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  • Jennifer M Mueller-Phillips
    The Influence of Process Accountability and Accounting...1
    research summary posted October 22, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 15.0 International Matters, 15.02 IFRS Changes – Impacts 
    Title:
    The Influence of Process Accountability and Accounting Standard Type on Auditor Usage of a Status Quo Heuristic
    Practical Implications:

    The results of this study are important for both audit firms and regulators to consider as standards change to become more principles-based (or as firms move towards using IFRS). The evidence indicates that auditors will sometimes fixate on the prior year accounting treatment, even if the applicable accounting standard has changed, and/or there are changes in the scenario. However, this bias towards maintaining the status quo can be mitigated by holding auditors accountable for their decision making process, particularly through a partner asking about the auditors’ decision making process.

     

    For more information on this study, please contact Scott Vandervelde.

    Citation:

    Messier, Jr., W. F., L. A. Quick, and S. D. Vandervelde. 2014. The influence of process accountability and accounting standard type on auditor usage of a status quo heuristic. Accounting, Organizations and Society 39 (1): 59-74

    Keywords:
    International Financial Reporting Standards, principles-based standards, status quo bias, accountability, auditor judgment
    Purpose of the Study:

    There has been considerable discussion about the U.S. reporting standards becoming less rules based, similar to International Financial Reporting Standards (IFRS). One proposed advantage of a change to IFRS is increased comparability across multinational and non-U.S. companies. Additionally, some believe that IFRS afford greater flexibility in its principles, thereby enabling firms’ accounting choices to better reflect the true economic nature of any given transaction. With fewer rules, both financial statement preparers and auditors would be expected to adjust to having more options with regards to financial reporting. However, some proposed changes leave the option open to implement IFRS (or other principles-based standards) in ways that still follow rules in U.S. GAAP. This paper investigates whether prior year accounting treatments influence the judgment for current year treatments when one way to implement the standard is to follow the prior year treatment.

    The authors motivate their expectations based on status quo theory and accountability theory. Status quo theory suggests that individuals often choose to maintain a prior decision when faced with a new choice. Accountability theory suggests that when individuals are held accountable for their decision making process, this will reduce the bias towards the status quo. 

    Design/Method/ Approach:

    The research evidence is collected in 2010 through 2013. The authors use an experiment to collect data from auditors, mainly at the senior and manager level, from Big 4 and large national accounting firms in the United States and Norway.

    Findings:
    • The authors find that some auditors fixate on prior year scenarios and judgments, even if the current year scenario and applicable accounting standards are different.
    • The authors find that holding auditors accountable for their decision making process reduces the likelihood of sticking with the prior year treatment, most notably when the prior year standards were U.S. GAAP.
    Category:
    Auditor Judgment, International Matters
    Sub-category:
    IFRS Changes – Impacts
  • The Auditing Section
    The Impact of Auditor Rotation on Auditor-client Negotiation1
    research summary posted May 4, 2012 by The Auditing Section, tagged 04.0 Independence and Ethics, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management, 15.04 Audit Firm Rotation 
    Title:
    The Impact of Auditor Rotation on Auditor-client Negotiation
    Practical Implications:

    The study investigates how mandatory audit firm rotation may affect the process of auditor-client negotiations that produce financial statements observed by the public.  Standard setters should be cognizant of the possible implications of mandating rotation.  Mandatory rotation will likely change the auditors’ and clients’ incentives and auditors and clients will likely change their negotiation strategies.  This may result in less cooperation between auditors and clients and in fewer negotiations that end to the satisfaction of both parties (not only in the final audit year prior to rotation but also in non-final years).

    Citation:

    Wang, K. J. and B. M. Tuttle. 2009. The Impact of Auditor Rotation on Auditor-client Negotiation. Accounting, Organizations, and Society 34 (2): 222-243.

    Keywords:
    Auditor rotation, auditor independence, auditor-client negotiation
    Purpose of the Study:

    This study is motivated by a demand for research on the potential effects of requiring mandatory rotation of audit firms following the Sarbanes-Oxley Act of 2002. While some believe that mandatory audit firm rotation is the only way to ensure auditor independence, most audit firms and their clients do not believe that mandatory audit firm rotation would impact auditor behavior. This study advances this debate by investigating how mandatory rotation may affect the process of auditor-client negotiations that produce financial statements.  Auditor-client negotiation is important to auditing because it is a natural process of reconciling incentive-induced differences in financial reporting.  Below are the objectives that the authors address in their study: 

    • Investigate how mandatory audit firm rotation (hereafter, mandatory rotation) affects auditor-client negotiations.
    • Examine the process differences in auditor-client negotiation with and without mandatory rotation – examine whether these process differences lead to material changes in the financial statements.
    • Examine the negotiation strategies used by both the auditor and the client and relate those strategies to the negotiated outcomes.  
    • Examine the impact on market dynamics as a result of auditor rotation.
    Design/Method/ Approach:

    The authors collected their evidence via a laboratory negotiation experiment using an abstract setting.  The data was collected prior to 2009.  Participants were graduate business students and were randomly assigned the role of manager (i.e., client) or verifier (i.e., auditor).  Participants were paired, one manager and one verifier, and completed a negotiation task.  For half of the negotiation pairs, mandatory rotation was required after three periods and for the other half of the pairs there were no rotation requirements.  Cash incentives were used to model the “real-world” incentives of clients and auditors.  The negotiation process, auditor and verifier strategies, and outcomes were compared between these two groups.

    Findings:
    • Mandatory rotation reduces the auditor’s relative importance of maintaining a relationship with the client. 
    • Auditors are more likely to use an obliging strategy (i.e. cooperating) under no mandatory rotation, as compared to mandatory rotation.
    • Auditors are more likely to use a strategy of inaction (i.e. unwillingness to compromise) under mandatory rotation (7%) compared to no mandatory rotation (1%).
    • Managers are less likely to send contending messages under mandatory rotation (17.6%), compared to no mandatory rotation (22%).
    • Auditors are less cooperative under mandatory rotation than under no mandatory rotation.
    • The agreement rate of negotiations under mandatory rotation is significantly lower than that under no mandatory rotation.
    • When negotiations result in agreement, the asset values under mandatory rotation are significantly lower (consistent with the auditor’s preferences) than those under no mandatory rotation.
    • In summary, under mandatory rotation auditors adopt less cooperative negotiation strategies, produce results that are more in line with the auditor’s preferences than with the client’s preferences, and less negotiations end in agreement.
    Category:
    Independence & Ethics, Auditor Judgment, Engagement Management
    Sub-category:
    Audit Firm Rotation, Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management, Audit Firm Rotation
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  • The Auditing Section
    Judgment and Decision Making Research in Auditing: A Task,...1
    research summary posted April 13, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    Judgment and Decision Making Research in Auditing: A Task, Person, and Interpersonal Interaction Perspective
    Practical Implications:

    The last 25 years has been an exciting and very productive period for judgment and decision making research in auditing.  The author of the discussion believes this review study will help stimulate important audit judgment and decision making research.  This line of
    research is important because it has potential to make important contributis to the audit practice.

    Citation:

    Nelson, M.W. and H. Tan. 2005. Judgment and Decision Making Research in Auditing: A Task, Person, and Interpersonal Perspective. Auditing: A Journal of Practice & Theory 24 (Supplement): 41-71.

    Trotman, K. T. 2005. Discussion of Judgment and Decision Making Research in Auditing: A Task, Person, and Interpersonal Perspective. Auditing: A Journal of Practice & Theory 24 (Supplement): 73-87.

    Keywords:
    Auditing, Judgment and decision making, Literature review
    Purpose of the Study:

    The purpose of the study is to review and discuss research in auditing specifically related to auditor judgment and decision making.  This line of research uses a psychological lens to understand, evaluate, and improve auditors’ judgments and decisions.  The authors
    classify the research into three broad areas: (1) the audit task, (2) the auditor and his/her attributes, and (3) the interaction between auditor and other stakeholders in task performance.  The authors synthesize the prior research and identify gaps and opportunities for future research. 

    The objective of the discussion paper is to build on the study by providing additional insights into areas of productive future research for judgment and decision making in auditing. 

    Design/Method/ Approach:

    The authors review judgment and decision making research in auditing conducted over the past 25 years.  Much of the research uses the laboratory experimental approach, but they also include some survey and field study approaches.  The review primarily considers papers published in major accounting journals such as The Accounting Review; Journal of Accounting Research; Contemporary Accounting Research; Accounting, Organization and Society; and Auditing: A Journal of Practice & Theory, as well as some selected working papers. 

    Findings:

    The Audit Task:  

    • The authors of the study find that much of the research related to audit tasks is grounded by the practice and professional standards.  The audit tasks most recently studied include (1) risk assessments, including the audit-risk model and related audit planning decisions, (2) analytical procedures and evidence evaluation, (3) auditors’ correction decisions regarding whether to require clients to book proposed adjustments, and (4) going concern judgments.  The authors stress the need for more research examining how auditing tasks are adapting to the current post-SOX reporting and regulatory environments. 
    • The author of the discussion feels there has been a lack of attention to audit task effects in prior research.  Prior research has not allowed us to make many general statements about the state of knowledge for each of the audit tasks.  The author
      stresses the importance of researchers to place more emphasis on audit tasks and to consider how specific audit tasks are different from the generic judgment and decision making (i.e., psychology-based) tasks.  

    Auditor Attributes: 

    • The authors of the study explain how auditors’ individual characteristics such as knowledge, ability, and personality, as well as their cognitive limitations, leave them susceptible to biases in audit judgments.  The authors focus their review of the related literature on four topics: (1) auditor knowledge and expertise, (2) other individual characteristics including aspects of personality, (3) cognitive limitations, and (4) decision aids designed to improve auditor judgments.  The authors stress the need for more research to examine how auditors’ affect or emotions also influence audit performance. 
    • The author of the discussion encourages future research to examine “why” biases in judgment occur in order to identify remedies for reducing the biases.

    Interpersonal Interactions: 

    • The authors of the study stress that because auditors do not work in isolation it is imperative to understand how people, tasks, and the environment that auditors interact with influence auditors’ performance.  The authors specifically examine interpersonal interactions between (1) auditors and other auditors, (2) auditors and their clients, and (3) auditors and other participants in the financial reporting process (e.g., jurors, judges, investors, analysts, etc.).  The authors call for more
      research related to interactions between auditors and audit committees as well as to strategic interactions between auditors and important stakeholders.  
    • The author of the discussion provides several insightful areas for future research, such as interactions between auditors and other auditors, auditors and clients, and auditors and users of audit reports. 
    Category:
    Auditor Judgment
    Sub-category:
    Audit Scope & Materiality Judgements, Prior Dispositions/Biases/Auditor state of mind, Materiality & Scope Decisions
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  • Jennifer M Mueller-Phillips
    Auditor Tenure and Going Concern Opinions for Bankrupt...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.04 Going Concern Decisions 
    Title:
    Auditor Tenure and Going Concern Opinions for Bankrupt Clients: Additional Evidence
    Practical Implications:

    This study should be of particular interest because the findings represent evidence concerning the relationship between auditor tenure and audit failures. The tenure effect, which is pronounced in the early years, is particularly important to the non-Big 4 sample because approximately 75 percent of non-Big 4 clients in the author’s sample have auditor tenures of four years or less. This short tenure, coupled with association between tenure and Type II errors suggest the adverse impact of short tenure is concentrated in the non-Big 4 sample. With this in mind, the findings of this paper may help to inform the continuing debate regarding the possible adverse effects of long auditor tenure. 

    Citation:

    Read, W.J., and A. Yezegel. 2016. Auditor Tenure and Going Concern Opinions for Bankrupt Clients: Additional Evidence. Auditing: A Journal of Practice and Theory 35 (1): 163-179.

    Keywords:
    going concern opinions, Type II errors, and auditor tenure
    Purpose of the Study:

    Regulators and lawmakers in the U.S. periodically express concerns about a possible association between auditor tenure length and audit failure. The authors define audit failure as a bankrupt company not receiving a going concern modified audit opinion prior to bankruptcy, a Type II reporting error.  Geiger and Raghunandan began investigating this relationship in the early 2000’s; however, the authors of this study hope to extend this investigation in the three following ways:

    • Studies have shown that audit reporting companies in financial distress changed following the enactment of the Sarbanes-Oxley Act of 2002 and related legislature and media scrutiny of the auditing profession; ergo, a closer examination of more recent data would be a worthwhile measure.
    • The previous study did not examine differences between Big 4 and non-Big 4 audit firms, and studies show that there are significant differences between Big 4 and non-Big 4 auditors, including going concern decisions.
    • The previous study assumed and tested for a linear relationship between auditor tenure and audit reporting failures; however, more recent data leads the authors to allow the association between auditor tenure and audit quality to be nonlinear. 
    Design/Method/ Approach:

    The authors examine prior audit reports for a sample of 401 U.S. publicly held companies that filed for bankruptcy during the period 2002-2008. A quadratic model was used to control for potential nonlinearity in the relationship between audit tenure and audit reporting.

    Findings:
    • The authors did not find evidence of a significant relation between auditor tenure and going concern opinions issued by Big 4 firms to their subsequently bankrupt clients.
    • The authors did find evidence indicating a higher likelihood of Type II errors for non-Big 4 auditors in the early years of an audit; however, this relation weakens and after approximately year four of the engagement, the authors begin to observe no statistical association between tenure length and Type II errors for non-Big 4 auditors, either.
    • The authors’ results from the endogeneity analysis are consistent with their primary conclusions that non-Big 4 audit firms are more likely to make Type II reporting errors compared to Big 4 firms during the initial years of an audit engagement.
    • The authors find that long auditor tenure, of itself, is not associated with Type II reporting errors. 
    Category:
    Auditor Judgment
    Sub-category:
    Going Concern Decisions
  • Jennifer M Mueller-Phillips
    Investigating Inspection Risk: An Analysis of PCAOB...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections, 11.0 Audit Quality and Quality Control, 11.11 Impact of Firm and External Inspection Programs 
    Title:
    Investigating Inspection Risk: An Analysis of PCAOB Inspections and Internal Quality Reviews
    Practical Implications:

    This paper complements and extends the limited extant research on inspection risk by clearly defining the construct and providing empirical evidence consistent with its existence and impact on auditors’ planning decisions. The authors contend that while auditors may perceive that PARs do not influence effort or fees, both PARs likely cause auditors, perhaps unconsciously, to increase effort and fees. 

    Citation:

    C. M. Stefaniak, R. W. Houston, and D. B. Brandon. 2017. Investigating Inspection Risk: An Analysis of PCAOB Inspections and Internal Quality Reviews. Auditing: A Journal of Practice and Theory 36 (1): 151 – 168.

    Keywords:
    inspection risk, audit quality, PCAOB inspections, and internal quality reviews
    Purpose of the Study:

    The authors report the results of an experiment that examines how auditor anticipation of the two primary external and internal post-audit reviews (PAR), specifically, U.S. Public Company Accounting Oversight Board (PCAOB) inspections or public accounting firms’ internal quality reviews (IQRs), affects auditors’ perceptions of overall engagement risk, as well as effort and pricing decisions. The authors define inspection risk as “the risk that an auditor or audit firm will suffer harm as a result of a PAR.” Although the current PAR regime has been in place for over ten years, there is little empirical evidence concerning whether, and to what extent, anticipating a PAR impacts auditor behavior, and whether the effects of anticipating a PCAOB inspection or IQR differ. IQRs also remain largely uninvestigated, despite researchers beginning to investigate external PCAOB reviews. 

    Design/Method/ Approach:

    To investigate how PAR salience affects auditors’ judgments and decisions, the authors conduct a 1 x 3 between-subjects experiment using a number of high-level auditors as participants. They manipulate PAR salience as PCAOB inspection salient, IQR salient, or no explicit expectation of a PAR. 

    Findings:
    • The authors find that PAR salience yields greater perceived overall engagement risk, even after controlling for traditional engagement risk-related factors, implying that auditors perceive inspection risk as incremental to these factors.
      • In addition, increased PAR salience results in greater audit effort and fees, consistent with an inspection risk component.
    • The authors find that both PARS yield higher fees, with the higher fees attributable only to greater effort, rather than an “inspection risk premium.”
    • PCAOB inspection results are more visible than IQRs, and partners perceive that PCAOB inspections can yield greater negative consequences for themselves and their firms; therefore, the authors find that PCAOB inspection salience involves larger increases in perceived overall engagement risk and audit effort than does IQR salience.
      • However, the authors do not find differences in audit fees between PCAOB and IQR salience. 
    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Impact of Firm & External Inspection Programs, Impact of potential post-audit review (e.g. PCAOB - internal firm inspections)
  • Jennifer M Mueller-Phillips
    Audit team time reporting: An agency theory perspective
    research summary posted October 21, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    Audit team time reporting: An agency theory perspective
    Practical Implications:

    The findings show that managers implicitly encourage auditors to underreport time when dealing with a favorable client. While CPA firms have decreased explicit incentives to underreport, these implicit incentives makes it likely that seniors are underreporting their time. This can lead to unrealistic budgets and possible costing issues for firms. Also, if a senior does not underreport they could risk getting a bad evaluation or not be assigned to desirable future engagements. These situations could lead to a reduction in raises, promotions, and continued employment.

    Citation:

    Agoglia, C. P., R. C. Hatfield, and T. A. Lambert. 2015. Audit team time reporting: An agency theory perspective. Accounting, Organizations and Society 44: 1-14.

    Keywords:
    auditor judgement, audit quality, workpaper review, underreporting
    Purpose of the Study:

    There is a substantial concern that audit teams underreport time for audit engagements. While some recent research suggests that explicit incentives to underreport have been reduced, other research suggests that there still may be implicit incentives to underreport. Based on agency theory, it is likely that reviewers rate the preparer more favorably when the client is desirable and the preparer underreported their time. The purpose of this study is to investigate this concern by evaluating how reviewer’s performance evaluations of the preparer and future staffing decisions are influenced by the following factors:

    • Desirability of the client
    • Whether the preparer underreported or reported accurately.
    Design/Method/ Approach:

    Data for this paper was collected prior to May 2015 by mailing experimental instruments to both managers and partners of CPA firms.  

    Findings:

    Managers rated the performance of a senior higher when they underreported time and were working on a desirable client. The findings also show that managers are more likely to request an underreporting senior on a future audit engagement. However, partners did not show any preference to seniors who underreported time.

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
  • Jennifer M Mueller-Phillips
    If You Want My Advice: Status Motives and Audit...
    research summary posted February 16, 2017 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments 
    Title:
    If You Want My Advice: Status Motives and Audit Consultations About Accounting Estimates
    Practical Implications:

    The finding that higher decision authority can have negative audit quality implications is relevant to audit firm policies, which often vest substantial authority in consultants, and to the ongoing debate over standards for the use of specialists. This and other findings also suggest that it may be beneficial to advocate lower decision authority. Finally, the findings can inform audit firm policies that require consultation with knowledgeable persons, as well as standard-setters and regulators whose responsibilities to provide guidance on using consultation to conduct more effective audits of financial statement estimates. 

    Citation:

    Knechel, W. R. and J. Leiby. 2016. If You Want My Advice: Status Motives and Audit Consultations About Accounting Estimates. Journal of Accounting Research 54 (5): 1331 – 1364. 

    Purpose of the Study:

    Financial reports contain many complex accounting estimates that require significant auditor judgment and can increase the risk of material misstatements. Auditors often struggle to maintain the requisite knowledge and questioning mindset necessary to effectively assess these estimates. Little is known about how the efficacy of consultation and the conditions under which consultants provide advice that might improve the audit of estimates. Consultation in auditing is pervasive and has substantial potential benefits, thus the availability of useful advice is often a necessary condition to improve the audit of estimates. In this study, the authors examine two properties of advice that are likely to help improve auditor judgment on accounting estimates: contrariness and precision. Contrariness refers to the degree to which a consultant’s advice differs from the advice-seeker’s own opinion, and precision refers to the narrowness of the range of options presented by a consultant to an advice seeker, that is, reducing the range of possible outcomes to be considered. 

    Design/Method/ Approach:

    The authors conduct an experiment with a number of audit managers and senior managers from a U.S. accounting firm. The authors manipulate status motives by priming auditors with a brief story prior to the task in which they act as a consultant to another auditor regarding the discount rate a client uses to estimate the fair value of a securitized asset. 

    Findings:
    • The authors find that a consultant’s recommendations are influenced by specialized knowledge and decision authority conditional on their status motives.
      • More specifically, when status motives are active, consultants with higher specialized knowledge are more precise but less contrary than those with lower knowledge.
    • The authors find that consultants recommend changes to the end of the range that is further from management’s preference, thus this increased precision is unlikely to influence the evaluation and ultimate quality of the estimate.
    • The authors find that precision decreases with higher decision authority and increases only when decision authority is lower and status motives are active. 
    Category:
    Audit Team Composition, Auditor Judgment
    Sub-category:
    Impact of Consultation on Judgments, Use of Specialists (e.g. financial instruments – actuaries - valuation)
  • Jennifer M Mueller-Phillips
    State Liability Regimes within the United States and Auditor...
    research summary posted February 16, 2017 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.09 Litigation Risk, 09.0 Auditor Judgment, 09.04 Going Concern Decisions 
    Title:
    State Liability Regimes within the United States and Auditor Reporting
    Practical Implications:

    These results imply that auditors are more likely to render modified GC opinions for clients subject to regimes that hold auditors liable to a larger class of third parties and impose joint-and-several liability for third-party damages, both of which reflect greater liability exposure. The higher incidence of GC opinions accompanying stronger state-level litigation threats could reflect higher audit quality, but it could also stem from excessively conservative auditors protecting their interests by avoiding costly civil lawsuits, which could undermine audit quality in some circumstances. 

    Citation:

    Anantharaman, D., J. A. Pittman, and N. Wans. 2016. State Liability Regimes within the United States and Auditor Reporting. The Accounting Review 91 (6): 1545 – 1575.

    Keywords:
    auditor litigation risk, state common law, and going-concern opinions
    Purpose of the Study:

    The authors of this study analyze the relation between state regimes governing auditor liability and auditors’ propensity to modify their opinion to express uncertainty on financially distressed clients’ ability to continue as a going concern.  Extant research implies that auditors have strong incentives to conduct high-quality audits in order to reduce the litigation examining consequences stemming from an alleged audit failure; however, the bulk of this research focuses on auditor liability arising under federal statutory laws, not state laws. This study delves into the issue of state laws, including if and to what extent litigation exposure under state common law affects auditors’ reporting decisions. 

    Design/Method/ Approach:

    A previous study developed a state-level score that captures third-party liability standards, which the authors of this study rely on to measure auditor litigation exposure stemming from third-party liability standards. To evaluate variation in liability-sharing standards across states, the authors closely read the relevant law to construct a state-level index that identifies whether each state follows a joint-and-several approach or a proportional approach to liability sharing. The authors assign to each client firm the highest of the liability indices dependent on the states in which the firm does business, and they measure audit outcomes with the propensity to issue going-concern (GC) opinions to financially distressed clients. 

    Findings:
    • The authors find that auditors are significantly more likely to issue a GC opinion to clients from states applying:
      • A more expansive third-party liability standard, or
      • The joint-and-several liability (JSL) rule for apportioning damages among defendants.
    • The authors find that liability regimes primarily affect auditor reporting for clients that are inherently more likely to be sued, reinforcing the conclusion that state-level liability regimes matter more when litigation exposure is higher.
    • The authors find some suggestive evidence that the higher expected legal costs arising from state-level liability regimes have a stronger impact on Big 4 auditors that are more sensitive to litigation threats. 
    Category:
    Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Going Concern Decisions, Litigation Risk
  • Jennifer M Mueller-Phillips
    Joint Impact of Materiality Guidance and Justification...
    research summary posted February 16, 2017 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments 
    Title:
    Joint Impact of Materiality Guidance and Justification Requirement on Auditors’ Planning Materiality
    Practical Implications:

    The features that the authors examine, guidance structure and need of justification, vary among the Big 4 public accounting firms, and the authors show that variations in these features result in systematic differences in auditors’ planning materiality judgments. They specifically show that in circumstances where auditors’ reliance on structured guidance is inappropriate, a justification requirement can mitigate this dysfunctional effect. 

    Citation:

    Audsabumrungrat, J., S. Pornupatham, and H. Tan. 2016. Joint Impact of Materiality Guidance and Justification Requirement on Auditors’ Planning Materiality. Behavioral Research in Accounting 28 (2): 17 – 27. 

    Keywords:
    planning materiality, structured guidance, and justification.
    Purpose of the Study:

    The authors of this study investigate whether the requirement to document a justification can overcome auditors’ overreliance on decision aids in a context where their use can lead to dysfunctional outcomes. They examine this issue in a planning materiality setting because planning materiality influences the effectiveness of the overall audit process. The decision aid they examine in this study relates to structured guidance to be used in materiality assessments. Public accounting firms have developed structured guidance to assist their staff in making planning materiality judgments and to increase judgment consistency within the firms, but variations exist in the use of such guidance. They also examine justification, which is the need to provide a rationale or reason to support one’s decisions. 

    Design/Method/ Approach:

    The authors test their prediction experimentally with audit managers from three Big 4 public accounting firms in Thailand. They employ a planning materiality assessment setting where merely following the steps documented in the structured guidance without making adjustments for client-specific factors can lead to less conservative materiality assessments. 

    Findings:
    • The authors find that audit managers make less conservative and less appropriate planning materiality assessments in the presence of structured materiality guidance, but this detrimental effect is mitigated by the need to justify their judgments.
    • Participants’ materiality assessments across all conditions are higher than that made by the expert panel, suggesting that participants are not making overly low assessments that have efficiency implications. 
    Category:
    Auditor Judgment
    Sub-category:
    Audit Scope & Materiality Judgements
  • Jennifer M Mueller-Phillips
    The Impact of Estimate Source and Social Pressure on...
    research summary posted February 16, 2017 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.03 Adequacy of Evidence 
    Title:
    The Impact of Estimate Source and Social Pressure on Auditors’ Fair Value Estimate Choices
    Practical Implications:

    To the auditors’ knowledge this study is the first to examine the joint effect of social pressure and estimate source. By examining the joint effect of these two factors, they identify the boundary conditions under which the effect of estimate source holds. The results of this study indicate that auditors perceive advice to be more acceptable when it is from a superior than when it is from a peer. Further, when advice is received from a peer, auditors in this study indicate that the advice is more likely to be weighed against other evidence than when the same advice is received from a supervisor. 

    Citation:

    Brink, A. G., F. Tang, and L. Yang. 2016. The Impact of Estimate Source and Social Pressure on Auditors’ Fair Value Estimate Choices. Behavioral Research in Accounting 28 (2): 29 – 40. 

    Keywords:
    social pressure, fair value estimates, experiment, auditor judgment.
    Purpose of the Study:

    This paper empirically examines how estimate source interacts with social influence pressure to affect auditors’ judgments of fair value estimates.  This research is motivated by growth in the use of fair value accounting practices in recent years and concern over the usefulness of reported fair values. Because of the subjectivity and judgment that is inherent in fair value estimation, evaluating fair value estimates poses a significant challenge to auditors and it is important to understand factors influencing auditors’ judgment in the selection and reporting of fair value estimates. While fair value accounting practices are of international concern, particular emphasis has been placed on whether emerging economies, such as China, are effectively implementing the fair value components of accounting standards. 

    Design/Method/ Approach:

    The authors conduct an experiment with Chinese auditor participants to investigate how auditors’ choices regarding the investigation of a subjective fair value estimate are influenced by the source of a fair value estimate and social pressure. 

    Findings:
    • The authors find that social influence pressure moderate the effect of estimate source.
      • Specifically, Chinese auditors’ risk assessments and judgments regarding whether the auditor will investigate further are not significantly influenced by information about the fair value estimate’s source when a supervisor advises the use of the questionable estimate.
      • However, when a peer gives the auditor the same advice, the source of the estimate has a significant impact on auditor judgments. 
    Category:
    Auditor Judgment
    Sub-category:
    Adequacy of Evidence

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