Staff and seniors auditors often times have more interaction with client personnel than other members on the team. These interactions provide them with insight into fraud-relevant information which is extremely valuable to the audit. It is important that partners create a group dynamic that is both supportive and nonthreatening in order to facilitate idea sharing. Firms can make brainstorming more effective by providing leadership training to partners encompassing these ideals.
Gissel, J. L., and K. M. Johnstone. 2017. Information Sharing during Auditors’ Fraud Brainstorming: Effects of Psychological Safety and Auditor Knowledge. Auditing, A Journal of Practice and Theory 36 (21): 87-110.
Brainstorming related to fraud is an important step during an audit. This study investigates the effects that perceived psychological safety and auditor knowledge have on how auditors interact during brainstorming. Specifically, the magnitude to which these factors affect an auditor’s willingness to share privately known, fraud-relevant information. The authors research under the assumption that a partner’s leadership is the driving force behind an auditor’s perception of psychological safety during brainstorming.
First, the 71 participants (38 staff and 33 seniors) reviewed case materials related to fraud-relevant risks. Afterwards, the participants watched a simulated brainstorming session. In the video the psychological safety of the situation was altered based on how the partner leading the session communicated. Results were determined based on the auditors’ reaction to the simulation and audit knowledge. The audit knowledge was measured by months of experience and familiarity with SAS NO. 99 and revenue recognition issues.
The authors find the following:
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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.
This paper extends previous work by examining how clients’ use of contending tactics affect auditors’ decisions during a negotiation, which separates itself from the research of the past by investigating the clients’ current negotiation tactics, not the tactics of the past. This paper also introduces the level-of-aspiration theory into consideration for auditor negotiation literature.
Bergner, J. M., S. A. Peffer and R. J. Ramsay. 2016. Concession, Contention, and Accountability in Auditor-Client Negotiations. Behavioral Research in Accounting 28 (1): 15-25
This study focuses on investigating how tactics employed by a client during negotiations impact experienced auditors’ propensity to waive material adjustments and whether the salience of a concurring partner review (CPR) can affect these negotiations. The audit profession as a whole remains fixated upon auditor independence and financial statement quality, so it is important to examine potential tactics by a client since negotiations directly affect the resulting financial statements. The authors of this study hope to expound upon existing literature by examining how a client who is concessionary or contentious during the negotiation may affect its outcome. In addition, they study whether a CPR reduces auditors’ propensities to waive material adjustments.
The authors conduct an online experiment in which auditors make decisions about the audit of a hypothetical client. They manipulate two independent variables: client tactics and CPR salience.
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.
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.
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
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?
The research evidence was collected as part of a field study.
The psychodynamics of work theory of Dejours was used to interpret the data.
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.
Although baselining appears to affect behaviors an interviewer perceives as deceptive, this study does not find evidence that baselining improves the accuracy of deception detection. However, baselining does appear to increase the accuracy of identifying truthful interviewees. The authors suggest that training interviewers in deception detection might improve the accuracy of their detection rates. They note that very few participants in their study had had training in detecting deception and that future research may prove useful in this area.
For more information on this study, please contact Chih-Chen Lee.
Lee, C-C. and R. Welker. 2011 Prior Exposure to Interviewee’s Truth-Telling (Baselining) and Deception-Detection Accuracy in Interviews. Behavioral Research in Accounting 23 (2): 131-146.
This study examines if the effect of baselining (acquiring knowledge of an interviewee’s truth-telling behavior prior to attempting to detect deception) increases the ability of an interviewer to accurately assess deception during an interview. Specifically, the authors examine:
208 students in junior level accounting courses were randomly paired into dyads consisting of an interviewer and interviewee. The dyads were then divided into three treatment groups. In one group, the interviewer baselined the interviewee engaging the interviewee in multiple truthful dialogues prior to a focal interview with the same interviewee where the interviewee may have either been honest or dishonest (interview of same person). In the second group, the interviewer observed the truth telling behavior of one interviewee before the focal interview with a different interviewee (interview of different person). In the third group no prior interview took place before the focal interview (No prior interview). The interviewer’s task in all groups was to determine which interviewee statements in the focal interview were truthful and, which were deceptive. The data were collected prior to 2011.
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:
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
The results of this study are especially important for auditors, suggesting that clients’ incentives and ingratiation of the auditor can influence audit decisions. Client incentives influence auditor judgment by affecting client credibility. Client ingratiation towards the auditor can influence auditor judgment by inducing positive affect toward the client, which can increase the likelihood auditors will comply with client requests (thus affecting audit quality). Finally, the results show that student participants were less trusting of the client than audit professional participants. This finding is consistent with prior accounting research that shows that as auditors gain more experience, they are less skeptical.
Robertson, J.C. 2010 The effects of ingratiation and client incentive on auditor judgment. Behavioral Research in Accounting 22 (2): 69-86.
Ingratiation is a strategic influence tactic through which the ingratiator attempts to induce positive affect, which in turn influences judgments such that the target is more likely to comply with the ingratiator’s request. (“Affect” is a broad term encompassing positive and negative valuations and moods.) This study examines how ingratiation affects auditor judgment. In addition, this study examines whether the aforementioned relationship is sensitive to differences in the client’s incentive to influence the auditor. Specifically, this paper examines the following:
Participants included both audit practitioners and graduate accounting majors and data was collected in the early 2000s. Participants were provided background information about a hypothetical audit client and a description of the assigned client incentive level (either low or high, based on the absence or presence of financial incentives to meet EPS targets to earn bonuses). Next, participants
performed an audit task that required them to determine the likelihood that they would recommend an adjusting journal entry to write down the inventory. In this stage, the CFO either ingratiated or did not ingratiate the auditor. The final stages of the experiment included participants’ assessment of their affect toward the CFO and a measure of the participants’ level of professional skepticism.
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:
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.
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.