotation; the term simply refers to a situation that could alter an auditor’s responsibilities and incentive structures, which could lead to a change in behavior. The authors believe that financial reporting quality is higher in lame duck situations and completed this study to test that hypothesis. 

    Design/Method/ Approach:

    The authors use data from 2000-2010 and focus their investigation on the effect of lame duck auditors on the quality of the quarterly financial statements. Interim quarterly reporting is the primary focus because it allows the authors to focus on the effect of reputation concerns rather than litigation risk.

    Findings:
    • The authors find that auditor independence and/or reputation concerns are strengthened in lame duck situations because financial reporting quality is higher when a lame duck auditor performs the quality review.
    • The authors find that lame duck auditors are more likely among older companies, accelerated filers, companies with a material weakness in internal control, and companies announcing a restatement during the current or prior year.
    • The authors find that lame duck auditors are less likely among larger companies, companies audited by a Big N auditor, and companies with higher leverage and higher revenue volatility.
    • The authors’ findings verify that the main results of the study are not attributable to systematic differences between lame duck and non-lame duck auditor observations. 
    • The authors’ findings suggest that creating more uncertainty regarding the present value of expected future cash flows or increasing potential reputational concerns has the potential to improve assurance quality.
    Category:
    Corporate Matters, Independence & Ethics
    Sub-category:
    Audit Firm Rotation, Earnings Management
  • Jennifer M Mueller-Phillips
    Evidence of Organizational Learning and Organizational...
    research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.07 Audit Firm Rotation, 11.0 Audit Quality and Quality Control 
    Title:
    Evidence of Organizational Learning and Organizational Forgetting from Financial Statement Audits
    Practical Implications:

     Organizational learning and knowledge depreciation play a significant role in a firm’s audit strategy, pricing strategy, budgeting and forecasting. Failing to account for knowledge dissipation and differences in learning across personnel may lead to costly errors in the budgeting process. Furthermore, finding that there is little or no learning among lower-level staff provides empirical support for the concern of the effects of high turnover rates among lower-level staff in public accounting. This suggests that targeting retention at this level might reduce costs, including the costs of continuously having to train new personnel.

    Citation:

     Causholli, M. 2016. Evidence of Organizational Learning and Organizational Forgetting from Financial Statement Audits. Auditing: A Journal of Practice and Theory 35 (2): 53-72.

    Keywords:
    audit efficiency, organizational learning, and audit production
    Purpose of the Study:

    Organizational learning occurs when an organization gains knowledge from the repetition of producing a product or providing a service and uses this knowledge to operate more efficiently and at a lower cost. Organizational forgetting is when this knowledge is lost over time and results in losses in productivity and increases in the cost of production. A good amount of research exists on these topics as they relate to production, but the research on the correlation between these topics and professional services is underserved. Causholli investigates the nature of learning in the production of financial statement audits in this paper. This investigation comes at a good time due to the increasing debate surrounding whether mandatory audit firm rotation should be enforced. In 2013, the U.S. House of Representatives prohibited the PCAOB from mandating audit firm rotation, but in 2014 the European Parliament passed new regulation that requires audit firm rotation after a maximum of ten years. Because of these differing viewpoints, Causholli hopes to shed light on the discussion by showing how audit production costs vary with audit firm tenure.

    Design/Method/ Approach:

    Two equations were used to provide empirical specifications and test the hypotheses. Engagements were divided into three groups based on the number of years with a client, the short-tenure group, the medium-tenure group, and the long-tenure group. The audit production data are provided by a large international accounting firm and were collected as part of the annual internal quality reviews performed in late spring through early fall 2003.

    Findings:
    • The author’s findings show that an increase in audit experience leads to an initial reduction in total labor hours.
    • The author finds that when labor hours are disaggregated, learning effects are not homogenous across different ranks of labor; specifically, learning is significant among higher labor ranks (partners, managers, and in-charge) and is not significant for the lower ranks (staff).
    • The author finds some evidence of knowledge depreciation; specifically, an increase in experience beyond the learning period negatively affects productivity. This leads to an increase in production costs for partners and in-charge, but not for managers.
    • Overall, the author’s findings suggest that learning by doing as well as knowledge depreciation occur in a professional service industry.
    Category:
    Audit Quality & Quality Control, Independence & Ethics
    Sub-category:
    Audit Firm Rotation
  • Jennifer M Mueller-Phillips
    Benefits and Costs of Appointing Joint Audit Engagement...
    research summary posted May 31, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.07 Audit Firm Rotation, 05.0 Audit Team Composition, 05.03 Partner Rotation, 15.0 International Matters, 15.03 Audit Partner Rotation 
    Title:
    Benefits and Costs of Appointing Joint Audit Engagement Partners
    Practical Implications:

     The results of this study are important to understanding the potential benefits of joint engagement partner audits compared to single-partner audits. The results of this study identify an association between the type of partner audit (joint vs. single) and audit quality and audit fees. As regulators consider the association between joint audits and audit quality, the results of this study suggest there are benefits to joint-partner audits, particularly when the partners are located in the same office. Compared to single-partner audits, joint-partner audits are associated with higher audit quality. Compared to joint audit firms, joint-partner audits appear to provide the same benefits without the increased cost.

    Citation:

    Ittonen, K., and P. C. Trønnes. 2015. Benefits and costs of appointing joint audit engagement partners. Auditing: A Journal of Practice & Theory 34 (3): 23-46.

    Keywords:
    Joint auditing; engagement partners; audit quality; audit fees
    Purpose of the Study:

    Audits using joint engagement partners versus audits using a single engagement partner may produce significant benefits. The purpose of this study is to examine the relationship between joint engagement partners and audit quality and audit fees. The authors of the study predict that joint audit partners improves audit quality via benefits in knowledge and experience, consultation availability with a joint partner, and reducing client-specific knowledge lost due to partner rotation.

    Design/Method/ Approach:

    The authors use 1,345 firm-year observations from the NASDAQ OMX Exchanges in Finland and Sweden for the period 2005 to 2009.

    Findings:
    • The authors find a stronger association between joint engagement partners and higher audit quality when the partners are from the same, rather than a different, office.
    • The authors find that joint engagement partners, compared to single partners, are associated with less accruals (two proxies for audit quality).
    • The authors find a small decrease in audit fees for joint engagement partners from different offices compared to single-partner audits. The authors find no difference in audit quality. 
    Category:
    Audit Team Composition, Independence & Ethics, International Matters
    Sub-category:
    Audit Firm Rotation, Audit Partner Rotation, Partner Rotation
  • Jennifer M Mueller-Phillips
    The Role of Auditors, Non-Auditors, and Internal Tax...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.03 Non-Audit Services 
    Title:
    The Role of Auditors, Non-Auditors, and Internal Tax Departments in Corporate Tax Aggressiveness.
    Practical Implications:

    The results of this study are important to policymakers as the PCAOB considers whether tax and audit services should be provided by different firms. The results of this study indicate that auditor-provided tax services may actually decrease the tax aggressiveness of companies, especially those serviced by the Big 4. Based on the representative who signs the tax return, tax aggressiveness is higher for internally prepared and non-auditor externally prepared tax returns than auditor-prepared tax returns. Additionally, accounting professionals may be interested in the findings of this study as it provides insights into how tax compliance changes in the presence of an audit. The authors suggest that signing a tax return with aggressive positions is costly to auditors because of reputation risk and financial reporting restatement risk in the tax accounts. As accounting professionals seek to perform effective audits and accurate tax returns, it may be beneficial to consider how tax compliance decisions could be impacted by the same firm providing both services.

    Citation:

    Klassen K. J., P. Lisowsky, and D. Mescall. 2016. The role of auditors, non-auditors, and internal tax departments in corporate tax aggressiveness. The Accounting Review. 91(1): 179-205.

    Keywords:
    tax preparer, auditor, tax fee, FIN 48, tax aggressiveness
    Purpose of the Study:

    Corporate tax returns may be prepared by management, an external party who does not perform the audit, or the company’s auditor. There is little evidence to suggest how the type of tax preparer impacts corporate tax decisions. In particular, it is unclear how the dual role of auditor-tax preparer may impact tax compliance outcomes. This study seeks to provide insight into how tax preparer type influences corporate tax aggressiveness. Specifically, the authors:

    • Examine the relationship between the tax return preparer type and corporation tax aggressiveness. 
    • Examine whether tax fees as a representation of tax planning supports the findings of prior academic research.
    • Examine the link between tax aggressiveness and tax preparer type for Big 4 firms.
    Design/Method/ Approach:

    The authors were able to obtain confidential data from the Internal Revenue Service (IRS) for 2008 and 2009. The data provided by the IRS Large Business & International Division included tax return preparer identities and FIN 48 disclosures. Financial statement data were obtained from Compustat, and auditor identity, tax fees, and audit fees were obtained from the Audit Analytics database. The authors proxy for tax aggressiveness using the current-year increase in the tax reserve from FIN 48 disclosures on each company’s tax return. They use the tax return preparer identities in combination with the auditor identities to identify the tax return preparer type for their analysis. Based on the availability of the data, the final sample consisted of 1,533 firm-years (804 firms in 2008 and 729 in 2009).

    Findings:
    • The authors find that tax returns that are internally prepared by management claim more aggressive tax positions than auditor-prepared returns. Tax returns that are prepared by a non-auditor external party also claim more aggressive tax positions than auditor-prepared returns.
    • The authors find that less tax aggressiveness occurs for clients when the tax preparer is also the auditor and a Big 4 firm than when the tax preparer and auditor are different Big 4 firms.
    • The authors corroborate prior academic research that suggests tax fees represent the level of tax planning by the audit firm. The authors find that even after considering the tax return preparer type which accounts for tax compliance costs, higher tax fees paid to the auditor are indicative of more tax aggressive behavior.
    Category:
    Independence & Ethics
    Sub-category:
    Non-audit Services
  • Jennifer M Mueller-Phillips
    Client Identification and Client Commitment in a Privately...
    research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure 
    Title:
    Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity.
    Practical Implications:

    The results of this study suggest a course of action for enhancing professional skepticism, so they are important for audit firms specializing in privately held clients, which is an institutional setting where auditors may find it more difficult to maintain their objectivity. The authors suggest that audit firms can use their internal messaging to help individual auditors decrease the harmful effects of client identification. Specifically, audit firms can encourage auditors to (1) take the perspective of financial statement users (e.g., shareholders), (2) view themselves and clients as members of a group assigned the goal of providing accurate financial statements to shareholders, and/or (3) identify more strongly with the audit firm or the audit profession. Furthermore, the authors suggest that audit firms increase client commitment by encouraging auditors to be more attentive and available to clients (e.g., catching up with clients periodically and spending more time at the client site) and encouraging clients to feel free to reach out to auditors.

    Citation:

    Herda, D. N. and J. J. Lavelle. 2015. Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity. Accounting Horizons 29 (3): 577-601.

    Keywords:
    organizational identification, organizational commitment, social identity theory, social exchange theory, auditor objectivity
    Purpose of the Study:

    Prior accounting scandals raised concerns that auditors’ relationships with their clients lower auditor independence, which in turn lowers professional skepticism, and ultimately decreases audit quality. Accounting research attempting to shed light on the social processes related to such concerns suggest that client identification can decrease auditor. However, the authors argue that client identification (i.e., “the extent to which an auditor’s self-concept and self-definition are derived from perceived oneness with the client”) differs from client commitment (i.e., “a responsibility for and a dedication to the client, but the auditor and client remain separate psychological entities”). The purpose of this study is to discover if (1) client identification and client commitment are two different ideas, (2) client identification detracts from auditor objectivity, and (3) client commitment enhances auditor objectivity.

    Design/Method/ Approach:

    The authors collected their evidence via research questionnaires emailed to auditors, ranging from staff auditors to partners, at a large regional public accounting firm during the summer of 2013. Survey participants were asked questions about client identification and client commitment, and then were asked to perform a case that dealt with auditors’ behavior in an audit conflict situation.

    Findings:
    • The authors find that client identification and client commitment really are two different ideas.
    • The authors find that client identification is associated with lower auditor objectivity.
    • The authors find that client commitment is associated with higher auditor objectivity.
    • The authors find that number of years of audit experience impacts auditor objectivity for auditors at lower levels in the audit firm’s hierarchy (i.e., staff auditors and seniors), but not those at higher levels in the hierarchy (i.e., manager and above). In other words, more junior staff exhibit greater audit objectivity if they have more years of audit experience.

    These results suggest that audit firms specializing in privately held clients may enhance audit quality by decreasing auditors’ client identification and increasing auditors’ client commitment.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Independence & Ethics
    Sub-category:
    Adequacy of Disclosure, Auditors’ Professional Skepticism, Individual & team conduct (e.g. premature signoff - underreporting hours)
  • Jennifer M Mueller-Phillips
    Do Abnormally High Audit Fees Impair Audit Quality?
    research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.02 Impact of Fees on Decisions by Auditors & Management, 06.0 Risk and Risk Management, Including Fraud Risk, 06.06 Earnings Management, 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 11.0 Audit Quality and Quality Control 
    Title:
    Do Abnormally High Audit Fees Impair Audit Quality?
    Practical Implications:

    The study provides useful insight into current regulatory debates on the auditor’s economic dependence on the client and increases understanding to the reasons why previous research provides mixed evidence on the association between various fee metrics and the extent of earnings management. If the association between abnormal fees and the magnitude of discretionary accruals is conditioned on the sign of abnormal fees, examining the association without reference to the sign of abnormal fees most likely leads to observations of insignificant associations, as also reported in most previous studies. This study’s findings suggest that future research on similar issues should take into account the asymmetric nonlinearity in the fee-quality relation.

    Citation:

    Choi, J. H., J. B. Kim, and Y. Zang. 2010. Do Abnormally High Audit Fees Impair Audit Quality? Auditing: A Journal of Practice & Theory 29 (2): 115-140.

    Keywords:
    audit quality, abnormal audit fees, earnings management
    Purpose of the Study:

    This study examines whether the association between audit fees and audit quality is asymmetric and thus nonlinear in the sense that the association is conditioned upon the sign of abnormal audit fees. The authors define abnormal audit fees as the difference between actual audit fees (i.e., actual fees paid to auditors for their financial statement audits) and the expected, normal level of audit fees. Actual audit fees consist of two parts: (1) normal fees that reflect auditors’ effort costs, litigation risk, and normal profits, and (2) abnormal fees that are specific to an auditor-client relationship. Normal fees are mainly determined by factors that are common across different clients, such as client size, client complexity, and client-specific risk, while abnormal fees are determined by factors that are idiosyncratic to a specific auditor-client relationship. As noted by Kinney and Libby, abnormal fees “may more accurately be likened to attempted bribes” and can better capture economic rents associated with audit services or an auditor’s economic bond to a client than normal fees or actual fees.

    Design/Method/ Approach:

    The authors obtain audit and nonaudit fee data from the Compustat audit fees file and all other financial data from the Compustat Industrial Annual File. The sample period for this study is restricted to the four-year period from 2000 to 2003. The full sample consists of 9,815 firm-years over the four-year sample period. They also construct a reduced sample of 7,061 observations that meet the data requirements for computing two additional variables. 

    Findings:

    The regression results reveal the following:

    • The proxy for audit quality is insignificantly associated with abnormal audit fees for the total sample of client firms with both positive and negative abnormal audit fees.
    • When the authors split total observations into those with positive abnormal fees and those with negative abnormal fees, the results change dramatically.
    • When the abnormal fees are positive, the magnitude of absolute discretionary accruals (an inverse measure of audit quality) is positively associated with abnormal fees, suggesting a negative relation between audit quality and positive abnormal fees.
    • In contrast, the association is insignificant when the abnormal fees are negative.
    • These findings imply that positive and negative abnormal fees create different incentive effects, for clients with positive abnormal fees, auditors are more likely to acquiesce to client pressure as abnormal audit fees increase, whereas for clients with negative abnormal fees, auditors are unlikely to compromise audit quality.
    • In contrast to the findings on the asymmetric association between abnormal audit fees and audit quality, the authors find no significant, comparable relation when abnormal nonaudit service (NAS) fees or abnormal total fees are used as a measure of auditor-client economic bond in lieu of abnormal audit fees.
    Category:
    Audit Quality & Quality Control, Engagement Management, Independence & Ethics, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Audit Fees & Fee Negotiations, Earnings Management, Earnings Management, Impact of Fees on Decisions by Auditors & Management

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