Auditing Section Research Summaries Space

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  • Jennifer M Mueller-Phillips
    Fraud Risk Awareness and the Likelihood of Audit Enforcement...
    research summary posted October 12, 2016 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.09 Litigation Risk, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    Fraud Risk Awareness and the Likelihood of Audit Enforcement Actions
    Practical Implications:

     This paper sheds light on the implications of a going concern opinion, specifically in the context of litigation against the auditor. While prior research has established that a going concern opinion reduces the likelihood of shareholder litigation in bankruptcy proceedings, this study shows that going concern opinions potentially open up the auditor to increased SEC litigation if the financial statements are found to be fraudulent. The authors suggest this should be taken into consideration when auditors are determining the extent of necessary documentation for fraud risk assessment, especially when the client is likely receiving a going concern opinion.

    Citation:

     Eutsler, J., E.B. Nickell, S.W. Robb. 2016. Fraud Risk Awareness and the Likelihood of Audit Enforcement Action. Accounting Horizons 30 (3): 379-392.

  • Jennifer M Mueller-Phillips
    Going Concern Opinion and Cost of Equity
    research summary posted March 9, 2015 by Jennifer M Mueller-Phillips, tagged 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    Going Concern Opinion and Cost of Equity
    Practical Implications:

    The evidence in this study illuminates the relevance of going concern opinions and the value of the information embedded in them. We provide evidence that investors perceive companies with going concern opinions to be problematic and thus demand a higher cost of equity. The results of our study are relevant to discussions about the desirability of the new going concern disclosures currently being considered by the FASB and the PCAOB.

    For more information on this study, please contact Jagan Krishnan.

    Citation:

    Amin, Keval, Jagan Krishnan, and Joon S. Yang. 2014. Going concern opinion and cost of equity. Auditing: A Journal of Practice and Theory 33 (4): 1–39.

  • The Auditing Section
    Independence Threats, Litigation Risk, and the Auditor’s D...
    research summary posted May 4, 2012 by The Auditing Section, tagged 04.0 Independence and Ethics, 04.02 Impact of Fees on Decisions by Auditors & Management, 09.0 Auditor Judgment, 09.04 Going Concern Decisions, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    Independence Threats, Litigation Risk, and the Auditor’s Decision Process
    Practical Implications:

    This study is important for audit firms and audit regulators, as it provides a more complete picture of how threats to auditor independence and litigation risk affect auditor performance. Rather than just focusing on the auditor’s final decision, this study demonstrates that the above incentives affect auditors through their evaluation of information during the decision process. Therefore, firms and regulators may be interested in research that specifically addresses processing biases. This research advocates using decision aids, such as artificial neural networks, to attenuate processing bias. Accountability-inducing controls, like those promoted by audit documentation standards, are unlikely to achieve this goal. Further, reviews conducted by individuals within the same firm are less likely to detect process bias. Review by independent parties, such as an audit committee, would likely be more effective.

    Citation:

    Blay, A.D. 2005. Independence Threats, Litigation Risk, and the Auditor’s Decision Process. Contemporary Accounting Research 22 (4): 759-789.

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  • Jennifer M Mueller-Phillips
    Insider Trading, Litigation Concerns, and Auditor...
    research summary posted September 14, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 06.0 Risk and Risk Management, Including Fraud Risk, 06.09 Litigation Risk, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    Insider Trading, Litigation Concerns, and Auditor Going-Concern Opinions.
    Practical Implications:

    The study offers two primary contributions. First, it provides insight into the incentive effect of corporate insider trading on auditor behavior. The study helps to fill this gap by providing evidence on the relationship between managers’ incentives and auditors’ opinions. Second, this study adds to the literature on insider trading. The evidence extends this literature by showing that insiders’ incentives to sell and their desire to avoid litigation can influence auditors’ reports.

    Citation:

    Chen, C., X. Martin, and X. Wang. 2013. Insider Trading, Litigation Concerns, and Auditor Going-Concern Opinions. Accounting Review 88 (2): 365-393.

  • The Auditing Section
    Recent Changes in the Association between Bankruptcies and...
    research summary posted April 13, 2012 by The Auditing Section, tagged 09.04 Going Concern Decisions, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    Recent Changes in the Association between Bankruptcies and Prior Audit Opinions
    Practical Implications:

    The evidence from this study can beused to support the perspective that the auditing profession is essentially self-correcting in that it seeks to maintain a positive image and control litigation costs.  This has practical implications for regulators and legislators in that these groups should evaluate the extent of the auditing profession’s changed behavior in the post-December 2001 period before promulgating further detailed, prescriptive regulations.  Specifically, this study implies that there are multiple ways to influence auditor behavior in addition to the traditional means of changing laws and auditing standards, such as litigation, harsh media and congressional pressure.  Another source of pressure on auditor behavior, not included in the article, would be the threat of sanctions on firms and individual partners (which arguably becomes more visible in recent years with the presence of PCAOB). Further, this study has implications for regulators and legislators in that it provides evidence that auditors’ increased conservatism did not result in longer audit delays.

    Citation:

    Geiger, M. A., K.
    Raghunandan, and D. V. Rama.  2005.  Recent Changes in the Association between Bankruptcies and Prior Audit Opinions.  Auditing:
    A Journal of Practice and Theory
    24 (1): 21-35.

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  • Jennifer M Mueller-Phillips
    The Auditor’s Going- Concern Opinion as a Communication of R...
    research summary posted October 10, 2013 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.04 Going Concern Decisions, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    The Auditor’s Going- Concern Opinion as a Communication of Risk
    Practical Implications:

    The results of this study have very important implications to auditors of publicly traded firms whose audit reports are available to the general public. Auditors should always keep in mind that their opinion has great importance to the market’s perception of their client. The effects that issuing a going-concern modified audit opinion can have on the market perception of a firm’s value, as evidenced by the different market perceptions for similarly financially distressed firms when one had a going-concern modified report and one did not, are grave enough to warrant significant consideration by auditor’s deciding whether or not the going-concern modified opinion is necessary.

    For more information on this study, please contact Allen D. Blay.
     

    Citation:

    Blay, A.D., M.A. Geiger, and D.S. North. 2011. The auditor’s going- concern opinion as a communication of risk. Auditing: A Journal of Practice and Theory 30 (2): 77-102.

  • Jennifer M Mueller-Phillips
    The changing relationship between audit firm size and going...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.04 Going Concern Decisions, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    The changing relationship between audit firm size and going concern reporting.
    Practical Implications:

    The results raise an interesting policy issue related to the ability of financially stressed clients to hire an audit firm. While the results of the study indicate that financially stressed clients are still able to hire an audit firm, their options appear to be decreasing over time. To the extent that their audit firm options continue to shrink over time, some financially stressed public companies may be unable to hire an audit firm in the future. Evaluating the implications and potential consequences to these firms represents an important area for further research. 

    Citation:

    Kaplan, S. E., and D. D. Williams. 2012. The changing relationship between audit firm size and going concern reporting. Accounting, Organizations & Society 37 (5): 322-341.

  • Jennifer M Mueller-Phillips
    The effect of strategic and operating turnaround initiatives...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies
    Practical Implications:

    Taken together, the results on the relations between management turnaround initiatives and going-concern decisions suggest that auditors consider strategic information when making going-concern decisions, and that there is a relationship between auditors’ strategic risk assessment (typically done in a business risk auditing context) and the outcome of the audit (i.e., the opinion). The results further indicate that auditors do not limit their evaluation of mitigating strategic actions to the management plans explicitly suggested in the audit standards.

    For more information on this study, please contact Marleen Willekens.

    Citation:

    Bruynseels, L. and M. Willekens. 2012. The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies. Accounting, Organizations and Society 37(4):223-241

  • Jennifer M Mueller-Phillips
    The effect of strategic and operating turnaround initiatives...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.04 Going Concern Decisions, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies.
    Practical Implications:

    The results on the relations between management turnaround initiatives and going-concern decisions suggest that auditors consider strategic information when making going-concern decisions, and that there is a relationship between auditors’ strategic risk assessment (typically done in a business risk auditing context) and the outcome of the audit (i.e., the opinion). The results further indicate that auditors do not limit their evaluation of mitigating strategic actions to the management plans explicitly suggested in the audit standards. Furthermore, the evidence suggests that auditors are already adopting a long-term view when assessing client viability, which again suggests that the current discussion on expanding the time horizon for going-concern assessment would not affect current practice substantially.

    Citation:

    Bruynseels, L., and M. Willekens. 2012. The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies. Accounting, Organizations & Society 37 (4): 223-241.

  • The Auditing Section
    The Effects of Experience on Complex Problem Representation...
    research summary posted May 9, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.04 Going Concern Decisions, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    The Effects of Experience on Complex Problem Representation and Judgment in Auditing: An Experimental Investigation
    Practical Implications:

    The results of this study have implications for training future professionals.  In the classroom problem-solving techniques that more closely resemble the experienced group can be incorporated to advance professionals to the expert level faster.  Further, a stage approach may be more efficient.  This idea incorporates having two “expert systems”, one to move novices to the intermediate level of knowledge more quickly and another to move intermediates up to the level of experts faster. 

    Citation:

    Lehmann, C.M., and C.S. Norman. 2006. The effects of experience on complex problem representation and judgment in auditing: an experimental investigation. Behavioral Research in Accounting 18 (1): 65-83.

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