Although the results in this study are only collected from a single group, audit partners, it provides valuable insights for both audit firms and their employees in respect to the development of technical knowledge in auditing. The results heighten the awareness that professional learning is a complex web of different factors. Audit firms might reconsider the fundamental model of learning in today´s professional environment.

Westermann, K. D., J. C. Bedard, and C. E. Earley, 2015. Learning the ‘Craft’ of auditing: a dynamic view of auditor’s on-the-job learning. Contemporary Accounting Research 32 (3): 864-896.

In the current environment audit practitioners must master a comprehensive body of intricate knowledge in order to obtain the class of professional proficiency requisite to comply with auditing standards, pass over supervisory inspections, and uphold their public responsibility. Besides mandatory requirements to become certified, that is partly retrieved at a university, a significant part of knowledge gained by auditors occurs trough on-the-job-learning. A learner (audit staff) shows how to perform a particular task and eventually this guidance will evoke in mastery of audit procedures by the youngster.

The researchers in this study are mainly interested in the question how technical knowledge of auditing is created and reinforced in every day practice that is situated within the social context of performing engagements. In more detail the researchers are interested in the processes through which new auditors learn technical knowledge (i.e. the craft of auditing) on the job, relying on candid comments of audit partners to depict these processes within the social and economic factors comprising their everyday work environment of the firm.

The authors used a semi-structured interview approach. Thirty practicing audit partners of a single big four audit firm in the USA participated. The interview instruments are developed via several stages: in the preliminary phase comments were received of two audit directors and one manager and in a later stage a pilot test was executed in conjunction with a retired big 4 partner. Interviews were conducted in the late 2008 and the early 2009 and are collected via phone or in person.

The data in this article reveals that on the job learning is a movable process that is subject to societal and economic forces. The authors have structured their findings in chronological progression of trainee development from hiring towards promotion as an audit senior. Audit partners placed their perspective on learning technical knowledge in the following categories: requirements and induction, learning on engagements, supervisory review and feedback practices and on-the-job learning in the senior role. 

Most significant detailed expressions by partners were: (1) an important part of technical learning takes place on engagements, but success strongly depends on facing challenging situations and gaining skills via trial and error, (2) audit partners are consistent regarding the magnitude of coaching and supervisory feedback (both formal and informal). It directly improves audit quality and enhances learning in technical accounting knowledge, and (3) on more complex accounting levels audit partners concerned the current structure of senior development. Seniors are less exposed to higher level issues since more complex work is more often being performed at higher level (manager or partner). This structure has only a short term benefit to audit quality because limits the opportunity to engage and learn complex accounting transactions.

Overall the researchers concluded that effective learning is a long, complex, multifaceted, and integrated process that achieves success trough a delicate balance of specific conditions in order to nurture development.

http://www.auditingresearchsummaries.org

In conjunction with the changes discussed in the paper, as listed below, the authors hoped that their initial research would encourage other scholars to look into auditor accountability and formulate proposals of their own through examining intended and possible unintended consequences of the research questions identified.

Peecher, M. E., I. Solomon, and K. T. Trotman. 2013. An accountability framework for financial statement auditors and related research questions. Accounting, Organizations and Society 38 (8).

In the past, public company auditing in many countries around the world was self-regulated but due to some major corporate collapses, worldwide changes were implemented. These changes led to entirely new regulatory bodies such as the Public Company Accounting Oversight Board and the Financial Reporting Council in the United Kingdom. Since these changes occurred, some believe audit quality has suffered. This paper attempts to address two overarching questions throughout it. (1) What kind of accountability framework could regulators use to motivate auditors to improve audit quality? (2) What accountability framework could regulators use to evaluate how well auditors have completed their duties? Based on these questions and the analyses of various research topics in psychology, neuroscience, economics and accounting, this paper hopes:

• To establish that forward-looking estimates are the basis for most financial statement information and that some of these estimates are highly uncertain.
• To propose an accountability framework with two dimensions:
  • Rewards versus penalties
  • Processes versus outcomes
• To show that auditors’ current regulatory accountabilities are generally in the form of penalties rather than rewards and depend heavily on audit outcomes rather than attributes of auditors’ judgment processes.
• To provide evidence that questions the suitability of the current system for improving the quality of auditors’ judgments and the quality of evaluations of those judgment made by inspectors.
• To identify four potential changes for improvement in the quality of audits.

The authors use data and research from a variety of backgrounds including psychology, neuroscience, accounting, and economics and create new exhibits based on that information.  This information is gathered from a variety of journals across a large segment of time. The authors also utilized research questions in the article and attempted to answer each one as they presented it. 

Based on preliminary research, the authors found:

• It would be beneficial to identify new ways to reward financial statement auditors.
• In certain instances steps should be taken to reframe auditors’ current incentives in reward terms.
• Audit quality would likely increase if auditors were more accountable for the judgment-process quality.

Based on research regarding the first proposed change, to introduce an auditor judgment rule, the authors found:

• Practitioner risk taking, compounded with practitioner research and development on ways to improve existing practices, are reduced without a judgment rule.
• Fear of liability makes it difficult to attract and retain the most talented individuals
• Market mechanisms would penalize nonperformance even if a judgment rule was introduced.

Based on research regarding the second proposed change, to add a concurrent element to regulators’ inspections, the authors found:

• Using retrospective verbal or written accounts of participants’ judgment processes often entail stylization, bias, and omissions due to lapses in memory.
• Audit working papers are stylized to reduce ambiguity, create a desired portrayal of the judgment process, and give a persuasive account of the auditor’s conclusions.
• Training and quality-control benefits come from including concurrent reviews of subordinate auditors’ work, as opposed to relying on exclusively retrospective work.

Based on research regarding the third proposed change, to encourage auditors to be skeptical of their own judgment processes, the authors found:

• When asked to take the position of a “reasonable investor,” managers were far more conservative than they were with their regular decisions.

Based on research regarding the fourth proposed change, to reward auditors who take stands on financial reporting quality, the authors found:

• Providing significant and direct rewards for auditors who uncover fraud has the potential to motivate helpful innovation by auditors to actively search for fraud.

http://www.auditingresearchsummaries.org

This study is important to audit practice as it provides an initial view into the effects of outsourcing and offshoring on juror perceptions of the due care exhibited in supervising audit work performance as embodied in assessed damage awards, while also providing perceptions on the expected quality and risk associated with these relationships. The results may be of particular interest to the profession given that this study examines audit work outsourced and/or offshored to India, the country cited as conducting the most outsourced audit work for North American CPA firms. Interestingly, the professional bodies (i.e., NASBA) have chosen not to grant reciprocity of practice for Indian charted accountants (i.e., Mutual Recognition Agreements). India has been denied multiple times while reciprocity has been granted to CPAs/CAs in Australia, Canada, Hong Kong, Ireland, Mexico, and New Zealand (NASBA 2012). The juror perceptions of quality and risk of audit work outsourced offshore, as shown in this study, parallel the concerns expressed by professional bodies.

For more information on this study, please contact Alex Lyubimov.

Lyubimov, A., V. Arnold, and S.G. Sutton. 2013. An Examination of the Legal Liability Associated with Outsourcing and Offshoring Audit Procedures. Auditing: A Journal of Practice and Theory 32 (2): 97-118.

Accounting firms have steadily increased the use of outsourcing and offshoring of professional services including independent audit procedures. While firms suggest that the work is of higher quality and similar litigation risk, questions remain as to whether public perceptions may be more negative. The purpose of this study is to examine the effect of outsourcing and offshoring of audit work on juror’s perceptions of auditor legal liability when an audit failure occurs.  More specifically, this paper examines liability associated with an audit failure when work is performed by another office of the same firm or outsourced to a separate firm, and whether the work is performed domestically or in another country.  Theory suggests that outsourcing and offshoring of those outsourced audit procedures has the potential to erode the perceived professionalism of auditors’ work as embodied through decreases in perceptions of work quality, increases in perceptions of associated risk, and ultimately more severe damages assessed against auditors during litigation.

An experiment was conducted using a 2 (insource vs. outsource) X 2 (onshore vs. offshore) design. The experiment was delivered through an internet application to facilitate the use of a diverse national sample of jury eligible participants. Participants, representing a broad demographic base, were individuals who were over the age of 18, jury-eligible in the US, had no legal or auditing experience, and not CPA’s. Data were collected over a four-day period in December, 2010.

Results indicate that choosing to outsource audit work to another audit firm is associated with higher compensatory damages in case of an audit failure.  Furthermore, when this third party audit firm is located in a different country (offshoring), outsourcing leads to significantly higher punitive damages.  Surprisingly, jurors assess higher than expected litigation awards for a failure by another domestic office of the firm for punitive damages. This result suggests that the close proximity in terms of both geography and organizational distance of the domestic office of the firm leads jurors to find the audit failure less understandable. Post hoc analyses indicate that potential jurors perceive that work completed by another domestic office of the firm has the highest expected quality and lowest risk, while work that is outsourced offshore is expected to be lowest quality and highest risk—consistent with proximity theory.

http://www.auditingresearchsummaries.org

The findings of this study imply that firm level expertise impacts audit quality but has a greater impact in conjunction with office level or partner level expertise. Similarly, concurring auditors have a greater impact on audit quality when their abilities are paired with those of a lead or signing partner. This study implicitly emphasizes the importance in cooperation and the sharing of intellectual resources among partners in Big 4 firms considering that expertise is not homogeneous across a firm. Additionally, this study has implications on what could result if the Public Company Accounting Oversight Board in the United States decided to require an engagement partner’s signature on the audit report.

For more information on this study, please contact Hsin-Yi Chi.
 

Chi, H., and C. Chin. Firm versus partner measures of auditor industry expertise and effects on auditor quality.  Accounting: A Journal of Practice and Theory 30 (2): 201-229.

This study explores the relationship between Big 4 audit quality and auditor expertise with respect to both the individual partners and the audit firm. The authors used accruals analysis as well as analysis of audit opinions to assess audit quality. To take the study a step further, an examination of the possible existence of differential audit quality between signing auditors whether lead or concurring partners was also performed. An office level perspective was used and deemed appropriate under the assumption that auditor expertise is permanently tied to individual professionals and their client knowledge which cannot be readily captured and distributed across the firm offices; additionally, the individual practice office is the decision-making unit of the firm when it comes to specific clients.

To accomplish their purpose, first the authors studied whether audit industry expertise is driven by firm expertise, individual partner expertise, or a combination of both. They also studied whether the association between audit quality and industry expertise of the signing auditor specialist was more or less prominent for the lead auditor or the concurring auditor. One would expect that the lead partner generally would exhibit a more prominent association with audit quality than concurring audit specialists because it is the lead partner who is actively engaged with daily audit proceedings; this study aims to discover if that is truly the case. The study assesses the effectiveness of an individual partner-level and firm-level auditor specialists in enhancing audit quality as well as provides evidence regarding industry expertise homogeneity between individual partners within the same firm.  
 

The evidence for this study was collected from Taiwanese publicly listed companies audited by the Big 4 firms from 1983 to 2004. Financial data, audit opinions data, and auditor names were obtained from the Taiwan Economic Journal. Taiwan was the chosen location for this evidence because the audit report in Taiwan contains two signing auditor names as well as the firm name. 

• Both firm-level industry expertise alone and partner- level industry expertise alone are associated with lower accruals. However, a combination of the two creates an effect above and beyond either level of expertise in isolation; therefore, differential discretionary accruals due to industry expertise are driven by a combination of firm and partner expertise.
• Differential accruals due to industry expertise of signing are primarily driven by the lead auditor rather than the concurring auditor.
• The differential likelihood of the issuance of a modified audit opinion is primarily attributable to signing auditor specialists and partner-level expertise.
• Firm level specialists alone are not associated with a higher likelihood of issuing a modified audit opinion. Instead, firm level specialists along with signing auditor specialists create effects above and beyond those observed with auditor specialists alone.
• Clients of lead signing auditor specialists have smaller accruals and are more likely to receive a modified audit opinion relative to those of non-specialists  whether the auditor specialists works alone or with a concurring auditor specialist.
• Concurring auditor specialists alone are not associated with higher audit quality.
• Industry expertise is not homogeneous across individual auditors within the same audit firm in Taiwan.
   

http://www.auditingresearchsummaries.org

The results of this study are important for audit firms to consider when planning how workpaper reviews will be performed, when setting preparers’ review expectations and when reviewing electronic workpapers.  Though the paper does not discuss these implications explicitly, the findings point to the following potential implications auditors may consider:

• Anticipation of face-to-face review by preparers tends to result in workpapers of higher quality.
• Face-to-face reviews tend to be of higher quality than electronic reviews.
• Workpapers prepared in anticipation of an electronic review tend to be lower in quality than the workpapers prepared in anticipation of a face-to-face review.  Thus, electronic reviewers may consider decreasing their reliance on such workpapers, spending more time reviewing the workpapers, providing more review notes, and/or increasing the amount of rework they require from the preparers.

Agoglia, C.P., R. C. Hatfield, and J. F. Brazel. 2009. The Effects of Audit Review Format on Review Team Judgments. Auditing: A Journal of Practice and Theory 28(1):95-111.

The increasing use of electronic workpapers enables reviewers to review workpapers electronically (i.e., remotely, communicating via email), rather than face-to-face (i.e., reviewing on-site with the opportunity to discuss review notes and ask/answer questions in person).  Recent accounting research finds that review mode can affect the judgments of auditors preparing workpapers.  In this study, Agoglia et al. investigate the extent to which review mode (electronic or face-to-face) affects the quality of documentation in the workpapers and the mechanism behind this relationship.  In addition, the authors investigate whether reviewers are able to discern and compensate for these documentation quality issues.

Agoglia et al. collect their evidence via an experiment in which auditors act as mock preparers or reviewers of workpapers.  Participants prepare preliminary going-concern evaluation workpapers for a hypothetical client.  Specifically, they are required to document evidence for a preliminary going concern conclusion.  Preparers are randomly assigned to one of two conditions: face-to-face review or electronic review.  Preparers in each condition are informed that their work will be reviewed face-to-face or electronically, depending on the condition.  

Reviewers are randomly assigned to preparers and informed that they will review the workpapers either face-to-face or electronically, depending on the preparer’s condition.  The reviewers are required to leave notes and assess quality, reliability, and completeness of the working papers, as well as any additional work still required to be done.  The reviewers’ judgments are then compared with those of experts (audit partners) who receive the same materials as the preparers.  The experimental data was collected in the early 2000’s.

• The judgments of the face-to-face workpaper reviewers are, on average, essentially the same as those of the experts (audit partners), indicating they are of relatively high quality.  Conversely, the judgments of the electronic workpaper reviewers are significantly different, on average, than those of the experts (i.e., of lower quality).
• The experts consider the evidence documentation provided by the electronic review group to be of lower quality than the documentation provided by the face-to-face preparers.  However, reviewers do not appear to recognize this issue.  Specifically, the authors find that the documentation quality assessment gap (reviewer minus expert mean assessment of documentation quality) is significant for the electronic review group, while it is insignificant for the face-to-face group – indicating that while experts and reviewers have similarly high perceptions of documentation quality of the face-to-face preparers, reviewers perceive workpapers of electronic review preparers to be of higher quality than do experts. The authors show that the documentation quality assessment gap negatively affects electronic reviewers’ judgment quality. In other words, it is electronic reviewers’ inability to assess the lower quality of the workpaper documentation that is the mechanism behind their lower reviewer judgment quality.            
• Electronic reviewers rely on the preparer’s workpapers and would require additional work to the same  extent as the face-to-face reviewers.  Further, electronic reviewers take about the same time to review and give about the same number of review notes as the face-to-face reviewers.  This finding is best viewed in light of the finding in prior research showing that reviewers believe electronic reviews are less effective.  However, electronic reviewers do not appear to be compensating for the lower quality of workpapers prepared in anticipation of electronic review.