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  • The Auditing Section
    Development of a Scale to Measure Professional Skepticism
    research summary posted May 2, 2012 by The Auditing Section, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    Development of a Scale to Measure Professional Skepticism
    Practical Implications:

    This study provides accounting firms with the first instrument theoretically designed to measure professional skepticism in auditors.  Objective measures of professional skepticism may be helpful to firms looking to increase audit efficiency or effectiveness, specifically in critical areas such as hypothesis generation, risk identification and fraud detection.

    Citation:

    Hurtt, R. K. (2010). Development of a Scale to Measure Professional Skepticism. Auditing: A Journal of Practice & Theory 29(1): 149-171.

    Keywords:
    Professional skepticism, scale development, trait skepticism
    Purpose of the Study:

    Professional standards have stressed the importance of individual auditor professional skepticism from the earliest codification. Although the concept of professional skepticism is widely accepted, there has been little research on exactly what comprises skepticism and how it can be measured. Professional skepticism is a complex characteristic; scales previously used to measure skepticism were not developed with the multi-dimensionality of professional skepticism in mind.  It can therefore, become difficult to draw appropriate conclusions or make comparisons with these measures. The study identifies two distinct types of professional skepticism: 1) trait skepticism, (defined as: relatively stable, an enduring quality of an individual) and 2) state skepticism (defined as: a temporary condition aroused by a given situation).  This particular study focuses only on the former and further delineates six character components of trait skepticism.  These characteristics are drawn from a careful review of the auditing standards as well as research in auditing, psychology, philosophy, and consumer behavior. The six characteristics are as follows:

    • A questioning mind
    • A suspension of judgment
    • A search for knowledge
    • Interpersonal understanding
    • Self-esteem
    • Autonomy      

    The author considers each of these component characteristics and develops a scale to more adequately and appropriately measure the trait skepticism of auditors. 

    Design/Method/ Approach:

    The author gathers 220 potential questions measuring each of the component characteristics identified. This large group of questions was further reduced based on several pre-tests performed on groups of varying size of undergraduate and graduate level business students. Once the scale had been reduced to a 30-item test, it was administered to 200 auditors from a major international accounting firm. To ensure that the scale was reliable, the test was re-administered to 88 auditors from the same international firm.  It is important to note that the scale was validated using auditors from only one major firm and was validated prior to the passage of the Sarbanes-Oxley Act of 2002.

    Findings:
    • The results provide preliminary evidence that the skepticism scale developed here is an instrument with appropriate reliability and validity.  
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind
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  • The Auditing Section
    Do Effects of Client Preference on Accounting...
    research summary posted May 7, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction, 11.09 Evaluation of Evidence 
    Title:
    Do Effects of Client Preference on Accounting Professionals’ Information Search and Subsequent Judgments Persist with High Practice Risk?
    Practical Implications:

    The results of this study should be of interest to audit firms, management, and regulators because high-practice-risk appears to reduce bias in accounting professionals’ judgment and decision-making. The authors’ discussion suggests that similar effects may result from the recent increase in regulatory scrutiny and penalties for aggressive accounting judgments. However, more research is needed in this area. This study also is relevant to companies who must comply with FIN No. 48. Managers certifying the accuracy of the financial statements and their external auditors will want to ensure that tax professionals make unbiased judgments about supportability.

    Citation:

    Kadous, K., A.M. Magro, B.C. Spilker.  2008. Do Effects of Client Preference on Accounting Professionals’ Information Search and Subsequent Judgments Persist with High Practice Risk? The Accounting Review 83 (1): 133-156

    Keywords:
    Confirmation bias, information search, practice risk, path analysis
    Purpose of the Study:

    Prior research shows that client preference directly influences accounting professionals’ judgments in ambiguous circumstances. Professionals have incentives to maintain good client relations, so they tend to endorse aggressive client-preferred positions. Client preference also indirectly influences professionals’ judgments because their search processes are biased toward obtaining evidence that confirms, rather than disconfirms, the client’s preferred position. The purpose of this paper is to examine whether increasing exposure to the potential costs of inappropriate judgments (i.e., practice risk) reduces the direct and indirect effects of client preference on accounting professionals’ recommendations.  In particular, the authors investigate whether:

    • High practice risk (relative to low practice risk) causes professionals to engage in more comprehensive and balanced searches for confirming and disconfirming information.
    • High practice risk (relative to low practice risk) causes professionals to provide recommendations that are less consistent th client preference. 

    The authors motivate their expectations with the psychology literature on accountability. This literature suggests that when practice risk is high and potential losses are salient, professionals are more likely to engage in “pre-emptive self-criticism.” In other words, they will anticipate objections that important others (regulators, jurors, etc.) might have to their client’s preferred alternative, consider multiple perspectives, and think in more complex ways.

    Design/Method/ Approach:

    The research evidence was collected in the mid-2000s.  Tax professionals of all experience levels from a broad cross-section of international, national, regional, and local firms participated in the web-based experiment.  Participants completed a simulated task involving the determination of a client’s investor/dealer status with respect to certain real estate transactions and their tax consequences. After reading background information and completing database training, participants searched for relevant court cases to support their judgments. Half of the available court cases supported investor treatment, while the other half supported dealer treatment. Participants reported the strength with which they would recommend investor versus dealer treatment and the likelihood of success in court if the issue were litigated.  

    Findings:
    • The authors find that professionals advising high-practice-risk clients exhibit less confirmation bias than professionals advising low-practice-risk clients.  Specifically, the relative amount of time spent reviewing court cases with positive versus negative precedents is significantly different between the low- and high-practice-risk treatment groups.
    • The authors find that recommendations are biased in favor of the client-preferred position when practice risk is low, but not when it is high.
    • Additionally, the authors present evidence that rules out differences in client desirability as a way to explain the results.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Management/Staff Interaction, Evaluation of Evidence
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  • The Auditing Section
    Exploring Trust and the Auditor-Client Relationship: Factors...
    research summary posted May 3, 2012 by The Auditing Section, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Exploring Trust and the Auditor-Client Relationship: Factors Influencing the Auditor’s Trust of a Client Representative
    Practical Implications:

    The findings provide evidence that auditors do hold a level of trust in client representatives and that the level of trust is associated with commonplace behaviors of client representative that attract trust.  The results of this study are important to make auditors and auditing standards setters aware of factors that may lead to greater auditor trust of client management and perhaps consider whether there may be a potential for excessive trust to overwhelm the auditor’s professional skepticism. Note that the study was unable to determine whether the levels of trust that the auditors had for the client were such that auditor judgment would be compromised.

    Citation:

    Rennie, M. D., L. S. Kopp, and W. M. Lemon. 2010. Exploring Trust and the Auditor-Client Relationship: Factors Influencing the Auditor’s Trust of a Client Representative. Auditing: A Journal of Practice and Theory 29 (1): 279-293

    Keywords:
    Trust, Professional Skepticism, Auditor-Client Relationship
    Purpose of the Study:

    A financial statement audit cannot be conducted in the absence of the auditor’s trust of client management.  The auditor needs information provide by management and the cooperation of management to carry out the audit.  Thus, the auditor has no option but to bestow some degree of trust upon client management.  Yet, if trust is too strong, professional skepticism could be impaired.  Below are the objectives of this descriptive, exploratory study: 

    • To shed light on auditors’ trust of client management using the context of an auditor-client disagreement.
    • To learn about client behaviors (e.g. openness of communication and demonstration of concern) that may influence the auditor’s trust of a client.
    • To learn about aspects of the auditor-client relationship (length of association and frequency of past disagreements) that may influence the auditor’s trust of a client.
    • To gather auditors’ opinions about the importance of trust and about managing the balance between trust and professional skepticism.
    Design/Method/ Approach:

    The authors collected their evidence via a survey questionnaire prior to June 2007. Participants surveyed include 71 experienced auditors (48 partners, 2 principals, 20 senior managers, and 3 managers) from Canadian international accounting firms. Participants were asked to briefly describe a disagreement they had previously had with a client and were asked specific questions about that disagreement.

    Findings:
    • A disagreement experience with the client is relevant to the auditor’s trust of that client.
    • A client’s openness of communication during the course of a disagreement is positively associated with the auditors’ trust of that client representative.
    • A client’s demonstration of concern toward the auditor appears to be trust-relevant.
    • The frequency of disagreements with the client is negatively associated with the auditor’s trust of the client.
    • The length of the auditor-client relationship is positively associated with the auditor’s trust.
    • An auditor’s satisfaction with the outcome of the disagreement is positively associated with the auditor’s trust. 
    • The auditor’s predisposition to trust is not associated with the auditor’s trust of the client.
    • Auditors believe it is important to trust their clients but they also attempt to ensure that trust does not impede professional skepticism.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Engagement Management
    Sub-category:
    Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management
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  • Jennifer M Mueller-Phillips
    Fear and Risk in the Audit Process
    research summary posted November 24, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
    Title:
    Fear and Risk in the Audit Process
    Practical Implications:

    Our analysis of fear helps better understand the relationship between comfort, confidence and fear in the audit process from the perspective of risk. On one hand, it suggests that confidence (self-confidence, confidence in work instrument and confidence in colleagues) without fear is a risky cocktail for auditors, who will not be sufficiently vigilant in carrying out their mission. On the other hand, it shows that fear without confidence is also a dangerous combination, which may induce auditors to maintain at a distance (and thus ignore) the inherent risks of their responsibilities. Ultimately, a sense of fear curbed by confidence and a sense of confidence tempered by fear is what enables public accountants to develop their ‘practical intelligence’, and thus to become comfortable without overlooking the risks of their job. Accordingly, the main implication which falls out of our study is the necessity for audit firms and audit regulators to create the conditions for the development among auditors of the right mix of fear and confidence.

    For more information on this study, please contact Henri Guénin-Paracini.

    Citation:

    Guénin-Paracini, H., Malsch B. and A. Paillé-Marché. 2014. Fear and risk in the audit process. Accounting, Organizations and Society 39 (4): 264-288

    Keywords:
    Auditors, audit process, fear, risk, practical intelligence, defensive strategies
    Purpose of the Study:

    While a number of studies have highlighted the role played by the feeling of comfort in audit work, comfort, in real audit settings, only arises at the very end of the audit task. The rest of the time, auditors seek to feel comfortable, but are inhabited primarily by fear. This became apparent to us in the course of an ethnographic study aimed at better understanding the work performed by auditors in the field. Of course, fear is not experienced by auditors all day long; it varies in intensity from individual to individual and depending on the circumstances; however, in general, public accountants have to deal with this emotion. If one considers that fear is the emotional experience of risk, this should hardly come as a surprise. In the post-Enron climate and after the enactment of the Sarbanes-Oxley Act, the risks associated with auditing have increased dramatically. Yet, associated with the perception of risk, the experience of fear and the role that fear plays in risk management processes have largely been overlooked in the literature. Our paper aims to ‘emotionalize’ and challenge the dominant cognitive orientation adopted by academics and regulators in their understanding of audit risks and auditors’ skepticism. It seeks better understand the role played by fear in audit practice, focusing specifically on the following questions: 1) What exactly is it that auditors worry about? 2) How do auditors manage fear in the field? 3) How does fear shape, and how is it shaped by, auditors’ work activity?

    Design/Method/ Approach:

    The research evidence was collected as part of a field study.

    • Seven audit teams including nine partners, five managers, 11 seniors and 19 assistants, were monitored in real time in June and July 2002 and between November 2003 and July 2004 (455 hours of observation).
    • Numerous documents were examined.
    • Interviews were conducted with four partners, three managers, eight seniors and 16 assistants.

    The psychodynamics of work theory of Dejours was used to interpret the data.

    Findings:
    • Confronted with technical knowledge and methodological standards’ limitations, auditors are nevertheless asked to certify the unknowable (i.e. to turn uncertainties into quasi certitudes), while being often reminded by the media that a failure on their part can have serious consequences. This ‘impossible mission’ creates fear within them. They are afraid of not detecting significant anomalies (a risk always present in auditing), and feel anxious about the judgments that they and others may pose over their possible mistakes.
    • Auditors manage their fear in two different ways. On one hand, they cultivate it through informal and formal techniques to stimulate vigilance, encourage self-surpassment, mitigate the ‘anesthetizing’ effect of habit, and maintain reputation. On the other hand, they strive to alleviate their fear before the end of each audit engagement, in order to convey their conclusions with a certain degree of comfort.
    • In the field, auditors finally become comfortable (i.e. quell their fear) either by mobilizing their ‘practical intelligence’ (which helps them handle that which, in their mission, cannot be obtained through the strict execution of standardized procedures) or by adopting defensive strategies (such as distancing themselves from work-related problems, mechanically applying audit methodologies, or relaxing their conception of a job well done). 

     

    Category:
    Audit Quality & Quality Control, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Management/Staff Interaction, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    How Do Auditors Weight Informal Contrary Advice? The Joint...
    research summary posted September 14, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    How Do Auditors Weight Informal Contrary Advice? The Joint Influence of Advisor Social Bond and Advice Justifiability.
    Practical Implications:

    By treating worse justified advice as though it were better justified advice, auditors are likely to overestimate the defensibility of their conclusions that are based on this advice. It also is worrisome that specialists appear to defensively resist well-justified, contrary advice from stronger social bond advisors. In response to a stronger social bond advisor’s better justified advice, specialists assess advisor competence to be higher and they assess the advice itself to be of higher quality, but they assign relatively low weight to the advice. This inconsistency implies that specialists may have difficulty accepting good advice even when they recognize its high quality.

    Citation:

    Kadous, K., J. Leiby, and M. E. Peecher. 2013. How Do Auditors Weight Informal Contrary Advice? The Joint Influence of Advisor Social Bond and Advice Justifiability. Accounting Review 88 (6): 2061-2087.

    Keywords:
    advice, audit quality, auditor judgment, fair value, social bond, true heuristic
    Purpose of the Study:

    Auditors regularly seek informal advice, including additional information, recommendations, and alternative perspectives about their initial judgments, from other auditors. Audit firms encourage advice seeking to enhance professional skepticism and improve professional judgment. Existing theory and evidence provide contrasting viewpoints. On the one hand, auditors recognize that following contrary advice can enhance the justifiability, or defensibility, of their judgments on ill-structured audit tasks such as determining the acceptability of management’s accounting policies. On the other hand, people generally discount contrary advice in nonauditing contexts, and auditors are prone to motivated reasoning.

    The authors expect that auditors’ willingness to use contrary advice is a joint function of their social bond with their advisor and advice justifiability. Social bond refers to auditors’ subjective sense of interpersonal closeness or connectedness toward their advisor. The authors examine the influence of advice justifiability on advice weighting for three reasons.

    • The justifiability of a recommendation is a reasonable proxy for advice quality in the ill-structured tasks that auditors frequently encounter, such as assessing the reasonableness of a fair value.
    • A common explanation for individuals’ general tendency to discount advice in everyday contexts is that while they can easily access reasons for their own opinions, they have far less ability to access reasons for their advisor’s recommendations.
    • The authors examine the influence of advice justifiability across both weaker and stronger levels of advisor social bond because theory predicts an interaction of advice justifiability and social bond for auditors’ advice weighting.
    Design/Method/ Approach:

    88 audit seniors from a Big 4 firm completed the experimental task at a national training session. Their audit experience ranged from 30 to 96 months, with a mean (standard deviation) experience of 39 months (10 months). The evidence was gathered prior to August 2010.

    Findings:

    The authors find that non-specialist auditors rely on the predicted trust heuristic. When advice comes from a stronger social bond advisor, they weight it relatively heavily and do not differentiate better from worse justified advice. Non-specialists also fail to objectively assess the quality of advice, and they optimistically assess specific attributes of advice coming from stronger social bond advisors, inaccurately equating better and worse justified advice. They do this even though they are able to distinguish advice justifiability and weight the advice accordingly when it comes from a weaker social bond auditor.

    In contrast, specialists do not rely on a trust heuristic in weighting advice, but they weight advice inconsistently with their own assessments of its quality. Specialists put less weight on better justified advice despite assessing its quality to be higher when it comes from a stronger social bond advisor. This inconsistency appears defensive in nature. The authors find that contrary advice has promise for reducing auditors’ motivated reasoning in that auditors significantly weight it in each condition. Informal contrary advice helps auditors to see an alternative point of view.

    Category:
    Auditor Judgment
    Sub-category:
    Impact of Consultation on Judgments, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    How Partners’ Views Influence Auditor Judgment
    research summary posted September 10, 2013 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.03 Interaction among Team Members 
    Title:
    How Partners’ Views Influence Auditor Judgment
    Practical Implications:

    While the audit partner is ultimately responsible, an audit opinion relies upon the work and judgments of numerous auditors at different levels throughout the firm (NYSSCPA 2009). Therefore, it is important that audit teams have access to independent judgments of individual auditors throughout the audit process. However, the authors’ findings provide evidence that “knowledge of superiors’ views biases auditors’ reports of their prior independent judgments, potentially inhibiting discussion and resolution of contrary views.”

    Whether judgment subordination is intentional or attributable to unconscious biases is not clear from the study. However, it is clear that it is insufficient for an auditor simply to formulate an opinion prior to hearing that of a superior. Rather, auditors should formulate and document their opinions prior to consulting with superiors and colleagues.

     

    It is not clear from this study whether the behavior described is prevalent among audit managers. It is possible that experience mitigates the likelihood of auditors to rely upon superior’s opinions. In addition, the judgment task involved a conservative alternative; it is possible that the effect will diminish when the partner’s opinion represents a less conservative alternative. 

    Citation:

    Peytcheva, M. and P.R. Gillett. 2011. How Partners’ Views Influence Auditor Judgment. Auditing: A Journal of Practice & Theory 30 (4): 285-301.

    Keywords:
    Audit judgment, motivated reasoning, cognitive bias
    Purpose of the Study:

    Prior research suggests auditors are likely to concur with the opinion of superiors if they learn of a superior’s opinion before forming their own judgments. This study examines the malleability of auditor judgments to the opinion of a superior after-the-fact. When given the opportunity to formulate an initial independent judgment, do auditors report later that they concurred with an audit partner’s contrary opinion?

    Design/Method/ Approach:
    • Participants were practicing auditors (27% audit seniors and 73% associates) as well as senior-level auditing students.
    • The study employed an experiment in two parts with participants divided into two experimental groups and one control group.
    • In part one, a judgment task was presented to each participant (whether to capitalize or expense an asset) and each participant was required to make a judgment but to wait to record that judgment until later:
    • Before Group: the experimental group that received an audit partner’s opinion (to expense the item) before they made their initial judgment
    • After Group: the experimental group that received an audit partner’s opinion (to expense the item) after they made their initial judgment
    • Control Group: made their judgment without receiving a partner opinion at any stage
    • In part two, the participants were asked to record the individual judgments they remembered making in part one.
    Findings:

    The authors find that around 80% of both experimental groups (the ‘before’ group and the ‘after’ group) selected to expense the item, versus only around 30% of the control group. Even among the sample of practicing auditors the percentage selecting to expense was around 75% in both experimental groups compared to 25% in the control group. There is no significant difference between the before and after groups, but there is a significant difference between the experimental groups and the control group. Therefore, the authors find that the audit partner’s opinion affects individual auditor judgments in a similar manner whether or not the auditor forms an independent opinion prior to learning of the partner’s opinion.

     

     

    Category:
    Auditor Judgment, Engagement Management, Independence & Ethics
    Sub-category:
    Individual & team conduct (e.g. premature signoff - underreporting hours), Interaction among Team Members, Prior Dispositions/Biases/Auditor state of mind
  • The Auditing Section
    Identity Narratives Under Threat: A Study of Former Members...
    research summary posted May 4, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    Identity Narratives Under Threat: A Study of Former Members of Arthur Andersen
    Practical Implications:

    Relying exclusively on official statements and documents may prevent one from accessing backstage behavior and representations. 
    In private interviews people may disclose information that differs from the formal representations they appear to support in more formal environments.

    Citation:

    Gendron, Y. and L. F. Spira. 2010. Identity narratives under threat: A study of former members of Arthur Andersen. Accounting, Organizations and Society 35: 275-300.

    Keywords:
    Organizational identity, professional identity, Arthur Andersen, professional failure
    Purpose of the Study:

    This study examines the processes by which individuals work their sense of organizational and professional identity in the aftermath of a professional failure.  Identity work comprises processes by which individuals reflectively seek to maintain or revise their sense of identification with an organization and profession, along with developing self-understandings regarding causes and consequences ensuing from significant events which threaten ones beliefs, interpretive schemes and perception of the self.  

    In this study the authors conducted interviews with former partners and employees of Arthur Andersen (AA) and addressed four research questions in this study, including:

    • How do former members of AA conceptualize the collapse of their firm and the underlying reasons?
    • How do former members engage in identity work in response to the firm’s collapse?
    • To what extent is their sense of identity with the AA organization and with the public accounting profession questioned as a result of their sense-making endeavor?
    • How can one continue to work in public accounting when his/her identity work implies significant doubt regarding peer trustworthiness and skepticism regarding the future of the profession?
    Design/Method/ Approach:

    Semi-structured interviews were conducted with twenty-five former partners and employees of AA, mostly in Canada and the UK.  The interviews focused on four main themes including: AA’s organizational background; underlying reasons and consequences of the firm’s debacle; post-Enron regulatory initiatives; and the impact of the collapse on the interviewee’s viewpoint regarding control mechanisms in accounting firms, peer trustworthiness, and the notion of the “profession”. The interviews were conducted in 2004.

    Findings:
    • Overall, the results of this study indicate that interviewees engaged extensively in processes of identity work and sense-making in trying to deal with the negative representation of the firm that resulted in the mass media after the collapse of AA.
    • The following key identity work patterns emerged during the interviews of the former members of AA:
    • Disillusion – questioning of the individual’s sense of organizational and public accountant identity
    • Resentfulness – questioning one’s sense of public accountant identity as significant doubt is cast on peer trustworthiness and the future of the profession.
    • Rationalization – characterized by consciously attempting to detach the self from the flow of emotions surrounding the firm’s collapse, in order to develop what is viewed as a form of rational understanding.
    • Hopefulness – expressing confidence regarding the future of public accounting.
    Category:
    Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind
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  • The Auditing Section
    Improving Assessments of Another Auditor’s Competence
    research summary posted April 23, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    Improving Assessments of Another Auditor’s Competence
    Practical Implications:

    The results of this study are important for auditors to consider when assessing others and when deciding what audit actions to take based on those assessments.  The results are also important for audit firms when considering what types of performance feedback to provide related to assessments of other auditors.  The evidence indicates that auditors use multiple anchors when assessing others. 
    Furthermore, it indicates that familiarity affects the anchors used by auditors in various assessment.  The study suggests that providing auditors with feedback on the accuracy of their assessments can increase performance, but only when the feedback type is appropriate to the level of familiarity between the auditor and the assessee.

    Citation:

    Harding, N. and K.T. Trotman. 2009. Improving Assessments of Another Auditor’s Competence. Auditing: A Journal of Practice and Theory 28 (1): 53-78.

    Keywords:
    competence assessments, outcome feedback, audit judgments, overconfidence
    Purpose of the Study:

    Audit standards require auditors to assess the work of other auditors as part of numerous tasks such as determining the proper level of supervision for subordinates and when relying on the work of other auditors.  Auditors also use their assessments of other auditors when determining engagement staffing, budgeting, and the extent of work paper review.  However, prior studies find that auditors tend to overstate others’ competence and are overconfident in their assessments.  Overstating the competence of peers and  subordinates may lead to under-auditing or inappropriate conclusions.  Therefore, improving auditors’ assessments of other auditors may improve audit quality.  This paper investigates the effect of familiarity on the process auditors use to assess other auditors and whether assessment accuracy is influenced by various levels of feedback. 

    The first study in this paper is aimed at identifying the process and anchors that auditors use in assessing others, both when they are familiar with the assessee and when they are not. The second study examines the effect of different types of outcome feedback on auditors’ performance when assessing the work of auditors that they are familiar and unfamiliar with. The three types of outcome feedback are based on the anchors identified in the first study.

    Design/Method/ Approach:

    The research evidence for both studies was collected prior to November 2007.  For the first study, the authors used senior associates from international auditing firms in Australia.  Participants thought aloud as they assessed the competence of four other auditors – one known staff, one known senior, one unknown staff, and one unknown senior.  The authors recorded the participants’ thoughts and examined the transcripts to identify any anchors used in assessing the other auditors.  For the second study, the authors used accounting graduate students. Participants completed multiple-choice tests, predicted performance of familiar vs. unfamiliar other subjects, and received one of three forms of feedback.

    Findings:

    Study 1:

    • The authors find that auditors assessing a peer that they are unfamiliar with use their perception of generic senior performance as an anchor.
    • The authors find no significant results related to assessments of unfamiliar subordinates.
    • The authors find that auditors assessing either a peer or subordinate they are familiar with use their perception of that specific auditor as an anchor.

    Study 2:

    • The authors find that, in general, the students poorly predicted performance and exhibited overconfidence in their predictions.
    • Students assessing a familiar individual performed better when provided with individual-specific feedback.
    • Students assessing an unfamiliar individual performed better when provided with average-group feedback.
    • Participants assessed a higher likelihood that the peer would answer the question correctly when they themselves had answered the question correctly (i.e. exhibited a curse of knowledge effect).
    • The authors find that overconfidence is not affected by familiarity. When assessing an unfamiliar auditor, overconfidence is positively related to the knowledge gap between the assessor and assessee.
    Category:
    Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind
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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
    Measuring Reflective Cognitive Capacity: A Methodological...
    research summary posted July 20, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    Measuring Reflective Cognitive Capacity: A Methodological Recommendation for Accounting Research of Feedback Effects.
    Practical Implications:


    The primary finding from the study is that average effects can mask real differences in participants’ cognitive capacity. Thus, the fundamental issue is not whether reflective cognitive capacity is malleable. Rather, the issue is this: can participants whose thinking dispositions predispose them to avoid being reflectiveto avoid reevaluating their initial responses and subsequently consider alternative theories (rules)enhance their ability to engage in reflective thinking? Future accounting behavioral research, especially studies that provide participants with feedback and an opportunity to learn, should include measures of reflective cognitive capacity (either the Need for Cognition scale or the Cognitive Reflection Test) in order to improve explained variance and more rigorously test techniques used to train accounting professionals. 

    Citation:

    Viator, R. E., Bagley, P. L., Barnes, B. G., & Harp, N. L. 2014. Measuring Reflective Cognitive Capacity: A Methodological Recommendation for Accounting Research of Feedback Effects. Behavioral Research In Accounting 26 (2): 131-160.

    Keywords:
    cognitive bias, cognitive reflection test, cognitive theory, feedback, reflective thinking
    Purpose of the Study:

    This study investigates whether measures of reflective cognitive capacity can differentiate which participants are more or less likely to benefit from feedback intervention. This is important because if participants systematically differ in their ability to reflect, and accounting researchers omit controlling for such variation, then accounting academe’s recommendations regarding the effectiveness of various feedback intervention techniques are likely to be overstated. In other words, such recommendations might not be applicable to those accounting professionals who are less inclined to engage in reflective thinking. This potential methodological issue relates to studies in managerial accounting settings and financial information processing, as well as audit judgments.

    Design/Method/ Approach:

    This study provides results from four separate experiments of feedback effects. These studies were conducted across a two-year period, utilizing four separate accounting participant pools, all enrolled in a Master’s of Science in Accounting program, employing different feedback mechanisms, and examining different measures of performance. In each of the four studies, reflective cognitive capacity is measured using the Need for Cognition scale; in the latter two studies, the Cognitive Reflection Test, recently reported in the behavioral economics literature is used. The evidence was gathered prior to April 2014.

    Findings:

    Across all four experiments, the results consistently document that variations in participants' reflective cognitive capacity explain differences in post-feedback performance. Based on four different experiments, conducted across a two-year period, the results provide strong evidence that the NFC and CRT measures could reasonably partition participants into two groups: those that are more likely, versus those that are less likely, to benefit from feedback intervention. The incremental benefit derived from controlling for differences in reflective cognitive capacity certainly exceeds the incremental cost. Based on an analysis of adjusted means, participants with relatively high reflective cognitive capacity improved their performance after receiving summary outcome feedback, whereas participants with relatively low reflective cognitive capacity did not improve.

    Category:
    Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind

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