Auditing Section Research Summaries Space
A Database of Auditing Research - Building Bridges with Practice
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research summary posted August 31, 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, 12.04 Investigations, 15.0 International Matters, 15.02 IFRS Changes – ImpactsTitle:Are Juries More Likely to Second-Guess Auditors Under Imprecise Accounting Standards?Practical Implications:The results of this study have implications for regulatory agencies and standard-setting bodies. As regulators contemplate whether to mandate IFRS and standard setters determine the level of implementation guidance for new standards, the litigation consequences of standard precision are an important consideration. Further, these results highlight the importance of regulators developing ways for jurors to evaluate audit judgments under imprecise standards, especially in industries and areas without precise industry reporting norms. Prior discussion on this issue has focused on how professional judgment frameworks are necessary to protect auditors and their clients from second guessing. This study suggests that judgments frameworks, if effective, may help protect auditors who make conservative judgments and also help hold auditors accountable for overly aggressive judgments.
Citation:Kadous, K., and M. Mercer. 2016. Are Juries More Likely to Second-Guess Auditors Under Imprecise Accounting Standards? Auditing: A Journal of Practice and Theory 35 (2): 101-117.
- research summary posted October 24, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 12.0 Accountants’ Reports and Reporting, 12.04 Investigations, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reportingTitle:Chief Audit Executives’ Evaluations of Whistle-Blowing AllegationsPractical Implications:
The findings of this study should be of interest to boards of directors, audit committees, and senior management who are accountable to investors and other parties for the timely and unbiased examination of whistle-blowing allegations. Prior research has shown that audit committee members can be biased in their evaluations of whistle-blower allegations and in the allocation of resources to investigate those allegations. However, the results of this study show that CAEs do not exhibit the same bias as audit committee members for allocating resources to investigate whistle-blower allegations. The audit committee often relies on the CAE to investigate whistle-blowing reports, and this study suggests that CAEs may be a better choice for managing the evaluation of whistle-blowing allegations relative to members of the audit committee. CAEs’ decisions are not shrouded in secrecy, and CAEs report to both management and the audit committee, creating multiple levels of accountability. They are less able to ignore allegations that pose personal threats than are directors.
Citation:Guthrie, C. P., C. S. Norman, and J. M. Rose. 2012. Chief Audit Executives’ Evaluations of Whistle-Blowing Allegations. Behavioral Research in Accounting 24(2): 87-99.
- research summary posted July 28, 2015 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.04 Management Integrity, 12.0 Accountants’ Reports and Reporting, 12.04 InvestigationsTitle:Cumulative Prospect Theory and Managerial Incentives for Fraudulent Financial Reporting.Practical Implications:
The study extends the fraudulent financial reporting literature by formulating fraud incidence as a function of performance outcomes using peer performance as a reference point. By testing CPT's individual-level behavioral implications on firm-level archival data, the study re-conceptualizes the investigation of fraudulent financial reporting in terms of risk attitude and extends prior investigations of CPT from laboratory experiments to a real-world setting of fraudulent financial reporting.
Citation:Fung, M. K. 2015. Cumulative Prospect Theory and Managerial Incentives for Fraudulent Financial Reporting. Contemporary Accounting Research, 32 (1): 55-75.
- research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.07 Impact of SEC Actions, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements, 12.04 InvestigationsTitle:SEC Division of Corporation Finance Monitoring and CEO Power.Practical Implications:
This research is important for several reasons. First, the authors provide insight into how a monitoring mechanism, such as the staff of the DCF, adds to the oversight of the financial reporting process. The findings illuminate the importance of understanding the conflict between boards and CEOs by suggesting that a strong CEO's influence over a board may adversely affect the effectiveness of board oversight. The authors provide evidence that the DCF may target companies with strong CEOs and weak board monitoring for more intensive review. Second, the results imply that the discovery of the need to restate is different for DCF-instigated restatements. DCF-prompted restatements lead companies to re-evaluate their governance structure.
Citation:Cheng, X., L. Gao, J. E. Lawrence, and D. B. Smith. 2014. SEC Division of Corporation Finance Monitoring and CEO Power. Auditing: A Journal of Practice & Theory 33 (1): 29-56.
- research summary posted September 14, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 11.0 Audit Quality and Quality Control, 11.10 Impact of Quality Reviewers, 11.11 Impact of Firm and External Inspection Programs, 12.0 Accountants’ Reports and Reporting, 12.04 InvestigationsTitle:When the PCAOB Talks, Who Listens? Evidence from Stakeholder Reaction to GAAP-Deficient PCAOB Inspection Reports of Small Auditors.Practical Implications:
The authors provide initial empirical evidence that Securities and Exchange Commission (SEC) registrants found GAAP-deficient PCAOB inspection reports to be a useful signal of audit quality for triennially inspected auditors. This evidence indicates that PCAOB inspection reports created heterogeneity in auditor brand name that did not previously exist. Also, this paper is the first to empirically link audit committee characteristics to PCAOB inspection report severity and auditor choice. The authors believe this is an increasingly relevant finding as audit committees have been granted much greater auditor dismissal and hiring authority due to SOX. This study indicates that a PCAOB inspection report may serve as an audit quality signal for auditors of broker-dealers, who were previously exempt from the inspection process. Such a finding has current relevance given the PCAOB has recently sought to expand the inspection program to foreign auditors, such as those based in China whose clients are cross-listed on U.S. security exchanges or are listed due to a reverse merger.
Citation:Abbott, L. J., K. A. Gunny, and T. C. Zhang. 2013. When the PCAOB Talks, Who Listens? Evidence from Stakeholder Reaction to GAAP-Deficient PCAOB Inspection Reports of Small Auditors. Auditing: A Journal of Practice & Theory 32 (2): 1-31.
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- 01.0 Standard Setting
- 01.01 Changes in Reporting Formats
- 01.02 Changes in Audit Standards
- 01.03 Impact of New Accounting Pronouncements
- 01.04 Impact of 404
- 01.05 Impact of SOX
- 01.06 Impact of PCAOB
- 01.07 Impact of SEC Actions
- 02.0 Client Acceptance and Continuance
- 02.01 Audit Fee Decisions
- 02.02 Client Risk Assessment
- 02.03 Management Integrity Assessments
- 02.04 Predecessor Auditor Factors
- 02.05 Business Risk Assessment - e.g., industry, IPO, complexity
- 02.06 Resignation Decisions
- 03.0 Auditor Selection and Auditor Changes
- 03.01 Auditor Qualifications
- 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergers
- 04.0 Independence and Ethics
- 04.01 Scope of Services
- 04.02 Impact of Fees on Decisions by Auditors & Management
- 04.03 Non-Audit Services
- 04.04 Moral Development and Individual Ethics Decisions
- 04.05 Ethics and Consultation
- 04.06 Reporting Ethics Breaches – Self & Others
- 04.07 Audit Firm Rotation
- 04.08 Impact of SEC Rules Changes/SarbOx
- 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours
- 05.0 Audit Team Composition
- 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation
- 05.02 Industry Expertise – Firm and Individual
- 05.03 Partner Rotation
- 05.04 Staff Hiring, Turnover and Morale
- 05.05 Diversity of Skill Sets e.g., Tenure and Experience
- 05.06 Qualifications of Engagement Quality Reviewers
- 05.07 Impact of 150-hour requirement
- 05.08 Impact of Office Size
- 05.09 Group Decision-Making
- 05.10 Impact of Diversity - e.g., gender - on Group Decision Making
- 06.0 Risk and Risk Management, Including Fraud Risk
- 06.01 Fraud Risk Assessment
- 06.02 Fraud Risk Models
- 06.03 Failure Risk Models
- 06.04 Management Integrity
- 06.05 Assessing Risk of Material Misstatement
- 06.06 Earnings Management
- 06.07 SAS No. 99 Brainstorming – process
- 06.08 SAS No. 99 Brainstorming – effectiveness
- 06.09 Litigation Risk
- 06.10 Impact of office size
- 07.0 Internal Control
- 07.01 Scope of Testing
- 07.02 Assessing Material Weaknesses
- 07.03 Reporting Material Weaknesses
- 07.04 Assessing Remediation of Weaknesses
- 07.05 Impact of 404 on Fees and Financial Reporting Quality
- 08.0 Auditing Procedures – Nature, Timing and Extent
- 08.01 Substantive Analytical Review – Effectiveness
- 08.02 Sample Selection – use of statistical sampling
- 08.03 Conclusions Based on Samples
- 08.04 Auditors’ Professional Skepticism
- 08.05 Evaluating Accruals/Detection of Abnormal Accruals
- 08.06 Earnings Management – Detection and Response
- 08.07 Interim Testing Procedures – Nature, Timing and Extent
- 08.08 Projecting Interim Testing Conclusions Year End
- 08.09 Impact of Technology on Audit Procedures
- 08.10 Confirmation – Process and Evaluation of Responses
- 08.11 Reliance on Internal Auditors
- 09.0 Auditor Judgment
- 09.01 Audit Scope and Materiality Judgments
- 09.02 Documentation Specificity
- 09.03 Adequacy of Evidence
- 09.04 Going Concern Decisions
- 09.05 Failure Risk Models
- 09.06 Adequacy of Disclosure
- 09.07 GAAP Departures
- 09.08 Evaluation of Errors – Statistical and Non-statistical
- 09.09 Impact of Consultation on Judgments
- 09.10 Prior Dispositions/Biases/Auditor state of mind
- 09.11 Auditor judgment in the workpaper review process
- 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections
- 09.13 Recognition vs. Disclosure
- 10.0 Engagement Management
- 10.01 Budgeting and Audit Time Management
- 10.02 Materiality and Scope Decisions
- 10.03 Interaction among Team Members
- 10.04 Interactions with Client Management
- 10.05 Interactions with Audit Committee Members
- 10.06 Audit Fees and Fee Negotiations
- 11.0 Audit Quality and Quality Control
- 11.01 Supervision and Review – Effectiveness
- 11.02 Engagement Quality Review – Processes and Effectiveness
- 11.03 Management/Staff Interaction
- 11.04 Industry Experience
- 11.05 Training and General Experience
- 11.06 Working Paper Review – Conduct, Biases and Predispositions
- 11.07 Attempts to Measure Audit Quality
- 11.08 Proxies for Audit Quality
- 11.09 Evaluation of Evidence
- 11.10 Impact of Quality Reviewers
- 11.11 Impact of Firm and External Inspection Programs
- 11.12 Impact of National Office on Auditor Decisions
- 11.13 Partner incentive schemes
- 12.0 Accountants’ Reports and Reporting
- 12.01 Going Concern Decisions
- 12.02 Quarterly Reviews
- 12.03 Restatements
- 12.04 Investigations
- 12.05 Changes in Reporting Formats
- 12.06 Consequences of Adverse 404 Opinions
- 12.07 Attestation Services
- 13.0 Governance
- 13.01 Board/Audit Committee Composition
- 13.02 Board/Financial Experts
- 13.03 Board/Audit Committee Tenure
- 13.04 Board/Audit Committee Compensation
- 13.05 Board/Audit Committee Oversight
- 13.06 Board/Audit Committee Processes
- 13.07 Internal auditor role and involvement in controls and reporting
- 14.0 Corporate Matters
- 14.01 Earnings Management
- 14.02 Corporate Whistle Blowers
- 14.03 Interim Reporting
- 14.04 MD and A Language/Signaling
- 14.05 Earnings Targets and Management Behavior
- 14.06 CFO Tenure and Experience
- 14.07 Executive Compensation
- 14.08 Press Release Language and Signaling
- 14.09 CEO Tenure and Experience
- 14.10 CEO Compensation
- 14.11 Audit Committee Effectiveness
- 15.0 International Matters
- 15.01 Audit Partner Identification by Name
- 15.02 IFRS Changes – Impacts
- 15.03 Audit Partner Rotation
- 15.04 Audit Firm Rotation
- 15.05 Sustainability Services