Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

Posts

  • Jennifer M Mueller-Phillips
    The Effect of Partner Communications of Fraud Likelihood and...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 06.08 SAS No. 99 Brainstorming – effectiveness, 08.04 Auditors’ Professional Skepticism, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors’ Professional Skepticism
    Practical Implications:

    Based on previous studies and preconceived notions, the finding that partners expressing their own views about the low likelihood of fraud had no effect on professional skepticism was surprising. This suggest that partner’s concern of not expressing this opinion to the team because it would lower the overall professional skepticism may be unwarranted. The evidence from this study indicates that partners can raise professional skepticism within the team by communicating management’s view of low likelihood of fraud, however it is not recommended for partners to use this approach every single time. Also, encouraging both outward and internal skeptical orientation can raise professional skepticism as well.

    Citation:

    Harding, N, and K. T. Trotman. 2017. The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors’ Professional Skepticism. Auditing, A Journal of Practice and Theory 36 (21): 111-131.

    Keywords:
    Professional skepticism; fraud; partner communication; inward versus outward orientation; trait skepticism
    Purpose of the Study:

    Professional skepticism is a key attribute for auditors, and as such firms have been exploring ways to enhance professional skepticism within audit teams. This study investigates the impact of partner communications, specifically partner attribution and skeptical orientation, on professional skepticism during fraud brainstorm meetings. Partner attribution refers to the following choices of communication regarding the likelihood of fraud:

    • Own view there is a low probability of fraud
    • Management’s view there is a low probability of fraud
    • Not making any view known

     

    The partner can also encourage different types of skeptical orientation. The two addressed in this paper are:

    • The traditional view of outward skepticism which focuses on the veracity of management representations.
    • Inward skepticism which focuses on the accuracy of one’s own judgments as an auditor.
    Design/Method/ Approach:

    Participants in the two studies were comprised of 88 managers and seniors from the Big 4 firms. The first study examined the effects that partner attribution had on professional skepticism. Alternatively, the second study examined the effectiveness of encouraging outward versus internal skeptical orientation. The analysis included a 2x2+1 design for each of the two judgments.

    Findings:

    The authors find the following related to partner attribution:

    • There are increased levels of professional skepticism in situations where the partner communicates management’s view of a low probability of fraud. The authors believe this may be the result of auditor’s trying to find evidence that contradicts management’s view.
    • There are no significant changes in skeptical skepticism in situations where the partner communicates his/her own view of a low probability of fraud or no view at all.

     

    The authors find the following related to skeptical orientation:

    • There is no advantage in encouraging either an outward versus internal skeptical orientation. Neither is more effective than the other in elevating professional skepticism.
    • However, encouraging outward and internal skeptical orientation together can increase the level of professional skepticism.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind, SAS No. 99 Brainstorming – effectiveness
    Home:

    http://commons.aaahq.org/groups/e5075f0eec/summary

  • Jennifer M Mueller-Phillips
    The Effect of Information Choice on Auditors’ Judgments a...
    research summary posted October 12, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 06.0 Risk and Risk Management, Including Fraud Risk, 06.09 Litigation Risk, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence 
    Title:
    The Effect of Information Choice on Auditors’ Judgments and Confidence
    Practical Implications:

     Implications for the practicing audit community are developed from the findings that less experienced auditors are susceptible to the information choice effect. In situations where litigation risk is low (high) and the auditor has less experience, auditors place greater (lower) significance on information given to them by an external party than information they sought out themselves. More experienced auditors are not subject to the information choice effect. Additionally, more experienced auditors are confident in judgments based on information sought themselves, even in a setting with elevated litigation risk. The results of this study may interest audit clients providing information to auditors, auditors reviewing the work of less (more) experienced colleagues, auditors performing a critical self-review, and regulators reviewing the work of auditors.

    Citation:

     Smith, S. D., W. B. Tayler, and D. F. Prawitt. 2016. The Effect of Information Choice on Auditors' Judgments and Confidence. Accounting Horizons 30 (3): 393–408.

    Keywords:
    information choice, litigation risk, confidence, experience, judgment impact
    Purpose of the Study:

    During the course of an audit, auditors choose what information they need to search for; however, they obtain both sought and unsought information.  These auditors must then use the information obtained to make judgements and decisions that ultimately lead to an audit opinion.  Thus, the weight auditors place on the information obtained when making judgements and the auditors’ confidence in those judgements has important implications for audit quality.  The authors of this paper investigate whether it matters if information is gotten by the auditor or given to the auditor.  Understanding that the way in which information is received affects information processing, the authors examine how the auditors’ receipt of additional sought or unsought information impacts the auditors’ judgment and confidence in that judgement given judgements with different levels of importance (e.g., high vs. low litigation risk) and auditors with different levels of experience (e.g., high vs. low).

    Design/Method/ Approach:

    Evidence was obtained during the 2010’s through an experiment using 136 auditors as participants.  Participants read a case and evaluated the likelihood of obsolescence in inventory.  The researchers manipulated the (1) choice to acquire relevant information (i.e., given a choice or not given a choice) and (2) litigation risk levels (i.e., high or low).  Furthermore, they measured auditor experience, and classified participants as more or less experienced based on number of years in public accounting.

    Findings:
    • In the high litigation setting, sought information is weighed more heavily than unsought information.  This result appears to be driven by auditor experience.  Specifically, when auditor experience is low and litigation risk is high, sought information is weighed more heavily than unsought information.
    • In the low litigation setting, sought information is weighed less heavily than unsought information.  This result appears to be driven by auditor experience.  Specifically, when auditor experience is low and litigation risk is low, information is weighed less heavily than unsought information.
    • Auditor confidence in their judgment of inventory obsolescence was greater when they chose to obtain additional information than when they were just given the additional information.  This result appears to be driven by auditor experience.  Specifically, more experienced auditors had greater confidence after obtaining sought information than unsought information.  This results also appears to depend on the litigation level.  In the high litigation setting, more experienced auditors had greater confidence after obtaining sought information than unsought information.
    Category:
    Audit Quality & Quality Control, Audit Team Composition, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Evaluation of Evidence, Litigation Risk, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    Perspective Taking in Auditor-Manager Interactions: An...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 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:
    Perspective Taking in Auditor-Manager Interactions: An experimental investigation of auditor behavior.
    Practical Implications:

    The results of this study are important for firms to consider in hiring and training practices as the evidence supports increased perspective taking improves auditor performance and ultimately audit quality. Audit firms may benefit from hiring auditors with prior experience in the corporate world and involvement in financial-reporting, and should continue efforts to hire more “boomerangs.” Audit firms can measure dispositional (i.e., trait) perspective taking among current employees and use this measure in determining staffing assignments. In terms of training design, audit firms can consider implementing training targeted toward role-taking. Finally, audit firms can also encourage perspective taking in other ways, for example, by including perspective taking prompts in audit programs.

    Citation:

    Church, B. K., M. Peytcheva, W. Yu, and O. Singtokul. 2015. Perspective taking in auditor-manager interactions: An experimental investigation of auditor behavior. Accounting, Organizations and Society 45: 40-51.

    Keywords:
    perspective taking, role-taking experience, individual difference, experimental economics
    Purpose of the Study:

    This study investigates how taking the perspective of client management affects auditors’ assessment of managers’ reporting choices and whether successful perspective taking can lead to enhanced financial-reporting quality and audit quality. Perspective taking involves taking the point of view of another, and understanding another’s thoughts, attitudes, or concerns in a specific situation. Perspective taking has been shown to improve individual judgment and decision making, thus the authors of this study investigate whether these benefits extend to the audit setting when auditors take on the role and perspective of client management. Audit firms have been increasing recruiting of former employees (or “boomerangs”), asserting the knowledge and experience auditors gain while in industry is an asset to the auditor and the firm. This study provides evidence supporting that prior role experience is a reason why “boomerangs” are successful.

    Design/Method/ Approach:

    The participants in this experimental study were students at a public university, mostly at the undergraduate level in business or economics. The evidence for this study was collected prior to September 17, 2012. The authors conduct two multi-round experiments providing participants monetary incentives designed to mimic the auditing context. In the first experiment, participants either took on a manager role followed by an auditor role or remained in the auditor role for the entire experiment. In the second study, participants took on an auditor role for the entire experiment and perspective taking disposition was measured. The task involved estimating earnings and making decisions regarding accepting or rejecting manager reported earnings values.

    Findings:
    • Overall, the authors find that perspective taking is beneficial to auditor performance and audit quality. Further, role-taking (i.e., taking the role of another) stimulates perspective taking.  
    • The authors find auditors with role-taking experience as a manager more accurately estimate managers’ reported earnings, compared to auditors without the role-taking experience. Auditors with role-taking experience also make better reporting decisions, in terms of whether to accept or reject manager reported earnings.
    • The authors find dispositional perspective taking (i.e., an individual’s natural ability to spontaneously take the viewpoint of another) influences auditor performance. Auditors with high perspective-taking disposition are better able to judge managers’ reported earnings than auditors with low perspective taking disposition.
    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Sustainability ServicesTraining & General Experience
  • Jennifer M Mueller-Phillips
    The Effects of Auditor Rotation, Professional Skepticism,...
    research summary posted September 15, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.07 Audit Firm Rotation, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    The Effects of Auditor Rotation, Professional Skepticism, and Interactions with Managers on Audit Quality.
    Practical Implications:

    The results of this study are important for both audit firms and regulators when considering the potential impact of mandatory audit firm rotation. Standard setters appear to increasingly advocate for auditors to utilize a mental frame in which they evaluate management assertions in terms of their level of dishonesty relative to verification their honesty. If this preference is ultimately paired with mandatory audit firm rotation, it could actually have a deleterious effect on audit quality. Conversely, this study finds that audit firm rotation can increase audit quality when auditors frame their mental representations of management’s assertions in terms of verification of their honest representations.

    Citation:

    Bowlin, K. O., J. L. Hobson, and M. D. Piercey. 2015. The Effects of Auditor Rotation, Professional Skepticism, and Interactions with Managers on Audit Quality. The Accounting Review 90 (4): 1363-1393.

    Keywords:
    auditor rotation, professional skepticism, audit quality, game theory
    Purpose of the Study:

    Regulators argue that audit firm rotation can improve audit quality by reducing the potential for longstanding auditor-client relationships to impair auditor independence. Standard setters have also recently noted that auditors often focus on verifying the honesty of management representations, and have encouraged auditors instead to evaluate them in terms of their potential dishonesty. This study examines whether the effects of auditor rotation on audit quality is dependent upon the mental frame used to evaluate either the honesty or dishonesty of management representations about the financial statements.

    Mental frame refers to whether an auditor frames their assessments of management representations in terms of either their potential honesty or their potential dishonesty. Psychology research finds that individuals do not make subjective probability assessments, like the probably that management’s assertions are honest (dishonest), based on normative laws of probability, but rather on the amount of subjective psychological support that comes to mind. When decision makers feel relatively unfamiliar with, and therefore, less competent to evaluate, subjective probabilities these individuals often find it difficult to produce psychological support for the probably of their current assessment frame, making them less likely to choose the action associated with that mental frame.  

    Design/Method/ Approach:

    The authors’ model the auditor-client relationship as a strategic game in which the auditor chooses a level of effort based on their perceived level of honesty within management’s financial statements whereas managers choose a level of honesty in reporting based on their perceived level of effort outlayed by the auditor. The researchers utilized an experimental economics experiment. The participants were undergraduate students who were tasked to repeatedly play a game for money designed to model this strategic interaction between auditors and clients. In the audit firm rotation condition the auditor was paired with a different manager each round. The evidence was gathered prior to October 2012.

    Findings:
    • When auditors assess the honesty of management representations, auditor rotation increases audit effort and decreases the frequency of low-effort audits paired with aggressive financial reporting, decreasing the likelihood of audit failure.
    • When auditors assess the dishonesty of management representations, auditor rotation decreases audit effort and increases low-effort audits paired with aggressive reporting.
    • Increasing the level of interpersonal interaction between auditors and managers via informal communication decreases audit effort, but does not interact with the auditor’s mental frame (honest versus dishonest).
    Category:
    Auditor Judgment, Independence & Ethics
    Sub-category:
    Audit Firm Rotation, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    How Do Auditors Weight Informal Contrary Advice? The Joint...
    research summary posted September 14, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    How Do Auditors Weight Informal Contrary Advice? The Joint Influence of Advisor Social Bond and Advice Justifiability.
    Practical Implications:

    By treating worse justified advice as though it were better justified advice, auditors are likely to overestimate the defensibility of their conclusions that are based on this advice. It also is worrisome that specialists appear to defensively resist well-justified, contrary advice from stronger social bond advisors. In response to a stronger social bond advisor’s better justified advice, specialists assess advisor competence to be higher and they assess the advice itself to be of higher quality, but they assign relatively low weight to the advice. This inconsistency implies that specialists may have difficulty accepting good advice even when they recognize its high quality.

    Citation:

    Kadous, K., J. Leiby, and M. E. Peecher. 2013. How Do Auditors Weight Informal Contrary Advice? The Joint Influence of Advisor Social Bond and Advice Justifiability. Accounting Review 88 (6): 2061-2087.

    Keywords:
    advice, audit quality, auditor judgment, fair value, social bond, true heuristic
    Purpose of the Study:

    Auditors regularly seek informal advice, including additional information, recommendations, and alternative perspectives about their initial judgments, from other auditors. Audit firms encourage advice seeking to enhance professional skepticism and improve professional judgment. Existing theory and evidence provide contrasting viewpoints. On the one hand, auditors recognize that following contrary advice can enhance the justifiability, or defensibility, of their judgments on ill-structured audit tasks such as determining the acceptability of management’s accounting policies. On the other hand, people generally discount contrary advice in nonauditing contexts, and auditors are prone to motivated reasoning.

    The authors expect that auditors’ willingness to use contrary advice is a joint function of their social bond with their advisor and advice justifiability. Social bond refers to auditors’ subjective sense of interpersonal closeness or connectedness toward their advisor. The authors examine the influence of advice justifiability on advice weighting for three reasons.

    • The justifiability of a recommendation is a reasonable proxy for advice quality in the ill-structured tasks that auditors frequently encounter, such as assessing the reasonableness of a fair value.
    • A common explanation for individuals’ general tendency to discount advice in everyday contexts is that while they can easily access reasons for their own opinions, they have far less ability to access reasons for their advisor’s recommendations.
    • The authors examine the influence of advice justifiability across both weaker and stronger levels of advisor social bond because theory predicts an interaction of advice justifiability and social bond for auditors’ advice weighting.
    Design/Method/ Approach:

    88 audit seniors from a Big 4 firm completed the experimental task at a national training session. Their audit experience ranged from 30 to 96 months, with a mean (standard deviation) experience of 39 months (10 months). The evidence was gathered prior to August 2010.

    Findings:

    The authors find that non-specialist auditors rely on the predicted trust heuristic. When advice comes from a stronger social bond advisor, they weight it relatively heavily and do not differentiate better from worse justified advice. Non-specialists also fail to objectively assess the quality of advice, and they optimistically assess specific attributes of advice coming from stronger social bond advisors, inaccurately equating better and worse justified advice. They do this even though they are able to distinguish advice justifiability and weight the advice accordingly when it comes from a weaker social bond auditor.

    In contrast, specialists do not rely on a trust heuristic in weighting advice, but they weight advice inconsistently with their own assessments of its quality. Specialists put less weight on better justified advice despite assessing its quality to be higher when it comes from a stronger social bond advisor. This inconsistency appears defensive in nature. The authors find that contrary advice has promise for reducing auditors’ motivated reasoning in that auditors significantly weight it in each condition. Informal contrary advice helps auditors to see an alternative point of view.

    Category:
    Auditor Judgment
    Sub-category:
    Impact of Consultation on Judgments, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    Measuring Reflective Cognitive Capacity: A Methodological...
    research summary posted July 20, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    Measuring Reflective Cognitive Capacity: A Methodological Recommendation for Accounting Research of Feedback Effects.
    Practical Implications:


    The primary finding from the study is that average effects can mask real differences in participants’ cognitive capacity. Thus, the fundamental issue is not whether reflective cognitive capacity is malleable. Rather, the issue is this: can participants whose thinking dispositions predispose them to avoid being reflectiveto avoid reevaluating their initial responses and subsequently consider alternative theories (rules)enhance their ability to engage in reflective thinking? Future accounting behavioral research, especially studies that provide participants with feedback and an opportunity to learn, should include measures of reflective cognitive capacity (either the Need for Cognition scale or the Cognitive Reflection Test) in order to improve explained variance and more rigorously test techniques used to train accounting professionals. 

    Citation:

    Viator, R. E., Bagley, P. L., Barnes, B. G., & Harp, N. L. 2014. Measuring Reflective Cognitive Capacity: A Methodological Recommendation for Accounting Research of Feedback Effects. Behavioral Research In Accounting 26 (2): 131-160.

    Keywords:
    cognitive bias, cognitive reflection test, cognitive theory, feedback, reflective thinking
    Purpose of the Study:

    This study investigates whether measures of reflective cognitive capacity can differentiate which participants are more or less likely to benefit from feedback intervention. This is important because if participants systematically differ in their ability to reflect, and accounting researchers omit controlling for such variation, then accounting academe’s recommendations regarding the effectiveness of various feedback intervention techniques are likely to be overstated. In other words, such recommendations might not be applicable to those accounting professionals who are less inclined to engage in reflective thinking. This potential methodological issue relates to studies in managerial accounting settings and financial information processing, as well as audit judgments.

    Design/Method/ Approach:

    This study provides results from four separate experiments of feedback effects. These studies were conducted across a two-year period, utilizing four separate accounting participant pools, all enrolled in a Master’s of Science in Accounting program, employing different feedback mechanisms, and examining different measures of performance. In each of the four studies, reflective cognitive capacity is measured using the Need for Cognition scale; in the latter two studies, the Cognitive Reflection Test, recently reported in the behavioral economics literature is used. The evidence was gathered prior to April 2014.

    Findings:

    Across all four experiments, the results consistently document that variations in participants' reflective cognitive capacity explain differences in post-feedback performance. Based on four different experiments, conducted across a two-year period, the results provide strong evidence that the NFC and CRT measures could reasonably partition participants into two groups: those that are more likely, versus those that are less likely, to benefit from feedback intervention. The incremental benefit derived from controlling for differences in reflective cognitive capacity certainly exceeds the incremental cost. Based on an analysis of adjusted means, participants with relatively high reflective cognitive capacity improved their performance after receiving summary outcome feedback, whereas participants with relatively low reflective cognitive capacity did not improve.

    Category:
    Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    The Effects of Client Identity Strength and Professional...
    research summary posted February 17, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.07 Audit Firm Rotation, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind 
    Title:
    The Effects of Client Identity Strength and Professional Identity Salience on Auditor Judgments
    Practical Implications:

    The results of this study provide an improved understanding of the joint effects of identity strength and salience on auditor judgments. Even in a setting with no prior auditor-client history, auditors who more strongly identify with the clients (i.e., share common values) agree more with the client. This is informative to debates about auditor rotation and independence, as it highlights short-tenure independence threats that rotation is unlikely to mitigate. Fortunately, the results also suggest heightening professional identity salience is a cost-effective alternative to auditor rotation to maintain auditor independence, even when auditor tenure is short.

    For more information on this study, please contact Tim Bauer.

    Citation:

    Bauer, T. D. 2015. The effects of client identity strength and professional identity salience on auditor judgments. The Accounting Review 90 (1): 95-114.

    Keywords:
    auditor independence; professional skepticism; professional identity; client identity; identity salience; identity strength.
    Purpose of the Study:

    Considerable accounting research, as well as recent proposed and mandated audit regulation has focused on auditor independence threats arising over long auditor tenure. Psychology research, however, suggests independence threats also likely arise when auditor tenure is short because auditors can quickly develop a strong client identity (i.e., overlap of norms and values), due to extensive auditor-client interaction. Rotation can even accelerate strong identity formation because it can increase bidding for clients and research has shown auditors try to strengthen social bonds with clients during the client acquisition process. This raises questions about the effectiveness of mandatory audit partner or firm rotation to address independence concerns.

    Relying on Social Identity Theory (SIT), this paper examines mechanisms for promoting auditor independence that can be implemented regardless of auditor tenure or rotation. Specifically, SIT suggests arousing an auditor’s identity as a professional (i.e., by increasing its salience) can promote auditor independence in mind, and mitigate threats to auditor judgment quality that stem from a stronger client identity. 

    Design/Method/ Approach:

    Two experiments are used to test hypotheses, in a setting with no prior auditor-client history.

    • Experiment One: going concern setting; conducted in 2010; participants are seniors, managers, and senior managers from several Big 4 accounting firms in Canada.
    • Experiment Two: inventory writedown setting; conducted in 2013; participants are seniors from a Big 4 firm in the U.S.
    Findings:
    • As predicted, auditors who identify more strongly with their clients, by sharing their values, agree more with the client’s preferred accounting treatment, unless the salience or arousal of their professional identity is heightened.
    • Further, as predicted, heightening professional identity salience increases professional skepticism. 
    Category:
    Auditor Judgment, Independence & Ethics
    Sub-category:
    Audit Firm Rotation, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    Fear and Risk in the Audit Process
    research summary posted November 24, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
    Title:
    Fear and Risk in the Audit Process
    Practical Implications:

    Our analysis of fear helps better understand the relationship between comfort, confidence and fear in the audit process from the perspective of risk. On one hand, it suggests that confidence (self-confidence, confidence in work instrument and confidence in colleagues) without fear is a risky cocktail for auditors, who will not be sufficiently vigilant in carrying out their mission. On the other hand, it shows that fear without confidence is also a dangerous combination, which may induce auditors to maintain at a distance (and thus ignore) the inherent risks of their responsibilities. Ultimately, a sense of fear curbed by confidence and a sense of confidence tempered by fear is what enables public accountants to develop their ‘practical intelligence’, and thus to become comfortable without overlooking the risks of their job. Accordingly, the main implication which falls out of our study is the necessity for audit firms and audit regulators to create the conditions for the development among auditors of the right mix of fear and confidence.

    For more information on this study, please contact Henri Guénin-Paracini.

    Citation:

    Guénin-Paracini, H., Malsch B. and A. Paillé-Marché. 2014. Fear and risk in the audit process. Accounting, Organizations and Society 39 (4): 264-288

    Keywords:
    Auditors, audit process, fear, risk, practical intelligence, defensive strategies
    Purpose of the Study:

    While a number of studies have highlighted the role played by the feeling of comfort in audit work, comfort, in real audit settings, only arises at the very end of the audit task. The rest of the time, auditors seek to feel comfortable, but are inhabited primarily by fear. This became apparent to us in the course of an ethnographic study aimed at better understanding the work performed by auditors in the field. Of course, fear is not experienced by auditors all day long; it varies in intensity from individual to individual and depending on the circumstances; however, in general, public accountants have to deal with this emotion. If one considers that fear is the emotional experience of risk, this should hardly come as a surprise. In the post-Enron climate and after the enactment of the Sarbanes-Oxley Act, the risks associated with auditing have increased dramatically. Yet, associated with the perception of risk, the experience of fear and the role that fear plays in risk management processes have largely been overlooked in the literature. Our paper aims to ‘emotionalize’ and challenge the dominant cognitive orientation adopted by academics and regulators in their understanding of audit risks and auditors’ skepticism. It seeks better understand the role played by fear in audit practice, focusing specifically on the following questions: 1) What exactly is it that auditors worry about? 2) How do auditors manage fear in the field? 3) How does fear shape, and how is it shaped by, auditors’ work activity?

    Design/Method/ Approach:

    The research evidence was collected as part of a field study.

    • Seven audit teams including nine partners, five managers, 11 seniors and 19 assistants, were monitored in real time in June and July 2002 and between November 2003 and July 2004 (455 hours of observation).
    • Numerous documents were examined.
    • Interviews were conducted with four partners, three managers, eight seniors and 16 assistants.

    The psychodynamics of work theory of Dejours was used to interpret the data.

    Findings:
    • Confronted with technical knowledge and methodological standards’ limitations, auditors are nevertheless asked to certify the unknowable (i.e. to turn uncertainties into quasi certitudes), while being often reminded by the media that a failure on their part can have serious consequences. This ‘impossible mission’ creates fear within them. They are afraid of not detecting significant anomalies (a risk always present in auditing), and feel anxious about the judgments that they and others may pose over their possible mistakes.
    • Auditors manage their fear in two different ways. On one hand, they cultivate it through informal and formal techniques to stimulate vigilance, encourage self-surpassment, mitigate the ‘anesthetizing’ effect of habit, and maintain reputation. On the other hand, they strive to alleviate their fear before the end of each audit engagement, in order to convey their conclusions with a certain degree of comfort.
    • In the field, auditors finally become comfortable (i.e. quell their fear) either by mobilizing their ‘practical intelligence’ (which helps them handle that which, in their mission, cannot be obtained through the strict execution of standardized procedures) or by adopting defensive strategies (such as distancing themselves from work-related problems, mechanically applying audit methodologies, or relaxing their conception of a job well done). 

     

    Category:
    Audit Quality & Quality Control, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Management/Staff Interaction, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    Research on Auditor Professional Skepticism: Literature...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence 
    Title:
    Research on Auditor Professional Skepticism: Literature Synthesis and Opportunities for Future Research
    Practical Implications:

    We find that while research studies provide insights into both the antecedents to skeptical judgments and actions, the majority of research efforts to date have focused on the antecedents to skeptical judgments and on auditor characteristics in particular. In addition, in order to understand how skeptical judgment translates into skeptical action, additional research on skeptical action is needed. Also, given the growth of multicultural audit teams, it is necessary to examine whether an auditor’s culture matters and whether it negatively impacts efforts by multinational accounting firms to deliver the same services throughout the world.

    To enhance professional skepticism, auditors should be encouraged to assess strategic and business-related risks, as well as risks of material misstatement in financial statements, in order to develop the expertise necessary to engage in skeptical judgments. Additionally, a demonstrated decrease in skepticism as one moves up through the firm hierarchy, can be addressed through training and education, as well as task specific experience, or expertise. In addition, future research could focus more on how the environment of audit firms can motivate auditors to exhibit more skeptical judgment and action.

    For more information on this study, please contact R. Kathy Hurtt.

    Citation:

    Hurtt, R.K., H. Brown-Liburd, C. E. Earley, and G. Krishnamoorthy. 2013. Research on Auditor Professional Skepticism: Literature Synthesis and Opportunities for Future Research. Auditing: A Journal of Practice & Theory 32 (Supplement 1): 45-97.

    Keywords:
    professional skepticism; skepticism; auditor skepticism; auditor judgment; skeptical behavior.
    Purpose of the Study:

    Both researchers (e.g., Nelson 2009) and regulators (e.g., the PCAOB) have emphasized the importance of exercising the appropriate level of professional skepticism when conducting an audit. However, professional skepticism remains a hard concept to define and measure.  In addition, it is often difficult to determine if a lack of skepticism is the primary cause of audit deficiencies and if so, what factors led to the lack of skepticism. The purpose of this paper is threefold: 1) extend the work of Nelson (2009) by synthesizing research related to auditors’ professional skepticism to identify antecedents to both skeptical judgment and skeptical action; 2) identify areas where research is lacking on a particular dimension and suggest avenues for future research; and 3) discuss the implications of research findings for regulators and auditing professionals.

    Design/Method/ Approach:

    We adopt two foundational aspects of the framework introduced in the seminal paper by Nelson (2009), which proposes that lack of skepticism can either be the result of a failure in problem recognition (lack of skeptical judgment) or a failure to act on a problem recognized (lack of skeptical action). We organize research studies into four categories of antecedents: 1) studies relating to auditor characteristics, 2) studies relating to evidence characteristics, 3) studies relating to client characteristics, and 4) studies relating to environmental characteristics. 

    Findings:

    Auditors approach audits with the intention of being professionally skeptical and they often respond to risk by changing behaviors (e.g., expand budgeted audit hours, identify more contradictions, negotiate more forcefully with a client).  In addition, auditors’ professional behavior is affected by cultural differences (Bik 2010) which suggests that culture influences values and these values influence professional and audit judgment (Patel et al. 2002). When professional skepticism is found lacking by the PCAOB and the SEC, researchers have noted the following as possible explanations: individual auditor characteristics may influence the ability of an auditor to recognize situations where additional work or investigation is required; unconscious bias may influence an auditor’s judgments or actions; and lack of knowledge, experience or expertise may impede skeptical judgments.   

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Evaluation of Evidence, Prior Dispositions/Biases/Auditor state of mind
  • 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

Filter by Type

Filter by Tag