The results of this study are important for audit firms to consider providing decision aids and/or on job training. The results suggest that considerable practical experience is necessary to achieve good judgment performance. In addition, the evidence indicates that auditing firms may wish to concentrate their training earlier to more quickly create a basis for high-quality auditor judgments.
Wright, William F. 2007. Academic Instruction as a Determinant of Judgment Performance. Behavioral Research in Accounting 19: 247-259.
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.
This study provides evidence that there were significant differences in the pre-negotiation judgments of partners and managers. Since an outcome of an auditor-client negotiation of a contentious issue may have a significant impact on financial reporting quality, the findings of the study suggest that the using partners in the negotiation process is likely to lead to improved reporting quality. The results have implications for audit firms in allocating manager and partner time to handle negotiation.
Trotman, K. T., A. M. Wright, and S.Wright. (2009). An Examination of the Effects of Auditor Rank on Pre-Negotiation Judgments. Auditing: A Journal of Practice & Theory 28(1): 191-203
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.
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.
Auditors who are higher-performing perceive technical knowledge and abilities, client interaction skills, and professional attitudes/behaviors as being important. Prioritizing training in these areas or recruiting new auditors who prioritize these areas may have a beneficial impact to firms. In addition, these auditors rely less on standard audit procedures and perceive that their role can influence the outcome of the audit. Therefore, it may be helpful for firms to emphasize the importance of using standard audit procedures only as a guideline for the audit, as overreliance on these procedures could lead to a lack of professional skepticism. Evaluating prospective hires in terms of their locus of control could also indicate their willingness to be more comfortable in ill-structured tasks and exert more effort on audit tasks.
For more information on this study, please contact Constance McKnight.
McKnight, C. A. and W. F. Wright. 2011. Characteristics of relatively high-performance auditors. Auditing: A Journal of Practice and Theory 30 (1): 191-206.
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 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.
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.
This experiment provides evidence that training in a systems perspective could help auditors analyze complex relationships between accounting data. This could be used to set appropriate analytics expectations and, more importantly, provide a credible way to determine whether management’s representations are well-grounded or not. This method also appears to require less mental effort to implement, since it moves the complicated relationship structure out of memory and onto a model. Given the added complexity of many estimates in today’s companies, systematic methods of processing information like a systems perspective may help to simplify the analysis of the estimates.
For more information on this study, please contact Billy Brewster.
Brewster, B. E. 2011. How a systems perspective improves knowledge acquisition and performance in analytical procedures. The Accounting Review 86 (3), 915-943.