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  • The Auditing Section
    A Comparison of Auditor and Client Initial Negotiation...
    research summary posted May 4, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    A Comparison of Auditor and Client Initial Negotiation Positions and Tactics
    Practical Implications:

    This study provides a more complete examination of auditor-client pre-negotiation decisions and negotiation tactics when confronted with an ambiguous accounting issue.  Because auditors and clients approach conflict resolution and make negotiation decisions in very different ways, the results should be of interest to auditors. 

    Citation:

    Bame-Aldred, C. W. and T. Kida. 2007. A Comparison of Auditor and Client Initial Negotiation Positions and Tactics. Accounting, Organizations, and Society 32 (6): 497-511.

    Keywords:
    Auditor-client negotiation, revenue recognition, financial reporting.
    Purpose of the Study:

    Auditors must work with clients when forming their financial reporting decisions and the two parties may encounter situations where their reporting goals are different.  This conflict can compel the auditor and client to enter into formal or informal negotiations.  Various studies have previously examined auditor-client negotiation behavior, but none have directly compared the negotiation decisions of auditors and clients when faced with the same negotiation context. As such, the overall purpose of the study is to further examine the negotiation behavior of auditors and clients when facing an ambiguous revenue recognition issue.  Negotiation behavior will ultimately have an impact on the firm’s financial reporting decisions. Below are the objectives that the authors address in their study: 

    • Examine the degree of flexibility inherent in auditor and client initial negotiation positions.
    • Examine whether auditors and clients accurately perceive the other party’s initial positions.
    • Examine the types of negotiation tactics auditors and clients are likely to use. 
    Design/Method/ Approach:

    The authors collected their evidence via research questionnaires mailed to auditors at national CPA firms and experienced financial managers at various companies during the Spring and Summer of 2002.  The auditor participants included partners, senior managers, and managers.  The financial managers included CFOs, controllers, accounting managers, and analysts from 38 different companies.  Participants read summary financial information, a description of the auditor-client relationship, and a scenario about the proper amount of revenue recognition in a specific conflict scenario.  Participants were asked questions about their initial negotiation positions, their range of acceptable amounts, their perceptions of the other party’s positions and limits, the importance of certain revenue recognition issues, and the likelihood of using specific types of negotiation tactics.

    Findings:
    • Auditors and clients differ in their desired recognition amounts, thus establishing the need for negotiation to resolve this conflict. 
    • Auditor solution sets (i.e., the revenue recognition amounts between their reporting goal and their limit) were about half as large as client solution sets, indicating considerably less flexibility by auditors during the negotiation process. 
    • Auditors’ and clients’ had overlapping solution sets, indicating that a negotiated settlement should still be quickly attainable for most auditor-client negotiations.
    • Clients’ perceptions were significantly more accurate than auditors’ perceptions about the other party’s goals and limits of recognition amounts.  Auditors appear to overestimate clients’ actual reporting goals and limits.
    • Auditors considered issues supporting higher revenue recognition (e.g., missing the analysts’ earnings estimates and management incentive bonus) as less important than clients.  Clients thought that consistency with existing revenue recognition methods and increased earnings variability were more important issues than did auditors.  However, auditors and clients considered issues supporting lower revenue recognition to be equally important.
    • Tactics:
      • The highest rated tactic by both auditors and clients was problem-solving (i.e., to provide substantial rationale for their solution to persuade the other party to change their mind). 
      • Both auditors and clients agreed they should try to get information about the other party’s preferences and that they would try to appear as if they would not back down from their initial position. 
      • The lowest rated tactic by both auditors and clients was to threaten to qualify the opinion (by auditors) or to threaten to terminate the relationship (by clients). 
      • Clients were more likely than auditors to use a tactic of bid high / concede later and a tactic of attempting to trade-off certain issues. 
      • Overall, auditors were less likely to use tactics that could be interpreted as appearing inconsistent with their professional responsibilities.
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management
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  • The Auditing Section
    A Model and Literature Review of Professional Skepticism in...
    research summary posted April 23, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    A Model and Literature Review of Professional Skepticism in Auditing
    Practical Implications:

    Professional skepticism is an integral component of auditing and audit quality, as evidenced by standards such as SAS 1 and SAS 109.  Regulators often refer to professional skepticism as something that was missing when audit failures occur.  Thus, understanding what factors influence auditors’ levels of professional skepticism is important.  The author contends that this study facilitates an understanding of how audit firms can influence professional skepticism in practice via changes in such practices as hiring, training, performance appraisal, review, decision aids, incentives, and changes in tasks and institutions. 

    Citation:

    Nelson, M. W. 2009. A Model and Literature Review of Professional Skepticism in Auditing.  Auditing: A Journal of Practice & Theory 28 (2): 1-34.

    Keywords:
    Auditing, Professional skepticism
    Purpose of the Study:

    The purpose of this study is to review research that examines professional skepticism in auditing.  Consistent with other research and recent regulatory concerns, the author defines professional skepticism as “indicated by auditor judgments and decisions that reflect a heightened assessment of the risk that an assertion is incorrect, conditional on the information available to the auditor.” Unlike the professional standards, this definition reflects more of a “presumptive doubt” view rather than a “neutral” view of professional skepticism, implying that auditors who exhibit higher levels of professional skepticism are auditors who need relatively more persuasive evidence (in terms of quality and/or quantity) to be convinced that an assertion is correct.  In other words, such auditors are more likely to doubt evidence that an assertion is true than they are to doubt evidence than an assertion is false.  

    Drawing from prior studies, the author describes how audit evidence combines auditor knowledge, traits, and incentives to affect the level of professional skepticism exercised in auditor judgments.  Further, the author describes how, given a judgment with some level of professional skepticism, the judgment combines with auditor knowledge, traits, and incentives to affect auditor actions that reflect relatively more or less degrees of professional skepticism.

    Design/Method/ Approach:

    The study reviews research that examines professional skepticism in auditing.  The author discusses the various definitions of professional skepticism both in professional standards and academic research.  The author draws on prior relevant research to explain how auditor knowledge, traits, and incentives combine to affect the level of professional skepticism in auditor judgments and auditor actions. 

    Findings:
    • Knowledge: The author finds that audit experience and specialization can have both positive and negative effects on the level of professional skepticism exercised.  Auditors with more knowledge are better able to identify high-frequency errors and complex patterns of evidence that indicate error, but are also more likely to assume that non-error explanations are correct and that missing evidence is consistent with non-error explanations.  Auditors’ knowledge about complex professional standards provides auditors with an advantage when interacting with clients about contentious accounting issues.
    • Traits: The author finds that auditor problem-solving abilities, ethical predispositions, and traits such as self-confidence and the tendency to doubt are all related to the level of professional skepticism exercised in auditor judgments and actions.  
    • Incentives: The author finds that auditors’ incentives differ in the extent to which they affect the levels of professional skepticism exercised in auditor judgments and actions.  Auditors’ incentives can affect an auditor directly or indirectly, be immediate versus probabilistic, be financial versus social in nature, and affect an auditor in conscious and unconscious ways.  
    • Judgments: The author describes how audit evidence and pre-existing auditor knowledge, traits, and incentives all affect the level of professional skepticism in auditor judgments.  An example of a critical auditor judgment that is influenced by the level of applied professional skepticism is the overall audit risk assessment.  The author finds that much of the prior research draws upon work in psychology to identify how auditors’ cognitive limitations affect their levels of professional skepticism. Auditors’ cognitive limitations affect their levels of professional skepticism in predictable ways; therefore, practical changes can be made to increase the levels of professional skepticism applied in auditor judgments when these cognitive limitations are present.
    • Actions: The author describes how the level of professional skepticism applied in auditor judgments is a primary driver of the level of professional skepticism applied in auditor actions.  Some studies provide evidence that, given the level of professional skepticism of a particular auditor judgment, auditors’ traits and incentives influence whether or not an auditor takes an action that exhibits that level of professional skepticism.  The main auditor actions studied in prior research include auditors’ actions to modify the nature and extent of planned audit tests and auditors’ willingness to waive adjustments of identified misstatements.  
    • The author describes in detail how auditing firms can enhance levels of applied professional skepticism via changes in such areas as hiring, training, performance evaluation and promotion, review and consultation, decision aids, incentives, and tasks and institutions.
    Category:
    Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind
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  • 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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  • The Auditing Section
    An Empirical Examination of a Three-Component Model of...
    research summary posted May 7, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    An Empirical Examination of a Three-Component Model of Professional Commitment among Public Accountants
    Practical Implications:

    Professional Commitment has been found to impact work behaviors. Theory indicates the three dimensions of PC can impact these behaviors in varying ways (positive or negative). Firms can influence some precursors to PC including training, organizational culture, requiring employees to complete a professional qualification, and participation in professional organizations.

    Citation:

    Smith, D. and Hall, M. 2008. An Empirical Examination of a Three-Component Model of Professional Commitment among Public Accountants. Behavioral Research in Accounting 20 (1): 75-92.

    Keywords:
    professional commitment, auditor judgment
    Purpose of the Study:

    Professional commitment (PC) refers to the attachments that individuals form to their profession. Those with strong professional commitment have been found to be less likely to leave their job and more likely to observe rules, to be involved in professional organizations, and to mentor. Three aspects of PC have been identified:

    • Affective professional commitment (APC): the extent to which individuals want to stay in the profession because they identify with the profession’s goals and want to help with the achievement of those goals.
    • Continuance professional commitment (CPC): the extent to which individuals feel they have to stay in the profession because of an accumulation of investments or a lack of comparable alternatives.
    • Normative professional commitment (NPC): the extent to which individuals feel they ought to stay in the profession through a sense of obligation. 

    The purpose of this study is to confirm whether these three aspects of PC apply to public accountants as well as to determine whether the professional commitment questionnaire (PCQ) used in the majority of prior PC research measures only APC or all three aspects of PC.

    Design/Method/ Approach:

    Accountants from one big-four and six middle-tier Australian accounting firms participated in this study. Participants filled out a survey designed to assess the participants’ level of PC, and specifically their levels of APC, CPC, and NPC.

    Findings:
    • The authors find evidence that there are three separate dimensions to an accountant’s PC: APC, CPC, and NPC.
    • Turnover is negatively correlated with APC and not correlated with CPC or NPC.
    • APC is positively correlated with Age and Tenure, CPC and NPC are not.
    • Females have higher turnover, but there is no evidence that different levels of PC influence this.
    • The PCQ only measures APC.
    Category:
    Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind
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  • Jennifer M Mueller-Phillips
    An Examination of the Credence Attributes of an Audit
    research summary posted October 15, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control 
    Title:
    An Examination of the Credence Attributes of an Audit
    Practical Implications:

    At its core, the theory proposed by the authors assumes that auditors are economic agents who provide a valuable service and can be expected to behave rationally to maximize their profits. Strategic behaviors such as under-auditing, over-auditing, or overbilling would be unobservable by an auditee in many instances. The possibility of such behaviors has important implications for the level of assurance over financial reports and can potentially affect the efficient allocation of capital resources. One of the goals of this study was to analyze how the credence aspect of audits could influence important policy decisions. Regulation may play a powerful role in mitigating the credence nature of auditing, e.g., PCAOB inspections. However, regulation can be a double-edged sword if it increases the incentive or opportunity for auditors to behave strategically. Therefore, auditors can take the theories and models presented in this study to evaluate their firms for potential profit maximizing biases that may negatively impact audit quality and efficiency. Policy makers could also use these theories and models to evaluate how new auditing policies might influence auditors’ incentives and behaviors.

    For more information on this study, please contact W. Robert Knechel.
     

    Citation:

    Causholli, M., and W. R. Knechel. 2012. An Examination of the Credence Attributes of an Audit. Accounting Horizons 26(4): 631-656.

    Keywords:
    Credence attributes; audit quality; audit efficiency.
    Purpose of the Study:

    The purpose of this study was to expand the understanding of the economics of auditing and audit markets by using the theory of credence goods as the basis for explaining auditors’ incentives. The idea of a credence good or service is that (1) the seller of the good or service is an expert who both recommends and provides a level of service to the buyer; (2) buyers of credence goods or services cannot assess how a service is a delivered and must rely on a seller’s recommendation; and (3) buyers cannot assess how well the service was performed. The authors suggest that the external audit is a credence good which provides auditors with incentives to under-audit, over-audit or overcharge their clients.

    Design/Method/ Approach:

    The authors take a purely theoretical approach to study the perspective of an audit as a credence good. The authors rely on prior research of credence goods and on the principles of Game Theory to help explain auditors’ incentives to under-audit, over-audit or overcharge clients and predict auditors’ behaviors under certain scenarios. The authors use theoretical decision trees to describe an auditor’s possible strategies for bidding for an audit, and for executing the audit. The authors also describe examples of prior auditing research that present results that support the author’s credence theory.

    Findings:

        The authors propose that if an audit is a credence good, the auditee cannot determine any of the levels of audit effort that define the auditor’s decisions. This creates information asymmetry between the auditor and auditee both before and after the audit because the auditee cannot be sure of the true level of assurance that is necessary before the audit, and the auditee cannot be sure of the true level of assurance that is gained as a consequence of the audit. The information asymmetry goes in favor of the auditor, who can act strategically to under-audit and earn greater profits because the auditee has imperfect information about the auditor’s work and the level of assurance gained by the auditor’s efforts.

     The authors also propose that there are disciplining mechanisms in the market for audit services that are in place to mitigate an auditor’s incentive to behave strategically such as an auditee’s direct knowledge, audit firm reputation and size, professional regulation, legal liability, and competition between audit firms. However, while these mechanisms may be in place, an auditor facing low penalties or risk of detection may be more likely to consider strategic actions. In environments with weak courts or regulation, auditors have more incentives to act strategically and expect to reap superior profits as a result. Similarly, changes in regulations or other structural changes in the audit market can induce changes in the incentives for auditors to behave strategically. Overall, disciplining mechanisms facilitate the operation of audit markets even though they may not completely resolve the information (credence) problem.
     

    Category:
    Audit Quality & Quality Control, Auditor Judgment, Standard Setting
    Sub-category:
    Changes in Audit Standards, Prior Dispositions/Biases/Auditor state of mind
  • The Auditing Section
    An Examination of the Effects of Auditor Rank on...
    research summary posted April 23, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 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:
    An Examination of the Effects of Auditor Rank on Pre-Negotiation Judgments
    Practical Implications:

    This study provides evidence that there were significant differences in the pre-negotiation judgments of partners and managers. Since an outcome of an auditor-client negotiation of a contentious issue may have a significant impact on financial reporting quality, the findings of the study suggest that the using partners in the negotiation process is likely to lead to improved reporting quality. The results have implications for audit firms in allocating manager and partner time to handle negotiation.

    Citation:

    Trotman, K. T., A. M. Wright, and S.Wright. (2009). An Examination of the Effects of Auditor Rank on Pre-Negotiation Judgments. Auditing: A Journal of Practice & Theory 28(1): 191-203

    Purpose of the Study:

    Negotiations are pervasive in the auditing environment.  In general, audit firms have choices over what level of staff are involved in the process of negotiation. An important issue is that differences may exist between partner and manager negotiation judgments and strategies. This study focuses on the expectations and assessments that partners and managers take into the negotiation process, specifically the pre-negotiation stage. The authors use negotiation theory as well as other general psychology findings to investigate how rank (partner versus manager) affects the pre-negotiation judgments made by auditors.  The authors suggest and test the following assertions:

    • Partners take a tougher stand than managers in pre-negotiation judgments.
    •  Partners have greater confidence in their ability to negotiate and therefore receive a resolution that is closer to their initial position.
    • Partners’ rank, which reflects both additional experience and power (as compared to the manager), will lead them to believe they are in a better position to negotiate outcomes closer to their initial position.
    Design/Method/ Approach:

    The research evidence was collected prior to September 2007. The authors used responses collected from a computerized case about inventory write-downs, administered to partners and managers at three Big 4 firms in Australia and the U.S.

    Findings:
    • Compared to managers, partners appear to take a tougher stand in the negotiation: they expect a larger initial write-down and require a higher minimum write-down that they would accept.
    • Partners’ estimates of the maximum inventory write-down that a CFO would accept were significantly higher than managers’ estimates.
    • Partners believed they can negotiate a larger amount above the minimum adjustment than managers.
    • There were no differences in negotiation persuasion knowledge between partners and managers.
    Category:
    Audit Team Composition, Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Prior Dispositions/Biases/Auditor state of mind, Training & General Experience
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  • The Auditing Section
    Attention to Evidence of Aggressive Financial Reporting and...
    research summary posted May 7, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    Attention to Evidence of Aggressive Financial Reporting and Intentional Misstatement Judgments: Effects of Experience and Trust
    Practical Implications:

    The results of this study are important for audit firms to consider when making audit personnel assignments in order to take advantage of individual traits and experiences.  Audit firms may benefit from audit team structures that include members with varying levels of trust and varying levels of prior fraud experience.  Diversifying audit team composition may improve fraud detection while maintaining audit efficiency. 

    Citation:

    Rose, J.M. 2007. Attention to evidence of aggressive financial reporting and intentional misstatement judgments: Effects of experience and trust. Behavioral Research in Accounting 19(1): 215-229.

    Keywords:
    aggressive reporting; experience; fraud; skepticism; trust
    Purpose of the Study:

    Auditors face increased pressure to detect and prevent fraud and increased responsibilities to maintain professional skepticism as a result of SAS No. 99.  Yet their ability to do so may be constrained by their individual traits or experiences.  Previous research has not sufficiently addressed auditors’ ability to detect potentially fraudulent reporting or auditors’ judgment concerning misstatements and has not evaluated auditor characteristics that can influence attention to evidence of aggressive reporting. 
    This paper investigates the following factors:  

    • Whether professional skepticism increases auditors’ attention to evidence of aggressive reporting. 
    • Whether dispositional trust affects auditor’s critical evaluation of audit evidence.  Dispositional trust is a personality trait which affects professional behavior by influencing the degree to which an individual believes that people are typically trustworthy or that they will personally benefit by trusting others.
    • Whether fraud-specific audit experience results in the development of knowledge structures that are useful for the detection of potentially fraudulent and aggressive reporting practices. 
    Design/Method/ Approach:

    The authors collected their evidence using a simulated task completed by practicing auditors from Big 4 and national accounting firms with an average of 3.6 years of experience.  Participants were given background information along with 45 pieces of audit evidence for a hypothetical audit client, and told that they were performing workpaper reviews for the client. Then, participants were asked to perform a surprise free recall of the information. Finally, participants were asked to make a judgment on the likelihood that the client’s financial statements were intentionally misstated.  Participants were assigned to either a higher or lower level of client-related skepticism and aggressive or non aggressive individual audit evidence items.

    Findings:
    • The authors find that increased skepticism is associated with increased attention to aggressive reporting, and as a result, increased belief that intentional misstatement has occurred.
    • Less trusting auditors appear to pay more attention to evidence of aggressive reporting than do more trusting auditors.  
    • The authors find that prior fraud-specific experience positively influences auditor’s judgments of intentional misstatement.  Prior fraud experience may allow auditors to develop fraud-based explanations for aggressive reporting and develop knowledge structures that include potential indicators of fraud. 
    Category:
    Risk & Risk Management - Including Fraud Risk, Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Fraud Risk Assessment, Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind
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  • The Auditing Section
    Auditor-Client Management Relationships and Roles in...
    research summary posted May 4, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Auditor-Client Management Relationships and Roles in Negotiating Financial Reporting
    Practical Implications:

    The results of this study identify that the “shadow” negotiation exists and provides insights into how the roles and relationships are negotiated.  This research identifies the CFO as having the commanding position in the negotiation process and identifies the “turns” available to the auditor in the process. The authors indicate that the Sarbanes-Oxley Act may provide that auditor with a new “move” by requiring the auditor to disclose the “preferred” accounting method to the audit committee.

    Citation:

    McCracken, S., S.E. Salterio, and M. Gibbins. 2008. Auditor-client management relationships and roles in negotiating financial reporting. Accounting, Organizations and Society 33 (4-5): 362-383

    Keywords:
    Auditor-client negotiation
    Purpose of the Study:

    This study focuses on the audit partner-chief financial officer (CFO) pair (i.e. the two main negotiators) in an actual ongoing relationship.  The authors use social positioning research, which investigates not only the substantive issues under negotiation, but also the “shadow” negotiation, which defines the roles of the negotiators, as well as negotiating power, in the relationship.  This research theorizes that the “shadow” negotiation occurs at the same time as the negotiation of the substantive issue and that the “shadow” negotiation affects the substantive issue negotiation.  This study examines the negotiator’s available “moves” to define how the relationship works and the power of each negotiator and the opposing negotiator’s “turn” to counter resist any attempt to change the positioning of the two parties.  The main objective of this study is to examine the relationships among the audit partner-CFO pairs.

    Design/Method/ Approach:

    The authors interviewed eight CFO-auditor pairs regarding auditor-client management negotiations in November and December 2001.  Interviews were first conducted with the CFOs regarding a specific example of an accounting issue negotiated with the auditor.  These were followed by interviews of the audit partner, five used the same example as the CFO, three used a different example.  The interviews typically lasted 45-75 minutes and were conducted by asking three open-ended questions in a conversational tone followed by five specific questions if they were unanswered in the open ended questions. 

    Findings:
    • In the partner/CFO pair, the audit partner is the “relationship manager,” responsible for developing or maintaining a “good” relationship, while the CFO determines the type of relationship that develops.  
    • The relationship between auditor and client is either proactive or reactive.  In a proactive relationship the auditor and CFO work together throughout the year (auditor is an “expert advisor”) whereas in a reactive role the auditor is not informed until time for the review (auditor is a “police officer”).  
    • The audit firm focuses on client management versus ending the relationship.  The firm prefers to assign a partner that matches the CFO’s preferred relationship style rather than threaten the loss of the client. 
    • The CFO can perform “moves” to change the auditor role to the desired relationship type including the threat to end the relationship, asking for a second opinion from national office, and indicating that the economic reality is not reflective in the GAAP accounting.  The auditor may “turn” these “moves” by preemptively consulting the national office. 
    • The auditor’s only “move” in the relationship is the passage of time to get to know the CFO better.
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management
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  • Jennifer M Mueller-Phillips
    Auditors’ Levels of Dispositional Need for Closure and E...
    research summary posted November 12, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    Auditors’ Levels of Dispositional Need for Closure and Effects on Hypothesis Generation and Confidence
    Practical Implications:

    This study provides evidence about DNFC, a stable personality characteristic that affects the judgment and decision making process and may also affect attrition of auditors. Evidence indicates that although higher-DNFC individuals are attracted to the profession, the lower-DNFC individuals may remain as auditors longer and be promoted to the level of partner. Therefore, early identification of a characteristic that may contribute to a rise to the rank of partner might be useful for accounting firms and allow for better training of future leaders.

    The evidence also indicates that auditors higher in DNFC tend to truncate the hypothesis-generation task sooner, producing fewer causal hypotheses and demonstrating lower hypothesis quality. Further, those same auditors express greater confidence that they have identified the true hypothesis—a combination that bodes poorly for the ultimate correct assessment of causality. However, assessment of an individual auditor’s DNFC could be helpful in tailoring audit programs to overcome limitations related to information-processing characteristics. This information may also be useful in forming audit teams (for example, pairing a low-DNFC individual with a high-DNFC individual) and in customizing auditor training (perhaps helping high/low-DNFC auditors learn compensating techniques).

     

    For more information on this study, please contact Dr. Charles Bailey at the University of Memphis, cbailey2@memphis.edu

    Citation:

    Bailey, C., C. Daily, and T. Phillips, Jr. 2011. Auditors’ Levels of Dispositional Need for Closure and Effects on Hypothesis Generation and Confidence. Behavioral Research in Accounting 23 (2): 27-50

    Keywords:
    auditing judgment, need for closure, motivated cognition, judgment and decision making, hypothesis generation.
    Purpose of the Study:

    The extent to which auditors seek and process information before forming a judgment can have important consequences in the conduct of an audit. This research focuses on dispositional need for closure (DNFC), which is a personal trait that affects the propensity to seek and process information before reaching a judgment. Psychology researchers have demonstrated consistent effects on hypothesis generation and confidence in lay-judgment settings, and in a validation sample they identified accounting students as a group high in DNFC. The initial purpose of this study is to provide evidence of the DNFC level of a group of professional accountants, and auditors were chosen because of the implications of high DNFC for these individuals.

    Since findings concerning lay decision makers are not always applicable to accounting professionals, in the second part of the study we examine whether differences in DNFC can affect hypothesis generation by professional auditors. If DNFC affects the judgments of professional auditors in the ways demonstrated among laypersons, then it can have important implications for auditing judgment. That is, auditors high in DNFC may prematurely truncate the hypothesis-generation process, collect little evidence, seize on conclusions prematurely, be overconfident in their correctness, and be slow to recognize their mistakes as new information emerges.

    Design/Method/ Approach:

    Research evidence for Study I was collected in 2002 from members of the AICPA who specified a professional interest in auditing and worked for a Big 4 accounting firm. Participants completed the Need for Closure Scale (NFCS). Study II was conducted in 2007, using members of the AICPA specifying a professional interest in auditing and working for a Big 4 firm or another large firm. Participants completed the NFCS and an auditing related hypothesis-generation task.

    Findings:
    • The authors find professional auditors significantly lower in DNFC than reported in a sample of accounting students, and progressively lower in DNFC at higher professional ranks. Yet, substantial variance in this characteristic persists even at higher ranks, to potentially affect judgment and task performance. Possibly students high in DNFC are attracted to the accounting major because of its structure, but once experienced in the business environment, may find that the profession is not as structured as they had anticipated, and ultimately may leave the firm voluntarily or involuntarily.
    • The authors find that auditors lower in DNFC generate more hypotheses—and higher quality hypotheses—than auditors higher in DNFC when presented with an audit-related decision task.
    • The authors find that auditors lower in DNFC spend relatively more time on the deliberative, judgmental task of hypothesis generation, but not on simple non-deliberative response tasks.
    • The authors find that auditors higher in DNFC generate fewer hypotheses and lower-quality hypotheses, yet express greater (and unwarranted) confidence that they have included among their hypotheses the true cause of an irregularity regarding the case they have reviewed. 
    Category:
    Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    COMMENTARY FROM THE AMERICAN ACCOUNTING ASSOCIATION’S 2011 A...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.02 Fraud Risk Models, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    COMMENTARY FROM THE AMERICAN ACCOUNTING ASSOCIATION’S 2011 ANNUAL MEETING PANEL ON EMERGING ISSUES IN FRAUD RESEARCH
    Practical Implications:

    When performing brainstorming sessions as mandated by SAS 99, auditors should brainstorm personality traits that may reveal potential fraudsters. Additionally, firms and academics should work to identify characteristics that provide an indication of which individuals are more likely to commit fraud.

    For more information on this study, please contact Sara Melendy.
     

    Citation:

    Brody, R. G., S. R. Melendy, and F. S. Perri 2012. Commentary from the American Accounting Association’s 2011 annual meeting panel on emerging issues in fraud research. Accounting Horizons 26 (3): 513-531.

    Keywords:
    None
    Purpose of the Study:

    During one of the investigative accounting panels at the American Accounting Association’s 2011 annual meeting, panelists discussed various issues related to fraud and fraud research. This article summarizes their discussion, and also draws upon some of the relevant published literature to highlight some of the fraud topics that are still largely unexplored and thus ripe for academic research. Additionally, the purpose of this paper is to (1) critically evaluate the state of current fraud research and provide guidance for future researchers, and (2) examine the publication process for both practitioner and scholarly journals from both an editorial and topical perspective.

    Design/Method/ Approach:

    This paper summarizes and synthesizes information from the American Accounting Association’s 2011 annual meeting and includes existent fraud research.

    Findings:

    There are important misperceptions about the nature of fraudsters. Important among these misperceptions are the following items:
    •    fraud is a one-time offense
    •    fraud is an out-of-character crime
    •    fraudsters are non-violent offenders
     

    Category:
    Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Models, Prior Dispositions/Biases/Auditor state of mind

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