Most importantly, the findings of this study educate on the audit quality implications of a subordinate making judgments with knowledge of their superior’s preference. While knowledge of a superior’s preference may negatively affect the objectivity of audit judgments, the findings suggest that is also has the potential to improve audit judgment quality. Second, possible cross-nation variation in audit judgment has important implications for the audit of multinational organizations and offshoring of audit work, among others. 

Kim, S. and N. Harding. 2017. The Effect of a Superior’s Perceived Expertise on the Predecisional Distortion of Evidence by Auditors. Auditing: A Journal of Practice and Theory 36 (1): 109 – 127.

Auditors are influenced by the known preferences of their superiors such that they are motivated to make judgments that favor those preferences. In this study, the authors examine the potential for the influence of a superior’s known preferences to positively affect audit quality, and whether that influence varies across nations that differ in their hierarchical culture. There is a potential for a superior’s preference to have information value such that a judgment favoring the superior’s preference may not be entirely non-normative; however, there is an implicit assumption that this is a threat to the objectivity of auditor judgments and detracts from audit quality. With this study, the authors hope to address a gap in the existing literature and, in doing so, to contribute to an understanding of what superiors should communicate to their subordinates in order to enhance audit quality. 

The authors conduct an experiment in which auditors from Australia and South Korea evaluate a number of going concern evidence items and then make a judgment as to whether the firm for which the evidence items relate would continue as a going concern. 

• The authors find that auditors exhibit greater levels of predecisional distortion toward the known preference of a superior perceived to possess higher levels of expertise as opposed to those perceived to have lower levels of expertise, and this is the case for auditors in both Australia and South Korea.
• The authors find no evidence of differences in the level of predecisional distortion exhibited by auditors from Australia and South Korea. 

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 This study should give pause to investors, auditors and regulators about the potential willingness of subordinate auditors to acquiesce to a superior’s unethical request. As such, the accounting profession should make sure to have a better understanding of the nature of and solutions to the problem such as changes in firm/team culture, personnel placement, etc. Additionally, audit firms can better use this information to understand which employees may be most susceptible to such negative influence and preempt such events.

 Johnson, E. N., D. J. Lowe, and P. M. Reckers. 2016. The Influence of Mood on Subordinates’ Ability to Resist Coercive Pressure in Public Accounting. Contemporary Accounting Review 33 (1): 261-287.

This study examines the relationship between subordinate auditors’ various affective states (i.e. mood/emotion) and their effect on auditors’ willingness to comply with a superiors’ unethical directive in six common auditing scenarios.  The authors also employ more real-world event triggers and scenarios compared with previous research.  This study seeks to better refine and test the broad constructs of mood used in previous research.

Sample: 118 audit seniors from two large international public accounting firms

Experiment: Create a broad distribution of arousal, fear and insignificance among participants by manipulating two aspects of the audit client CEO (high/low dominance and high/low prestige) and one aspect of the auditor (above/below average work-life history).

Analyses: 2x2x2 between subjects ANOVA using median splits on each measured variable: fear, insignificance and arousal

Regardless of affective state manipulations, the audit seniors express a high level of willingness to comply with a superiors’ unethical direction.  However, this willingness to comply is increased when auditors are made to feel more insignificant (i.e. weak/low power position relative to others) and fearful (i.e. elevated uncertainty and lower perceptions of control regarding future events and circumstances) but decreased when auditors are in an active, positive mood state (i.e. arousal).  Interestingly, these results obtain despite significant doubt by the firms’ senior management who reviewed the task that any of their subordinates would express willingness to engage in such behavior.  As such, auditors may be more willing to engage in or overlook unethical behavior than previously thought.  

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Given the extent of audit evidence collected by young staff auditors, the findings of this study have direct implications for workpaper and audit quality. The mismatch of age, experience, and knowledge between staff-level auditors and client management can result in a potentially intimidating situation for the staff-level auditor, and impact decisions made in collecting information and conducting testwork. These results provide new evidence regarding the impact of auditor-client interactions on audit quality. This suggests that firms may want to consider how to manage these social mismatches of their staff.

For more information on this study, please contact G. Bradley Bennett.
 

Bennett, G. B., and R. C. Hatfield. 2013. The Effect of the Social Mismatch between Staff Auditors and Client Management on the Collection of Audit Evidence. The Accounting Review 88 (1): 31–50.

This study analyzes social interactions between staff-level auditors and client management to determine how differences in perceptions may influence decisions regarding the collection of audit evidence. During fieldwork, staff-level auditors have extensive interaction with client management, and evidence suggests these auditors are often socially “mismatched” with client management, in terms of their experience, age, and accounting knowledge. Concerns exist over these staff-level auditors’ desires to avoid the interactions and how it may affect the amount of audit evidence collected. The authors of this study attempt to determine the overall effects of these relationships.

Surveys were conducted to gather evidence about audit staff interactions with client management. The results of these studies were used to develop and experiment. Graduate auditing students with approximately 2.5 months average internship experience over one busy season were considered an appropriate and practical proxy for staff-level auditors with minimal experience. Participants in the experiment included 138 Master’s of Accountancy students, 52 percent female and 48 percent male, from a large state university in the Southeast. Participants in the experiment were put into a simulated work environment and asked to review accounts receivable confirmations in which additional information was needed from the client’s controller. Results of the experiment were used to determine the participant’s perception of the audit client and their ability to collect sufficient audit evidence.

• Social differences between staff-level auditors and client management reduce the likelihood that staff-level auditors will request additional audit evidence via face-to-face meetings with the audit client.
• Client’s explicit behavior to intimidate the auditor does not necessarily result in a difference in auditor behavior.
• Allowing participants to request evidence via email increased the likelihood that such evidence was requested.
• Participants often document their findings in such a way as to minimalize the chance of a reviewer identifying the issue.
   

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Given the results, the study provides evidence that there may need to be some additional guidance or tools used by auditors to stimulate the planning of client inquiries in order enhance the reliability of audit evidence obtained from client inquiry.  Auditors may benefit from having some high-level guidelines and framework to prepare and plan for meetings where they will be inquiring of management.  There would be benefits to providing a loose framework of items to consider before making an inquiry of management. This could increase the reliability of the inquiries as a form of evidence.  If the information obtained through inquiry is more reliable, the judgments and decisions that an auditor makes based on the inquiries may achieve a higher level of audit quality.

For more information on this study, please contact Guoping Liu.
 

Liu, Guoping. 2012. Gathering Evidence through Enquiry:  A Process Improvement Focus.   Behavior Research in Accounting 24 (2): 153-175.

As the accounting guidance continues to implement standards that require client management to make even more estimates in their financial statements, auditors have to rely on inquiries of client management as means of obtaining of audit evidence.  The critical aspect of this notion is how to make information obtained from management inquiries a more reliable form of audit evidence.  In order to make the evidence more reliable, it is important to determine what improvements in the inquiry process need to be made. 

Audit inquiries are a key aspect of seeking information regarding the company’s financial and non-financial information.  Inquiries could include obtaining information regarding significant fluctuations in financial information, changes in the business, assumptions made in estimates, the rationale behind complex business transaction as well as other aspects about a client.

The authors develop two types of decision aids and examine how these aids impact the inquiry process in which auditors engage with management.  The author believes that these decision aids may help improve how auditors plan for inquiries of client management as opposed to explicitly indicating how the inquiry process should occur.   The two types of decision aids are:

• Theory-based decision aid:    This is based on psychology-based theory that someone who plans for the inquiry procedure by creating a mental simulation of its conversation with management will be better prepared to successfully completes the inquiry process.  Cognitive planning could ultimately improve the task performance (but not by prescribing specific behavior) by providing only simple task instructions to assist in planning for an inquiry. 
• Practice-based decision aid:  This is based on the CICA 360 model that focuses on providing a basis for developing a practice-aid for the planning of client management inquiry,  This model focuses on the reliability of the evidence obtained through the inquiry including the reliability of the interviewee, the effectiveness of the interviewer, the quality of the information, the credibility of the findings noted, and how the information is integrated and synthesized by the auditor into the audit evidence.  The author develops a list of matters to consider in preparing for the client management inquiry.  Using a practice-based planning tool, the auditors will improve how auditors plan for the inquiries as compared to performing a checklist of required steps in carrying the inquiry task.

The participants consisted of 150 Master-level students (from two Canadian universities) who have approximately 6-24 months of audit experience.  The experiment was a 1x3 between-subject research design.  The participants were divided into one of three groups:  base, cognitive planning and practice aid groups.  The base group was provided the background information and then given the instruction to describe how they would perform the inquiry of management.  The cognitive planning group was given more instruction than the base group and was instructed to consider the information the auditor would like to obtain, how to obtain such information during the inquiry, and sequence of steps to carry out the inquiry.  The group is then asked to describe how they would perform the inquiry of management.  The practice group was given the practice-aid that listed the matters to consider in planning the inquiry in detail

• Comparing the results of the cognitive planning group to the base group, the author finds that the cognitive planning group planned to pose more questions of a larger and more diverse group of the client.  This group also planned to extend their audit procedures beyond inquiry to corroborate the information obtained from management during the inquiry. 
• When comparing the results of the cognitive planning group to the practice aid group, the results are similar with regard to their planned questions and number of interviewees; however, there was less focus on corroboration outside of inquiring of management
   

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The article provides a broad summary of prior audit firm culture and governance research with an additional focus on areas for future research.  This literature review is important for accounting firms considering or expanding quality-oriented tone at the top initiatives.  In addition, this review of accounting firm governance structures includes methods for accounting firms to mold, mentor, manage, train and reward employees to improve firm performance and audit quality. 

Jenkins, J.G., D.R. Deis, J.C. Bedard, and M.B. Curtis. 2008. Accounting Firm Culture and Governance: A Research Synthesis Behavioral Research in Accounting 20 (1): 45-74.

This paper summarizes the academic literature related to accounting firm culture and governance.  The authors motivate the study as a response to the PCAOB’s intent to revise the standards on accounting firm quality control.  The authors argue that recent audit failures demonstrate the potential consequences of the cultural tension in audit firms between revenue generation and quality service.  Regulators stress that the “tone at the top” can establish the role of the audit as for the public good rather than as a mere commodity by encouraging objectivity, independence, professional skepticism and accountability to the public.  This paper addresses the concern that greed can change accounting firm’s emphasis on delivering professional services to an emphasis on profitability.  The authors addressed the following topics: 

• the role of audit firm culture and how it impacts audit quality.
• various governance and control mechanisms within accounting firms, including consultation policies, ethics training, and independent monitoring boards.  

This paper is based on a literature synthesis prepared by the auditing section of the American Accounting Association (AAA) for the Public Company Accounting Oversight Board (PCAOB).

The authors presented a research overview of several topics based on a review of recent accounting literature.  The results of the review were summarized in topical areas relating to culture and governance.  The authors also presented a research agenda for each topical area in which they suggested a variety of research issues to stimulate future research.  Topical areas include: The Roles of Culture, Conflicts between Organizational and Individual Goals, The Roles of Subcultures within Organizations, Social Influence, Mentoring, Communicating Culture to the Outside, Measuring Culture, Control Mechanisms within Firms, Policies Related to Consultation, Ethics Training, Independent Monitoring Boards.

• Firm employees undergo a socialization process in which they are molded to the organizational culture (the firm’s set of beliefs and values).  Regulators encourage firms to use this acculturation process to stress the importance of high quality audits and taking difficult stands on issues involving earnings management, fraud or illegal acts, or contentious accounting issues.  The authors offer suggestions for future research to improve understanding in this area.
• Subcultures may develop in firms based on functional areas (tax, audit, and consulting), individual offices in large firms (particularly foreign firm offices or firms acquired in a merger), or the influence of non-accounting professionals.  Cultural complexities may arise from power imbalances or from national political, public policy and legislative differences.
• Social influence pressures and power from accounting firm superiors manifest in areas such as engagement time budgets and performance reviews.  Using their power, superiors positively or negatively affect the work efforts of subordinate auditors.  Firm culture can moderate or exacerbate the influence of social influence pressure and power and affect audit quality, client relationships, and employee retention.
• The goal of accounting firm governance is to achieve goal congruence among the individuals and the organization and to foster consistency and firm-wide policies through authority structures, rules, procedures, and incentive systems.  Research suggests that partner compensation schemes should be based on more than revenue generation alone.  Partners should be focused on limiting firm risks through using a larger pool of revenue for partner compensation schemes, focusing on technical expertise among audit teams, and recognizing the importance of audit quality in the face of budgetary pressures. 
• Ethics training may direct and alter employee behavior.  However, firms appear to rely primarily on colleges to educate their members.  Since the effects of ethics training may deteriorate over time, firms should consider supplementing this exposure with periodic reinforcement.    

The authors suggest that their literature review reveals that accounting firm governance is a largely unexplored research topic and that accounting firms have unique ownership structures and operating characteristics in comparison to other large organizations.