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  • Jennifer M Mueller-Phillips
    The Effect of the Social Mismatch between Staff Auditors and...
    research summary posted April 17, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 10.0 Engagement Management, 10.04 Interactions with Client Management, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
    Title:
    The Effect of the Social Mismatch between Staff Auditors and Client Management on the Collection of Audit Evidence
    Practical Implications:

    Given the extent of audit evidence collected by young staff auditors, the findings of this study have direct implications for workpaper and audit quality. The mismatch of age, experience, and knowledge between staff-level auditors and client management can result in a potentially intimidating situation for the staff-level auditor, and impact decisions made in collecting information and conducting testwork. These results provide new evidence regarding the impact of auditor-client interactions on audit quality. This suggests that firms may want to consider how to manage these social mismatches of their staff.

    For more information on this study, please contact G. Bradley Bennett.
     

    Citation:

    Bennett, G. B., and R. C. Hatfield. 2013. The Effect of the Social Mismatch between Staff Auditors and Client Management on the Collection of Audit Evidence. The Accounting Review 88 (1): 31–50.

    Keywords:
    audit documentation; audit environment; audit evidence; audit quality; auditor-client relationship; intimidation; staff-level auditor
    Purpose of the Study:

    This study analyzes social interactions between staff-level auditors and client management to determine how differences in perceptions may influence decisions regarding the collection of audit evidence. During fieldwork, staff-level auditors have extensive interaction with client management, and evidence suggests these auditors are often socially “mismatched” with client management, in terms of their experience, age, and accounting knowledge. Concerns exist over these staff-level auditors’ desires to avoid the interactions and how it may affect the amount of audit evidence collected. The authors of this study attempt to determine the overall effects of these relationships.

    Design/Method/ Approach:

    Surveys were conducted to gather evidence about audit staff interactions with client management. The results of these studies were used to develop and experiment. Graduate auditing students with approximately 2.5 months average internship experience over one busy season were considered an appropriate and practical proxy for staff-level auditors with minimal experience. Participants in the experiment included 138 Master’s of Accountancy students, 52 percent female and 48 percent male, from a large state university in the Southeast. Participants in the experiment were put into a simulated work environment and asked to review accounts receivable confirmations in which additional information was needed from the client’s controller. Results of the experiment were used to determine the participant’s perception of the audit client and their ability to collect sufficient audit evidence.

    Findings:
    • Social differences between staff-level auditors and client management reduce the likelihood that staff-level auditors will request additional audit evidence via face-to-face meetings with the audit client.
    • Client’s explicit behavior to intimidate the auditor does not necessarily result in a difference in auditor behavior.
    • Allowing participants to request evidence via email increased the likelihood that such evidence was requested.
    • Participants often document their findings in such a way as to minimalize the chance of a reviewer identifying the issue.
       
    Category:
    Audit Quality & Quality Control, Auditor Judgment, Engagement Management
    Sub-category:
    Adequacy of Evidence, Interactions with Client Management, Management/Staff Interaction
  • 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

    Keywords:
    audit adjustments; prior auditor involvement; client pressure
    Purpose of the Study:

    Prior research indicates that prior client-related decisions can influence an individual’s current year decisions.  The purpose of this study is to look at how prior decisions related to waived audit adjustments impact current year proposed audit adjustments.  This is important since individuals might not fully correct prior year adjustments in the current year since it could result in an admission of prior judgment errors. Further, this study tests whether client pressure further exasperates the situation by evaluating auditors in situations where client pressure is higher or lower.  Prior research finds that auditors unknowingly tend to make judgments closer to their client’s wishes in higher pressure situations. SOX was designed to decrease this likelihood.  This study evaluates a post-SOX sample to examine whether auditors are more likely to resist these pressures. 

    Design/Method/ Approach:

    The author conducted an experiment including auditors of the senior associate, manager, and partner ranks prior to November 2011.  The experiment manipulated both client pressure (high and low) and involvement on this client’s prior year audit adjustment (waived prior year adjustment or not involved in the waiving of the prior year adjustment).  Auditors were then asked to propose an audit adjustment for allowance for bad debts. 

    Findings:
    • The authors find that auditors who were not involved in the waiving of a prior period immaterial adjustment propose adjustments that are significantly larger than auditors who had waived the prior period adjustment. 
    • The authors also find that auditors propose smaller adjustments when client pressures are higher (i.e., larger audit client and CFO that is opposed to making the full adjustment). 
    • However, the authors find no evidence to suggest that prior involvement causes even smaller in proposed adjustments when client pressure is higher. 
       
    Category:
    Auditor Judgment, Engagement Management
    Sub-category:
    Audit Scope & Materiality Judgements, Interactions with Client Management
  • The Auditing Section
    The Impact of Auditor Rotation on Auditor-client Negotiation1
    research summary posted May 4, 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.

    Keywords:
    Auditor rotation, auditor independence, auditor-client negotiation
    Purpose of the Study:

    This study is motivated by a demand for research on the potential effects of requiring mandatory rotation of audit firms following the Sarbanes-Oxley Act of 2002. While some believe that mandatory audit firm rotation is the only way to ensure auditor independence, most audit firms and their clients do not believe that mandatory audit firm rotation would impact auditor behavior. This study advances this debate by investigating how mandatory rotation may affect the process of auditor-client negotiations that produce financial statements.  Auditor-client negotiation is important to auditing because it is a natural process of reconciling incentive-induced differences in financial reporting.  Below are the objectives that the authors address in their study: 

    • Investigate how mandatory audit firm rotation (hereafter, mandatory rotation) affects auditor-client negotiations.
    • Examine the process differences in auditor-client negotiation with and without mandatory rotation – examine whether these process differences lead to material changes in the financial statements.
    • Examine the negotiation strategies used by both the auditor and the client and relate those strategies to the negotiated outcomes.  
    • Examine the impact on market dynamics as a result of auditor rotation.
    Design/Method/ Approach:

    The authors collected their evidence via a laboratory negotiation experiment using an abstract setting.  The data was collected prior to 2009.  Participants were graduate business students and were randomly assigned the role of manager (i.e., client) or verifier (i.e., auditor).  Participants were paired, one manager and one verifier, and completed a negotiation task.  For half of the negotiation pairs, mandatory rotation was required after three periods and for the other half of the pairs there were no rotation requirements.  Cash incentives were used to model the “real-world” incentives of clients and auditors.  The negotiation process, auditor and verifier strategies, and outcomes were compared between these two groups.

    Findings:
    • Mandatory rotation reduces the auditor’s relative importance of maintaining a relationship with the client. 
    • Auditors are more likely to use an obliging strategy (i.e. cooperating) under no mandatory rotation, as compared to mandatory rotation.
    • Auditors are more likely to use a strategy of inaction (i.e. unwillingness to compromise) under mandatory rotation (7%) compared to no mandatory rotation (1%).
    • Managers are less likely to send contending messages under mandatory rotation (17.6%), compared to no mandatory rotation (22%).
    • Auditors are less cooperative under mandatory rotation than under no mandatory rotation.
    • The agreement rate of negotiations under mandatory rotation is significantly lower than that under no mandatory rotation.
    • When negotiations result in agreement, the asset values under mandatory rotation are significantly lower (consistent with the auditor’s preferences) than those under no mandatory rotation.
    • In summary, under mandatory rotation auditors adopt less cooperative negotiation strategies, produce results that are more in line with the auditor’s preferences than with the client’s preferences, and less negotiations end in agreement.
    Category:
    Independence & Ethics, Auditor Judgment, Engagement Management
    Sub-category:
    Audit Firm Rotation, Prior Dispositions/Biases/Auditor state of mind, Interactions with Client Management, Audit Firm Rotation
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  • Jennifer M Mueller-Phillips
    The Impact of the Timing of a Prior Year’s Auditor C...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management 
    Title:
    The Impact of the Timing of a Prior Year’s Auditor Concessions on Financial Officers’ Judgments
    Practical Implications:

    The authors examine an important aspect of audit-client history and provide evidence on how the timing of auditor concessions in one period affects financial officers’ negotiation judgments in the subsequent period. They also show the importance of incorporating this variable into auditor-client negotiation studies. 

    Citation:

    Cheng, M. M., H. T. Tan, K. T. Trotman, and A. Tse. 2017. The Impact of the Timing of a Prior Year’s Auditor Concessions on Financial Officers’ Judgments. Auditing: A Journal of Practice and Theory 36 (1): 43 – 62. 

    Keywords:
    auditor-client negotiations, negotiation strategy, concession timing and negotiation history
    Purpose of the Study:

    Auditors and clients frequently engage in negotiations to resolve disagreements over financial reporting decisions. These negotiations ultimately lead to concessions being made either by the auditor, the client, or both. Existing research delves into the effect of strategies employed during negotiations in the current period, but this study differs by examining multi-period effects of negotiation strategies. Specifically, the authors consider the impact of negotiation history by investigating three concession timing strategies (concession-start, concession-end, and gradual concession) used by auditors in the previous negotiation period and their effect on financial officers’ negotiation judgments for the current year audit.  

    Design/Method/ Approach:

    The authors conduct an experiment where financial officers made negotiation judgments after receiving information about an auditor’s negotiation behavior in the prior year. 

    Findings:
    • The authors find that financial officers expect a larger ultimate income-decreasing write-down and expect to provide more concessions to the auditor if their auditors had used a concession-start strategy rather than a concession-end strategy in the prior year.
    • The authors find support for a mediation model in which an auditor’s prior-period concession provided at the end (rather than the start) of the negotiation positively increases managers’ expected ultimate write-down, which then positively affects their satisfaction with the negotiation outcome; in turn, negotiation outcome positively influences manager’s intention to continue a future relationship with the auditor. 
    Category:
    Engagement Management
    Sub-category:
    Interactions with Client Management
  • 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.

    Purpose of the Study:

    The “missing link” between trainee accountants and their senior employees, i.e. partners is the manager. This article suggests that becoming a manager is a rite of passage with two main effects:

    • Destabilization of the manager’s previous identity.
    • Shaping of the new identity as a manager through a set of new practices.

    The authors address the important, yet under-researched, role of the manager through an ethnographic analysis of their fundamental transition from junior trainees to potential partners in the context of a Big 4 Firm. This analysis outlines how managers in a complex network balance being an efficient client manager while also being a good team and time manager; additionally, how managers generate visibility to develop a “fame agenda” is addressed.

    Design/Method/ Approach:

    The authors collaborated with a Big 4 Firm to gather the data.  The data consisted of four sources of empirical materials. First, the Big 4 Firm’s website, newsletters, and other publicly accessible materials were analyzed along with confidential internal documents including employee satisfaction surveys, performance reports, change management surveys, exit surveys, and employment statistics. Second, the research team performed un-obtrusive on site observation including participating in meetings, planning sessions, client site visits, and other internal gatherings. Third, they conducted semi-structured interviews with 17 employees from different divisions of the organization and included partners, managers, and directors. Fourth, researchers shadowed 7 organizational members, managers and directors, for one working day each. The empirical research for this study was conducted between January 2005 and September 2006. However, a second round of interviews with senior executives was conducted from mid- 2009 until May 2010. An ethnographic approach was deemed the most appropriate method to allow researchers to focus on real data from many sources.

    Findings:
    • Managers must manage relationships with junior staff which involves acting as a mentor, a supervisor, a nurturer, and also as a person responsible for reviewing work and providing feedback.
    • Managing client relationships is another key role for a manager. This role involves adjusting behavior towards the client according to the hierarchical position of the client representative as well as handling relationships with global and local clients differently. Relationships with higher ranked representatives and with local clients are more nurtured because of the increased influence that these clients have when deciding to keep the Big 4 Firm as the auditor. Additionally, managers have to find a way to use clients as a vehicle for self-promotion.
    • Managers also have to be able to manage partner relationships. Managers must begin to show interests in different aspects of the firm to impress the partners who are ultimately responsible for the future of the managers. Managers must be able to handle the uncertainty that comes with a partner that can override any and all of a manager’s decisions.
    • However, one of the most important things that managers must be able to do has no technical relevance at all; it is to become visible to the firm. Managers must find time to get involved with firm initiatives in order to essentially gain popularity and increase their chances for promotion. This is referred to in the article as developing a “fame agenda”.
       
    Category:
    Audit Team Composition, Engagement Management
    Sub-category:
    Interaction among Team Members, Interactions with Client Management, Staff Hiring - Turnover & Morale

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