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  • Jennifer M Mueller-Phillips
    Negative Affect: A Consequence of Multiple Accountabilities...
    research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness 
    Title:
    Negative Affect: A Consequence of Multiple Accountabilities in Auditing.
    Practical Implications:

    This study is unique to the accountability literature in that the author examines how professionals’ affective states are impacted by the multiple sources of accountability auditors face from within their firm. The study also contributes to the auditing affect literature by examining how an aspect of the audit environment, accountability, influences negative affect. The study is important for audit practitioners as well. The author finds that the multiple accountabilities that are pervasive in auditing can cause negative affect and that the resulting negative affect can harm low-complexity audit task performance. These findings are important to practitioners in that they identify a source of harm to audit efficiency and audit effectiveness.

    Citation:

    Bagley, P. L. 2010. Negative Affect: A Consequence of Multiple Accountabilities in Auditing. Auditing: A Journal of Practice & Theory 29 (2): 141-157.

    Keywords:
    accountability, multiple accountabilities, negative affect
    Purpose of the Study:

    Accountability is the requirement to justify one’s decisions or actions to another and is operationalized in the audit through the review process. Accountability, an essential part of the audit environment, allows experienced auditors to monitor the appropriateness of conclusions made on the basis of audit work performed predominately by less experienced auditors. Accountability has been extensively examined in accounting literature, with research finding that it has an overwhelmingly positive impact on audit task performance. However, this literature focuses on review from one superior (i.e., a single accountability requirement), whereas auditors are frequently held accountable to multiple parties with various preferences for performance simultaneously. According to psychology research, the increased scrutiny from being held accountable to multiple parties can lead to negative consequences including negative affective (i.e., emotional) responses.

    The purpose of this paper is to examine whether the multiple accountabilities inherent in the audit environment cause auditors to experience negative affect and whether this negative affect impacts audit task performance.

    Design/Method/ Approach:

    One hundred thirty-six auditors in one of three accountability conditions (no accountability, single accountability, or multiple accountabilities) completed both a low-complexity and high-complexity audit task. Immediately following each task, participants answered a series of questions to assess their negative affect. The evidence was gather prior to June 2008.

    Findings:
    • The author finds that auditors confronted with multiple accountabilities experience significantly more negative affect than auditors in the single accountability or no accountability conditions. Auditors in the single accountability and no accountability conditions do not experience significantly different negative affect, indicating that it is multiple accountabilities which induce negative affect.
    • The findings are not task dependent. Auditors in the multiple accountabilities condition experience significantly higher negative affect than those in the single accountability and no accountability conditions when performing both low-complexity and high-complexity tasks.
    • In addition, task complexity itself contributes to negative affect independent from accountability. In particular, the author finds that auditors experience significantly higher negative affect when completing a high complexity task than when completing a low-complexity task.
    • Finally, the author finds evidence that high negative affect can harm low-complexity task performance.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Supervision & Review – Effectiveness
  • Jennifer M Mueller-Phillips
    Learning the ’Craft’ of auditing: a dynamic view of aud...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness, 11.05 Training and General Experience 
    Title:
    Learning the ’Craft’ of auditing: a dynamic view of auditor’s on-the-job learning.
    Practical Implications:

    Although the results in this study are only collected from a single group, audit partners, it provides valuable insights for both audit firms and their employees in respect to the development of technical knowledge in auditing. The results heighten the awareness that professional learning is a complex web of different factors. Audit firms might reconsider the fundamental model of learning in today´s professional environment.

    Citation:

    Westermann, K. D., J. C. Bedard, and C. E. Earley, 2015. Learning the ‘Craft’ of auditing: a dynamic view of auditor’s on-the-job learning. Contemporary Accounting Research 32 (3): 864-896.

    Keywords:
    Auditing, Learning, Apprenticeship, Personnel Development
    Purpose of the Study:

    In the current environment audit practitioners must master a comprehensive body of intricate knowledge in order to obtain the class of professional proficiency requisite to comply with auditing standards, pass over supervisory inspections, and uphold their public responsibility. Besides mandatory requirements to become certified, that is partly retrieved at a university, a significant part of knowledge gained by auditors occurs trough on-the-job-learning. A learner (audit staff) shows how to perform a particular task and eventually this guidance will evoke in mastery of audit procedures by the youngster.

    The researchers in this study are mainly interested in the question how technical knowledge of auditing is created and reinforced in every day practice that is situated within the social context of performing engagements. In more detail the researchers are interested in the processes through which new auditors learn technical knowledge (i.e. the craft of auditing) on the job, relying on candid comments of audit partners to depict these processes within the social and economic factors comprising their everyday work environment of the firm.

    Design/Method/ Approach:

    The authors used a semi-structured interview approach. Thirty practicing audit partners of a single big four audit firm in the USA participated. The interview instruments are developed via several stages: in the preliminary phase comments were received of two audit directors and one manager and in a later stage a pilot test was executed in conjunction with a retired big 4 partner. Interviews were conducted in the late 2008 and the early 2009 and are collected via phone or in person.

    Findings:

    The data in this article reveals that on the job learning is a movable process that is subject to societal and economic forces. The authors have structured their findings in chronological progression of trainee development from hiring towards promotion as an audit senior. Audit partners placed their perspective on learning technical knowledge in the following categories: requirements and induction, learning on engagements, supervisory review and feedback practices and on-the-job learning in the senior role. 

    Most significant detailed expressions by partners were: (1) an important part of technical learning takes place on engagements, but success strongly depends on facing challenging situations and gaining skills via trial and error, (2) audit partners are consistent regarding the magnitude of coaching and supervisory feedback (both formal and informal). It directly improves audit quality and enhances learning in technical accounting knowledge, and (3) on more complex accounting levels audit partners concerned the current structure of senior development. Seniors are less exposed to higher level issues since more complex work is more often being performed at higher level (manager or partner). This structure has only a short term benefit to audit quality because limits the opportunity to engage and learn complex accounting transactions.

    Overall the researchers concluded that effective learning is a long, complex, multifaceted, and integrated process that achieves success trough a delicate balance of specific conditions in order to nurture development.

    Category:
    Audit Quality & Quality Control
    Sub-category:
    Supervision & Review – Effectiveness, Sustainability ServicesTraining & General Experience
  • Jennifer M Mueller-Phillips
    How Do Audit Workpaper Reviewers Cope with the Conflicting...
    research summary posted October 13, 2015 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    How Do Audit Workpaper Reviewers Cope with the Conflicting Pressures of Detecting Misstatements and Balancing Client Workloads?
    Practical Implications:

    These findings have implications for both practice and future research. For example, the PCAOB has raised questions about (1) the thoroughness with which engagement managers and partners review audit documentation, and (2) the extent to which their attention to engagements reflects audit-related risks. Further, the IFAC has acknowledged that reviewers in today’s audit environment have alternative ways in which to conduct their reviews, and prior research suggests that the choice of review format has implications for audit. The results presented here advance the understanding of the factors that influence this choice. The findings provide insight to firms, regulators, and inspectors regarding the impact of workload pressure and misstatement risk on how audit managers and partners conduct their reviews. These issues are increasingly relevant given recent changes to the regulatory environment.

    Citation:

    Agoglia, C. P., J. F. Brazel, R. C. Hatfield, and S. B. Jackson. 2010. How Do Audit Workpaper Reviewers Cope with the Conflicting Pressures of Detecting Misstatements and Balancing Client Workloads? Auditing: A Journal of Practice & Theory 29 (2): 27-43.

    Keywords:
    audit quality, electronic communication, face-to-face interaction, misstatement risk, review process, workload pressure
    Purpose of the Study:

    This study examines how risk of misstatement and workload pressure affect audit workpaper reviewers’ choice of review format. Recently, auditors have witnessed a number of changes in their regulatory environment that have increased their workloads. The advent of electronic communication and electronic workpapers has provided auditors with the means to alleviate certain pressures on firm resources. Electronically reviewing workpapers and transmitting review notes can ease scheduling issues and reduce reviewer travel time as it permits reviewers to review multiple jobs concurrently and from a remote location. However, prior research suggests that face-to-face communication during review has the potential to improve audit quality. Concerns over the effectiveness of reviews are highlighted by recent PCAOB inspections which raise questions about how engagement risk impacts the thoroughness of the review process. Further, the International Federation of Accountants (IFAC) acknowledges current alternatives available to reviewers and advises that explicit consideration be given to the review format choice during the audit planning process. While prior research has concentrated on the impact and extent of review, the study contributes to the literature by focusing on the choice between alternative review formats.

    Design/Method/ Approach:

    The authors surveyed twenty-three practicing auditor managers and partners to learn their beliefs about in-person and electronic communication during review. Seventy-eight percent of survey participants were from international firms, while 22 percent were from large regional firms. For the authors experiment participants were 60 practicing auditors from international, national, and large regional firms. They were primarily managers (43 percent) and partners (50 percent) with an average of 14.5 years of experience. Evidence was gathered prior to July 2009.

    Findings:

    Results of the survey suggest that reviewers view in-person interaction during review as more effective and electronic interaction as more convenient. In addition, reviewers report that they use electronic and in-person communication for roughly an equal proportion of their reviews. Results of the experiment indicate that risk of misstatement and workload pressure interact to affect participants’ review mode choices. Misstatement risk moderates the effect of workload pressure such that, when risk is high, the effect of workload pressure is effectively eliminated. These findings suggest that reviewers perceive reviews involving face-to-face interaction to be more appropriate when effectiveness of procedures is essential to ensure an acceptable level of audit quality and, when risk conditions allow, consider electronic review to be a practicable way to cope with workload pressures associated with a hectic client schedule.

    Given the survey and experimental results, the authors conclude that reviewers will choose to sacrifice convenience when higher risk calls for employing a more effective review format. They document a relationship between risk and review format. Therefore, the authors are able to shed light on how auditors are concurrently reacting to the pressures of client risk and balancing a portfolio of clients while maintaining audit quality.

    Category:
    Audit Quality & Quality Control, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Engagement Quality Review – Processes & Effectiveness, Working Paper Review – Conduct - Biases & Predispositions
  • Jennifer M Mueller-Phillips
    An Accountability Framework for Financial Statement Auditors...
    research summary posted March 30, 2015 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    An Accountability Framework for Financial Statement Auditors and Related Research Questions
    Practical Implications:

    In conjunction with the changes discussed in the paper, as listed below, the authors hoped that their initial research would encourage other scholars to look into auditor accountability and formulate proposals of their own through examining intended and possible unintended consequences of the research questions identified.

    Citation:

    Peecher, M. E., I. Solomon, and K. T. Trotman. 2013. An accountability framework for financial statement auditors and related research questions. Accounting, Organizations and Society 38 (8).

    Purpose of the Study:

    In the past, public company auditing in many countries around the world was self-regulated but due to some major corporate collapses, worldwide changes were implemented. These changes led to entirely new regulatory bodies such as the Public Company Accounting Oversight Board and the Financial Reporting Council in the United Kingdom. Since these changes occurred, some believe audit quality has suffered. This paper attempts to address two overarching questions throughout it. (1) What kind of accountability framework could regulators use to motivate auditors to improve audit quality? (2) What accountability framework could regulators use to evaluate how well auditors have completed their duties? Based on these questions and the analyses of various research topics in psychology, neuroscience, economics and accounting, this paper hopes:

    • To establish that forward-looking estimates are the basis for most financial statement information and that some of these estimates are highly uncertain.
    • To propose an accountability framework with two dimensions:
      • Rewards versus penalties
      • Processes versus outcomes
    • To show that auditors’ current regulatory accountabilities are generally in the form of penalties rather than rewards and depend heavily on audit outcomes rather than attributes of auditors’ judgment processes.
    • To provide evidence that questions the suitability of the current system for improving the quality of auditors’ judgments and the quality of evaluations of those judgment made by inspectors.
    • To identify four potential changes for improvement in the quality of audits.
    Design/Method/ Approach:

    The authors use data and research from a variety of backgrounds including psychology, neuroscience, accounting, and economics and create new exhibits based on that information.  This information is gathered from a variety of journals across a large segment of time. The authors also utilized research questions in the article and attempted to answer each one as they presented it. 

    Findings:

    Based on preliminary research, the authors found:

    • It would be beneficial to identify new ways to reward financial statement auditors.
    • In certain instances steps should be taken to reframe auditors’ current incentives in reward terms.
    • Audit quality would likely increase if auditors were more accountable for the judgment-process quality.

    Based on research regarding the first proposed change, to introduce an auditor judgment rule, the authors found:

    • Practitioner risk taking, compounded with practitioner research and development on ways to improve existing practices, are reduced without a judgment rule.
    • Fear of liability makes it difficult to attract and retain the most talented individuals
    • Market mechanisms would penalize nonperformance even if a judgment rule was introduced.

    Based on research regarding the second proposed change, to add a concurrent element to regulators’ inspections, the authors found:

    • Using retrospective verbal or written accounts of participants’ judgment processes often entail stylization, bias, and omissions due to lapses in memory.
    • Audit working papers are stylized to reduce ambiguity, create a desired portrayal of the judgment process, and give a persuasive account of the auditor’s conclusions.
    • Training and quality-control benefits come from including concurrent reviews of subordinate auditors’ work, as opposed to relying on exclusively retrospective work.

    Based on research regarding the third proposed change, to encourage auditors to be skeptical of their own judgment processes, the authors found:

    • When asked to take the position of a “reasonable investor,” managers were far more conservative than they were with their regular decisions.

    Based on research regarding the fourth proposed change, to reward auditors who take stands on financial reporting quality, the authors found:

    • Providing significant and direct rewards for auditors who uncover fraud has the potential to motivate helpful innovation by auditors to actively search for fraud.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Supervision & Review – Effectiveness, Working Paper Review – Conduct - Biases & Predispositions
  • Jennifer M Mueller-Phillips
    Audit Partner Rotation and Financial Reporting Quality
    research summary posted February 15, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness 
    Title:
    Audit Partner Rotation and Financial Reporting Quality
    Practical Implications:

    This study informs the debates on costs and benefits of audit partner rotation. The results support concerns of the audit profession that audit partner rotation may impair the quality of audited financial information in the initial years of a new partner’s engagement with a client. This impairment appears to be more pronounced for larger clients and clients of non-Big 4 audit firms. Furthermore, the persistence of these quality consequences for non-Big 4 audit firms raises questions about the resource capacity of such firms to cope with imposing regulations. Given that partner rotation has both monetary and social costs, perhaps the decision to shorten partner engagement with a client from seven to five years is not in the best interests of auditors and investors. Ultimately, the costs of an audit will be passed onto investors, and as the study suggests, more frequent rotation may mean more periods of lower financial statement quality in the initial years of a partner’s engagement with a client. Additionally, the study’s city-level industry specialist and office size results suggest industry specialists and larger audit firm offices may have more capacity to absorb and manage partner rotation effects than non-specialists and smaller offices. Such findings support the audit profession’s concern over resource challenges brought on by more stringent partner rotation requirements. 

    For more information on this study, please contact Paul Tanyi.

    Citation:

    Litt, B., D. S. Sharma, T. Simpson and P. N. Tanyi. 2014. Audit Partner Rotation and Financial Reporting Quality. Auditing: A Journal of Practice and Theory 33 (3): 59-86

    Keywords:
    Audit quality, earnings management, financial reporting quality, discretionary accruals, meet or beat, partner rotation, partner change
    Purpose of the Study:

    Audit partner rotation has received considerable attention globally and in the U.S. since Section 203 of the Sarbanes-Oxley Act of 2002 accelerated the rotation period for lead and concurring engagement partners from seven to five years and expanded their cooling-off period from two to five years. Policymakers have rationalized these regulations based on enhanced partner independence and a fresh set of eyes examining the financial statements, thus increasing overall audit quality. However, the audit profession has argued that the loss of engagement partner continuity and client-specific knowledge brought on by increased rotation may actually hinder the quality of the audit. Despite such debate, there is a paucity of research on the effects of audit partner rotation in the U.S., largely due to the absence of publicly available information on audit partners. Using a novel approach to determine audit partner rotation, the authors are able to investigate the effect of rotation on financial reporting quality in the U.S. 

    Design/Method/ Approach:

    After performing procedures to obtain assurance on audit firm compliance with rotation regulations, the authors collect data from 2000 to 2010 for a sample of U.S. public clients that have changed audit firms. From this data, they are able to determine: (1) the first year of a partner’s engagement with a client (the year of audit firm change), (2) the year of audit partner rotation (five years later), and (3) the post-rotation year that a new audit partner leads the audit engagement (the sixth year post-audit firm change). The authors then examine whether financial reporting quality differs between the final two years with an outgoing partner and the first two years with a new partner post-rotation by evaluating discretionary accruals and going-concern reporting for these periods.

    Findings:
    • The authors find that financial reporting quality is lower during the first two years with a new audit partner as compared to the last two years with an outgoing partner. 
    • The authors find that partner rotation has a more adverse effect on financial reporting quality for larger clients of Big 4 auditors and across all clients of non-Big 4 auditors. 
    • The authors find the decline in financial reporting quality to be limited to the first year post-rotation for larger Big 4 clients, but persistent for up to three years post-rotation for non-Big 4 clients.
    • The authors find that non-specialist audit firms and audit firms with smaller offices at the city-level exhibit lower financial reporting quality as a result of rotation.
    • The authors find that financial reporting quality is less negatively affected during the first two years of an audit partner’s engagement with a client relative to the first two years of an audit firm’s engagement with a client.
    Category:
    Audit Quality & Quality Control, Standard Setting
    Sub-category:
    Impact of SOX, Supervision & Review – Effectiveness
  • Jennifer M Mueller-Phillips
    An Examination of the Legal Liability Associated with...
    research summary posted November 10, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.09 Litigation Risk, 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness 
    Title:
    An Examination of the Legal Liability Associated with Outsourcing and Offshoring Audit Procedures
    Practical Implications:

    This study is important to audit practice as it provides an initial view into the effects of outsourcing and offshoring on juror perceptions of the due care exhibited in supervising audit work performance as embodied in assessed damage awards, while also providing perceptions on the expected quality and risk associated with these relationships. The results may be of particular interest to the profession given that this study examines audit work outsourced and/or offshored to India, the country cited as conducting the most outsourced audit work for North American CPA firms. Interestingly, the professional bodies (i.e., NASBA) have chosen not to grant reciprocity of practice for Indian charted accountants (i.e., Mutual Recognition Agreements). India has been denied multiple times while reciprocity has been granted to CPAs/CAs in Australia, Canada, Hong Kong, Ireland, Mexico, and New Zealand (NASBA 2012). The juror perceptions of quality and risk of audit work outsourced offshore, as shown in this study, parallel the concerns expressed by professional bodies.

     

    For more information on this study, please contact Alex Lyubimov.

    Citation:

    Lyubimov, A., V. Arnold, and S.G. Sutton. 2013. An Examination of the Legal Liability Associated with Outsourcing and Offshoring Audit Procedures. Auditing: A Journal of Practice and Theory 32 (2): 97-118.

    Keywords:
    outsourcing; offshoring; audit quality; litigation risk; juror decision-making; auditor liability; counterfactual reasoning.
    Purpose of the Study:

    Accounting firms have steadily increased the use of outsourcing and offshoring of professional services including independent audit procedures. While firms suggest that the work is of higher quality and similar litigation risk, questions remain as to whether public perceptions may be more negative. The purpose of this study is to examine the effect of outsourcing and offshoring of audit work on juror’s perceptions of auditor legal liability when an audit failure occurs.  More specifically, this paper examines liability associated with an audit failure when work is performed by another office of the same firm or outsourced to a separate firm, and whether the work is performed domestically or in another country.  Theory suggests that outsourcing and offshoring of those outsourced audit procedures has the potential to erode the perceived professionalism of auditors’ work as embodied through decreases in perceptions of work quality, increases in perceptions of associated risk, and ultimately more severe damages assessed against auditors during litigation.

    Design/Method/ Approach:

    An experiment was conducted using a 2 (insource vs. outsource) X 2 (onshore vs. offshore) design. The experiment was delivered through an internet application to facilitate the use of a diverse national sample of jury eligible participants. Participants, representing a broad demographic base, were individuals who were over the age of 18, jury-eligible in the US, had no legal or auditing experience, and not CPA’s. Data were collected over a four-day period in December, 2010.

    Findings:

    Results indicate that choosing to outsource audit work to another audit firm is associated with higher compensatory damages in case of an audit failure.  Furthermore, when this third party audit firm is located in a different country (offshoring), outsourcing leads to significantly higher punitive damages.  Surprisingly, jurors assess higher than expected litigation awards for a failure by another domestic office of the firm for punitive damages. This result suggests that the close proximity in terms of both geography and organizational distance of the domestic office of the firm leads jurors to find the audit failure less understandable. Post hoc analyses indicate that potential jurors perceive that work completed by another domestic office of the firm has the highest expected quality and lowest risk, while work that is outsourced offshore is expected to be lowest quality and highest risk—consistent with proximity theory.

    Category:
    Audit Quality & Quality Control, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Litigation Risk, Supervision & Review – Effectiveness
  • Jennifer M Mueller-Phillips
    Characteristics of Relatively High-Performance Auditors
    research summary posted October 29, 2013 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale, 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness 
    Title:
    Characteristics of Relatively High-Performance Auditors
    Practical Implications:

    The findings of this article have implications important to both accounting firms and auditors. If pertinent behavioral skills can be learned, auditors could increase their level of performance by engaging in training to enhance those skills. CPA firms could benefit from identifying characteristics that lead to higher job performance by making those characteristics a focus in the process of hiring personnel. Existing firm employees could emphasize their understanding of the importance of taking a more comprehensive view of the auditing profession and CPA firms could emphasize hiring employees that exemplify a balance of task-oriented aspects, personality aspects, and a willingness to extend standardized tasks to ensure high auditor performance.

    For more information on this study, please contact Constance A. McKnight.
     

    Citation:

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

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

    The job performance of auditors is a main driver of the quality of financial statement audits. Accordingly, audit firms find it appropriate to give auditors performance evaluations to maintain audit quality. This study examines the characteristics of relatively high-performance auditors to assess how the determinants of auditor job performance have evolved from concentration on the quality of judgments made based on technical knowledge and ability to a more overall view of performance which includes tacit knowledge on a broad set of performance attributes. The following are the three possible characteristics of higher-performance auditors that the authors chose to assess:

     

    • Ability to identify  technical knowledge and ability, client interaction skills, and professional attitudes and behaviors as more relevant
    • Higher inclination to extend the standard audit procedures
    • A more proactive and involved internal locus of control i.e., the extent to which a person chooses to be involved with, and influence, a process leading to an eventual outcome.
       
    Design/Method/ Approach:

    This study was conducted using directly reported CPA firm performance evaluations from public accounting firms including the ranks of staff auditor, senior, and manager. The two most recent supervisor-assessed performance evaluations and annual compensation were used. Additionally, auditors provided self-assessments of their performance over the same period. The data was gathered prior to 2011.

    Findings:
    • Higher performing auditors exhibited higher technical knowledge and ability and they placed and emphasis on client interaction skills as well as professional attitudes and behaviors compared to low performers.
    • Auditors who did not rely on standard audit procedures and were more inclined to extend those procedures performed at higher levels than auditors that were more inclined rely on the standard procedures.
    • When auditors are more proactive regarding the performance of audit judgment tasks and decisions i.e. have more of an internal locus of control, they will be associated with a better job performance.
    • Secondary Findings:
      • The relatively high-performance auditors indicated significant awareness of their superior performance in their self-reported performance evaluations indicating confidence in high-performers.
      • Although, compensation varies according to rank and is higher at larger firms, the authors found that firm-reported job performance evaluations do have an impact on auditor compensation.
         
    Category:
    Audit Quality & Quality Control, Audit Team Composition
    Sub-category:
    Staff Hiring - Turnover & Morale, Supervision & Review – Effectiveness
  • Jennifer M Mueller-Phillips
    Firm versus Partner Measure of Auditor Industry Expertise...
    research summary posted October 10, 2013 by Jennifer M Mueller-Phillips, tagged 11.01 Supervision and Review – Effectiveness, 11.02 Engagement Quality Review – Processes and Effectiveness, 11.04 Industry Experience, 11.07 Attempts to Measure Audit Quality, 11.08 Proxies for Audit Quality 
    Title:
    Firm versus Partner Measure of Auditor Industry Expertise and Effects on Auditor Quality
    Practical Implications:

    The findings of this study imply that firm level expertise impacts audit quality but has a greater impact in conjunction with office level or partner level expertise. Similarly, concurring auditors have a greater impact on audit quality when their abilities are paired with those of a lead or signing partner. This study implicitly emphasizes the importance in cooperation and the sharing of intellectual resources among partners in Big 4 firms considering that expertise is not homogeneous across a firm. Additionally, this study has implications on what could result if the Public Company Accounting Oversight Board in the United States decided to require an engagement partner’s signature on the audit report.

    For more information on this study, please contact Hsin-Yi Chi.
     

    Citation:

    Chi, H., and C. Chin. Firm versus partner measures of auditor industry expertise and effects on auditor quality.  Accounting: A Journal of Practice and Theory 30 (2): 201-229.

    Keywords:
    individual partner industry expertise; discretionary accruals; modified audit opinion; audit quality.
    Purpose of the Study:

    This study explores the relationship between Big 4 audit quality and auditor expertise with respect to both the individual partners and the audit firm. The authors used accruals analysis as well as analysis of audit opinions to assess audit quality. To take the study a step further, an examination of the possible existence of differential audit quality between signing auditors whether lead or concurring partners was also performed. An office level perspective was used and deemed appropriate under the assumption that auditor expertise is permanently tied to individual professionals and their client knowledge which cannot be readily captured and distributed across the firm offices; additionally, the individual practice office is the decision-making unit of the firm when it comes to specific clients.

    To accomplish their purpose, first the authors studied whether audit industry expertise is driven by firm expertise, individual partner expertise, or a combination of both. They also studied whether the association between audit quality and industry expertise of the signing auditor specialist was more or less prominent for the lead auditor or the concurring auditor. One would expect that the lead partner generally would exhibit a more prominent association with audit quality than concurring audit specialists because it is the lead partner who is actively engaged with daily audit proceedings; this study aims to discover if that is truly the case. The study assesses the effectiveness of an individual partner-level and firm-level auditor specialists in enhancing audit quality as well as provides evidence regarding industry expertise homogeneity between individual partners within the same firm.  
     

    Design/Method/ Approach:

    The evidence for this study was collected from Taiwanese publicly listed companies audited by the Big 4 firms from 1983 to 2004. Financial data, audit opinions data, and auditor names were obtained from the Taiwan Economic Journal. Taiwan was the chosen location for this evidence because the audit report in Taiwan contains two signing auditor names as well as the firm name. 

    Findings:
    • Both firm-level industry expertise alone and partner- level industry expertise alone are associated with lower accruals. However, a combination of the two creates an effect above and beyond either level of expertise in isolation; therefore, differential discretionary accruals due to industry expertise are driven by a combination of firm and partner expertise.
    • Differential accruals due to industry expertise of signing are primarily driven by the lead auditor rather than the concurring auditor.
    • The differential likelihood of the issuance of a modified audit opinion is primarily attributable to signing auditor specialists and partner-level expertise.
    • Firm level specialists alone are not associated with a higher likelihood of issuing a modified audit opinion. Instead, firm level specialists along with signing auditor specialists create effects above and beyond those observed with auditor specialists alone.
    • Clients of lead signing auditor specialists have smaller accruals and are more likely to receive a modified audit opinion relative to those of non-specialists  whether the auditor specialists works alone or with a concurring auditor specialist.
    • Concurring auditor specialists alone are not associated with higher audit quality.
    • Industry expertise is not homogeneous across individual auditors within the same audit firm in Taiwan.
       
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Attempts to Measure Audit Quality, Engagement Quality Review – Processes & Effectiveness, Industry Experience, Proxies for Audit Quality, Supervision & Review – Effectiveness
  • The Auditing Section
    The Effects of a Supervisor’s Active Intervention in S...
    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, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness 
    Title:
    The Effects of a Supervisor’s Active Intervention in Subordinates’ Judgments, Directional Goals, and Perceived Technical Knowledge Advantage on Audit Team Judgments
    Practical Implications:

    This study suggest that supervisors can not only influence their subordinates’ judgment by intervening in subordinates’ judgment process(es), but can also increase their own biases by intervening. In doing so, their increased biases impact the final decisions regarding the audit testwork. Findings suggest that auditors are not aware of this increase in supervisors’ biases, and, thus are not consciously taking steps to mitigate this effect (e.g., avoiding early interventions). Authors suggest training or policy changes that could lower the risk of additional bias. This could be done by making auditors aware of consequences of intervening in subordinates’ judgments. Policies and/or planning could take additional steps to reduce the amount of superiors’ early interventions as much as possible.

    Citation:

    Peecher, M. E., Piercey, M. D., Rich, J. S., and R. M. Tubbs. 2010. The Effects of a Supervisor’s Active Intervention in Subordinates’ Judgments, Directional Goals, and Perceived Technical Knowledge Advantage on Audit Team Judgments. The Accounting Review 85 (5):  1763-1786. 

    Keywords:
    audit team judgments; client pressure; directional goals; active intervention; technical knowledge
    Purpose of the Study:

    Supervision and review of subordinates’ work is a requirement under GAAS.  However, when supervisors have preferred conclusions in mind (often at a subtle, “subconscious” level) and then intervene to “coach” or “instruct” subordinates’ work and judgment processes, the subordinates’ judgment can become biased in the same direction as their supervisors’. Such biased intervention could not only bias the subordinate’s judgment, but reaffirm the supervisors’ (unconscious) biases.  This study evaluates how the intervention on subordinates’ judgment impacts the supervisor’s finalized judgments for the audit team, and whether technical proficiency impacts this effect. This study primarily evaluates: 

    • Whether audit supervisors (who have preferred conclusions in mind) that intervene and guide their subordinates judgments are more biased in their final judgments, compared to those supervisors who do not intervene (but also have preferred conclusions in mind).
    • How the supervisors’ technical knowledge may influence the potential biases on his/her final judgment. 
    • Whether such effects of intervening are conscious or sub-conscious.
    Design/Method/ Approach:

    For the first experiment, financial services industry specialist auditors are used in a valuation task. The participants were paired (one subordinate, one supervisor) based on their experience. Subordinates were comprised of staff and senior staff; supervisors were in-charges and seniors. Participants were asked to review financial information for a hypothetical client and then to assess the discount rate. Supervisors were asked to review the subordinates’ discount rate before finalizing the audit team’s discount rate.

    For the second experiment, auditors from a major accounting firm were asked to read the same materials provided to participants in the first experiment and then rate how biased the audit team’s estimate is from the best possible estimate (from “extremely low” to “no bias” to “extremely high”).

    Findings:
    • The final judgment of audit supervisors who intervened in their subordinate’s judgment process was influenced more than the judgment of those supervisors who did not intervene, even though both sets of supervisors had the same directional goals/preferences.
    • Audit supervisors’ perceived technical expertise reduced the effects of their initial preferences/directional goals.
    • While auditors believe that directional goals/preferences bias supervisors’ finalized judgments, they do not appear to believe that intervening with subordinates’ judgment increases this bias. This suggests that the increases in the bias are not conscious or acknowledged.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Auditor judgment in the workpaper review process, Supervision & Review – Effectiveness
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  • The Auditing Section
    The Effects of Audit Review Format on Review Team Judgments
    research summary last edited May 25, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
    Title:
    The Effects of Audit Review Format on Review Team Judgments
    Practical Implications:

    The results of this study are important for audit firms to consider when planning how workpaper reviews will be performed, when setting preparers’ review expectations and when reviewing electronic workpapers.  Though the paper does not discuss these implications explicitly, the findings point to the following potential implications auditors may consider:

    • Anticipation of face-to-face review by preparers tends to result in workpapers of higher quality.
    • Face-to-face reviews tend to be of higher quality than electronic reviews.
    • Workpapers prepared in anticipation of an electronic review tend to be lower in quality than the workpapers prepared in anticipation of a face-to-face review.  Thus, electronic reviewers may consider decreasing their reliance on such workpapers, spending more time reviewing the workpapers, providing more review notes, and/or increasing the amount of rework they require from the preparers.
    Citation:

    Agoglia, C.P., R. C. Hatfield, and J. F. Brazel. 2009. The Effects of Audit Review Format on Review Team Judgments. Auditing: A Journal of Practice and Theory 28(1):95-111.

    Keywords:
    documentation; review process; judgment quality; electronic review; face-to-face review.
    Purpose of the Study:

    The increasing use of electronic workpapers enables reviewers to review workpapers electronically (i.e., remotely, communicating via email), rather than face-to-face (i.e., reviewing on-site with the opportunity to discuss review notes and ask/answer questions in person).  Recent accounting research finds that review mode can affect the judgments of auditors preparing workpapers.  In this study, Agoglia et al. investigate the extent to which review mode (electronic or face-to-face) affects the quality of documentation in the workpapers and the mechanism behind this relationship.  In addition, the authors investigate whether reviewers are able to discern and compensate for these documentation quality issues.

    Design/Method/ Approach:

    Agoglia et al. collect their evidence via an experiment in which auditors act as mock preparers or reviewers of workpapers.  Participants prepare preliminary going-concern evaluation workpapers for a hypothetical client.  Specifically, they are required to document evidence for a preliminary going concern conclusion.  Preparers are randomly assigned to one of two conditions: face-to-face review or electronic review.  Preparers in each condition are informed that their work will be reviewed face-to-face or electronically, depending on the condition.  

    Reviewers are randomly assigned to preparers and informed that they will review the workpapers either face-to-face or electronically, depending on the preparer’s condition.  The reviewers are required to leave notes and assess quality, reliability, and completeness of the working papers, as well as any additional work still required to be done.  The reviewers’ judgments are then compared with those of experts (audit partners) who receive the same materials as the preparers.  The experimental data was collected in the early 2000’s.

    Findings:
    • The judgments of the face-to-face workpaper reviewers are, on average, essentially the same as those of the experts (audit partners), indicating they are of relatively high quality.  Conversely, the judgments of the electronic workpaper reviewers are significantly different, on average, than those of the experts (i.e., of lower quality).
    • The experts consider the evidence documentation provided by the electronic review group to be of lower quality than the documentation provided by the face-to-face preparers.  However, reviewers do not appear to recognize this issue.  Specifically, the authors find that the documentation quality assessment gap (reviewer minus expert mean assessment of documentation quality) is significant for the electronic review group, while it is insignificant for the face-to-face group – indicating that while experts and reviewers have similarly high perceptions of documentation quality of the face-to-face preparers, reviewers perceive workpapers of electronic review preparers to be of higher quality than do experts. The authors show that the documentation quality assessment gap negatively affects electronic reviewers’ judgment quality. In other words, it is electronic reviewers’ inability to assess the lower quality of the workpaper documentation that is the mechanism behind their lower reviewer judgment quality.            
    • Electronic reviewers rely on the preparer’s workpapers and would require additional work to the same  extent as the face-to-face reviewers.  Further, electronic reviewers take about the same time to review and give about the same number of review notes as the face-to-face reviewers.  This finding is best viewed in light of the finding in prior research showing that reviewers believe electronic reviews are less effective.  However, electronic reviewers do not appear to be compensating for the lower quality of workpapers prepared in anticipation of electronic review.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Supervision & Review – Effectiveness, Working Paper Review – Conduct - Biases & Predispositions
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