Auditing Section Research Summaries Space

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  • Jennifer M Mueller-Phillips
    Does Disclosure of Conflict of Interest Increase or Decrease...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments 
    Title:
    Does Disclosure of Conflict of Interest Increase or Decrease Bias?
    Practical Implications:

     Valuators’ judgment and decision making is currently unexplored. This study provides preliminary evidence on how valuators act in the presence of conflict of interest, and the need for conflict disclosures. The results of this study have implications for public accounting firms to the extent that they provide either fairness opinions and associated valuation judgments or are involved in some audit aspects related to mergers/acquisitions. This study contributes to accounting and psychology literature on conflict of interest disclosures and is the first study to test the biasing effects of conflict disclosure specifically targeting professionals performing familiar tasks. Further, this study extends existing literature of the topic by documenting that bias arising from disclosure of conflict of interest depends on whether the conflict of interest is aligned or misaligned with the client’s interest. This study provides the first evidence that disclosure of conflict of interest causes bias in Client-Aligned, but not in a Client-Misaligned, conflict of interest setting.

    Citation:

     Jamal, K., E. Marshall and H. Tan. 2016. Does Disclosure of Conflict of Interest Increase or Decrease Bias? Auditing: A Journal of Practice and Theory 35 (2): 89-99.

    Keywords:
    Conflict of interest, disclosure, bias, auditor independence, valuation, client advocacy, nature of conflict
    Purpose of the Study:

     Professional valuators are increasingly called upon to supply inputs that form part of the financial statements and the audit report. However, criticisms of potential conflicts of interest relating to valuators’ reports abound. One concern is that professional valuators provide expert opinions in circumstances where they are required to act in the public interest, yet are hired and paid by a client who has self interest in the outcome of the valuator’s report. This study seeks to investigate, in a valuation setting involving professional valuators, the efficacy of disclosure in curbing biases stemming from conflict of interest. Further, this study investigates whether the effect of disclosure of conflict of interest depends on the nature of the conflict of interest—specifically, whether the conflict of interest is aligned with or threatens the current client’s (seller or auditor’s) interest.

    Design/Method/ Approach:

     The authors recruited 90 experts with business valuation experience and sent these participants research instruments via courier mail. On average, participants had 13.3 years of work experience, 6.7 years of work experience in business valuation, and had worked on 38 valuation engagements. These individuals were asked to make a valuation judgment in the context of a larger fairness opinion engagement on the sale of a subsidiary. Conflict of interest was manipulated as either Client-Aligned (valuators’ interest aligned with auditors) or Client-Misaligned (valuators’ interest aligned with audit client). The results were also examined in the presence and absence of disclosure (No Disclosure, Disclosure).

    Findings:

     The study resulted in the following conclusions. • In a Client-Aligned conflict situation, disclosure of conflict of interest induces bias toward the current client (auditor), and does not produce the intended result of reducing or preventing bias. • In a Client-Misaligned conflict of interest setting where the valuator has potential future business opportunities with the buyer (audit client), the authors found evidence that valuation estimates are still biased toward the current client (auditor), regardless of disclosure. • In the Client-Aligned conflict situation, disclosure magnified bias. In contrast, in the client-misaligned conflict setting, disclosure of conflict of interest did not cause any incremental bias.

    Category:
    Audit Team Composition, Auditor Judgment
    Sub-category:
    Impact of Consultation on Judgments, Use of Specialists (e.g. financial instruments – actuaries - valuation)
  • Jennifer M Mueller-Phillips
    Biased Evidence Processing by Multidisciplinary Greenhouse...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence 
    Title:
    Biased Evidence Processing by Multidisciplinary Greenhouse Gas Assurance Teams
    Practical Implications:

     This study has implications for public accounting firms engaging in GHG engagements. Team training that establishes an understanding of the knowledge and role of the team members from differing disciplines might help to alleviate over-reliance on peer-provided evidence. In the context of multidisciplinary assurance teams, establishing and adhering to audit firm quality control mechanisms relating to evidence collection, evaluation, and review are of particular importance. Accounting firms may also need to pay particular attention in fostering an assurance environment that encourages objective evidence processing.

    Citation:

     Kim, S., W. J. Green, and K. M. Johnstone. 2016. Biased Evidence Processing by Multidisciplinary Greenhouse Gas Assurance Teams. Auditing: A Journal of Practice and Theory 35 (3): 119-139.

    Keywords:
    greenhouse gas (GHG) assurance, multidisciplinary teams, internal experts, evidence weighting, and misstatement likelihood judgments.
    Purpose of the Study:

    Due to the increased attention being paid to the environment as well as how humans are impacting the environment, there exists growing demand for a range of corporate social responsibility information. In order to be most efficient, assurors conduct greenhouse gas (GHG) assurance engagements using multidisciplinary teams containing varying technical expertise, with some possessing financial audit-related expertise and others possessing science or combined science/financial-related expertise. The purpose of this study is to investigate how auditors respond to the discipline-specific expertise of other team members in undertaking GHG assurance. 

    Design/Method/ Approach:

    The authors test this by conducting an experiment in which traditional auditor participants respond to a simulated multidisciplinary team and examine whether the auditors bias their weighting of evidence based on if the senior assuror has a science background as opposed to a financial background. 

    Findings:
    • The authors find that the assuror participants bias their processing of audit evidence by conforming to the science senior’s explanation, despite the fact that, in this setting, no science-related expertise is needed to compile or evaluate the evidence and other available evidence items contradict the science senior’s explanation.
    • The authors find that the results also support the mitigating role of the reviewer’s expertise on the effect of the science senior’s explanation. Specifically, the participants who learned the explanation of a science senior place less weight on the science-related evidence items once they learn that the reviewer has financial assurance expertise.
    • The authors also find evidence that this biased weighting of evidence and the mitigating role of the reviewer’s expertise translate into the final assurance judgments.
    Sub-category:
    Auditor judgment in the workpaper review process
  • Jennifer M Mueller-Phillips
    Facilitating Brainstorming: Impact of Task Representation on...
    research summary posted May 31, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.09 Group Decision-Making, 06.0 Risk and Risk Management, Including Fraud Risk, 06.08 SAS No. 99 Brainstorming – effectiveness, 09.0 Auditor Judgment 
    Title:
    Facilitating Brainstorming: Impact of Task Representation on Auditors’ Identification of Potential Frauds
    Practical Implications:

    The results of this study are important due to the requirement of members of the audit engagement team to identify potential fraud. The results of this study identify a method of improving auditor performance of identifying potential frauds at both the individual brainstorming stage and the subsequent group brainstorming stage. Because the effectiveness of the group brainstorming session is dependent on the quality and quantity of inputs from the individual auditor brainstorming sessions, the present study suggests a simple intervention regarding task representation to improve the performance of these inputs. Specifically, auditors considering potential fraud categories (e.g., revenue recognition, inventory, etc.) one by one, as opposed to all at once, identify a greater quantity and quality of potential frauds. By improving both the individual and group brainstorming stages, auditors are less likely to overlook potential fraud.

    Citation:

    Chen, W., A. S. Khalifa, and K. T. Trotman. 2015. Facilitating brainstorming: Impact of task representation on auditors’ identification of potential frauds. Auditing: A Journal of Practice & Theory 34 (3): 1-22.

    Keywords:
    Brainstorming; task representation; fraud identification; fraud risk assessments
    Purpose of the Study:

    Members of audit engagement teams are required by auditing standards to discuss the client’s susceptibility to potential frauds, usually referred to as “brainstorming.” The purpose of this study is to examine individual auditor brainstorming prior to the brainstorming session of the group. The specific preparation stage prior to a group brainstorming session is an important input to the group session itself and may alter the effectiveness of the subsequent group brainstorming session. The authors of the study predict that a sequential unpacking approach (consideration of fraud categories one by one) to identifying potential fraud improves the quantity and quality of potential frauds identified at both the individual brainstorming stage and the group brainstorming stage.

    Design/Method/ Approach:

    The experimental evidence was collected prior to 2013 at either the Melbourne or the Sydney office of a Big 4 firm in Australia. The experimental design was a 2 x 1 between-subjects design with task representation manipulated as sequential unpacking (categories considered one by one) or simultaneous unpacking (categories considered at once). Auditor participants included seniors, assistant managers, and managers with an overall average of 4.83 years of audit experience.

    Findings:
    • The authors find that sequential unpacking improves auditor performance at the individual brainstorming stage compared to simultaneous unpacking.
    • The authors find that auditors in the sequential unpacking treatment tend to distribute identified potential frauds across categories more evenly than those in the simultaneous unpacking treatment.
    • The authors find the benefits of sequential unpacking to extend beyond individual brainstorming to the group brainstorming session.
    • The authors find that the perceived likelihood of fraud is lower for auditors in the sequential unpacking treatment than those in the simultaneous unpacking treatment.
    Category:
    Audit Team Composition, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Group Decision-Making, SAS No. 99 Brainstorming – effectiveness
  • Jennifer M Mueller-Phillips
    Group judgment and decision making in auditing: Past and...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.09 Group Decision-Making, 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments, 09.11 Auditor judgment in the workpaper review process 
    Title:
    Group judgment and decision making in auditing: Past and future research.
    Practical Implications:

    The insights highlighted in this paper from research on audit groups/teams inform one’s understanding of how best to design group interactions between auditors within the firm and with professionals outside the audit firm, including management, audit committees, and inspectors. These insights are important given the criticism audit firms have faced from regulators and inspectors over the past decade and the multi-person setting present in auditing. Further, while a large literature exists on single-person decision-making, these studies may not generalize to multi-person settings. The review also highlights the need for continued research in this area and the importance audit practitioner involvement with future research efforts.

    Citation:

    Trotman, K., T. Bauer, and K. Humphreys. 2015. Group judgment and decision making in auditing: Past and future research. Accounting, Organizations and Society 47: 56-72.

    Keywords:
    Review process, brainstorming, consultation
    Purpose of the Study:

    This paper examines experimental research on audit groups/teams. The paper focuses on three main areas: 1) the hierarchical review process, 2) brainstorming as part of the fraud detection planning process, and 3) consultation within firms. The authors define research on audit groups/team as those papers where two or more individuals within the audit firm interact with one another face-to-face, electronically, or where on person prepares/reviews working papers for another. In addition to summarizing research to date in each of the three areas, the authors suggest directions for future research within the three areas as well as future research on within-firm group interactions. These areas include shared mental models, audit team diversity, and interactions with groups outside the audit firm, such as audit committees.

    Design/Method/ Approach:

    The paper summarizes research on group audit JDM experimental studies published in Accounting, Organizations, and SocietyContemporary Accounting ResearchJournal of Accounting Research, and The Accounting Review from 1970 through 2015. Relevant working papers are also discussed.

    Findings:

    Note: Given the breadth of this review paper, only select subsections are summarized below.

    • Hierarchical review process:
      • What performance gains result from the review process?
        • The review process generally improves audit effectiveness.
        • However, it is not always effective as biases may not be mitigated by the review process, such as the recency effect.
      • Alternative forms of the review process: Includes research on comparing reviews with and without discussion, specialized versus all-encompassing reviews, and electronic versus face-to-face reviews.
      • Effects of the preparer on the review process:  
        • Studies investigate the attributes of the preparer and the effects of preparer stylization on the review process.  
        • Overall, preparer attributes and stylization have a significant impact on the review process.
    • Brainstorming:
      • Face-to-face interacting versus nominal brainstorming: Nominal groups generate more unique ideas than face-to-face interacting groups, due to process losses (e.g., production blocking) occurring in the face-to-face interacting context.
      • Interacting face-to-face brainstorming compared to alternate brainstorming formats: While unstructured face-to-face brainstorming is the most common method used by audit firms, other methods (e.g., providing guidelines or instructions) outperform this unstructured method with respect to the quantity of fraud risks identified and fraud hypotheses generated.
      • Electronic brainstorming:  
        • Positive consequences of electronic brainstorming include minimizing production blocking and evaluation apprehension, however social loafing is a potential negative consequence.
        • Evidence supports the claim that electronic brainstorming is superior to face-to-face interaction, however as with non-electronic brainstorming, nominal electronic brainstorming outperforms interacting electronic brainstorming.
    • Consultation within firms:
      • Willingness to follow consulting advice: Auditors tend to incorporate advice received, however receiving advice can increase the tendency to follow aggressive client preferences.
      • Willingness to seek consulting advice: In general, auditors are more likely and willing to consult when related risk is high.
    Category:
    Audit Team Composition, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Group Decision-Making, Impact of Consultation on Judgments
  • Jennifer M Mueller-Phillips
    Construal instructions and professional skepticism in...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.02 Documentation Specificity, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence 
    Title:
    Construal instructions and professional skepticism in evaluating complex estimates.
    Practical Implications:

    The findings of this study have important implications for practice. Given the concern from the PCAOB regarding auditors’ lack of professional skepticism, this paper finds a mechanism to increase and improve the level of professional skepticism. In addition, the technique the author finds (providing high-level construal instructions) to auditors is “simple to use, inexpensive, and can easily be tailored for a firm’s specific needs or language

    Citation:

    Rasso, J.T. 2015. Construal instructions and professional skepticism in evaluating complex estimates. Accounting, Organizations and Society 46: 44-55.

    Keywords:
    professional skepticism, material misstatement, auditor judgment
    Purpose of the Study:

    The purpose of this study is to examine whether instructing auditors to create summaries of their audit findings during evidence evaluation in a broad/abstract manner (creating high-level construals) increases professional skepticism. Theoretical research suggests that using these high-level construals (or interpretations) helps individuals to process and understand numerous pieces information. The author suggests that this method could help auditors to ‘see the big picture’, which could help identify patterns in the evidence or possible material misstatements. Then, auditors may be more willing to gather and evaluate additional evidence to test for these potential problems.

    Design/Method/ Approach:

    Data for this paper was collected prior to April 2015 by using a computerized experiment. Auditors were used as participants in the study, and they averaged 5.4 years of audit experience (ranging from staff auditor to partner). In addition, ninety percent of the auditors had audited fair value estimates in the past.

    Findings:

    Auditors that were given documentation instructions to create high-level construals were more likely to exert professional skepticism compared to auditors given low-level construals (identifying specifically how an estimate could be fairly stated or misstated) or auditors given no instructions. Specifically, they spent more time collecting and evaluating audit evidence, collected more evidence, and rated the risk of the fair value estimate higher. These findings suggest that auditors using the high-level construal instructions process the information from their findings better and recognize a need to gather more evidence when given an incomplete amount of evidence. In addition, when evidence suggests that the fair value is overstated, auditors given the high-level construal instructions are more likely to realize the high risk.

    Category:
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Auditors’ Professional Skepticism, Documentation Specificity, Evaluation of Evidence
  • Jennifer M Mueller-Phillips
    Effect of Concession-Timing Strategies in Auditor–Client N...
    research summary posted January 20, 2016 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Effect of Concession-Timing Strategies in Auditor–Client Negotiations: It Matters Who Is Using Them.
    Practical Implications:

    The results of this paper are of interests to both the management and the auditors in practice. While there are various concession-timing strategies, it is normal for the auditors to make a large concession towards the end of the negotiation and for the management to make a large concession at the start of the negotiation. Violating these norms will lead to ineffective outcomes. However, both the parties can make small, gradual concessions along the negotiation process and this gradual strategy will lead to the most effective outcomes. The findings can be generalized to other negotiation settings, such as the negotiation between the buyer and seller in transfer pricing settings.

    Citation:

    Sun, Y., H. T. Tan, and J. Zhang. 2015. Effect of ConcessionTiming Strategies in AuditorClient Negotiations: It Matters Who Is Using Them. Contemporary Accounting Research 32 (4): 14891506.

    Keywords:
    negotiation strategies, auditors, financial managers, norms
    Purpose of the Study:

    There are three types of concession-timing strategies available to the auditors and the management in an audit adjustment negotiation: 1) start strategy- offer large concessions only at the beginning of the negotiation; 2) end strategy - offer large concessions only near the end of the negotiation; and 3) gradual strategy  offer small, gradual and reciprocal concessions along the negotiation process. The paper first considers the norms on who should use certain types of the strategies and then investigate whether norm-violation will render the negotiation strategy ineffective. Specifically, the authors expect it is the norms for the auditors to adopt either the start strategy or the gradual strategy and for the management to adopt either the end strategy or the gradual strategy. Norm-inconsistent behaviors mean the auditors use the start strategy and the management use the end strategy.

    General negotiation studies have examined the effectiveness of the three concession-timing strategies but those studies neither examine party-specific effectiveness nor consider reactions from the counter-party. The purpose of this paper is to take those considerations into account and examine the norm effect in an auditor-client negotiation context.

    Design/Method/ Approach:

    The authors collected the evidence via an experiment conducted in China during the early 2010s. A group of auditors from the Big 4 accounting firms and a group of financial managers participate in the experiment. The audit disagreement is related to an impairment charge. Through manipulating the negotiation strategies of the hypothetical counter-party, the authors record the concession amounts made by the auditors and the financial managers respectively.

    Findings:
    • The authors find the financial manager participants concede more if the hypothetical auditors adopt either the start or the gradual strategy and the two strategies does not have significant different impacts on the concession amounts.  
    • The authors find the auditor participants concede more if the hypothetical financial managers adopt either the start or the gradual strategy but the impact on the concession amounts is greater for the gradual strategy than the start strategy.
    • The authors also find the financial manager participants and auditor participants response with less norm-consistent behaviors if the hypothetical counter-party adopts a norm-inconsistent strategy.
    • The authors elicit the beliefs of the financial manager participants and the auditor participants about the norms on the use of specific strategies. They find evidence consistent with their expectations. Specifically, the general beliefs from both parties are that the auditors should adopt either the end or the gradual strategy and the managers should adopt either the start or the gradual strategy.
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Interactions with Client Management
  • Jennifer M Mueller-Phillips
    The Impact of Audit Evidence Documentation on Jurors’ N...
    research summary posted January 19, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 09.0 Auditor Judgment, 09.02 Documentation Specificity 
    Title:
    The Impact of Audit Evidence Documentation on Jurors’ Negligence Verdicts and Damage Awards.
    Practical Implications:

    This study suggests that audit workpaper documentation decisions can significantly influence juror negligence verdicts and damage awards in cases where the auditor faces litigation. This is a particularly important finding for audit firms as this is an aspect of the litigation process that the auditor can directly control prior to facing litigation by considering how jurors might perceive this information when designing documentation procedures.

    Citation:

    Backof, A. G. 2015. The Impact of Audit Evidence Documentation on Jurors’ Negligence Verdicts and Damage Awards. The Accounting Review 90 (6): 2177-2204.

    Keywords:
    audit documentation, auditor liability, culpable control model, damage awards
    Purpose of the Study:

    During litigation proceedings, audit workpaper documentation represents a key piece of evidence supporting the quality of audit work because these documents are not only presented to jurors and scrutinized by experts during the trial, but are also available for juror review during deliberations. Because of its prominence during trials, the method and information contained in audit workpaper documentation has the potential to influence juror negligence verdicts and damage awards. This study examines how variation in audit documentation decisions related to the linkage of specific audit procedures performed to risks of misstatement for individual-level accounts, along with the inclusion of facts inconsistent with the auditor’s professional judgment influenced subsequent juror decisions. In particular, the study addresses the following research objectives:

    • Whether the inclusion of the auditor’s consideration of alternative accounting treatments in workpaper documentation influences juror perceptions of the foreseeability of the misstatement.
    • Whether the inclusion of documentation which directly links account-level risks of misstatement to specific audit procedures performed increases the juror’s evaluations of auditor intentions to conduct a quality risk-based audit.  
    • Whether differences in workpaper documentation influence juror evaluations of auditor negligence and subsequent damage assessments.
    Design/Method/ Approach:

    The research evidence was collected utilizing a group of participants whose characteristics mimicked that of an average jury pool. Participants listened to a 28-minute audio recording of a negligence lawsuit, and then received a written transcript of the trial along with copies of the audit workpapers entered into evidence during the trial. Participants were instructed to assume the role of a juror in order to evaluate whether the audit firm was negligent and to determine an appropriate level of damages to assess the audit firm.

    Findings:
    • Jurors assess the likelihood of auditor negligence as higher when the auditor includes in their workpaper documentation facts inconsistent with their professional judgments. This is the case because jurors assess the misstatement as more foreseeable when this information is available in the workpaper documentation.  
    • When the workpaper documentation includes direct links between identified account-specific risks of misstatement and specific audit procedures performed, jurors do not view auditor’s intentions to conduct a quality risk-based audit as higher. Subsequently, jurors do not view the auditor’s likelihood of negligence to be lower when this information is included in workpaper documentation.
    • Workpaper documentation which includes direct links between identified account-specific risks of misstatement and specific audit procedures performed does not significantly influence the amount of damages awarded by jurors when facts inconsistent with the auditor’s professional judgments are not additionally included in the documentation. However, when this additional information is present, jurors award lower damages when the documentation does include direct links between identified account-specific risks of misstatement and specific audit procedures performed.
    Category:
    Auditor Judgment, Standard Setting
    Sub-category:
    Changes in Audit Standards, Documentation Specificity
  • Jennifer M Mueller-Phillips
    Client Identification and Client Commitment in a Privately...
    research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure 
    Title:
    Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity.
    Practical Implications:

    The results of this study suggest a course of action for enhancing professional skepticism, so they are important for audit firms specializing in privately held clients, which is an institutional setting where auditors may find it more difficult to maintain their objectivity. The authors suggest that audit firms can use their internal messaging to help individual auditors decrease the harmful effects of client identification. Specifically, audit firms can encourage auditors to (1) take the perspective of financial statement users (e.g., shareholders), (2) view themselves and clients as members of a group assigned the goal of providing accurate financial statements to shareholders, and/or (3) identify more strongly with the audit firm or the audit profession. Furthermore, the authors suggest that audit firms increase client commitment by encouraging auditors to be more attentive and available to clients (e.g., catching up with clients periodically and spending more time at the client site) and encouraging clients to feel free to reach out to auditors.

    Citation:

    Herda, D. N. and J. J. Lavelle. 2015. Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity. Accounting Horizons 29 (3): 577-601.

    Keywords:
    organizational identification, organizational commitment, social identity theory, social exchange theory, auditor objectivity
    Purpose of the Study:

    Prior accounting scandals raised concerns that auditors’ relationships with their clients lower auditor independence, which in turn lowers professional skepticism, and ultimately decreases audit quality. Accounting research attempting to shed light on the social processes related to such concerns suggest that client identification can decrease auditor. However, the authors argue that client identification (i.e., “the extent to which an auditor’s self-concept and self-definition are derived from perceived oneness with the client”) differs from client commitment (i.e., “a responsibility for and a dedication to the client, but the auditor and client remain separate psychological entities”). The purpose of this study is to discover if (1) client identification and client commitment are two different ideas, (2) client identification detracts from auditor objectivity, and (3) client commitment enhances auditor objectivity.

    Design/Method/ Approach:

    The authors collected their evidence via research questionnaires emailed to auditors, ranging from staff auditors to partners, at a large regional public accounting firm during the summer of 2013. Survey participants were asked questions about client identification and client commitment, and then were asked to perform a case that dealt with auditors’ behavior in an audit conflict situation.

    Findings:
    • The authors find that client identification and client commitment really are two different ideas.
    • The authors find that client identification is associated with lower auditor objectivity.
    • The authors find that client commitment is associated with higher auditor objectivity.
    • The authors find that number of years of audit experience impacts auditor objectivity for auditors at lower levels in the audit firm’s hierarchy (i.e., staff auditors and seniors), but not those at higher levels in the hierarchy (i.e., manager and above). In other words, more junior staff exhibit greater audit objectivity if they have more years of audit experience.

    These results suggest that audit firms specializing in privately held clients may enhance audit quality by decreasing auditors’ client identification and increasing auditors’ client commitment.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Independence & Ethics
    Sub-category:
    Adequacy of Disclosure, Auditors’ Professional Skepticism, Individual & team conduct (e.g. premature signoff - underreporting hours)
  • Jennifer M Mueller-Phillips
    On audits and airplanes: Redundancy and...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.03 Adequacy of Evidence 
    Title:
    On audits and airplanes: Redundancy and reliability-assessment in high technologies.
    Practical Implications:

    This article explains the importance of redundancy to both design and assessment practices in aviation, but contests redundancy’s ability to accurately translate between them. It suggests that FAA reliability assessments serve a useful regulatory purpose by couching the qualitative work of engineers and regulators in an idiom of calculative objectivity, but cautions that this comes with potentially perverse consequences. For, like many audit-practices, reliability calculations are constitutive of their subjects, and their construal of redundancy shapes both airplanes and aviation praxis.

    Citation:

    Downer, J. 2011. On audits and airplanes: Redundancy and reliability-assessment in high technologies. Accounting, Organizations & Society 36 (4/5): 269-283.

    Keywords:
    reliability assessments, redundancy, auditing
    Purpose of the Study:

    Reliability assessments of the most publicly significant high technologies from nuclear power-plants to civil jetliners  invoke calculative practices that are both opaque to the public gaze and largely neglected by sociologists of accounting. This paper is an effort to begin the long process of redressing the latter. A panoply of oversight bodies are responsible for performing reliability assessments of high technologies. Invariably, these are state regulators, such as the Nuclear Regulatory Commission (NRC) and Federal Aviation Administration (FAA) in the US. Among other functions, they measure and verify the reliability of complex and potentially dangerous technologies. This function is important, not only because the technologies involved are consequential, but also because the reliability they require is not readily knowable.

    This paper argues that reliability assessments of complex technologies can usefully be construed as ‘audits’ and understood in relation to the literature on audit-practices. It looks at a specific calculative tool  redundancy  and explores its role in the assessments of new airframes by the Federal Aviation Administration (FAA).

    Design/Method/ Approach:

    This article is a commentary.

    Findings:

    It is important to recognize that the counting practices of high technology, like those of other audit domains, are worthy of sociological consideration and amenable to sociological deconstruction. Like all institutional audit practices, they are socially constructed and materially constitutive: shaping technological systems and colonizing engineering practices. They may even be more constitutive in engineering than in other domains. Modernity widely subscribes to a pervasive but misleading ideal that construes technologies as more ‘objectively knowable’ than most audit objects, and this imbues engineering calculations with uncommon influence.

    In the specific case of FAA reliability assessments, the ideal of objectivity leans heavily on redundancy because of its usefulness in enacting quantitative proof. It allows auditors to translate the vicissitudes of engineering practice into the formal language of regulatory assessment. Yet this function depends on a false equivalence between redundancy as ‘engineering tool’ and redundancy as ‘audit paradigm’, where the latter is misconstrued as accurately reflecting the former. And, given the socially and materially constitutive nature of formal reliability assessments, this disjuncture has complex ramifications with significant social consequences. Calculative practices like redundancy are not important because they accurately represent the technological world but because they claim to, and because such claims become institutionalized in ways that shape technological designs, influence technological practices, and frame important technological choices.

    Category:
    Auditor Judgment
    Sub-category:
    Adequacy of Evidence
  • 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.

    Keywords:
    corporate turnarounds, strategic planning, auditors’ report, going-concern decision
    Purpose of the Study:

    Audit reporting of distressed companies is more relevant than ever as management and auditors face the consequences of the global financial crisis and economic downturn. In the midst of this economic turmoil, standard setters are considering revisions to the auditing standard on the auditor’s evaluation of a company’s ability to continue as a going concern.

    This paper examines two issues related to the current debate about the time horizon and scope of information considered in going-concern decision-making: In particular, the authors ask: (1) do auditors take into account management plans and strategic actions to overcome financial difficulties, and (2) do auditors only assess short-term viability, or do they adopt a long-term view when making a going-concern decision. To that purpose the authors investigate whether and how a broad array of strategic and operating turnaround initiatives taken by management of financially distressed firms affect the auditor’s going-concern decision. In addition, the authors examine whether auditor industry specialization amplifies the extent to which auditors rely on strategic or operating turnaround initiatives in this context. The authors argue that their knowledge of industry best practices will allow specialist auditors to evaluate the adequacy and appropriateness of proposed management turnaround initiatives better, which in turn leads to an increased use of this type of information in going-concern decision-making.

    Design/Method/ Approach:

    The authors select a sample adopting a matched pair design. The authors select a sample of companies that received a first-time going-concern opinion and then a match sample of distressed companies that did not receive a going-concern opinion. They identify manufacturing companies from the Compustat database that received a qualified opinion or unqualified opinion with an explanatory paragraph. This results in a final sample of 389 manufacturing companies that received a non-clean audit opinion in fiscal years 1998 2001. To test the going-concern model, they match the going-concern opinion (GCO) sample with a sample of distressed companies that did not receive a going-concern report. The final sample consists of 174 distressed firm observations. 

    Findings:
    • The presence of strategic turnaround initiatives that are likely to generate positive cash flow effects in both the short run and the long run is negatively associated with the likelihood that a going-concern opinion is issued.
    • Cooperative agreements provide positive signals about the going-concern status of the firm and therefore can be interpreted as a distress-mitigating factor.
    • In contrast, the authors find that strategic initiatives that are likely to generate positive cash flow effects only in the long run are positively associated with the likelihood that a going-concern opinion is issued.
    • The evidence suggests that new mergers and acquisitions are not perceived as mitigating factors but rather as going-concern risk factors.
    • Only particular operating turnaround initiatives are associated with a higher likelihood that a going-concern opinion is issued.
    • More detailed analysis shows that cost reduction initiatives are perceived as additional going-concern risk factors, increasing the likelihood of a going-concern opinion.
    • City-level industry specialists perceive the implementation of short-term operating initiatives as a going-concern risk factor, whereas non-specialists do not.
    • Together with the finding that there is no difference between specialists and non-specialists in their use (and evaluation) of information regarding strategic turnaround initiatives, the authors find only partial confirmation for the expectation that industry specialists rely more on turnaround initiatives in their going-concern decision.
    Category:
    Accountants' Reporting, Auditor Judgment
    Sub-category:
    Going Concern Decisions, Going Concern Decisions

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