Auditing Section Research Summaries Space

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  • Jennifer M Mueller-Phillips
    “When You Make Manager, We Put A Big Mountain In Front Of Y...
    research summary posted October 31, 2013 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale, 10.0 Engagement Management, 10.03 Interaction among Team Members, 10.04 Interactions with Client Management 
    Title:
    “When You Make Manager, We Put A Big Mountain In Front Of You”: An Ethnography Of Managers In A Big 4 Accounting Firm
    Practical Implications:

    This study points out the paradox that managers find themselves in as they struggle to manage relationships with staff, partners, and clients while simultaneously engaging in non-client productive activities in order to gain notoriety in the firm and impress the partners. The “mountain” referred to in the title of this article represents the different and unpredictable obstacles that managers must overcome in order to reach the other side of their career; partnership.

    For more information on this study, please contact Martin Kornberger.
     

    Citation:

    Kornberger, M., L. Justensen, and J. Mourtsen.2011. When you make manager, we put a big mountain in front of you: an ethnography of managers in a big 4 accounting firm. Accounting, Organizations and Society 36 (8): 514-533.

  • 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.  

  • Jennifer M Mueller-Phillips
    Organizational Error Climate and Auditors’ Predispositions t...
    research summary posted October 3, 2013 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.03 Interaction among Team Members, 10.04 Interactions with Client Management, 11.0 Audit Quality and Quality Control 
    Title:
    Organizational Error Climate and Auditors’ Predispositions toward Handling Errors
    Practical Implications:

    The results of this study imply that an appropriately structured error climate may serve as a “soft” management control tool for an audit organization by encouraging the development of predispositions toward functional error handling behaviors, and reducing the tendency of auditors to engage in dysfunctional error handling behaviors such as ignoring or concealing errors. This increase in functional auditor error management behaviors supports both high quality work results and client cooperativeness. Managers of audit organizations should actively participate in the organization’s error climate by establishing, communicating, and practicing a high error management method. The efforts in actively dealing with the organization’s error climate could be documented and presented to regulators and oversight bodies such as the PCAOB as an integral part of the audit organization’s internal quality control.


    For more information on this study, please contact Ulfert Gronewold.
     

    Citation:

    Donle, M., and U. Gronewold. 2011. Organizational error climate and auditors’ predispositions toward handling errors. Behavioral Research in Accounting 23 (2): 69-92.

  • Jennifer M Mueller-Phillips
    The Effect of Past Client Relationship and Strength of the...
    research summary posted September 26, 2013 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    The Effect of Past Client Relationship and Strength of the Audit Committee on Auditor Negotiations
    Practical Implications:

    The authors note a number of implications for practitioners resulting from this study.  First, auditors need to be aware of the strength of the audit committee and the prior relationship with the client to determine potential dysfunctional results, particularly if dealing with a compromising client.  This could lead to making too large of a concession.  This study also shows the importance of having a strong audit committee and how that strength leads to having an auditor that is in a stronger position to negotiate.  However, it also shows the difficulty that can occur as a result of working on a client with a weaker audit committee.  Further, this study underscores the need to continue searching for other factors that may increase negotiation position in the event of a weak audit committee environment. 
     
    For more information on this study, please contact Helen L. Brown-Liburd.
     

    Citation:

    Brown-Liburd, H. L., and A. M. Wright. 2011. The Effect of Past Client Relationship and Strength of the Audit Committee on Auditor Negotiations. Auditing: A Journal of Practice & Theory 30 (4):51-69.

  • Jennifer M Mueller-Phillips
    The Effects of Prior Auditor Involvement and Client Pressure...
    research summary posted September 26, 2013 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    The Effects of Prior Auditor Involvement and Client Pressure on Proposed Audit Adjustments
    Practical Implications:

    Regulators and investors are concerned that conflicts of interest between auditor and client may result in material adjustments that are waived when they should be proposed.  As a result, certain regulations have been implemented to prevent that conflict (i.e., SOX).  This research indicates that auditors may still favor client preferences when possible. Therefore, the reforms of SOX may not have been sufficient.
    The authors also note that this study mirrors what might result in an audit partner or audit firm rotation in that proposed adjustments are higher when the auditor had no involvement in waiving the prior period adjustments.  The authors state that audit firm rotation is expected to be costly and have a number of other negative consequences.  However, they also note their results show benefits to not having that prior involvement and thus some of the benefits of audit firm rotation (e.g., less conflict of interest/client pressure) could be attained by audit partner rotation. 
     
    For more information on this study, please contact Richard C. Hatfield.
     

    Citation:

    Hatfield, R. C., S. B. Jackson, and S. D. Vandervelde. 2011. The Effects of Prior Auditor Involvement and Client Pressure on Proposed Audit Adjustments. Behavioral Research in Accounting 23 (2):117-130

  • The Auditing Section
    The Impact of Auditor Rotation on Auditor-client Negotiation1
    research summary last edited May 25, 2012 by The Auditing Section, tagged 04.0 Independence and Ethics, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management, 15.04 Audit Firm Rotation 
    Title:
    The Impact of Auditor Rotation on Auditor-client Negotiation
    Practical Implications:

    The study investigates how mandatory audit firm rotation may affect the process of auditor-client negotiations that produce financial statements observed by the public.  Standard setters should be cognizant of the possible implications of mandating rotation.  Mandatory rotation will likely change the auditors’ and clients’ incentives and auditors and clients will likely change their negotiation strategies.  This may result in less cooperation between auditors and clients and in fewer negotiations that end to the satisfaction of both parties (not only in the final audit year prior to rotation but also in non-final years).

    Citation:

    Wang, K. J. and B. M. Tuttle. 2009. The Impact of Auditor Rotation on Auditor-client Negotiation. Accounting, Organizations, and Society 34 (2): 222-243.

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  • The Auditing Section
    The Effect of Auditors’ Use of a Reciprocity-Based S...
    research summary last edited May 25, 2012 by The Auditing Section, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    The Effect of Auditors’ Use of a Reciprocity-Based Strategy on Auditor-Client Negotiations
    Practical Implications:

    The results of this study are important for audit firms to consider in designing their training and guidance for client negotiation. The results suggest that the concession approach leads to increased client satisfaction, retention, and better-negotiated outcomes. Thus, this approach may be useful in allowing the auditor to arrive at an outcome consistent with his/her initial, unstated position while maintaining an adequate relationship with management.

    Citation:

    Sanchez, M.H., C.P. Agoglia, and R.C. Hatfield. 2007. The Effect of Auditors’ Use of a Reciprocity-Based Strategy on Auditor-Client Negotiations. The Accounting Review 82 (1): 241-263.

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  • The Auditing Section
    The Effect of Magnitude of Audit Difference and Prior Client...
    research summary last edited May 25, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    The Effect of Magnitude of Audit Difference and Prior Client Concessions on Negotiations of Proposed Adjustments
    Practical Implications:

    The results of this study are important for auditors to consider because, ceteris paribus, the auditor’s proposed adjustment should not be affected by either the magnitude of the audit difference or prior concessions. The study demonstrates that even when auditors plan and execute quality audits, financial statement quality may suffer when high initial audit differences (client’s unaudited balance - auditor’s independent estimate) and/or prior client concessions exist due to unintentional bias in auditors’ proposed adjustments. Audit firms may want to consider providing formal training opportunities to address this bias and improve negotiation outcomes. Though further research is needed in this area, the authors suggest that the order in which misstatements are negotiated or resolved should be considered.

    Citation:

    Hatfield, R.C., R.W. Houston, C.M. Stefaniak, and S. Usrey. 2010. The Effect of Magnitude of Audit Difference and Prior Client Concessions on Negotiations of Proposed Adjustments. The Accounting Review 85 (5): 1647-1668.

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  • The Auditing Section
    Resolving Disputed Financial Reporting Issues: Effects of...
    research summary last edited May 25, 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.

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  • The Auditing Section
    The Auditor’s Strategy Selection for Negotiation with M...
    research summary last edited May 25, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    The Auditor’s Strategy Selection for Negotiation with Management: Flexibility of Initial Accounting Position and Nature of the Relationship
    Practical Implications:

    The results of the study suggest that audit partners are highly likely to use integrative negotiation strategies (i.e., where both parties experience a “win”), even in the variety of accounting contexts included in the study.  This finding implies that audit partners may routinely look for “wins” for client management, which under certain circumstances, could result in materially misstated financial statements.  The authors suggest that by gaining a more “fine-grained” knowledge of when to utilize the various negotiation tactics, along with the ability to use the tactics effectively, auditors may be even more prepared to deal with negotiations with client management that involve contentious accounting issues.  

    Citation:

    Gibbins, M., McCracken, S., and Salterio, S.E. 2010. The Auditor’s Strategy Selection for Negotiation with Management: Flexibility of Initial Accounting Position and Nature of the Relationship. Accounting, Organizations, and Society 35(6): 579 – 595.

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