Requiring engagement partners to sign their names to audit reports appears to result in increased audit quality, earnings informativeness, and audit fees, suggesting that the signature requirement emphasizes personal accountability for engagement partners. Requiring the identification of engagement partners in audit reports would likely have similar effects. Thus, there are both costs and benefits that the PCAOB should consider in making its decision regarding partner identification.
For more information on this study, please contact Chan Li: chanli@katz.pitt.edu.
Carcello, J. V. and C. Li. 2013. Costs and benefits of requiring an engagement partner signature: Recent experience in the United Kingdom. The Accounting Review 88 (5): 1511-1546.
This study draws attention to the potentially large issues involved with inconsistencies in the measurement of auditor industry specialization with a focus on audit fees and audit quality. The findings of this study suggest that audit fee-based measures should probably be prioritized by researchers and that previous empirical findings based on other measurement variables need to be re-examined. Results also show that choosing a market share approach or a portfolio approach has very significant consequences, so the decision should not be made absent-mindedly. Furthermore, the choice of absolute versus relative measures of ISP if not neutral, either, and the sensitivity tests indicated that ISP calculations are very sensitive to the industry classification used.
Audousset-Coulier, S., A. Jeny, and L. Jiang. 2016. The Validity of Auditor Industry Specialization Measures. Auditing: A Journal of Practice and Theory 35 (1): 139-161.
This study shows that industry specialists reduce a specific type of risk, stock price crash risk, which has become increasingly important following the Enron scandal and the recent financial market crisis. It also shows that the effects of opacity and conservatism on crash risk are moderated by auditor quality, furthering the emerging literature on the determinants of crash risk.
Robin, J. Ashok and Hao Zhang. 2015. Do industry-specialist auditors influence stock price crash risk? Auditing: A Journal of Practice and Theory 34 (3): 47-79.
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.
Based on the interviews and problems identified, the authors conjecture that potentially suboptimal auditing methods are being used to evaluate complex estimates which are an important and growing part of the financial statements. This may be negatively impacting audit quality. More specifically, auditors over-rely on management estimates because they lack the knowledge and incentives to behave otherwise. This possibility has direct consequences for auditor professional skepticism because increasing professional skepticism may be less effective unless auditors are also given the requisite knowledge to properly use it. These problems are reinforced by auditing standards and regulators which generally outline/criticize the current auditing methods without suggesting new or better ones.
Griffith, E., J. Hammersley, and K. Kadous. 2015. Audits of Complex Estimates as Verification of Management Numbers: How Institutional Pressures Shape Practice. Contemporary Accounting Research 32 (3): 833-863.
The results of this study are important for firms to consider in hiring and training practices as the evidence supports increased perspective taking improves auditor performance and ultimately audit quality. Audit firms may benefit from hiring auditors with prior experience in the corporate world and involvement in financial-reporting, and should continue efforts to hire more “boomerangs.” Audit firms can measure dispositional (i.e., trait) perspective taking among current employees and use this measure in determining staffing assignments. In terms of training design, audit firms can consider implementing training targeted toward role-taking. Finally, audit firms can also encourage perspective taking in other ways, for example, by including perspective taking prompts in audit programs.
Church, B. K., M. Peytcheva, W. Yu, and O. Singtokul. 2015. Perspective taking in auditor-manager interactions: An experimental investigation of auditor behavior. Accounting, Organizations and Society 45: 40-51.
The findings of this study have policy implications for regulators in China and other emerging economies with regard to administering the auditing profession and improving the corporate governance of public companies by fostering auditor independence. One policy implication of this finding is that simply increasing audit firm size fails to enhance auditor independence. The experience of mature markets suggests that, in addition to public regulatory enforcement, other mechanisms, such as private litigation against auditors and improved disclosures on audit services, are helpful in ensuring a well-functioning audit market.
Chan, K. H., and Wu, D. 2011. Aggregate Quasi Rents and Auditor Independence: Evidence from Audit Firm Mergers in China. Contemporary Accounting Research 28 (1): 175-213.
By exploring the O*NET database, the authors discover its potential professional accounting applications. Because of its extensive listing of required occupational skills and knowledge, the O*NET provides a useful starting point for writing accounting job descriptions. The O*NET’s focus on entry-level positions makes it an important resource for recruiting accounting professionals. Its data can help structure and clarify the recruiting process by helping to build descriptions of required knowledge, ability and skills and required competencies. Data can also contribute to designing compensation and performance evaluation systems by defining the required knowledge, skill and abilities required for accounting positions, and, in determining appropriate compensation. Existing or proposed accounting positions can be assessed, i.e., benchmarked, against the standardized O*NET occupational categories of accounting work, as a means of determining their minimal requirements, organizational rank, or compensation.
For more information on this study, please contact Dan N. Stone.
Scarlata, A. N., D. N. Stone, K. T. Jones, and C. C. Chen. 2011. The O*NET: A Challenging, Useful Resource for Investigating Auditing and Accounting Work. Accounting Horizons. 25 (4): 781-809
The findings of this study are important for audit firms to consider when resolving financial reporting issues with client management. The overall pattern of our results illustrates that audit managers and audit partners intend to use different negotiation strategies and, therefore, substituting managers for partners in order to increase audit efficiency may in some contexts undermine audit effectiveness. Indeed, concern is warranted based on these results that suggest that a manager’s intended strategy entering negotiations with client management may be, pending context, substantially different and more client-outcome-oriented than the partners’ intended strategy would be. This could be worrisome for audit partners if they are not aware of negotiations that managers are undertaking on their own while out in the field. From a practice perspective, partners need to be aware of circumstances where managers negotiate with client management, since the tactics employed and potentially the outcomes obtained by the manager may be different than if the partner had been involved. Thus, based on our findings, audit partners may be the more effective negotiators and, thus, will have better negotiated outcomes than less experienced managers.
For more information on this study, please contact Susan McCracken.
McCracken, S., S.E. Salterio, and R.N. Schmidt. 2011. Do managers intend to use the same negotiation strategies as partners? Behavioral Research in Accounting 23 (1): 131-160.
In this study, we show that both subordinates and superiors are overconfident in predicting other auditor’ knowledge and that this overconfidence effect interacts with task difficulty. Inaccuracy in assessing the technical knowledge of other specific auditors has the potential to degrade audit quality. Likewise, incorrect assessments of the technical knowledge of groups of auditors may distort the audit firms understanding of training needs of auditors. More accurate and objective assessments of interpersonal knowledge of other auditors are needed to enhance audit quality.
For more information on this study, please contact Hun-Tong Tan.
Han, J., K. Jamal, and H-T. Tan. 2011. Auditors’ overconfidence in predicting the technical knowledge of superiors and subordinates. Auditing: A Journal of Practice & Theory 30(1): 101-119.