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  • 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
    Discussion of “Does the Identity of Engagement Partners M...
    research summary posted January 20, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 01.03 Impact of New Accounting Pronouncements, 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions, 15.0 International Matters, 15.01 Audit Partner Identification by Name 
    Title:
    Discussion of “Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions”.
    Practical Implications:

    This discussion emphasizes significant caution when interpreting the results of the study. Mainly, it is unclear if results of the study can generalize to the broader public company market in the US. Furthermore, if the results are misinterpreted (i.e., individual auditors are not systematically aggressive but, instead, high quality auditors are systematically assigned the riskiest clients) then regulation requiring audit partner identification could actually have overall negative effects on overall audit quality.

    Citation:

    Kinney, W.R. 2015. Discussion of “Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions”. Contemporary Accounting Research 32 (4):1479-1488.

    Keywords:
    auditor attributes, reporting style, auditor identification, audit quality, going concern opinion, Type I error, Type II error, credit risk, insolvency risks, statutory audits
    Purpose of the Study:

    The author reviews the paper's content, analyzes its predictive validity, and discusses its multiple implications. He provides constructive suggestions for improvements. Based on predictive validity analysis, the author concludes that engagement partner assignment strategy is an important and acknowledged omitted variable that affects the study's internal validity via both the independent variable (partner's prior performance measure) and the dependent variable (borrower's cost of debt capital). The omission also affects construct validities and, if audit firms are applying a plausible assignment strategy, then interpretation of the study's main results would be reversed. Finally, the lack of a standards intervention noted by the authors and the extreme size and other differences between audits of Swedish private companies and U.S. public companies impair external validity and generalization to the U.S. intervention.

    Design/Method/ Approach:

    This article is a discussion.

    Findings:

    The discussion emphasizes the following points:

    • KVZ (the reviewed paper’s authors Knechel, Vanstraelen and Zerni) main analyses are for statutory (not financial statement) audits of small, private, Swedish companies. Therefore, these results may have more limited generalizability. 
    • KVZ use publically available data for private companies without considering the significant amount of private information available to private lenders and audit firms.
    • KVZ acknowledge and cannot rule out a potential competing hypothesis whereby audit firms follow a “best partner to riskiest engagements” strategy. In this case, the highest quality partners may appear to have the most aggressive reporting strategy because that partner serves riskier clients with harder to predict bankruptcy risk. To confirm/disconfirm this competing hypothesis occurs, KVZ could ask audit firm management to describe their audit partner assignment strategies and rank a sample of partners accordingly. This information could be correlated with KVZ’s reporting style measures.    
    • Regulators, academics, and popular/business press articles may be similarly over-generalizing KVZ’s results. Furthermore, misinterpretation of results could have the ill-effects of high quality audit partners being assessed as low quality. This false characterization may lead high quality auditors to refuse to audit riskier clients where their skills are most needed. As such, any interpretations of KVZ’s results should proceed with much caution.
    Category:
    Accountants' Reporting, Audit Team Composition, International Matters, Standard Setting
    Sub-category:
    Audit Partner Identification by Name, Changes in Audit Standards, Diversity of Skill Sets (e.g. Tenure & Experience), Going Concern Decisions, Impact of New Accounting Pronouncements
  • Jennifer M Mueller-Phillips
    Does the Identity of Engagement Partners Matter? An Analysis...
    research summary posted January 20, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 01.03 Impact of New Accounting Pronouncements, 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions, 15.0 International Matters, 15.01 Audit Partner Identification by Name 
    Title:
    Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions.
    Practical Implications:

    Auditor aggressive/conservative reporting style may be a systematic audit partner attribute and non-randomly distributed across engagements. Particular market participants (in this case, lenders) appear to recognize and price these differences in reporting style. While the particular mechanism through which these different reporting styles occur is not possible to determine, the results suggest the importance of individual audit partners in influencing audit reporting decisions. Therefore, current regulations in both the US and EU to identify the individual partner’s identity could potentially offer valuable information to market participants.

    Citation:

    Knechel, W. R., A. Vanstaelen, and M. Zerni. 2015. Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions. Contemporary Accounting Research 32 (4):1443-1478.

    Keywords:
    auditor attributes, reporting style, auditor identification, audit quality, going concern opinion, Type I error, Type II error, credit risk, insolvency risks, statutory audits
    Purpose of the Study:

    Current debate exists as to whether requiring individual auditor identification would enhance audit quality and, if so, whether investors understand and respond to these differences. This study provides empirical evidence to support the assertions that:

    1. Reporting style (i.e. consistently conservative or aggressive reporting) is an individual partner attribute that systematically differs between partners.  
    2. Investors understand and respond to these differences when assessing a company’s risk.

    This study is especially relevant given both the EU’s decade old requirement to disclosure of audit engagement partner and the recent, similar PCAOB requirement that US audit partners do the same.

    Design/Method/ Approach:

    The authors use archival methods. They acquired panel data between 2001  2008 of the total clienteles of individual Big 4 audit partners of statutory audits for small, private companies in Sweden. This excludes non-Big 4 auditors and joint auditors.

    Findings:

    In general, the frequency of Type I and II reporting errors is correlated over time for an individual partner both (1) across time for the same client and (2) between clients. As such, aggressive or conservative accounting appears to be a systematic partner attribute. Regarding investors, they appear to understand that partner reporting style is systematic across time and between clients and penalize firms audited by partners with a history of aggressive reporting via higher interest rates, lower credit ratings, and higher credit/insolvency risk. These results are, generally, economically significant.

    More specific results include:  

    • Predictive ability of both accruals and cash flows on future OCFs are lower when prior reporting errors of either Type have previously occurred.
    • Prior aggressive reporting results in lower persistence of current accrual estimates.  
    • Type I (Type II) reporting errors are negatively (positively) associated with abnormal accruals.
    • Conservative accrual reporting is positively (negatively) associated with Type I (Type II) reporting errors in all settings. Aggressive accrual reporting is positively (negatively) associated with Type II (Type I) reporting errors in low-risk settings.  
    • Clients of partners with aggressive reporting style have higher implicit interest rates, lower credit ratings, higher assessed insolvency risk, and lower Tobin’s Q. Conservative reporting styles has no effect on these credit measures.  
    • Past partner reporting style differentially affects market reaction to a new Going Concern Opinion.
    • Past partner Type II reporting errors has an economically marginally-significant effect on insolvency risk.
    Category:
    Accountants' Reporting, Audit Team Composition, International Matters, Standard Setting
    Sub-category:
    Audit Partner Identification by Name, Changes in Audit Standards, Diversity of Skill Sets (e.g. Tenure & Experience), Going Concern Decisions, Going Concern Decisions, Impact of New Accounting Pronouncements
  • Jennifer M Mueller-Phillips
    The Effect of Early Career Experience on Auditors'...
    research summary posted October 16, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 09.0 Auditor Judgment 
    Title:
    The Effect of Early Career Experience on Auditors' Assessments of Error Explanations in Analytical Review.
    Practical Implications:

    The results of this study have other implications for audit researchers. The results of this study suggest that staff-level auditors may be appropriate surrogates for senior-level auditors for certain tasks, under certain conditions. This has implications for researchers because staff-level auditors may be more accessible to researchers than senior-level auditors due to being less time constrained and being more connected to universities due to being recent graduates or being enrolled in a fifth-year Master’s program concurrent with their being staff-level auditors. Also, this study extends research on the role of individuals’ subjective experience while self-generating alternative explanations on their likelihood assessments.

    Citation:

    Yen, A. C. 2012. The Effect of Early Career Experience on Auditors' Assessments of Error Explanations in Analytical Review. Behavioral Research in Accounting 24 (2): 211-229.

    Keywords:
    analytical review, audit experience, counterfactual reasoning
    Purpose of the Study:

    This paper examines the analytical review judgments of staff-level auditors. The performance of analytical review procedures has traditionally been associated with senior-level auditors. However, changes in the audit environment (e.g., increased team auditing, a shift away from compliance testing to increased analytical procedures, and more work pushed down to lower-level staff) over the last ten to fifteen years may have led to staff-level auditors being exposed to the analytical review process, and more specifically, financial statement error knowledge, earlier in their careers. Thus, an assessment of staff-level auditors’ performance on analytical review procedures is necessary, both to increase the understanding of the learning curve as it relates to analytical review procedures and to provide evidence on the readiness of staff-level auditors to perform these traditionally more senior-level procedures. To examine this research question, the author conducts an experiment based on Heiman (1988, 1990). 

    Design/Method/ Approach:

    Forty-six staff-level auditors and forty-one graduate accounting students with no full-time audit experience participated in the experiment and were paid a flat wage of ten dollars plus the chance of winning a drawing for a number of restaurant gift certificates. The graduate accounting students were recruited from two accounting classes at an urban university in the northeastern United States. The staff-level auditors were recruited from professional contacts of the author. The evidence was gathered prior to March 2012.

    Findings:

    The author finds that both staff-level and student participants overestimate (underestimate) the likelihood of specified (unspecified) causes, and that providing either group with alternative explanations reduces their likelihood assessments for an original specified cause. On the other hand, when participants are asked to self-generate alternative explanations, the likelihood assessments for staff-level auditors and students are different. Students’ likelihood assessments increase after being asked to self-generate alternative explanations. The pattern of results for the students in this study is consistent with the pattern observed for the students in Heiman (1988). For staff-level auditors, their assessments are reduced after being asked to self-generate alternative explanations, if they self-generate at least two alternatives. The pattern of results for staff-level auditors in this study is similar to the pattern observed for senior-level auditors in Heiman (1990). Overall, these results show that staff-level auditors perform more like Heiman’s (1990) senior-level auditors than like students on this analytical review task.

    Category:
    Audit Team Composition, Auditor Judgment
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience)
  • Jennifer M Mueller-Phillips
    The Effect of China’s Weak Institutional Environment on t...
    research summary posted September 15, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 11.0 Audit Quality and Quality Control, 11.07 Attempts to Measure Audit Quality 
    Title:
    The Effect of China’s Weak Institutional Environment on the Quality of Big 4 Audits.
    Practical Implications:

    This study suggests that the strength of the institutional environment can significantly influence audit quality, and subsequently financial reporting quality even for global accounting firms with standardized training and auditing procedures.  Furthermore, this study has important implications for the SEC which has voiced concerns about the quality of auditing in China, and the PCAOB which has been barred by the Chinses government from conducting inspections of auditing firms located in mainland China.

    Citation:

    Ke, B., C. S. Lennox, and Q. Xin. 2015. The Effect of China’s Weak Institutional Environment on the Quality of Big 4 Audits. The Accounting Review 90 (4): 1591-1619.

    Keywords:
    Audit quality, Big 4, China
    Purpose of the Study:

    The Big 4 audit firms operate on a global scale and assert that they maintain a uniformly high level of quality around the word by providing their employees standardized training and through the global application of consistent auditing methodologies. However, there is some reason to suspect that the strength of a country’s institutional environment might influence the supply of audit quality such that Big 4 firms provide lower-quality audits in countries with relatively weak institutional environments. Because it is difficult to control for all differences between countries, this can be difficult for researchers to examine empirically. To combat this issue, this study takes advantage of a unique characteristics of Chinese firms.  Hong Kong is seen as having a stronger institutional environment relative to mainland China and firms that are listed on both the mainland exchange and the Hong Kong exchange must prepare and audit two separate sets of financial statements. This allows the authors to better isolate how variability in institutional strength affects audit quality for the clients of Big 4 firms. In particular, the study address the following research objectives:

    • Whether Big 4 firms assign their most experienced audit partners to clients who are listed on both exchanges relative to those only listed on the mainland exchange.  
    • Whether audit quality of cross-listed firms is higher than firms solely listed on the mainland exchange.
    • Whether differences in audit quality between firms that are cross-listed and firms that are only listed on the mainland China exchange lead to differences in financial reporting quality.
    Design/Method/ Approach:

    The authors use data on publicly traded Chinese companies from the years 1995-2012 to examine differences in audit quality, and financial reporting quality for firms cross-listed on both the HK exchange and the mainland China exchange, relative to firms solely listed on the mainland China exchange.  To examine differences in partner experience, the researchers utilize data from a unique dataset supplied by the Chinese Institute of Certified Public Accountants.

    Findings:
    • Partners assigned to cross-listed firms are significantly more experienced than partners assigned to clients that are not cross-listed. This suggests that Big 4 firms may assign auditors based on the strength of the institutional environment such that their more experienced auditors are assigned to stronger institutional environments.
    • Cross-listed firms are associated with higher levels of audit quality relative to firms only listed on the mainland China exchange. This is consistent with the assertion that Big 4 audit firms may provide lower-quality audits in weaker institutional environments.
    • Cross-listed firms are associated with lower levels of financial reporting quality relative to firms only listed on the mainland China exchange. This suggests that the lower level of audit quality provided by Big 4 firms in weaker institutional environments negatively impacts financial reporting quality.
    Category:
    Audit Quality & Quality Control, Audit Team Composition
    Sub-category:
    Attempts to Measure Audit Quality, Diversity of Skill Sets (e.g. Tenure & Experience)
  • Jennifer M Mueller-Phillips
    Being a Successful Professional: An Exploration of who Makes...
    research summary posted July 28, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience 
    Title:
    Being a Successful Professional: An Exploration of who Makes Partner in the Big 4.
    Practical Implications:

    This article has sought to profile the partner habitus in Big 4 firms in order to better understand what constitutes success within this context. The need to generate revenue tends to undermine ethics and professional independence. In the context of the accounting field, the authors would argue that to be a professional at the top level essentially means to embody commercialism. If commercial concerns dominate the habitus of the leaders of Big 4 firms, then one can expect future conflicts and tensions to occur with traditional professional values. Although in one sense equity partnership is becoming more exclusive and difficult to attain, the authors equally show how making partner is more meritocratic than in the past, as social ties are less important.

    Citation:

    Carter, C., and C. Spence. 2014. Being a Successful Professional: An Exploration of Who Makes Partner in the Big 4. Contemporary Accounting Research 31 (4): 949-981.

    Keywords:
    accounting firms, partnership, professional corporations
    Purpose of the Study:

    Professionalismin the ideal-type sense of the termis not disappearing, but its meaning in practice is clearly changing being fused with commercialism in ways that appear to vary across firms, sectors, geographical contexts, and even within firms themselves. The twenty-first century accounting professional is likely to embody different logicsranging from traditional accounting values through to entrepreneurial practices. This paper explores the theme of what it means to be a successful professional in the Big 4 today. The researchers ask the questions: 

    • Is there a significant gap between partners’ socioeconomic origins and their current status in society?
    • What are the meaningful distinctions between partners and those just below partner level in the Big 4?
    • What are the perceived essential qualities of partners in the Big 4?
    • In what ways can the accounting partners of today be distinguished from partners of previous generations in terms of their habitus and capital portfolios?
    Design/Method/ Approach:

    This paper reports on a series of qualitative interviews undertaken with 32 senior professionals in the Big 4 between 2010 and 2012 in Canada and the UK. The interviews lasted between 45 minutes and 3 hours and were semi structured. Individuals came from three of the Big 4 firms, with one individual not from Big 4 and one individual who worked for Arthur Andersen. All the interviewees were white and only three were female.

    Findings:
    • Success in the Big 4 is measured, ultimately, in terms of economic capital.
    • Interviewees uniformly emphasized that the skills required to be a partner were primarily those that could be deployed in order to generate revenue, win new business, and maintain or enhance existing and potential client relationships.
    • Beyond the primary importance of selling and business development, technical abilities and competencies were also highlighted by interviewees as of importance.
    • Several partners openly acknowledged having subordinates who were technically much more competent than they were and that their job was to “call in the specialists” whenever needed.
    • The UK interviewees came from relatively modest backgroundsaspirational working class or lower-middle class; they were generally educated in the state system and were the children of parents who themselves were unlikely to have had the luxury of higher education.
    • It was unusual for an interviewee to have received a privileged education at the secondary level and/or to have attended an elite university. Of the 32 interviewees, only three fitted this mold, one of whom left the Big 4 at senior manager level complaining that he never fit into the culture.
    Category:
    Audit Team Composition
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience)
  • Jennifer M Mueller-Phillips
    An empirical investigation of the impact of audit and...
    research summary posted July 20, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience 
    Title:
    An empirical investigation of the impact of audit and auditor characteristics on auditor performance.
    Practical Implications:

    The study provides a real-life setting, offering external validation, allowing the authors to analyze the performance and the characteristics of an audit team, as opposed to an individual as it is done in most experimental studies. As they measure audit performance by the tax adjustment resulting from a tax audit, the study also contributes to the tax audit literature by further explaining the determinants of a corporate tax audit outcome. The authors provide additional insight on audit and audit team characteristics that are associated with tax adjustments.

    Citation:

    Alissa, W., Capkun, V., Jeanjean, T., & Suca, N. 2014. An empirical investigation of the impact of audit and auditor characteristics on auditor performance. Accounting, Organizations & Society 39 (7): 495-510.

    Keywords:
    tax audits, audit performance, audit experience
    Purpose of the Study:

    Audit performance is determined not only by the inherent complexity of the firm or the business unit audited, but also by audit task and auditor characteristics. A large body of experimental and theoretical research in psychology and auditing shows that audit performance increases with effort , decreases in task complexity, and increases in auditor experience. In this paper, the authors offer external validation to these findings by providing supporting empirical archival evidence.

    Due to increasing regulation, the number and complexity of audit tasks is rising, requiring more effort and knowledge on the part of auditors in internal, financial, and tax audits alike. This, in turn, puts more pressure on internal audit departments, audit firms, and tax authorities to understand and manage the design of their audits and audit teams in order to maximize performance. Given that audit tasks vary in complexity, and, unavoidably, auditors vary in knowledge and ability, maximum performance will be achieved only if the combination of task complexity and audit team characteristics is such so as to allow for the highest output per unit of effort (dedicated capacity). Consequently, the optimal allocation of effort becomes one of the most important drivers of performance, especially in the environment where the capacity is constrained, such as internal audit departments, audit firms and tax authorities.

    Design/Method/ Approach:

    The authors use a unique and confidential database of 15,392 tax audits performed by the Croatian Tax Administration during the 20022006 period to examine the impact of task complexity, auditor experience, and auditor effort on audit performance. The authors also used annual corporate income tax filings and VAT filings.  

    Findings:

    The authors find that task complexity mitigates the positive relationship between auditor effort and audit performance, consistent with the psychology literature argument that more complex tasks require more cognitive effort and that there is a diminishing marginal impact of effort on performance. They also find that auditor experience enhances the impact of auditor effort on performance. This result is in line with the argument that effort has a positive impact on performance only if the individual has some experience with the task. The results indicate that more experience increases the impact of auditor effort on audit performance more when complexity is high. This suggests that assigning a highly experienced auditor to a more complex task has a bigger marginal impact on performance than assigning a highly experienced auditor to a low complexity task, and consequently maximizes total performance. In other words, the skills of highly experienced auditors are wasted on low complexity tasks.

    Category:
    Audit Team Composition
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience)
  • Jennifer M Mueller-Phillips
    Productivity Growth in the Public Accounting Industry: The...
    research summary posted October 15, 2013 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.03 Non-Audit Services, 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.09 Impact of Technology on Audit Procedures 
    Title:
    Productivity Growth in the Public Accounting Industry: The Roles of Information Technology and Human Capital
    Practical Implications:

    Given the positive effects that human capital and IT accumulation had on productivity growth, the findings of this study imply that firms seeking to improve their revenues per employee could do so by investing in more IT and human capital. The potential effects of these investments on audit quality could be beneficial when determining the level of investment to make. However, firms should keep in mind the possibility of diminishing results once a certain level of IT and human capital is accumulated. This study also has implications for the debate in the United States surrounding the Sarbanes- Oxley Act which prohibits certain non-audit services by public accounting firms. The debate stem from a concern of the effects of non-audit services on independence but this study displays the benefits that could arise if non-audit services were allowed.

    For more information on this study, please contact Hsihui Chang.
     

    Citation:

    Chang, H., J. Chen, R. Duh, and S. Li. 2011. Productivity growth in the public accounting industry: the roles of information technology and human capital. Auditing: A Journal of Practice and Theory 30 (1): 21-48.

    Keywords:
    productivity growth; efficiency change; technical progress; IT capital accumulation; human capital accumulation; Big 4; non-audit services.
    Purpose of the Study:

    The audit industry has changed dramatically over the last two decades. These changes have brought on increased competition among firms which has created immense pressure for audit firms to minimize their costs while maximizing productivity. For many public accounting firms, the way to manage productivity growth and enhance service delivery came in the form of investments in information technology and human capital. Investments in information technology can increase productivity through automation of routine auditing tasks, improvements in audit team collaboration and communication, as well as through an increased level of experience with information systems which can improve auditor performance in engagements to help clients integrate their company information systems. High quality human capital, which is usually indicated through education levels and work experience and results in both technical and tacit knowledge, contributes to the productivity growth of a firm through higher quality services for clients.

    This study breaks down human capital and information technology (IT) into four drivers of productivity growth among public accounting firms; efficiency change, technical progress, IT capital accumulation, and human capital accumulation. The authors assessed both the simultaneous effects of human capital and IT as well as the individual contributions of the four distinct components of these factors on productivity growth. Some firms also chose to boost productivity through engaging in more non- audit services. Although most studies focus on the effects that non-audit services have on auditor independence, this study focuses on how non- audit services can contribute to productivity growth.
     

    Design/Method/ Approach:

    The authors analyzed data on revenues, employees, IT expenditures, and human capital for a sample of public accounting firms in Taiwan from 1993 to 2003. The data was obtained from the Annual Survey of Accounting Firms in Taiwan published by the Department of Statistic of Taiwan’s Ministry of Finance. The authors chose Taiwan as a proper setting for this study because its publications included more advantageous data than that of the United States published in Accounting Today’s annual surveys.

    Findings:
    • Public accounting firms experienced growth in productivity, specifically, labor productivity evidenced through revenue per employee. 
    • This growth, in order of least contribution to greatest contribution, resulted from efficiency improvement, technical progress, human capital accumulation, and IT capital accumulation. Thus, the primary drivers were human capital and IT accumulation.
    • There was a significant difference in productivity growth between Big 4 and non- Big 4 firms. This difference was primarily attributable to greater technical progress and IT capital accumulation among the Big 4. Additionally, there was no difference in human capital accumulation between Big 4 and non- Big 4 firms.
    • Although the advance of technology provides all accounting firms with opportunities to improve productivity, not all firms exploit these opportunities equally. The Big 4 invested more heavily in IT systems and were rewarded with higher productivity growth.
    • Firms with a greater growth in non-audit services had higher productivity than other firms because they accumulated higher IT and human capital over the sample period.
    • Early movers into non-audit services tended to have higher changes in IT capital accumulation.
    • Both early moving firms into non-audit services and firms that emphasized growth in non-audit services presented a direct relationship with productivity growth higher than that of firms which focused on traditional audit services.
       
    Category:
    Audit Team Composition, Auditing Procedures - Nature - Timing and Extent, Internal Control
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses, Non-audit Services, Staff Hiring - Turnover & Morale
  • Jennifer M Mueller-Phillips
    Characteristics of Relatively High-Performance Auditors
    research summary posted September 19, 2013 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    Characteristics of Relatively High-Performance Auditors
    Practical Implications:

    Auditors who are higher-performing perceive technical knowledge and abilities, client interaction skills, and professional attitudes/behaviors as being important.  Prioritizing training in these areas or recruiting new auditors who prioritize these areas may have a beneficial impact to firms.  In addition, these auditors rely less on standard audit procedures and perceive that their role can influence the outcome of the audit.  Therefore, it may be helpful for firms to emphasize the importance of using standard audit procedures only as a guideline for the audit, as overreliance on these procedures could lead to a lack of professional skepticism.  Evaluating prospective hires in terms of their locus of control could also indicate their willingness to be more comfortable in ill-structured tasks and exert more effort on audit tasks.
       
    For more information on this study, please contact Constance McKnight.
     

    Citation:

    McKnight, C. A. and W. F. Wright.  2011.  Characteristics of relatively high-performance auditors.  Auditing: A Journal of Practice and Theory 30 (1): 191-206.

    Keywords:
    job performance; tacit knowledge; task structure; locus of control; expertise
    Purpose of the Study:

    Previous research has examined some determinants of auditor job performance, but has not examined what in particular distinguishes auditors with superior overall job performance.  Determinants of superior job performance could be factored into training or hiring practices, depending on whether the determinants can be taught or are innate.  Attributes such as technical knowledge and abilities, client interaction skills, and professional attitudes/behaviors are predicted to be perceived as more important determinants of overall job performance by higher-performing auditors.  Predicted indicators of higher job performance are less reliant on standard audit procedures (indicating a higher willingness to be professionally skeptical) and having a personality resulting in an internal “locus of control” (believing in their ability to influence outcomes, as opposed to the outcome being primarily influenced by external factors).

    Design/Method/ Approach:

    The authors obtained the two most recent performance evaluations from eight public accounting firms for 56 auditors (including staff, seniors, and managers) prior to 2008; these were used to split the auditors into higher-performance and lower-performance.  The auditors then performed self-evaluations of their overall performance on their last two jobs and assessed their relative performance in terms of technical knowledge and abilities, client interaction skills, and professional attitudes/behaviors.  They also completed evaluations of how much they rely on standard procedures as well as completing a locus of control survey.

    Findings:
    • Auditors with higher firm performance evaluations assessed their relative performance in terms of technical knowledge and abilities, client interaction skills, and professional attitudes/behaviors as higher than those with lower evaluations
    • Staff auditors with higher firm performance evaluations rely less on standard audit procedures than those with lower evaluations
      • Seniors and managers had no difference of reliance on standard audit procedures across the firm performance evaluation levels
    • Auditors with higher firm performance evaluations are more likely to have an internal locus of control than those with lower evaluations
       
    Category:
    Audit Quality & Quality Control, Audit Team Composition
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience)
  • The Auditing Section
    Resolving Disputed Financial Reporting Issues: Effects of...
    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, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Resolving Disputed Financial Reporting Issues: Effects of Auditor Negotiation Experience and Engagement Risk on Negotiation Process and Outcome
    Practical Implications:

    The critical implication from these findings is that, despite the expectation of conservatism required by GAAP, under certain circumstances some auditors may acquiesce more readily to client pressures than other auditors.  Specifically, when engagement risk is high, auditors with lower negotiation experience may tend to make more concessions in negotiations to the client than auditors with higher negotiation experience or auditors in a lower engagement risk setting.  

    Thus, though the paper does not discuss the following point specifically, the audit firms should be aware of this vulnerability of auditors with lower negotiation experience and should consider this in planning negotiations and assignments.  Potentially, audit firms may consider assigning managers and partners who are less experienced in negotiation to clients with lower engagement risk and/or lower litigation exposure for the audit firm.  Alternatively, when managers or partners with lower negotiation experience are placed on clients with high engagement risk, firms may consider assigning a manager or partner with more negotiation experience to accompany the manager or partner with less negotiation experience. 

    Citation:

    Brown, H. L., and K. M. Johnstone. Resolving Disputed Financial Reporting Issues: Effects of Auditor Negotiation Experience and Engagement Risk on Negotiation Process and Outcome. Auditing: A Journal of Practice and Theory 28(2):65-92.

    Keywords:
    auditor decision-making; experience; negotiation; risk.
    Purpose of the Study:

    Auditing necessitates negotiation between the auditor and the client to resolve disputed reporting issues.  Such negotiation can materially affect financial statements.  However, little is known regarding how contextual factors, such as auditor or client characteristics, affect client-auditor negotiations.  Understanding how such factors affect client-auditor negotiations is important because such an understanding provides insight into how training, personnel assignment, and other audit interventions may improve audit quality and reduce litigation exposure related to the issues involved in client-auditor negotiation.  Brown and Johnstone investigate how two factors, engagement risk and auditor negotiation experience resolving complex financial reporting issues, impact the process and outcome of client-auditor negotiation.

    Design/Method/ Approach:

    Brown and Johnstone collected their evidence via an experiment in which audit partners and managers who participate assume the auditor role in an experimental case setting.  The experimental case involves a complex revenue recognition issue, for which professional standards are imprecisely defined.  In the case, the auditors are required to decide how to allocate revenue between current and future periods for a multi-year contract.  The client’s preference is to recognize the majority of the revenue currently, though most of the earnings process is not complete.  Auditor participants then negotiate with the client via the internet.  Pre-determined client responses are generated by a computer program.  The experimental data was collected in the early 2000’s.

    Findings:

    Auditors with lower negotiation experience in the context of high engagement risk compared to (1) the auditors with lower negotiation experience in the context of low engagement risk and (2) the auditors with higher negotiation experience in both low and high engagement risk contexts, exhibit the following differences in judgments:

    • Significantly more concessions
    • Marginally less conservative negotiation outcomes
    • Marginally less confidence about whether their final outcomes are appropriate under GAAP
    Category:
    Audit Team Composition, Engagement Management
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Interactions with Client Management
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