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  • Jennifer M Mueller-Phillips
    A Synthesis of Fraud-Related Research
    research summary posted February 19, 2015 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment 
    Title:
    A Synthesis of Fraud-Related Research
    Practical Implications:

    To facilitate the development of auditing and other professional standards and to inform regulators of insights from the academic literature, the Auditing Section of the AAA decided to develop a series of literature syntheses for the Public Company Accounting Oversight Board (PCAOB). This paper is authored by one of the research synthesis teams formed by the Auditing Section under this program.  The literature review is organized around a model that considers fraud from the perspective of the auditor. The model incorporates the fraud triangle, which auditors include in their assessment of the likelihood of fraudulent financial reporting. In addition, we examine auditors’ processes of assessing the existence and effectiveness of the client’s anti-fraud measures including corporate governance mechanisms and internal controls, and their consideration of possible fraud schemes and concealment techniques. This synthesis should be relevant to regulators, practitioners, and academics.

    Citation:

    Trompeter, G., T. Carpenter, N. Desai, K. Jones, and R. Riley. 2013. A Synthesis of Fraud-Related Research. Auditing: A Journal of Practice & Theory 32 (Supplement 1): 287-321.

    Keywords:
    fraud, auditing, literature review, SAS 99
    Purpose of the Study:

    This paper was prepared as a part of the series of literature syntheses sponsored by the Auditing Section of the American Accounting Association (AAA). As such, this paper integrates and discusses implications of academic research on fraudulent financial reporting, particularly as it applies to the audit. We synthesize academic literature related to fraudulent financial reporting with dual purposes: (1) to better understand the nature and extent of the existing literature on financial reporting fraud, and (2) to highlight areas where there is a need for future research. We examine accounting and auditing research as well as related disciplines including criminology, ethics, finance, organizational behavior, psychology and sociology. We synthesize the research around a model that illustrates the auditors’ approach to fraud. The model incorporates auditors’ use of the fraud triangle (i.e., management’s incentive, attitude, and opportunity to commit fraud), their assessment of the existence and effectiveness of the client’s anti-fraud measures (e.g., corporate governance mechanisms and internal controls), and their consideration of possible fraud schemes and concealment techniques when making an overall fraud risk assessment of the client. The model further illustrates how auditors can incorporate this assessment into an overall strategy to detect fraud by implementing appropriate fraud-detection procedures. We summarize the recent literature of each component and suggest avenues for future research.

    Design/Method/ Approach:

    We organize our literature review around an expanded fraud model that considers fraud from the perspective of the auditor. We review accounting and auditing literature related to fraud as well as approximately 60 journals from various fields including criminology, ethics, finance, organizational behavior, psychology, and sociology. Our purpose is to broaden our perspective of fraud and to gain insights from other disciplines about the dynamics of fraud that may be useful to auditors, standard setters, and academics.

    Findings:
    • The PCAOB finds that auditors have difficulty responding when fraud risk is high. Whether auditors simply fail to respond with appropriate fraud-related audit techniques or whether auditors do not know how to respond with appropriate testing is an important area for future research.
    • Little research has been done in identifying fraud examination tools and techniques that can be used by auditors to detect fraud once initial red flags are identified. Future research is important in this area.
    • Existing research has established the relationship between incentives and earnings management and fraud. Future research could address the extent to which, and the conditions under which, incentives might result in earnings management through aggressive accruals, biases in fair value estimates, and structured transactions.
    • There has been a great deal of literature focused on various aspects of the fraud triangle. However, there is still interest in learning more about the factors that affect the likelihood that an individual will engage in fraud. The fraudster’s assessment of anti-fraud measures, particularly controls, with respect to the probability (perception) of detection is also important.
    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Assessment
  • Jennifer M Mueller-Phillips
    A Test of the Auditor Reliability Framework Using Lenders’ J...
    research summary posted February 24, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 04.0 Independence and Ethics, 04.08 Impact of SEC Rules Changes/SarbOx 
    Title:
    A Test of the Auditor Reliability Framework Using Lenders’ Judgments
    Practical Implications:

    The results of this study indicate that banning the provision of both non-audit and audit services by a single firm likely increased perceptions of auditor independence, but did not significantly effect overall judgments of reliability or the extent to which financial statement users incorporate financial statement information into their decision process. Additionally, results of this study indicate that companies who have audits performed by auditors who are perceived to possess greater integrity, expertise and independence likely enjoy reduced costs of borrowing.

    For more information on this study, please contact F. Todd DeZoort.

    Citation:

    DeZoort, F.T., T. Holt, and M.H. Taylor. 2012. A test of the auditor reliability framework using lenders’ judgments. Accounting, Organizations and Society 37 (8): 519-533.

    Purpose of the Study:

    The purpose of this study is to test the relationship between financial statement users’ perceptions of auditor expertise, integrity, independence and objectivity and overall assessments of auditor reliability. Previous research suggests that perceptions of auditor reliability are critical to perceptions of financial statement reliability. This study directly tests that assertion and also investigates the relationship between perceptions of financial statement reliability and subsequent reliance on disclosed financial information. 

    Design/Method/ Approach:

    Data for this study was collected via a survey of commercial lenders belonging to the Risk Management Association prior to 2012. The survey yielded 187 responses and required participants to review financial information for a hypothetical company. Participants responded to several questions about their perceptions of the company’s auditors, the financial statements and overall risk as a potential applicant for a commercial loan.

    Findings:

    This study investigates the relationship between financial statement users’ perceptions of auditor expertise, integrity, independence and objectivity and makes the following observations:

    • Perceptions of auditor integrity are positively correlated with perceptions of auditor independence, expertise, objectivity and reliability
    • Perceptions of auditor expertise are positively correlated with perceptions of auditor objectivity
    • Perceptions of auditor independence are positively correlated with perceptions of objectivity
    • Perceptions of auditor objectivity are positively correlated with perceptions of auditor reliability.

    This study also investigates how perceptions of auditor reliability influence financial statement users’ interpretation and use of financial statement information.

    • Perceptions of auditor reliability are positively correlated with perceptions of financial statement reliability
    • Perceptions of financial statement reliability are negatively correlated with judged risk of default on a commercial loan

    Finally, manipulating whether or not the auditor provided non-audit services in addition to performing the financial statement audit had the following effects:

    • Negatively impacted perceptions of auditor independence, objectivity and reliability
    • Did not statistically impact perceptions of auditor integrity, expertise, financial statement reliability or default risk
    Category:
    Independence & Ethics, Standard Setting
    Sub-category:
    Impact of SEC Rules Changes/SarBox
  • The Auditing Section
    A Test of the Selection-Socialization Theory in Moral...
    research summary posted May 7, 2012 by The Auditing Section, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions 
    Title:
    A Test of the Selection-Socialization Theory in Moral Reasoning of CPAs in Industry Practice
    Practical Implications:

    The results of this study are useful for understanding what factors are influential in the moral development of CPAs. Practitioners should consider the results of this study when making hiring and promotion decisions. Results may also be informative to the development of ethical training programs.

    Citation:

    Abdolmohammadi, M. J. and D. L. Ariail. 2009. A Test of the Selection-Socialization Theory in Moral Reasoning of CPAs in Industry Practice. Behavioral Research in Accounting 21 (2): 1-12.

    Keywords:
    moral development; defining issues test (DIT), selection-socialization, Inverted-U
    Purpose of the Study:

    Past research on the moral reasoning of Certified Public Accountants (CPAs) has indicated that the the moral reasoning of CPAs in public accounting appears to increase from the senior to manager level but then decrease from the manager to the partner level (referred to as an Inverted-U Phenomenon). This phenomenon is consistent with Selection-Socialization Theory, which predicts that individuals at superior levels (e.g. partners) often promote employees with attributes similar to their own. This paper examines the existence of this phenomenon by collecting information on the moral development of CPAs in both industry and public practice.

    Design/Method/ Approach:

    The authors collected data (sometime prior to 2009) from 273 practicing CPAs. To measure their moral development, participants were asked to fill out the Defining Issues Test (DIT). The DIT is a generic instrument commonly used in research to determine an individual’s moral development within six stages. The six stages range from low levels of moral reasoning, characterized by self-interest, to higher levels characterized, by law abidance and adherence to universal principles of justice and human rights.

    Findings:
    • The authors do not find significant differences in the moral reasoning between accountants of different rank and thus, no evidence of the Inverted-U Phenomenon suggested by prior research.
    • The authors also did not find differences in moral reasoning between CPAs in industry and those in public practice.
    • Although there is no indication that gender or ethical training affects CPAs’ moral reasoning, the authors do find that CPAs with graduate degrees scored higher in moral reasoning than those with only undergraduate degrees and that politically moderate or liberal CPAs scored higher than conservatives.
    Category:
    Independence & Ethics
    Sub-category:
    Moral Development and Individual Ethics Decisions
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  • The Auditing Section
    A Theoretical Framework of the Relationship between Public...
    research summary posted May 9, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale 
    Title:
    A Theoretical Framework of the Relationship between Public Accounting Firms and Their Auditors
    Practical Implications:

    The model developed by the authors provides a theoretical foundation for understanding and exploring issues related to CPA firm and auditor employee behavior in the public accounting environment. Most important, the framework identifies factors impacting both what firms should provide to their CPA employees and how the employees may value what is provided. For example, the compensation package received by employees should include not only salaries and benefits, but also the opportunities for future development, flexibility of work and personal satisfaction.

    Citation:

    Almer, E. D., J. L. Higgs, and K. L. Hooks. 2005.  A Theoretical Framework of the Relationship between Public Accounting Firms and Their Auditors. Behavioral Research in Accounting 17: 1-22.

    Purpose of the Study:

    The behavior of auditors employed by public accounting firms has drawn significant attention.  Prior accounting research explains and predicts auditor behavior in the work environment, such as socialization, turnover, expertise and audit quality reduction acts. However, none has developed an overall model of the auditor-public accounting firm employment relationship. The primary purpose of this study is to provide a model for the auditor-public accounting firm employment relationship, and to identify how auditing professionals contribute and what they receive as a result of their work efforts, as well as influences on those work efforts.

    Design/Method/ Approach:

    Not applicable, it is a theoretical paper.

    Findings:

    Propositions

    • An employment contract represents the relationship between a CPA firm employer and an employee. The value of the CPA-
      employee provided professional work received by the CPA firm should be equal to the compensation package received by the CPA employee.
    • Some factors can influence the value received by the CPA firms, such as the value of the CPA employees’ professional work, or some inefficiency due to temporary interruptions of work, and labor market forces. Also, the compensation package should include salary, benefits, development, flexibility, deferred compensation, and satisfaction of personal preferences.
    • The two parties of an employment contract may not well understand the nature of multidimensional job activities of an auditor, as well as how they are valued, communicated and measured.
    • It is unclear how CPA firms incorporate the temporary interruptions of work into the employment contracts and how interruptions may or may not benefit the firm and the auditors.
    • Salary and traditional benefits are not the only compensation received by auditors.
    • The value placed on professional development is unknown and influenced by various factors, and may differ between the auditor and the firm.
    • The value placed on flexibility is influenced by the personal needs of the auditor and confidence in the firm’s information system.
    • The value placed on deferred compensation is unknown and influenced by unspecified factors, and differs between the parties to the contract.
    • Satisfaction of personal preferences is necessary to the auditor, but the personal preferences are ill-defined and thus may not be properly valued or explicitly recognized in the employment contract.
    Category:
    Audit Team Composition
    Sub-category:
    Staff Hiring - Turnover & Morale
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  • Jennifer M Mueller-Phillips
    Abnormal Audit Fees and Audit Quality: The Importance of...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 11.0 Audit Quality and Quality Control, 14.0 Corporate Matters, 14.01 Earnings Management 
    Title:
    Abnormal Audit Fees and Audit Quality: The Importance of Considering Managerial Incentives in Tests of Earnings Management.
    Practical Implications:

    This paper provides new evidence on the fee-quality relationship using the propensity to use income-increasing discretionary accruals to meet or beat analysts' forecasts. The evidence in this paper suggests that abnormal audit fees are positively related to audit quality. This result is consistent with concerns raised by regulators that lower audit fees could reflect a lower level of effort provided by the auditor. This is important, given the trend of declining audit fees in recent years. By finding different results using a more focused sample of firms with the incentive and ability to manage earnings, this study highlights the importance of considering the context when performing tests of earnings management. This information is of interest to regulators, such as the SEC.

    Citation:

    Eshleman, J. D., & P. Guo. 2014. Abnormal Audit Fees and Audit Quality: The Importance of Considering Managerial Incentives in Tests of Earnings Management. Auditing: A Journal of Practice & Theory 33 (1): 117-138.

    Keywords:
    audit fees, audit quality, discretionary accruals, meet-or-beat, earnings management
    Purpose of the Study:

    In this study, the authors attempt to shed light on the conflicting evidence by performing a study of the relationship between abnormal audit fees and audit quality using a new research design. Specifically, the authors examine whether clients paying abnormal audit fees are more or less likely to use discretionary accruals to meet or beat the consensus analyst forecast.

    A growing body of accounting literature examines the relationship between audit fees and audit quality. Researchers are interested in this relationship because, ex ante, it is not clear whether receiving higher fee revenue from a client will improve audit quality or harm it. On the one hand, it could be argued that an auditor who receives abnormally high audit fees from a client will lose their independence and allow the managers of the client firm to engage in questionable accounting practices. However, it is also possible that audit fees are a measure of audit effort, i.e., higher fees indicate that the auditor worked more hours, signaling greater effort. To the extent that audit fees are a measure of audit effort, low audit fees could harm audit quality.

    Design/Method/ Approach:

    Audit fee and auditor data are obtained from Audit Analytics, financial statement data are obtained from Compustat, and analyst forecast data are obtained from the I/B/E/S database. The authors perform tests on two samples of 4,476 firm-years and 1,670 firm-year observations spanning 2000 to 2011.

    Findings:

    The authors find that clients paying higher abnormal audit fees are significantly less likely to use discretionary accruals to meet or beat the consensus analyst forecast. If abnormal audit fees are held at their mean, a one-standard-deviation increase in abnormal audit fees decreases the client's likelihood of using discretionary accruals to meet or beat the consensus forecast by approximately 5 percent. This is consistent with higher audit fees being indicative of greater auditor effort and, ultimately, better audit quality. The authors obtain similar results whether they use the audit fee model of Choi et al. (2010), the one proposed by Blankley et al. (2012), or their own audit fee model.

    Category:
    Audit Quality & Quality Control, Client Acceptance and Continuance, Corporate Matters
    Sub-category:
    Audit Fee Decisions, Earnings Management
  • Jennifer M Mueller-Phillips
    Abnormal Audit Fees and Restatements
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements 
    Title:
    Abnormal Audit Fees and Restatements
    Practical Implications:

    The conclusion that audit fees are associated with the risk of audit failure may impact auditors as they face pressure to reduce audit fees. Auditors should consider this risk based on the client’s position as well as trying to minimize risk related to audit fee reductions. Similarly, client’s audit committee should consider the trade-off between current fees and the risk of restatement. With the changes that SOX introduced, regulators should review how changes in audit fees affects the quality of financial statements over time.

     

     

    For more information on this study, please contact Dr. David Hurtt.

    Citation:

    Alan I. Blankley, David N. Hurtt, and Jason E. MacGregor. 2012. Abnormal Audit Fees and Restatements. Auditing: A Journal of Practice & Theory: 31 (1): 79-96.

    Keywords:
    Restatements, audit fees, audit quality
    Purpose of the Study:

    Overall, this paper investigates whether there is a relationship between audit fees and subsequent financial statement restatements. The authors investigated whether audit firms charged more for audit services prior to a restatement compared to non-restatement clients. Past research finds that this relationship has a positive correlation. However, the authors revisited this relationship for the post-SOX period based on multiple factors:

     

    • The relationship of audit fees to future restatements is unclear since high fees may increase restatement probability due to independence issues, while low fees may increase the probability of future restatement because they potentially reflect lower levels of service or effort.
    • SOX affects the auditor-client relationship through changes such as partner rotation and prohibiting some non-audit services provided to audit clients. Research revealed a shift in firms increasing pricing for risk.
    • With the recent economic downturn, companies trying to decrease audit fees could be focusing on cutting cost instead of focusing on the quality of the financial statements.
    • Past research was inconclusive on the relationship between future restatements and audit fees because of the time frame studied as well as the omission of an internal control strength variable.

     

    Finding a clear relationship between audit fees and future restatements could have implications in how auditors, audit committees, and regulators view audit fees in a post-SOX business environment. As a result, the study could impact fee negotiations from the standpoint of audit quality.

    Design/Method/ Approach:

    Audit fee and restatement data was collected from Audit Analytics for the 2002 through 2009 period. The authors used two statistical models to study the association audit fees may have with future restatements. First, using an audit fee model based on prior research, the authors derived the abnormal or unusual audit fee after controlling for audit risk, client complexity, internal control strength and other influences on fees. In the second model, the authors tested a robust logistic regression model where the variable of interest was the abnormal audit fee derived from the first model. 

    Findings:
    • The authors find that abnormal audit fees are negatively associated with the probability of future financial statement restatements.
    • When audit fees are noticeably high, the likelihood of restatement is low. When audit fees are noticeably low, the likelihood of restatement is high.
    • When audit fees are abnormally low, there may be pressure for auditors to maintain the profitability of the engagement by minimizing hours to complete the audit.
    • This relationship is robust when the model included or excluded a variety of internal control and restatement variables.
    Category:
    Accountants' Reporting, Engagement Management
    Sub-category:
    Audit Fees & Fee Negotiations, Restatements
  • The Auditing Section
    Academic Instruction as a Determinant of Judgment...
    research summary posted May 7, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    Academic Instruction as a Determinant of Judgment Performance
    Practical Implications:

    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.

    Citation:

    Wright, William F. 2007.  Academic Instruction as a Determinant of Judgment Performance. Behavioral Research in Accounting 19: 247-259.

    Keywords:
    Audit judgment; instruction; experience;
    Purpose of the Study:

    Knowledge and personal involvement are important factors that affect auditor judgment quality. It is generally believed that sufficient knowledge can lead to good auditor judgment.  Two sources of relevant knowledge are academic instruction and practical experience. Yet the relative benefits of the two sources remain unclear. The primary purpose of the study is to test for the benefit of task-specific academic instruction and practice relative to task-specific CPA training and experience in making auditor judgments. 

    Design/Method/ Approach:

    The research evidence is collected during 1991. Three groups of people participated in the experiment: (1) graduate business students, (2) inexperienced financial institution audit seniors, and (3) experienced financial institution auditors (managers, senior managers, and junior partners). Participants were asked to complete a simulated case involving evaluating the collectability of commercial loans to a fictitious manufacturer of microcomputers.

    Findings:
    • The author finds that, compared to the inexperienced audit seniors, the graduate students who completed an elective course in credit analysis made more accurate and less biased judgments.
    • The author finds that, the graduate students who completed an elective course in credit analysis made judgment similar to that of the experience auditors.
    Category:
    Audit Team Composition, Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Industry Expertise – Firm and Individual, Prior Dispositions/Biases/Auditor state of mind, Training & General Experience
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  • Jennifer M Mueller-Phillips
    Accelerated filing deadlines, internal controls, and...
    research summary posted October 20, 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 
    Title:
    Accelerated filing deadlines, internal controls, and financial statement quality: The case of originating misstatements.
    Practical Implications:

    Given the significant amount of concern regarding the reliability of financial statement reporting under new filing deadlines (movement from 90 days to 75 days in 2003 and then to 60 days in 2006), the authors provide evidence which shows the concern was valid but only temporarily. The authors use originated misstatements to indicate the beginning of a misstatement, showing that accelerated filers experienced higher likelihood of misstatements after the first acceleration, however large accelerated filers did not experience such a change in response to the second acceleration. Additionally, implementation of SOX appears to have increased reliability with fewer originated misstatements upon implementation.

    Citation:

    Boland, C. M., S. N. Bronson, C. E. Hogan. 2015. Accelerated filing deadlines, internal controls, and financial statement quality: The case of originating misstatements. Accounting Horizons 29 (3) 297-331.

    Keywords:
    Accelerated filing, financial statement restatements, Sarbanes-Oxley Act, filing lags, internal controls
    Purpose of the Study:

    The authors investigate whether Government regulationspecifically through changes in filing deadlines and implementation of the Sarbanes Oxley Act (SOX)influence the origination of financial statement misstatements. They specifically focus on the origination of misstatements to determine if firms sacrificed relevance and reliability to comply with accelerated filing dates.

    Design/Method/ Approach:

    The analyses use a sample of 17,216 firm-year observations from 12/15/2002 to 12/14/2007. The authors run a regression analysis predicting the likelihood of a restatement for accelerated filers and large accelerated filers relative to non-accelerated filers. The model incorporates controls for other known determinants of changes in likelihood of restatement.

    Findings:

    The authors find:

    • Accelerated filers had a higher likelihood of a misstatement following the filing deadline shift from 90 to 75 days.
    • Accelerated filers had a reduced likelihood of a misstatement following implementation of SOX.
    • Large accelerated filers did not experience a change in likelihood of a misstatement following the filing deadline shift from 75 to 60 days.

    The results suggest that the concerns of filers and their auditors regarding the potential for lower-quality information resulting from accelerated filing was valid, although only temporarily. In the long run, companies were able to file reports in a timelier manner without a corresponding increase in the likelihood of misstatement.

    Category:
    Accountants' Reporting, Standard Setting
    Sub-category:
    Impact of SEC Actions, Restatements
  • The Auditing Section
    Accountability and auditors’ materiality judgments: The e...
    research summary posted May 3, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 09.02 Documentation Specificity, 09.11 Auditor judgment in the workpaper review process, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions, 10.03 Interaction among Team Members 
    Title:
    Accountability and auditors’ materiality judgments: The effects of differential pressure strength on conservatism, variability, and effort.
    Practical Implications:

    Firms should consider the levels of accountability pressure and situations where they use them and consider how different levels of pressure may impact performance.  Higher levels of accountability pressure may increase effectiveness and increase the likelihood of finding material misstatements. 

    On the other hand, increased effectiveness and time spent due to higher levels of accountability pressure may cause inefficiencies and result in unnecessary effort.  Firms should evaluate the costs and benefits for their situations. 

    The authors note that this study only looks at the effect of accountability pressure from an unknown partner.  In the real world, auditors have accountability pressures from many levels such as other superiors, clients, regulators, and audit committees. 
    Further, the auditor may have assessed things differently if they knew the partner that was performing their review.

    Citation:

    DeZoort, T., P. Harrison, and M. Taylor. 2006.  Accountability and auditors’ materiality judgments: The effects of differential pressure strength on conservatism, variability, and effort.  Accounting, Organizations, and Society 31 (4-5):  373-390. 

    Keywords:
    Audit Judgment; Audit Materiality; accountability pressure; materiality judgment
    Purpose of the Study:

    The purpose of this study is to look at how four different levels of accountability pressure (i.e. how their decisions would be reviewed) affect auditor conservatism, variability, and effort in tasks related to materiality.

    Design/Method/ Approach:

     The authors performed a computerized experiment using a final sample of auditors from five public accounting firms.  Participants were managers, staff and senior associates.   Participants were asked to review client background information, financial information, and a proposed audit adjustment for the Allowance for Doubtful Accounts balance.  Participants were asked to provide a planning materiality amount for the engagement and a materiality judgment regarding the proposed audit adjustment.  The auditors were put into one of four levels of accountability pressure:

    • Anonymity –judgment decision and responses were anonymous
    • Review –audit partner review but no feedback provided
    • Justification – participants provide written justification, which was reviewed but no comments provided
    • Feedback –formal feedback from partner about performance provided  

    In addition, about half of the participants received a “planning materiality decision aid,” which provided a range of planning materiality values.

    Findings:
    • For higher levels of accountability pressure strength (i.e. justification and feedback) judgments regarding planning materiality and proposed audit adjustments were more conservative and less variable.  In addition, higher level participants spent more time on the tasks, provided longer explanations and included more qualitative factors than those in lower levels, which suggest a higher level of effort.
    • Planning materiality decision aids reduced planning materiality variation across the various pressure levels, particularly for those in the lower accountability pressure groups.  
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Audit Scope & Materiality Judgements, Documentation Specificity, Auditor judgment in the workpaper review process, Materiality & Scope Decisions, Interaction among Team Members
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  • The Auditing Section
    Accountants’ Commitment to Their Profession: Multiple D...
    research summary posted May 9, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale 
    Title:
    Accountants’ Commitment to Their Profession: Multiple Dimensions of Professional Commitment and Opportunities for Future Research
    Practical Implications:

    This paper studies professional commitment and is of importance to practitioners. The results contribute to a greater understanding of how accountants’ professional commitment forms. Most importantly, it helps practitioners to better understand how the combination of an accountant’s professional commitment and other factors influence work related outcomes (e.g. work performance, turnover intentions, job satisfaction, ethical development, etc.).

    Citation:

    Hall, M., D. Smith, and K. Langfield-Smith. 2005.  Accountants’ Commitment to Their Profession: Multiple Dimensions of Professional Commitment and Opportunities for Future Research. Behavioral Research in Accounting 17: 89-109.

    Purpose of the Study:

    Professional commitment (PC) refers to the attachments that individuals form to their profession. Since PC has been linked to important outcomes such as improved work performance, reduced turnover intentions, and greater satisfaction at both the organizational and professional levels, it is very important to develop a more complete understanding of individuals’ PC. Professional Commitment consists of three dimensions, including affective PC (of or relating to experience of feeling or emotion), continuance PC, and normative PC. The primary purpose of this study is to examine the different dimensions of PC, how they develop, and how they affect accountants’ professional and organizational outcomes.

    Design/Method/ Approach:

    Not applicable; this is a review paper.

    Findings:
    • Affective PC leads one to willingly stay in his/her profession. Continuance PC leads one to stay in the profession because of the high costs associated with leaving. Normative PC leads one to remain in the profession out of a sense of obligation.
    • The factors which affect affective PC include job level, personal characteristics (personality type and ethical orientation), organizational characteristics (work environment such as public accounting, private industry, or government), and situational factors (e.g. satisfaction with rewards). Affective PC together with job and professional satisfaction influence employees’  urnover intentions, organizational-professional conflict, and ethical attitudes and decision making.
    • Examining multiple dimensions of PC may provide a more complete understanding of an individual’s commitment to his/her profession.
    Category:
    Audit Team Composition
    Sub-category:
    Staff Hiring - Turnover & Morale
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