This discussion emphasizes significant caution when interpreting the results of the study. Mainly, it is unclear if results of the study can generalize to the broader public company market in the US. Furthermore, if the results are misinterpreted (i.e., individual auditors are not systematically aggressive but, instead, high quality auditors are systematically assigned the riskiest clients) then regulation requiring audit partner identification could actually have overall negative effects on overall audit quality.

Kinney, W.R. 2015. Discussion of “Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions”. Contemporary Accounting Research 32 (4):1479-1488.

The author reviews the paper's content, analyzes its predictive validity, and discusses its multiple implications. He provides constructive suggestions for improvements. Based on predictive validity analysis, the author concludes that engagement partner assignment strategy is an important and acknowledged omitted variable that affects the study's internal validity via both the independent variable (partner's prior performance measure) and the dependent variable (borrower's cost of debt capital). The omission also affects construct validities and, if audit firms are applying a plausible assignment strategy, then interpretation of the study's main results would be reversed. Finally, the lack of a standards intervention noted by the authors and the extreme size and other differences between audits of Swedish private companies and U.S. public companies impair external validity and generalization to the U.S. intervention.

This article is a discussion.

The discussion emphasizes the following points:

• KVZ (the reviewed paper’s authors Knechel, Vanstraelen and Zerni) main analyses are for statutory (not financial statement) audits of small, private, Swedish companies. Therefore, these results may have more limited generalizability. 
• KVZ use publically available data for private companies without considering the significant amount of private information available to private lenders and audit firms.
• KVZ acknowledge and cannot rule out a potential competing hypothesis whereby audit firms follow a “best partner to riskiest engagements” strategy. In this case, the highest quality partners may appear to have the most aggressive reporting strategy because that partner serves riskier clients with harder to predict bankruptcy risk. To confirm/disconfirm this competing hypothesis occurs, KVZ could ask audit firm management to describe their audit partner assignment strategies and rank a sample of partners accordingly. This information could be correlated with KVZ’s reporting style measures.    
• Regulators, academics, and popular/business press articles may be similarly over-generalizing KVZ’s results. Furthermore, misinterpretation of results could have the ill-effects of high quality audit partners being assessed as low quality. This false characterization may lead high quality auditors to refuse to audit riskier clients where their skills are most needed. As such, any interpretations of KVZ’s results should proceed with much caution.

http://www.auditingresearchsummaries.org

The results of this study have other implications for audit researchers. The results of this study suggest that staff-level auditors may be appropriate surrogates for senior-level auditors for certain tasks, under certain conditions. This has implications for researchers because staff-level auditors may be more accessible to researchers than senior-level auditors due to being less time constrained and being more connected to universities due to being recent graduates or being enrolled in a fifth-year Master’s program concurrent with their being staff-level auditors. Also, this study extends research on the role of individuals’ subjective experience while self-generating alternative explanations on their likelihood assessments.

Yen, A. C. 2012. The Effect of Early Career Experience on Auditors' Assessments of Error Explanations in Analytical Review. Behavioral Research in Accounting 24 (2): 211-229.

This paper examines the analytical review judgments of staff-level auditors. The performance of analytical review procedures has traditionally been associated with senior-level auditors. However, changes in the audit environment (e.g., increased team auditing, a shift away from compliance testing to increased analytical procedures, and more work “pushed down” to lower-level staff) over the last ten to fifteen years may have led to staff-level auditors being exposed to the analytical review process, and more specifically, financial statement error knowledge, earlier in their careers. Thus, an assessment of staff-level auditors’ performance on analytical review procedures is necessary, both to increase the understanding of the learning curve as it relates to analytical review procedures and to provide evidence on the readiness of staff-level auditors to perform these traditionally more senior-level procedures. To examine this research question, the author conducts an experiment based on Heiman (1988, 1990). 

Forty-six staff-level auditors and forty-one graduate accounting students with no full-time audit experience participated in the experiment and were paid a flat wage of ten dollars plus the chance of winning a drawing for a number of restaurant gift certificates. The graduate accounting students were recruited from two accounting classes at an urban university in the northeastern United States. The staff-level auditors were recruited from professional contacts of the author. The evidence was gathered prior to March 2012.

The author finds that both staff-level and student participants overestimate (underestimate) the likelihood of specified (unspecified) causes, and that providing either group with alternative explanations reduces their likelihood assessments for an original specified cause. On the other hand, when participants are asked to self-generate alternative explanations, the likelihood assessments for staff-level auditors and students are different. Students’ likelihood assessments increase after being asked to self-generate alternative explanations. The pattern of results for the students in this study is consistent with the pattern observed for the students in Heiman (1988). For staff-level auditors, their assessments are reduced after being asked to self-generate alternative explanations, if they self-generate at least two alternatives. The pattern of results for staff-level auditors in this study is similar to the pattern observed for senior-level auditors in Heiman (1990). Overall, these results show that staff-level auditors perform more like Heiman’s (1990) senior-level auditors than like students on this analytical review task.

http://www.auditingresearchsummaries.org

This article has sought to profile the partner habitus in Big 4 firms in order to better understand what constitutes success within this context. The need to generate revenue tends to undermine ethics and professional independence. In the context of the accounting field, the authors would argue that to be a professional at the top level essentially means to embody commercialism. If commercial concerns dominate the habitus of the leaders of Big 4 firms, then one can expect future conflicts and tensions to occur with traditional professional values. Although in one sense equity partnership is becoming more exclusive and difficult to attain, the authors equally show how making partner is more meritocratic than in the past, as social ties are less important.

Carter, C., and C. Spence. 2014. Being a Successful Professional: An Exploration of Who Makes Partner in the Big 4. Contemporary Accounting Research 31 (4): 949-981.

Professionalism—in the ideal-type sense of the term—is not disappearing, but its meaning in practice is clearly changing being fused with commercialism in ways that appear to vary across firms, sectors, geographical contexts, and even within firms themselves. The twenty-first century accounting professional is likely to embody different logics—ranging from traditional accounting values through to entrepreneurial practices. This paper explores the theme of what it means to be a successful professional in the Big 4 today. The researchers ask the questions: 

• Is there a significant gap between partners’ socioeconomic origins and their current status in society?
• What are the meaningful distinctions between partners and those just below partner level in the Big 4?
• What are the perceived essential qualities of partners in the Big 4?
• In what ways can the accounting partners of today be distinguished from partners of previous generations in terms of their habitus and capital portfolios?

This paper reports on a series of qualitative interviews undertaken with 32 senior professionals in the Big 4 between 2010 and 2012 in Canada and the UK. The interviews lasted between 45 minutes and 3 hours and were semi structured. Individuals came from three of the Big 4 firms, with one individual not from Big 4 and one individual who worked for Arthur Andersen. All the interviewees were white and only three were female.

• Success in the Big 4 is measured, ultimately, in terms of economic capital.
• Interviewees uniformly emphasized that the skills required to be a partner were primarily those that could be deployed in order to generate revenue, win new business, and maintain or enhance existing and potential client relationships.
• Beyond the primary importance of selling and business development, technical abilities and competencies were also highlighted by interviewees as of importance.
• Several partners openly acknowledged having subordinates who were technically much more competent than they were and that their job was to “call in the specialists” whenever needed.
• The UK interviewees came from relatively modest backgrounds—aspirational working class or lower-middle class; they were generally educated in the state system and were the children of parents who themselves were unlikely to have had the luxury of higher education.
• It was unusual for an interviewee to have received a privileged education at the secondary level and/or to have attended an elite university. Of the 32 interviewees, only three fitted this mold, one of whom left the Big 4 at senior manager level complaining that he never fit into the culture.

http://www.auditingresearchsummaries.org

Given the positive effects that human capital and IT accumulation had on productivity growth, the findings of this study imply that firms seeking to improve their revenues per employee could do so by investing in more IT and human capital. The potential effects of these investments on audit quality could be beneficial when determining the level of investment to make. However, firms should keep in mind the possibility of diminishing results once a certain level of IT and human capital is accumulated. This study also has implications for the debate in the United States surrounding the Sarbanes- Oxley Act which prohibits certain non-audit services by public accounting firms. The debate stem from a concern of the effects of non-audit services on independence but this study displays the benefits that could arise if non-audit services were allowed.

For more information on this study, please contact Hsihui Chang.
 

Chang, H., J. Chen, R. Duh, and S. Li. 2011. Productivity growth in the public accounting industry: the roles of information technology and human capital. Auditing: A Journal of Practice and Theory 30 (1): 21-48.

The audit industry has changed dramatically over the last two decades. These changes have brought on increased competition among firms which has created immense pressure for audit firms to minimize their costs while maximizing productivity. For many public accounting firms, the way to manage productivity growth and enhance service delivery came in the form of investments in information technology and human capital. Investments in information technology can increase productivity through automation of routine auditing tasks, improvements in audit team collaboration and communication, as well as through an increased level of experience with information systems which can improve auditor performance in engagements to help clients integrate their company information systems. High quality human capital, which is usually indicated through education levels and work experience and results in both technical and tacit knowledge, contributes to the productivity growth of a firm through higher quality services for clients.

This study breaks down human capital and information technology (IT) into four drivers of productivity growth among public accounting firms; efficiency change, technical progress, IT capital accumulation, and human capital accumulation. The authors assessed both the simultaneous effects of human capital and IT as well as the individual contributions of the four distinct components of these factors on productivity growth. Some firms also chose to boost productivity through engaging in more non- audit services. Although most studies focus on the effects that non-audit services have on auditor independence, this study focuses on how non- audit services can contribute to productivity growth.
 

The authors analyzed data on revenues, employees, IT expenditures, and human capital for a sample of public accounting firms in Taiwan from 1993 to 2003. The data was obtained from the Annual Survey of Accounting Firms in Taiwan published by the Department of Statistic of Taiwan’s Ministry of Finance. The authors chose Taiwan as a proper setting for this study because its publications included more advantageous data than that of the United States published in Accounting Today’s annual surveys.

• Public accounting firms experienced growth in productivity, specifically, labor productivity evidenced through revenue per employee. 
• This growth, in order of least contribution to greatest contribution, resulted from efficiency improvement, technical progress, human capital accumulation, and IT capital accumulation. Thus, the primary drivers were human capital and IT accumulation.
• There was a significant difference in productivity growth between Big 4 and non- Big 4 firms. This difference was primarily attributable to greater technical progress and IT capital accumulation among the Big 4. Additionally, there was no difference in human capital accumulation between Big 4 and non- Big 4 firms.
• Although the advance of technology provides all accounting firms with opportunities to improve productivity, not all firms exploit these opportunities equally. The Big 4 invested more heavily in IT systems and were rewarded with higher productivity growth.
• Firms with a greater growth in non-audit services had higher productivity than other firms because they accumulated higher IT and human capital over the sample period.
• Early movers into non-audit services tended to have higher changes in IT capital accumulation.
• Both early moving firms into non-audit services and firms that emphasized growth in non-audit services presented a direct relationship with productivity growth higher than that of firms which focused on traditional audit services.
   

http://www.auditingresearchsummaries.org

The critical implication from these findings is that, despite the expectation of conservatism required by GAAP, under certain circumstances some auditors may acquiesce more readily to client pressures than other auditors.  Specifically, when engagement risk is high, auditors with lower negotiation experience may tend to make more concessions in negotiations to the client than auditors with higher negotiation experience or auditors in a lower engagement risk setting.  

Thus, though the paper does not discuss the following point specifically, the audit firms should be aware of this vulnerability of auditors with lower negotiation experience and should consider this in planning negotiations and assignments.  Potentially, audit firms may consider assigning managers and partners who are less experienced in negotiation to clients with lower engagement risk and/or lower litigation exposure for the audit firm.  Alternatively, when managers or partners with lower negotiation experience are placed on clients with high engagement risk, firms may consider assigning a manager or partner with more negotiation experience to accompany the manager or partner with less negotiation experience. 

Brown, H. L., and K. M. Johnstone. Resolving Disputed Financial Reporting Issues: Effects of Auditor Negotiation Experience and Engagement Risk on Negotiation Process and Outcome. Auditing: A Journal of Practice and Theory 28(2):65-92.

Auditing necessitates negotiation between the auditor and the client to resolve disputed reporting issues.  Such negotiation can materially affect financial statements.  However, little is known regarding how contextual factors, such as auditor or client characteristics, affect client-auditor negotiations.  Understanding how such factors affect client-auditor negotiations is important because such an understanding provides insight into how training, personnel assignment, and other audit interventions may improve audit quality and reduce litigation exposure related to the issues involved in client-auditor negotiation.  Brown and Johnstone investigate how two factors, engagement risk and auditor negotiation experience resolving complex financial reporting issues, impact the process and outcome of client-auditor negotiation.

Brown and Johnstone collected their evidence via an experiment in which audit partners and managers who participate assume the auditor role in an experimental case setting.  The experimental case involves a complex revenue recognition issue, for which professional standards are imprecisely defined.  In the case, the auditors are required to decide how to allocate revenue between current and future periods for a multi-year contract.  The client’s preference is to recognize the majority of the revenue currently, though most of the earnings process is not complete.  Auditor participants then negotiate with the client via the internet.  Pre-determined client responses are generated by a computer program.  The experimental data was collected in the early 2000’s.

Auditors with lower negotiation experience in the context of high engagement risk compared to (1) the auditors with lower negotiation experience in the context of low engagement risk and (2) the auditors with higher negotiation experience in both low and high engagement risk contexts, exhibit the following differences in judgments:

• Significantly more concessions
• Marginally less conservative negotiation outcomes
• Marginally less confidence about whether their final outcomes are appropriate under GAAP