These findings suggest that auditors with lower moral reasoning scores (i.e., who tend to cooperate with close allies, but tend to be less cooperative with other parties) might in some cases better adhere to the profession’s duties. Auditors with higher moral reasoning scores (i.e., who tend to view norms and rules as flexible and interpret them depending on a situation) are more likely to depart from auditing conventions and cooperate with others to their mutual benefit. There have been similar findings, i.e. contrary to what we might expect in relation to moral reasoning, in other research settings.
Schatzberg, J. W., G. R. Sevcik, B. P. Shapiro, L. Thorne, and R. S. O. Wallace. 2005. A reexamination of behavior in experimental audit markets: The effects of moral reasoning and economic incentives on auditor reporting and fees. Contemporary Accounting Research 22 (1): 229-264.
The results suggest that fees paid to auditors, even for non-audit services, can potentially threaten auditor independence, particularly among banks that are not subject to the same level of regulatory scrutiny as large banks.
Kanagaretnam, K., G. V. Krishnan, and G. J. Lobo. 2010. An Empirical Analysis of Auditor Independence in the Banking Industry. The Accounting Review 85 (6): 2011-2046.
These findings add to the understanding of how accountants respond to ethical tones at all levels within their organization and provide important evidence that the tone at the bottom is a key determinant, more so than tone at the top, of the ethical decision making of staff auditors. This study provides important insights into how ethical tone at multiple levels of an organization impacts entry-level employees’ ethical decision making. By recognizing the important role that immediate supervisors play in influencing their subordinates, organizations can more effectively promote an ethical culture at all levels of the organization and not simply at the top.
Pickerd, J. S., Summers, S. L., & Wood, D. A. 2015. An Examination of How Entry-Level Staff Auditors Respond to Tone at the Top vis-a`-vis Tone at the Bottom. Behavioral Research in Accounting 27 (1): 79-98.
Lowballing has been cited as a threat to auditor independence and manager performance in regulatory reports and academic research. This study suggests that auditors may face independence issues at the beginning of a client relationship under the lowballing fee structure because of the uncertainty of retaining a client. The study also suggests, however, that these independence issues seem to dissipate over time. Therefore, auditors should be aware of these potential opportunities to lose objectivity when they acquire new audit clients and continue to rely on professional skepticism to evaluate management assertions.
For more information on this study, please contact Darius J. Fatemi.
Fatemi, D. J. 2012. An Experimental Investigation of the Influence of Audit Fee Structure and Auditor Selection Rights on Auditor Independence and Client Investment Decisions. Auditing: A Journal of Practice and Theory 31(3): 75-94.
This study provides policy-makers and practitioners with critical insight into differences in auditor selection criteria between family and non-family firms and differences in the severity of their agency conflicts between shareholders and managers and also between family owners and minority shareholders.
Our empirical evidence also sheds light on how family firms view and value the external audit and whether they are selecting auditors on price or quality, or some combination of these factors. In addition, given the current downward trend in audit revenues as a percentage of total revenues, our findings could lead accounting firms to re-examine how they market audit services to family firms.
Ho, J.L., and F.Kang. 2013.Auditor Choice and Audit Fees in Family Firms: Evidence from the S&P 1500.Auditing: A Journal of Practice and Theory32(4): 71-93
http://commons.aaahq.org/groups/e5075f0eec/summary
The finding of this study suggest that concerns over the relation between auditor fees and the possible impairment of auditor independence, as reflected in going concern modification decisions, are supported in the more recent years for highly distressed clients. The relationship between auditor fees and impairment of auditor independence with respect to auditor decision-making has long been a concern of many regulators in the accounting industry. This research may inform both audit firms and standard setters with respect to specific types of engagements and the judgments or behaviors most likely to be affected.
For more information on this study, please contact Allen D. Blay.
Blay, A. D., and M. A. Geiger. 2013. Auditor Fees and Auditor Independence: Evidence from Going Concern Reporting Decisions. Contemporary Accounting Research 30 (2).
The results of this study have implications to both New Zealand and the United States. Regulators in New Zealand should assess these results as possible indications that the profession’s self-regulated status may need to be revised in light of the existence of lower financial reporting quality for clients that have weak audit committee oversight and are economically important clients to the auditor. Additionally, these results provide evidence to contribute to the ongoing debate in the United States regarding the merits and the intended and unintended consequences of independent auditor oversight through regulatory bodies such as the PCAOB.
For more information on this study, please contact Vineeta D. Sharma.
Sharma, V., D.S. Divesh, and U. Ananthanarayanan. 2011. Client importance and earnings management: the moderating role of audit committees. Auditing: A Journal of Practice and Theory 30 (1): 125-156.
This study uses engagement-level audit partner data, to analyze whether audit quality is driven by client importance at the office- or partner-level. Overall, the results contribute to evidence showing that investor protection rules and laws at the country-level are associated with engagement-level audit quality. This indicates the importance of strong investor protection regulations. These results may be of interest to shareholders and securities market regulators, especially in developing economies, transitional economies, or economies where such regulations are weak. Additionally, these results may be of interests to auditors in countries with such economies. Finally, to the extent that audit firms serve clients with investors that receive varying levels of protection (i.e. public vs. private or a “well-known seasoned issuer”), these results may indicate opportunities for such firms to enhance audit requirements for certain non-public engagements.
The results of this study also suggest that audit accountability at the individual level makes auditors more sensitive to the costs of audit failure. This result may have implications for auditor accountability from a regulatory standpoint, as well as an audit firm policy standpoint.
Chen, S., S. Y. J. Sun, and D. Wu. 2010. Client Importance, Institutional Improvements, and Audit Quality in China: An Office and Individual Auditor Level Analysis. The Accounting Review 85 (1): 127-158.
The results of this study are useful for regulators to consider the motives for auditor changes and to understand audit client portfolio management. The findings underscore the importance of engagement pricing as a determinant of audit firm’s client retention decisions. Specifically, the evidence suggests that engagement pricing pressure occurs on more than an isolated basis and the audit firm’s inability to recover unexpectedly high labor usage is associated with the severing of the auditor-client relationship.
Hackenbrack, K. E. and C. E. Hogan. 2005. Client Retention and Engagement-Level Pricing. Auditing: A Journal of Practice and Theory 24 (1): 7-20.
This research note presents evidence that the question of whether new standards or regulations have achieved the objective of altering the behavior of their intended target cannot be adequately assessed shortly after they have come into effect, as the implementation often requires a steep learning curve and is frequently accompanied by intense public debates and media scrutiny. From the policy standpoint, it suggests that the concern expressed by the U.S, Treasury Department officials about auditors’ applying an overly strict approach in their audits to counter elevated liability after SOX may not be warranted.
For more information on this study, please contact Wenjun Zhang.
Kao, J. L., Y. Li., and W. Zhang. 2014. Did SOX influence the association between fee dependence and auditors’ propensity to issue going-concern opinions? Auditing: A Journal of Practice and Theory 33 (2): 165-185