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  • Jennifer M Mueller-Phillips
    The Effect of Deadline Pressure on Pre‐Negotiation P...
    research summary posted January 20, 2016 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.01 Budgeting and Audit Time Management, 10.04 Interactions with Client Management 
    Title:
    The Effect of Deadline Pressure on Pre‐Negotiation Positions: A Comparison of Auditors and Client Management.
    Practical Implications:

    This paper provides a more complete analysis on the concessionary behaviors and planned negotiation tactics of both the auditors and the client management in the same negotiation context. The findings can improve auditor practitioners’ self-awareness in the audit adjustment negotiation process and help them better consider the effect of deadline pressure on negotiations. The result that auditors react differently than the clients under the deadline pressure is particularly useful for auditor practitioners to predict the behavior of their clients and to design effective negotiation trainings.  

    Citation:

    Bennett, G. B., R. C. Hatfield, and C. Stefaniak. 2015. The Effect of Deadline Pressure on PreNegotiation Positions: A Comparison of Auditors and Client Management. Contemporary Accounting Research 32 (4): 15071528.

    Keywords:
    pre-negotiation judgments, time pressure, auditor-client negotiation, concessionary behavior
    Purpose of the Study:

    Prior research on auditor-client negotiation mainly focuses on one side of the negotiation. This paper complements prior literature by comparing the pre-negotiation judgments: 1) initial positions and 2) concession behaviors between the auditors and their clients in the same negotiation setting. Because the recent regulatory change on accelerated deadlines of the SEC filings imposes time pressure on both parties, the authors further investigate whether the effect of deadline pressure on the two parties are different. The authors motivate their expectations based on an analysis of economic consequences, prior findings from the audit-client negotiation literature and the flexible rigidity hypothesis of negotiation behavior. Specifically, they examine whether:

    • The clients make more concessions in determining the pre-negotiation positions (i.e., rst oer, goal, and limit) than the auditors. The authors argue the clients will concede more because the costs of no agreement to the clients are substantially higher than the costs to the auditors. In addition, prior auditor-client negotiation research shows the auditors’ negotiation ranges are smaller than managers’ and the auditor concessionary behavior is limited by professionalism.
    • The increase in the pre-negotiation concession behavior due to time pressure is greater for the auditors than the clients. The general negotiation literature finds negotiation parties tend to concede more when time pressure increases. The authors argue the clients will not change their pre-negotiation strategy or positions that much under time pressure because they already expect to concede a greater amount than the auditors.
    Design/Method/ Approach:

    The authors collected the evidence via an experiment conducted during the early 2010s. The authors solicit auditors from the AICPA’s mailing lists and CFOs from an online repository of executive biographies to be the experiment participants and ask them to prepare for an upcoming negotiation about a disagreement on the inventory obsolescence account. The auditors (CFOs) first state their goal for the estimate, the minimum (maximum) amount to accept (i.e., limit), and their initial offer, and then indicate their preferences on specific negotiation tactics.

    Findings:
    • The authors find the concessions on the initial offer, goal estimate and limit are all greater for the CFOs than the auditors. This indicates the client management in general concede more than the auditors in pre-negotiation positions.
    • The authors find auditors concede more on the initial offer, goal estimate and limit in high time pressure state than in low time pressure state. On the contrary, the difference between the concession amounts in the two states is not significant for the management. This indicates when facing time pressure, auditors are likely to make more concessions and the increased concessions are greater than that of the management.
    • The authors find auditors like to use contentious (i.e., remaining firm) tactics in negotiations when time pressure is low but move away from these tactics when time pressure is high.
    Category:
    Engagement Management
    Sub-category:
    Budgeting & Audit Time Management, Interactions with Client Management
  • Jennifer M Mueller-Phillips
    Office-Level Characteristics of the Big 4 and Audit Report...
    research summary posted September 17, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual, 05.08 Impact of Office Size, 10.0 Engagement Management, 10.01 Budgeting and Audit Time Management, 12.0 Accountants’ Reports and Reporting, 12.05 Changes in Reporting Formats 
    Title:
    Office-Level Characteristics of the Big 4 and Audit Report Timeliness.
    Practical Implications:

    This study provides further support for the importance of office-specific characteristics on audit and financial reporting outcomes and provides evidence of the benefit of office-specific industry expertise. The study should be of interest to financial reporters and audit firms interested in reducing audit report lag times and to regulators and investors interested in increasing the timeliness of financial reporting information.

    Citation:

    Whitworth, J. D., and T. A. Lambert. 2014. Office-Level Characteristics of the Big 4 and Audit Report Timeliness. Auditing: A Journal of Practice & Theory 33 (3): 129-152.

    Keywords:
    audit report lag, industry expertise, office-level characteristics, product specialist strategy, timeliness
    Purpose of the Study:

    Timeliness of annual financial reporting information has long been a concern of investors, regulators, financial reporters, and auditors. Recent changes in the audit and financial reporting environment have resulted in longer audit report lags and have increased the importance of identifying factors associated with a timely audit. The authors examine timeliness implications of office specific attributes of the audit firm. Specifically, they examine whether office-specific industry expertise, office size, and the importance of the client to the local office are associated with audit delay (i.e., the time between fiscal year-end and the audit report date). The authors explore the sensitivity of the results to various measures and consider the impact of earnings quality. They examine two types of industry expertise and whether the aforementioned audit firm attributes are associated with a propensity to issue an early earnings announcement.

    Design/Method/ Approach:

    The authors use a regression model to test their hypotheses. They obtain audit delay, audit fees, and other audit-related information from Audit Analytics and financial information from Compustat for the years 20032008. Combining the Audit Analytics and Compustat samples provides a sample of 14,948 firm-year observations after excluding firms not audited by one of the Big 4 auditors.

    Findings:
    • The authors find that office-specific industry expertise is negatively associated with audit delay (for all but the largest quartile of firm offices, suggesting that such expertise allows audit firms and their clients to realize efficiencies within the audit process in the form of reduced post-fiscal-year-end audit time.
    • However, sensitivity analyses suggest that office-specific industry expertise is not significantly associated with audit delay for firms with the lowest accruals quality.
    • Office size and client importance are both positively associated with audit delay.
    • However, the most important clients are associated with a more timely audit.
    • Office-specific industry expertise is positively associated with the propensity to announce earnings substantially early and such expertise garnered via a product-specialist strategy is positively associated with audit delay relative to a low-cost specialist strategy.
    Category:
    Accountants' Reporting, Audit Team Composition, Engagement Management
    Sub-category:
    Budgeting & Audit Time Management, Changes in Reporting Formats, Impact of Office Size, Industry Expertise – Firm and Individual
  • Jennifer M Mueller-Phillips
    Audit team time reporting: An agency theory perspective.
    research summary posted September 16, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 10.0 Engagement Management, 10.01 Budgeting and Audit Time Management 
    Title:
    Audit team time reporting: An agency theory perspective.
    Practical Implications:

    This study contributes to the literature in a number of important ways. First, the authors present evidence that managers still tacitly encourage underreporting by their engagement team, even in a setting without explicit mention of time budgets as a performance metric. Thus, while explicit incentives may have reduced, it appears likely that implicit manager incentives to underreport persist. Second, the results suggest that managers’ tacit encouragement of underreporting is contrary to what the “principals” of the firm appear to want. Further, the authors find a positive association between partners’ beliefs about how likely it is the senior reported all hours worked and their preference for the senior. Third, the agency framework perspective on the phenomenon of underreporting suggests that agency theory can assist researchers, regulators, and practitioners wishing to understand and curb the behavior.

    Citation:

    Agoglia, C. P., R. C. Hatfield, and T. A. Lambert. 2015. Audit team time reporting: An agency theory perspective. Accounting, Organizations & Society 44: 1-14.

    Keywords:
    auditing, agency theory, engagement budgeting, reporting accuracy
    Purpose of the Study:

    This study examines the role agency incentives play in diminishing the effectiveness of firm policies aimed at reducing underreporting of time. Underreporting occurs when an auditor does not record all hours worked on a particular engagement and is believed to negatively affect audit quality, to lead to other unethical and dysfunctional audit behaviors that can increase audit risk, and to result in incorrect information being used in client pricing and retention decisions. As a consequence, audit firm policies expressly prohibit underreporting.

    While some research suggests that explicit incentives to meet time budgets have recently been reduced at audit firms, there is also evidence indicating that audit seniors and staff still feel at least implicit pressure to meet budgets. The authors examine the possibility that both of these findings tell a part of the story. Specifically, they explore whether, and under what conditions, seniors and staff are implicitly encouraged to underreport time through future engagement staffing decisions and the performance evaluation process. Further, the authors consider the extent to which agency theory can serve as a framework for understanding how the incentives of audit managers and partners influence how they view underreporting by their engagement staff.

    Design/Method/ Approach:

    Participants in Experiment 1 were 100 audit managers. Managers had, on average, 9.7 years of audit experience. Participants in Experiment 2 were 119 audit partners. Partners had, on average, 25.8 years of audit experience. The authors conducted the experiments prior to May 2015.

    Findings:
    • When managers’ agency-related incentives conflict more strongly with those of the firm (more desirable client), they tend to tacitly encourage underreporting through their evaluations of the senior’s performance.
    • When the client is less desirable, managers’ preference for underreporters dissipates.
    • These results are consistent with agency theory expectations, as managers behave more like agents, acting in their own interest when their incentives conflict with the firm’s, but acting more in the firm’s interest when there is no strong conflict between their incentives and the firm’s.
    • Managers are also more likely to request an underreporter on a future engagement.
    • In contrast, partners placed in the same setting show no evidence of encouraging underreporting.
    • Thus, the results suggest that managers’ tacit encouragement of underreporting is contrary to what the “principals” of the firm (i.e., partners) appear to want. While firms may have reduced their emphasis on formal, explicit incentives to underreport, it appears likely that implicit manager incentives persist.
    Category:
    Engagement Management, Independence & Ethics
    Sub-category:
    Budgeting & Audit Time Management, Individual & team conduct (e.g. premature signoff - underreporting hours)
  • Jennifer M Mueller-Phillips
    Are Fraud Specialists Relatively More Effective than...
    research summary posted July 22, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 10.0 Engagement Management, 10.01 Budgeting and Audit Time Management 
    Title:
    Are Fraud Specialists Relatively More Effective than Auditors at Modifying Audit Programs in the Presence of Fraud Risk?
    Practical Implications:

    Although both auditors and fraud specialists added non-standard procedures to the audit program, auditors cut the budgets for some standard procedures, making room in the overall audit budget for non-standard additional procedures. In contrast, fraud specialists added standard procedures, but they were not more effective than those selected by auditors, and also provided less budget room for those procedures. The involvement of fraud specialists in planning an audit engagement where fraud risk is present is likely to lead to additional audit effort and cost, possibly without commensurate benefit. However, considering the potential consequences to the auditor of undiscovered fraud, it may be cost-effective to include additional non-standard procedures in an audit program if they improve the probability of discovering a fraud.

    Citation:

    Boritz, J. E., Kochetova-Kozloski, N., & Robinson, L. 2015. Are Fraud Specialists Relatively More Effective than Auditors at Modifying Audit Programs in the Presence of Fraud Risk? Accounting Review 90 (3): 881-915.

    Keywords:
    audit planning, audit procedures, fraud, specialists
    Purpose of the Study:

    Since the passage of Statement on Auditing Standards (SAS) 99 and the Sarbanes-Oxley Act of 2002, policy-makers and regulators have promulgated additional guidance aimed at improving auditors’ performance in assessing and responding to fraud risks of audit clients. Auditors are expected to address fraud risk through the design of their audit methods and programs and by involving specialists. The authors study whether fraud specialists are relatively more effective than auditors in designing an audit program that will address elevated fraud risk. The goal is to examine whether the expertise of fraud specialists can directly contribute to planning the nature and extent of audit procedures, and whether the mix of procedures that such specialists recommend is likely to be more effective and efficient than the procedures proposed by auditors in a setting where ex ante fraud risk is rated at above a low level. By directly examining fraud specialists’ recommendations for an audit plan under conditions of an elevated fraud risk, the authors seek to clarify whether there are benefits in requesting fraud specialists to participate in audit program design.

    Design/Method/ Approach:

    Participants completed an audit case based on an actual company that had issued fraudulent financial statements. Thirty-two fraud specialists and sixteen auditors completed the case  On average, the fraud specialists were 41 years old, had 12 years of specialized fraud-related experience, and six years of auditing experience. The auditors were, on average, 36 years old, had 13.25 years of auditing experience, but no specialized fraud experience. The evidence was gathered prior to November 2010.

    Findings:
    • In a situation with elevated fraud risk, fraud specialists did not select more procedures from a standard audit program than financial statement auditors; nor were the selected procedures more effective than those selected by auditors. This suggests that the benefits of involving fraud specialists in audit planning do not lie in their ability to identify more effective standard audit procedures.
    • When the risk of fraud is other than low, the fraud specialists proposed more additional procedures than did auditors, and the specialist-proposed additional procedures were marginally more effective, but significantly less efficient, than the additional procedures proposed by auditors. This suggests that involving fraud specialists in audit planning can carry benefits for engagements where fraud risk is not low by helping to identify a larger set of effective procedures than even very experienced auditors are able to do.
    • Fraud specialists increased time budgets to reflect the additional effort that they proposed via extensive non-standard procedures. However, although they proposed significantly more additional procedures than did auditors, their proposed time budget increases for those procedures were significantly lower than adjustments proposed by the auditors. 
    Category:
    Audit Team Composition, Engagement Management, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Budgeting & Audit Time Management, Fraud Risk Assessment, Use of Specialists (e.g. financial instruments – actuaries - valuation)
  • Jennifer M Mueller-Phillips
    Does Time Constraint Lead to Poorer Audit Performance?...
    research summary posted October 29, 2013 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.01 Budgeting and Audit Time Management 
    Title:
    Does Time Constraint Lead to Poorer Audit Performance? Effects of Forewarning of Impending Time Constraints and Instructions
    Practical Implications:

    The results of this study suggest that public accounting firms that highlight the need for auditors to get creative and think outside the box, and presumably provide incentives for the auditors to do so may be enabling themselves with the potential to provide superior performance in the face of impending time constraints. Given the many forms of time constraints that exist in the auditing profession, thinking outside the box to create a strategic and efficient allocation of time could greatly improve the work of auditors today.

    For more information on this study, please contact Kin-Yew Low.
     

    Citation:

    Low, K., and Tan, H. 2011. Does time constraint lead to poorer audit performance? Effects of forewarning of impending time constraints and instructions. Auditing: A Journal of Practice and Theory 30 (4): 173-190.

    Keywords:
    forewarning of impending time constraints; “think-out-of-the-box” instructions; time-constrained audit performance.
    Purpose of the Study:

    Time constraints are common to many professions. In the auditing profession, time constraints may present themselves in the form of time budgets, task deadlines, and constraints on available staff.  Auditors generally are forewarned of impending time constraints and therefore have an opportunity to revise their audit plans accordingly. This study investigates the effects of early versus late warning of impending time constraints. The timing of the warning potentially has an effect on the auditor’s preparation to address and cope with time constraints. Additionally, the authors study the effects of the presence of instructions to the auditor to consider modifying the prior year’s audit procedures or develop new audit procedures and hence not to be restricted by prior year’s audit work and what is specified in the firm’s audit manuals. The authors describe these instructions as “thinking out of the box” instructions. The study suggests that time constraints can have a positive impact on auditor performance depending on how the auditor responds to the warning of the constraint. The authors also studied whether warning and instructions changed the stress experienced by auditors as a result of imposed time constraints.

    Design/Method/ Approach:

    Audit seniors, assistants, and supervisors from the Singapore office of three Big 4 firms took part in a computerized experiment that required auditors to plan and conduct audit tests on a client’s inventory obsolescence allowance balance. Factors manipulated between subjects were whether auditors were warned at the beginning or end of the planning stage of the impending time constraints that will be imposed in the completion stage; also, whether, at the planning stage, auditors are provided with instructions to think out of the box. The participants had two and a half years of audit experience, on average. The information for this study was collected prior to November 2011.

    Findings:
    • Generally, auditors tend to perform poorly under time constraints on audit completion.
    • Early warning of impending time constraints, however, mitigates the negative impact on performance in terms of smaller absolute deviation in auditors’ estimate from actual errors.
    • The aforementioned benefit from early warning of time constraint is enhanced by the existence of explicit instructions for auditors to consider alternative audit procedures and to think outside the box.
    • The mere existence of instructions to think outside the box per se does not improve time-constrained performance, but these instructions incrementally improve an auditor’s performance in conjunction with early warning of time constraints. That is, these instructions will not be beneficial if the auditor has no time to modify the existing audit procedures.
    • An additional finding of this study was that auditors experienced greater stress during planning when given an early warning of impending time constraints.
       
    Category:
    Engagement Management
    Sub-category:
    Budgeting & Audit Time Management
  • Jennifer M Mueller-Phillips
    Auditor Workload Compression and Busy Season Auditor...
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.06 Resignation Decisions, 10.0 Engagement Management, 10.01 Budgeting and Audit Time Management 
    Title:
    Auditor Workload Compression and Busy Season Auditor Switching
    Practical Implications:

    The distribution of fiscal year-end companies in an auditor’s client portfolio can place significant strains on the resources of a CPA firm. Auditors are cautioned about the damaging effects of workload compression on the auditor-client relationship. Policymakers should consider auditors’ workloads when enacting new rules and regulations.  

    Citation:

    López, D. M., and G. F. Peters. 2011. Auditor Workload Compression and Busy Season Auditor Switching. Accounting Horizons 25 (2):357-380

    Keywords:
    auditor switching, busy season, December year-end, workload compression
    Purpose of the Study:

    This study investigates the impact of the busy season and auditors’ workload compression on audit resources and the likelihood of auditor switching.

    Design/Method/ Approach:

    This study uses data from Compustat and Audit Analytics to get 10,238 observations comprised of 3,525 different companies across 163 different local auditor offices. 

    Findings:
    • December year-end companies have a lower likelihood of auditor switching than that of non-December year-end companies. This result is consistent with economic predictions of high switching transaction costs for busy season companies and their auditors.
    • The study also finds that the likelihood of switching increases with the level of auditor workload compression, providing evidence that workload compression has a damaging effect on the auditor-client relationship.
    • The likelihood of auditor changes is greater when there are more competing auditors within geographical proximity.
    Category:
    Client Acceptance and Continuance, Engagement Management
    Sub-category:
    Budgeting & Audit Time Management, Resignation Decisions
  • Jennifer M Mueller-Phillips
    The Relationship between Audit Report Lags and Future...
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.01 Budgeting and Audit Time Management, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements 
    Title:
    The Relationship between Audit Report Lags and Future Restatements
    Practical Implications:

    It is important for auditors to understand that extending an audit not only creates the opportunity to collect additional evidence but also increased the time pressure on auditors. Audit firms should consider how to mitigate the time pressure associated with long audit. Further, audit committees should understand the trade-off involved in pressuring the auditors to meet filing deadlines and the effect on audit quality. Finally, regulators should be attentive to the consequences future regulation can have with time pressures on auditors and reduced filing times

     

     

    For more information on this study, please contact Dr. David Hurtt.

    Citation:

    Alan I. Blankley, David N. Hurtt, and Jason E. MacGregor. 2014. The Relationship between Audit Report Lags and Future Restatements. Auditing: A Journal of Practice & Theory 33 (2): 27-57.

    Keywords:
    Audit report lag, restatements, time pressure
    Purpose of the Study:

    It is important for financial statements users to understand what factors could signal a heightened risk for future financial statement restatement. This paper considers whether audit report lag, that is the time gap between fiscal year-end and the date of the auditor’s report, is associated with a heighten risk of future restatement.

    Some believe the audit report lag signals the volume of work expended to complete the audit engagement. Under this belief, the lag is viewed as a proxy for an auditor effort. So an unexpectedly long audit would indicate that additional effort was exerted. Since auditor effort should reduce the risk of restatement, unexpectedly long audit would indicate lower risk of future restatements. However, some believe audit lag indicates the time pressure an auditor is facing to complete the engagement. Since time pressure undermines auditor effectiveness, long audit would increase the risk of restatement. 

    Design/Method/ Approach:

    Audit lag data and restatement data was collected from Audit Analytics for the 2002 through 2009 period. The authors used two statistical models to study the association audit lag may have with future restatements. First, using an audit lag model based on prior research, the authors derived the abnormal or unusual audit lag after controlling for audit risk, client complexity, internal control strength and other influences on lag. In the second model, the authors tested a robust logistic regression model where the variable of interest was the abnormal audit lag derived from the first model.

    Findings:
    • The authors find that there is a positive relationship between abnormal audit report lag times and the probability of a future financial statement restatement. This indicates long auditors are associated with low quality audit.
    • There is a positive relationship between auditor expertise and probability of a future restatement. The authors suggest that expertise brings in difficult engagements with complex audit issues, increasing the lag and the probability of a future restatement.
    • The authors contend that their findings indicate that audit report lags are associated time pressure. 
    Category:
    Accountants' Reporting, Engagement Management
    Sub-category:
    Budgeting & Audit Time Management, Restatements

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