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  • Jennifer M Mueller-Phillips
    Do changes in audit actions and attitudes consistent with...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.06 Earnings Management, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Do changes in audit actions and attitudes consistent with increased auditor scepticism deter aggressive earnings management? An experimental investigation
    Practical Implications:
    • Regulators and standard setters have been concerned that we do not know which audit actions most likely detect fraud.  An understanding of what audit procedures are likely to discourage managers from committing fraud is valuable. 
    • Specifically, the study shows that changes in the nature and extent of audit procedures combined with increased skepticism via critical inquiry are helpful in deterring potentially fraudulent behavior. 
    • Similar changes in audit procedures also affect management’s judgment about the ethicality of potentially fraudulent behavior. 
       
    Citation:

    Chen, Q., K. Kelly, and S. Salterio. 2012. Do changes in audit actions and attitudes consistent with increased auditor scepticism deter aggressive earnings management? An experimental investigation. Accounting, Organizations and Society 37 (2): 95-115.  

    Keywords:
    Fraud, Audit Procedures, Professional Skepticism, Earnings Management
    Purpose of the Study:

    Recent years have brought increased focus on the financial statement audit as not just a means of detection but a deterrent to fraud.  The link between detection and deterrence is made in practice because an increase in the ability to detect fraud on the part of the auditor (if widely known) should also lead to an increase in the ability of the audit process to deter fraud.
    The current study seeks to identify whether different audit procedures and attitudes toward management deter aggressive earnings management that is possibly fraudulent.  Using the experimental research approach allows the authors to focus on a scenario where the increase in deterrence is not due to an increase in the probability of detection but is most likely due to the specific changes in the audit approach tested. 
     

    Design/Method/ Approach:

    Corporate managers were placed in different experimental conditions to examine differences in their assessments about potentially fraudulent behavior.  Participants were told they were the manager of a firm for which rotational audits are performed.  In the current year, the manager’s division was not being audited, but they were made aware of the audit procedures being performed in other divisions.  In one condition, the procedures were the same as last year (SALY).  In another condition, the extent or quantity of evidence collected would be increased.  In the third condition the nature of evidence collected was increased (i.e. confirmations rather than internal documentation).  Within each of these three conditions half of the participants would also note an increase in auditor skepticism via more critical inquiry procedures while the other half would not.  Managers were then asked to assess a level of potential earnings management in their division as well as the ethicality of any potential earnings management.  The experiment was web-based.

    Findings:
    • When managers find out about a change in the nature of audit work being performed at other divisions, they respond by reducing earnings management in their own division as compared to the condition where procedures were the same as last year or where the change in procedure is an increase in audit evidence only. 
    • Managers exhibited this behavior even though the changes in procedures did not affect their division. 
    • Combining a more skeptical auditor attitude toward a manager with a change in the nature of audit evidence, the extent of evidence collected, or a change in the nature of the evidence, reduces earnings management as compared to the same as last year condition
    • An increase in evidence collected alone, or more critical inquiry alone does not significantly deter earnings management relative to the condition where procedures were the same as last year.
    • The results of management’s assessment of the ethicality of potential earnings management mirrors the results for the planned level of earnings management described above.  These results hold, even after considering manager ethical disposition.
       
    Category:
    Auditing Procedures - Nature - Timing and Extent, Engagement Management, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Auditors’ Professional Skepticism, Earnings Management, Interactions with Client Management
  • The Auditing Section
    Exploring Trust and the Auditor-Client Relationship: Factors...
    research summary posted May 3, 2012 by The Auditing Section, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    Exploring Trust and the Auditor-Client Relationship: Factors Influencing the Auditor’s Trust of a Client Representative
    Practical Implications:

    The findings provide evidence that auditors do hold a level of trust in client representatives and that the level of trust is associated with commonplace behaviors of client representative that attract trust.  The results of this study are important to make auditors and auditing standards setters aware of factors that may lead to greater auditor trust of client management and perhaps consider whether there may be a potential for excessive trust to overwhelm the auditor’s professional skepticism. Note that the study was unable to determine whether the levels of trust that the auditors had for the client were such that auditor judgment would be compromised.

    Citation:

    Rennie, M. D., L. S. Kopp, and W. M. Lemon. 2010. Exploring Trust and the Auditor-Client Relationship: Factors Influencing the Auditor’s Trust of a Client Representative. Auditing: A Journal of Practice and Theory 29 (1): 279-293

    Keywords:
    Trust, Professional Skepticism, Auditor-Client Relationship
    Purpose of the Study:

    A financial statement audit cannot be conducted in the absence of the auditor’s trust of client management.  The auditor needs information provide by management and the cooperation of management to carry out the audit.  Thus, the auditor has no option but to bestow some degree of trust upon client management.  Yet, if trust is too strong, professional skepticism could be impaired.  Below are the objectives of this descriptive, exploratory study: 

    • To shed light on auditors’ trust of client management using the context of an auditor-client disagreement.
    • To learn about client behaviors (e.g. openness of communication and demonstration of concern) that may influence the auditor’s trust of a client.
    • To learn about aspects of the auditor-client relationship (length of association and frequency of past disagreements) that may influence the auditor’s trust of a client.
    • To gather auditors’ opinions about the importance of trust and about managing the balance between trust and professional skepticism.
    Design/Method/ Approach:

    The authors collected their evidence via a survey questionnaire prior to June 2007. Participants surveyed include 71 experienced auditors (48 partners, 2 principals, 20 senior managers, and 3 managers) from Canadian international accounting firms. Participants were asked to briefly describe a disagreement they had previously had with a client and were asked specific questions about that disagreement.

    Findings:
    • A disagreement experience with the client is relevant to the auditor’s trust of that client.
    • A client’s openness of communication during the course of a disagreement is positively associated with the auditors’ trust of that client representative.
    • A client’s demonstration of concern toward the auditor appears to be trust-relevant.
    • The frequency of disagreements with the client is negatively associated with the auditor’s trust of the client.
    • The length of the auditor-client relationship is positively associated with the auditor’s trust.
    • An auditor’s satisfaction with the outcome of the disagreement is positively associated with the auditor’s trust. 
    • The auditor’s predisposition to trust is not associated with the auditor’s trust of the client.
    • Auditors believe it is important to trust their clients but they also attempt to ensure that trust does not impede professional skepticism.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Engagement Management
    Sub-category:
    Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management
    Home:
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  • Jennifer M Mueller-Phillips
    Field Data on Accounting Error Rates and Audit Sampling
    research summary posted February 19, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.02 Sample Selection – use of statistical sampling, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.08 Evaluation of Errors – Statistical and Non-statistical 
    Title:
    Field Data on Accounting Error Rates and Audit Sampling
    Practical Implications:

    This study provides several important practice implications. First, prior research on audit sampling that relied on the assumption of relatively large error rates may not provide useful guidance for post-SOX audit sampling populations. Second, auditing educators, regulators, and standard setters benefit from an updated understanding of how auditors apply audit sampling guidance in auditing standards when using audit sampling in the field. For example, knowing the relatively high compliance (compared with prior periods) with requirements in auditing standards should impact the way audit sampling is taught in universities and firm trainings, how peer and federal inspectors address audit sampling issues, as well as the need for further clarity of auditing standards. Auditors also benefit as they consider the sampling techniques and input assumptions that will produce the most effective and efficient sampling plans. Specifically, an important implication of our study is related to the impact of standardized sampling templates. The firm in this study mandated the use of such templates, which contributed to levels of explicit consideration of error projection, sufficiency of sample sizes, and of sampling risk in planning and evaluating sample testing.

    For more information on this study, please contact Steve Glover.

    Citation:

    Durney, M., R. J. Elder, and S. M. Glover. 2014. Field data on accounting error rates and audit sampling. Auditing: A Journal of Practice and Theory 33 (2): 79-110

    Keywords:
    Sampling, error rates, error projection, sampling risk
    Purpose of the Study:

    Prior research has examined error characteristics of accounting populations. Many studies investigating audit sampling techniques rely on assumptions concerning the error characteristics of accounting populations. Prior research studies examining auditor performance when using audit sampling have reported:

    • Decreasing sample sizes for tests of details.
    • Auditors frequently fail to project sample errors.
    • Auditors do not consider sampling risk when projecting sample errors.

    These studies involve data from periods preceding the events resulting in the Sarbanes–Oxley Act (hereafter, SOX). Much has happened since SOX, including a renewed focus on audit quality, new auditing and accounting standards, and the creation of the PCAOB. Using proprietary post-SOX data from a large accounting firm, the authors report on:

    • Error rates in populations subject to audit sampling.
    • Auditor compliance with auditing standards with regards to error projection, sample size, and consideration of sampling risk.
    Design/Method/ Approach:

    Data for the study is comprised of the results of 160 different sampling applications from a large auditing firm in 2005 and 2006. The sampling applications were applied across a range of financial statement accounts including accounts receivable, inventory, loans, expenses, plant additions, and revenues. All the tests were substantive tests of details and meant to be representative of the population.

    Findings:

    The authors find the following:

    • Error rates in populations subject to audit sampling are significantly lower in magnitude and frequency than researchers have traditionally assumed.
    • Significantly larger sample sizes and higher error projection rates than reported in previous studies using pre-SOX data.
    • Explicit consideration of sampling risk by auditors.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Conclusions Based on Samples, Evaluation of Errors - Statistical and Non-statistical, Sample Selection – use of statistical sampling
  • Jennifer M Mueller-Phillips
    How Do Auditors Behave During Periods of Market Euphoria?...
    research summary posted April 17, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.05 Business Risk Assessment - e.g., industry, IPO, complexity, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.04 Going Concern Decisions 
    Title:
    How Do Auditors Behave During Periods of Market Euphoria? The Case of Internet IPOs
    Practical Implications:

    Due to the potential for future market bubbles, the findings of this study may be of interest to audit regulators and standard setters. These finding suggest mixed conclusions regarding the Big 5’s behavior during periods of market euphoria. The presence of going concern opinions varies inversely with variables that represent client viability and auditor self-interest. Evidence that points to a decrease in the predictive value of Big 5 opinions signed during the Internet IPO bubble may also have consequences for investors.
     
    For more information on this study, please contact Andrew J. Leone.
     

    Citation:

    Leone, A. J., S. Rice, J. P. Weber, and M. Willenborg. 2013. How Do Auditors Behave During Periods of Market Euphoria? The Case of Internet IPOs. Contemporary Accounting Research 30 (1).

    Keywords:
    auditors’ opinions; going concerns; initial public offerings; online information services
    Purpose of the Study:

    The study of periods of market euphoria is a long-standing topic of interest to economists. Theorists specify conditions under which market participants and institutions cause bubbles to form. This study looks at how auditors behave during these periods of euphoric market conditions, specifically around the time of the wave of Internet companies’ IPOs in the late 1990s and early 2000s. The goal was to discover how audit decisions change with fluctuations in the external marketplace. The authors address whether auditors are maintaining their responsibility to act in the public’s best interest during these unique market conditions, and how going concern decisions of these Internet IPO companies might vary based on these conditions.

    Design/Method/ Approach:

    The authors obtained a sample of 756 Internet IPO filings from 1996 to 2000 using an online database, as well as a sample of non- Internet IPO registrants. Using descriptive statistics, the authors tested these samples for determinants that could lead auditors to shift their going concern decision criteria during euphoric market conditions.

    Findings:
    • The presence of going concern opinions varies with variables that proxy for both economic reasons and for less independence and skepticism by the Big 5.
    • Some evidence points to associations between costs to investors and a decrease in Big 5 going concern opinions during the bubble.
    • Big 5 firms were not a major cause of the Internet IPO bubble, but large audit firms did little to slow it from inflating.
       
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Client Acceptance and Continuance
    Sub-category:
    Auditors’ Professional Skepticism, Business Risk Assessment (e.g. industry - IPO - complexity), Going Concern Decisions
  • Jennifer M Mueller-Phillips
    The effect of an Audit Judgment Rule on audit committee...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 13.0 Governance, 13.05 Board/Audit Committee Oversight 
    Title:
    The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates.
    Practical Implications:

    The findings of this study have important implications for practice. Although prior research has suggested that an audit judgment rule may improve audit quality, findings from this research suggest that audit quality may decrease. This is seen indirectly by the audit committee members’ belief that accounting estimates become less conservative and due diligence decreases when there is an audit judgment rule. However, this was not directly tested, and future research is needed to determine whether audit judgment rules are beneficial or not.

    Citation:

    Kang, Y.J., A.J. Trotman, and K.T. Trotman. 2015. The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates. Accounting, Organizations and Society 46: 59-76.

    Keywords:
    audit judgment rule, professional skepticism
    Purpose of the Study:

    The purpose of this study is to examine how a proposed audit judgment rule impacts the professional skepticism of the members of an audit committee. Prior research has suggested that an audit judgment rule be implemented that requires courts and inspectors to not second-guess auditors’ reasoned judgments when they are made in good faith and in a rigorous manner. Currently, the concern is that auditors are engaging in defensive auditing and fearful of using innovative approaches to auditing accounting estimates. By examining the audit committees reaction to the proposed rule, the researchers are able to examine how audit committees believe this change impacts audit quality and how it impacts the behavior of the audit committee.

    Design/Method/ Approach:

    Data for this paper was collected prior to March 2015 by using an experiment with audit committee members from Australia. All participants had been on an audit committee in the past, and on average they had been on audit committees for 10.33 years.

    Findings:

    With the introduction of the audit judgment rule, there was an increase in perceived accountability in ensuring the reasonableness of the financial statements from the audit committee members. This was due to a belief that accounting estimates become less conservative and due diligence decreases. This increase in perceived accountability did not necessarily lead the audit committee members to act more professionally skeptical by asking more probing questions. However, the audit committee was more comfortable when they used innovative techniques in developing their accounting estimates. This was due to a belief that innovation leads to improved audit quality. Additional analysis demonstrates that former audit partners showed greater skepticism (by asking more probing questions) than other audit committee members.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Governance, Standard Setting
    Sub-category:
    Auditors’ Professional Skepticism, Board/Audit Committee Oversight, Changes in Audit Standards
  • The Auditing Section
    The Effect of Audit Inquiries on the Ability to Detect...
    research summary posted May 7, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism 
    Title:
    The Effect of Audit Inquiries on the Ability to Detect Financial Misrepresentations
    Practical Implications:

    The results of this study show that inquiry, including repeating questions and providing deception training do not increase the accuracy of those observing interviews.  However, the participants were less likely to believe interviewees when they observed the open ended question inquiry than when they observed the yes/no questions only. Therefore, there is some evidence that by observing an inquiry, professional skepticism is increased.       

    The authors recognize that their results may not generalize to experienced auditors, who may have general or specialized knowledge and abilities that enable them to detect deception better than undergraduate accounting students and recommend further research on experienced auditors.  

    Citation:

    Lee, C. C. and Welker, R. B. 2007. The effect of audit inquiries on the ability to detect financial misrepresentations. Behavioral Research in Accounting 19 (1): 161-178.

    Keywords:
    fraudulent financial reporting, audit inquiry, deception detection, deception training
    Purpose of the Study:

    There has been a recent emphasis placed on inquiries for fraud risk assessments. The present study assesses how well deception can be detected during audit inquiries.  Due to the nature of an audit inquiry, the authors predict that the inquiries will create an environment where deception is more difficult to carry out and is therefore easier to catch. Using two experiments, the authors examine whether a student observing an interview (as opposed to performing the interview) is effective at detecting deception and whether training increases the ability to detect deception. 

    Design/Method/ Approach:

    The authors performed two experiments using undergraduate accounting students.  The experiment involved a simulated interview where an interviewer (former auditor and CPA) asked an interviewee (MBA student) questions and observers (accounting students) reviewed a video of the interviews and determined whether the interviewee was telling the truth or lying.  Observers were exposed to one of three sections of the interview: just the representations of the interviewee (just yes or no questions), the representations and the inquiry (yes/no and open ended questions), or the entire interview (including repeated questions). 

    A second experiment was conducted which was consistent with the first experiment. A new set of undergraduate accounting students were observers of the same interviews used in experiment one. However, half of the observers received training and half did not. 

    Findings:
    • Students are not any better at detecting deception by observing an interview than random chance.
    • Those who observed the inquiry (open ended questions) are no better at detecting deception than those who just observed the representations (yes/no questions).
    • Those who observed the entire interview with repeated questions are no better at detecting deception than those who observed the inquiry without repeated questions.
    • Those who received training were not any better at detecting deception than those who did not receive training.
    Category:
    Risk & Risk Management - Including Fraud Risk, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Fraud Risk Assessment, Auditors’ Professional Skepticism
    Home:
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  • Jennifer M Mueller-Phillips
    The Effect of Client Lies on Auditor Memory Resistance and...
    research summary posted August 30, 2016 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism 
    Title:
    The Effect of Client Lies on Auditor Memory Resistance and False Memory Acceptance
    Practical Implications:

      These results have important implications for audit practice, as the author shows that the specific techniques used by auditors to gather evidence for building knowledge structures are essential to resisting client influence. This paper also shows that in spite of the responsibility of understanding complex business environments and any resulting indicators, evidence finds that even experienced decision makers have difficulty learning in dynamically complex environments. Improving judgment and decision making in these settings requires enhancing auditors’ development of systems-based mental models.

    Citation:

    Brewster, B. 2016. The Effect of Client Lies on Auditor Memory Resistance and False memory Acceptance. Auditing: A Journal of Practice and Theory 35 (3): 33-50.

    Keywords:
    misinformation effect, memory errors, business risk, and analytical procedures.
    Purpose of the Study:

    Professional auditing standards direct auditors to critically evaluate and verify all client-provided information, in the hope that auditors will resist any client lies that cannot be directly corroborated. Traditional psychology research supports this conjecture because warning individuals about the ambitions of communicators typically bolsters resistance via a suspicious mindset. However, the author believes that features of the audit environment create scenarios in which the auditor is susceptible to client lies, especially blatantly incorrect ones. In particular, if auditors are unable to refute client lies through existing evidence-related memories, they will succumb to a memory error called the misinformation effect. If correct, this would mean that after exposure to a client lie, an auditor’s cognitive processing is tainted, and he/she would gravitate toward the client-provided false memories instead of his/her own true evidence-based memories when subsequently retrieving related information. As a result, the author examines the conditions that moderate auditor resistance toward and susceptibility to believing client-provided lies. 

    Design/Method/ Approach:

    The author completed a study with professional auditors from an international accounting firm with an average work experience of 44 months. He asked them to complete an experimental task, holding one group static and allowing the other to be dynamic. 

    Findings:
    • The author finds no significant differences between dynamic or static KPI understanding type conditions when participants evaluated their comprehension of the industry overview and the tutorial.
    • The author finds that auditors who develop poorly constructed memories of industry-related evidence will favor falsely implanted client communication more than their own real memories during recall.
    • The author finds that the data shows that auditors with better developed, more rigid, and more accessible memories are resistant to favoring falsely implanted client communication more than their own memories and are more likely to identify the client-provided falsehood.
    • The author finds that those who succumbed to the misinformation effect were equally as confident in their own real memories as the auditors who resisted.
    • The author’s findings are consistent with prior research that speculated that auditors with insufficient mental models regarding complex evidence are more likely to have their knowledge manipulated by the client.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Auditors’ Professional Skepticism
  • 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 Effects of Professional Role, Decision Context, and...
    research summary posted July 16, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism 
    Title:
    The Effects of Professional Role, Decision Context, and Gender on the Ethical Decision Making of Public Accounting Professionals.
    Practical Implications:

    In the study, subjects who are less relativistic are less likely to concede to the client. This study identifies an interesting gender difference with respect to the ethical decision-making process between male and female accountants. Given that the lines dividing auditors and tax professionals are increasingly being blurred, firms’ training programs should take into consideration both differences in context and individual differences in experiences due to professional roles. With the increased emphasis on firms’ ethics training, these results add to the premise that one size fits all training programs are unlikely to achieve the desired results, and that firms’ ethics training may need to be tailored to account for different individual approaches to decision making.

    Citation:

    Bobek, D. D., Hageman, A. M., & Radtke, R. R. 2015. The Effects of Professional Role, Decision Context, and Gender on the Ethical Decision Making of Public Accounting Professionals. Behavioral Research in Accounting 27 1: 55-78.

    Keywords:
    ethical decision making, auditors, tax professionals, gender, context, professional role
    Purpose of the Study:

    The purpose of this study is to investigate how professional role (auditor or tax professional), decision context (an audit or tax issue), and gender influence public accounting professionals’ ethical decision making.

    U.S. auditors are bound by professional standards to function as independent, objective evaluators of evidence, and to operate as professional skeptics. In the past decade, auditors have been under increasing attack for abandoning their professional skepticism charge.  Unlike auditors, tax professionals, while also having an obligation to the tax system, face a unique professional position of being required to advocate for their clients. U.S. tax professionals have faced increasing oversight and stiffened penalties in response to the marketing of tax shelters by CPA firms and the provision of overly aggressive tax advice. Tax professionals in the U.S. have become increasingly involved in audits with respect to clients’ tax provisions and the requirements of FASB ASC 740, particularly because income taxes are one of the most frequent causes of the Securities and Exchange Commission’s (SEC) Comment Letters sent by the SEC to its registrants. Thus, while auditors and tax professionals face different environmental constraints, they have both been under increased scrutiny in recent years due to lapses in professional judgment. the marketing of tax shelters by CPA firms and the provision of overly aggressive tax advice. Thus, while auditors and tax professionals face different environmental constraints, they have both been under increased scrutiny in recent years due to lapses in professional judgment. 

    Design/Method/ Approach:

    This study investigates the effects of professional role, decision context, and gender in ethical decision making using an experiment with 134 public accounting professionals with a mixture of auditing and tax backgrounds as participants. Participants are from seven different public accounting firm offices in two different U.S. states. The sample contained 87 auditors and 47 tax professionals separately, and 76 males and 58 females separately.

    Findings:

    The results show that male participants’ professional experience influences their ethical decision making, as auditors are less likely than tax professionals to recommend conceding to the client and to indicate that they would concede when faced with a contentious client issue. The results also indicate that context plays an important role in ethical decision making, as male professional accountants are less likely to recommend that a third party concede to the client in an auditing context than in a tax context, and are less likely to indicate that they themselves would concede.

    Furthermore, the results highlight the importance of individual attributes in making ethical decisions; in particular, accountants’ ethical judgments are influenced by relativism and firm size. In addition, an interesting gender effect is identified in that females appear to use a different decision-making process than males with respect to ethical situations. Specifically, except for the effect of relativism on behavioral intentions, the results obtained for the full sample of 134 professionals appear to be driven by the male participants. When males and females are analyzed separately, professional role, context, firm size, and moral intensity are not significantly related to females’ ethical decision making.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Independence & Ethics
    Sub-category:
    Auditors’ Professional Skepticism, Moral Development and Individual Ethics Decisions
  • Jennifer M Mueller-Phillips
    The Outcome Effect and Professional Skepticism
    research summary posted February 16, 2017 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism 
    Title:
    The Outcome Effect and Professional Skepticism
    Practical Implications:

    These findings demonstrate that, although the profession is calling for more skepticism, the underlying culture may inhibit such behavior if auditors are punished for being skeptical when it turns out there is no misstatement. In relation to consultation prior to skeptical behavior, an internal firm-level training that makes evaluators more aware of outcome bias may be more effective than a subordinate-driven solution if encouraging skeptical behavior. 

    Citation:

    Brazel, J. F., S. B. Jackson, T. J. Schaefer, and B. W. Stewart. 2016. The Outcome Effect and Professional Skepticism. The Accounting Review 91 (6): 1577 – 1599. 

    Keywords:
    audit, evaluation, hindsight bias, outcome effect, and professional skepticism.
    Purpose of the Study:

    The level of audit quality on audit engagements hinges on the amount of professional skepticism exercised by auditors. This viewpoint has led to a renewed focus on addressing auditors’ failure to exercise sufficient levels of skepticism.  Highly skeptical auditors increase the likelihood that material misstatements are detected, but exercising skepticism may also come at a cost when additional work is performed to obtain sufficient and appropriate evidence. The authors experimentally test whether outcome effects exist in supervisors’ evaluations of skeptical behavior. Specifically, does outcome information affect the evaluation of an auditor’s decision to investigate a matter as though the auditor should have “known all along” whether a misstatement existed? 

    Design/Method/ Approach:

    The authors utilize an experiment in which practicing audit seniors were asked to evaluate the performance of a hypothetical staff auditor on his or her engagement. They also administered a survey to investigate auditors’ perceptions of how the outcome of investigating an inconsistency affects how they are evaluated. 

    Findings:
    • The authors find strong support for the prediction that the outcome of an investigation will affect auditors’ performance evaluations. Despite the fact that the staff auditors exhibited the same skeptical judgments and actions, the outcome effect causes their evaluations to provide lower performance evaluations to staff who do not identify a misstatement versus staff who do identify a misstatement.
    • The authors observe that the outcome of the investigation influences the perceived benefit of the investigation, which, in turn, influences whether the evaluator frames the cost of the investigation as lost time or a normal cost of the audit.
    • The authors’ survey results suggest that the participants anticipate that outcome effects will be present in the evaluations of auditors who engage in skeptical behavior.
    • In addition, although one might think that consultation could provide an easy fix for outcome bias in evaluations, the authors find that even when subordinates consult with their supervisors prior to engaging in skeptical behavior and receive permission to proceed, supervisors are unable to purge outcome bias from their evaluations of audit staff.  
    Category:
    Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Auditors’ Professional Skepticism

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