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  • Jennifer M Mueller-Phillips
    Information Sharing during Auditors’ Fraud Brainstorming: E...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 06.08 SAS No. 99 Brainstorming – effectiveness, 11.03 Management/Staff Interaction 
    Title:
    Information Sharing during Auditors’ Fraud Brainstorming: Effects of Psychological Safety and Auditor Knowledge
    Practical Implications:

    Staff and seniors auditors often times have more interaction with client personnel than other members on the team. These interactions provide them with insight into fraud-relevant information which is extremely valuable to the audit. It is important that partners create a group dynamic that is both supportive and nonthreatening in order to facilitate idea sharing. Firms can make brainstorming more effective by providing leadership training to partners encompassing these ideals.

    Citation:

    Gissel, J. L., and K. M. Johnstone. 2017. Information Sharing during Auditors’ Fraud Brainstorming: Effects of Psychological Safety and Auditor Knowledge. Auditing, A Journal of Practice and Theory 36 (21): 87-110.

    Keywords:
    Audit planning; fraud brainstorming; information sharing; leadership; psychological safety
    Purpose of the Study:

    Brainstorming related to fraud is an important step during an audit. This study investigates the effects that perceived psychological safety and auditor knowledge have on how auditors interact during brainstorming. Specifically, the magnitude to which these factors affect an auditor’s willingness to share privately known, fraud-relevant information. The authors research under the assumption that a partner’s leadership is the driving force behind an auditor’s perception of psychological safety during brainstorming.

    Design/Method/ Approach:

    First, the 71 participants (38 staff and 33 seniors) reviewed case materials related to fraud-relevant risks. Afterwards, the participants watched a simulated brainstorming session. In the video the psychological safety of the situation was altered based on how the partner leading the session communicated. Results were determined based on the auditors’ reaction to the simulation and audit knowledge. The audit knowledge was measured by months of experience and familiarity with SAS NO. 99 and revenue recognition issues.

    Findings:

    The authors find the following:

    • Less-knowledgeable auditors are more likely to share privately known, fraud-relevant information in a setting they perceive as supportive and nonthreatening.
    • Alternatively, psychological safety does not affect more-knowledgeable auditors on their willingness to share such information. The authors believe this is due to experienced auditors understanding the critical importance of relaying this information to the team.
    • Less-knowledgeable auditors still want to contribute to the meeting during less psychological safe meetings. However, instead of providing privately known information, they chose to share commonly known, fraud-relevant and fraud irrelevant-knowledge. This is viewed as a safer choice because it is likely not controversial or surprising. 
    Category:
    Audit Quality & Quality Control, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Management/Staff Interaction, SAS No. 99 Brainstorming – effectiveness
    Home:

    http://commons.aaahq.org/groups/e5075f0eec/summary

  • Jennifer M Mueller-Phillips
    The Effect of a Superior’s Perceived Expertise on the P...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction, 11.04 Industry Experience 
    Title:
    The Effect of a Superior’s Perceived Expertise on the Predecisional Distortion of Evidence by Auditors
    Practical Implications:

    Most importantly, the findings of this study educate on the audit quality implications of a subordinate making judgments with knowledge of their superior’s preference. While knowledge of a superior’s preference may negatively affect the objectivity of audit judgments, the findings suggest that is also has the potential to improve audit judgment quality. Second, possible cross-nation variation in audit judgment has important implications for the audit of multinational organizations and offshoring of audit work, among others. 

    Citation:

    Kim, S. and N. Harding. 2017. The Effect of a Superior’s Perceived Expertise on the Predecisional Distortion of Evidence by Auditors. Auditing: A Journal of Practice and Theory 36 (1): 109 – 127.

    Keywords:
    audit quality, culture, predecisional distortion, superior’s expertise, Australia, and South Korea
    Purpose of the Study:

    Auditors are influenced by the known preferences of their superiors such that they are motivated to make judgments that favor those preferences. In this study, the authors examine the potential for the influence of a superior’s known preferences to positively affect audit quality, and whether that influence varies across nations that differ in their hierarchical culture. There is a potential for a superior’s preference to have information value such that a judgment favoring the superior’s preference may not be entirely non-normative; however, there is an implicit assumption that this is a threat to the objectivity of auditor judgments and detracts from audit quality. With this study, the authors hope to address a gap in the existing literature and, in doing so, to contribute to an understanding of what superiors should communicate to their subordinates in order to enhance audit quality. 

    Design/Method/ Approach:

    The authors conduct an experiment in which auditors from Australia and South Korea evaluate a number of going concern evidence items and then make a judgment as to whether the firm for which the evidence items relate would continue as a going concern. 

    Findings:
    • The authors find that auditors exhibit greater levels of predecisional distortion toward the known preference of a superior perceived to possess higher levels of expertise as opposed to those perceived to have lower levels of expertise, and this is the case for auditors in both Australia and South Korea.
    • The authors find no evidence of differences in the level of predecisional distortion exhibited by auditors from Australia and South Korea. 
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Industry Expertise – Firm and Individual, Management/Staff Interaction
  • Jennifer M Mueller-Phillips
    Concession, Contention, and Accountability in Auditor-Client...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
    Title:
    Concession, Contention, and Accountability in Auditor-Client Negotiations
    Practical Implications:

    This paper extends previous work by examining how clients’ use of contending tactics affect auditors’ decisions during a negotiation, which separates itself from the research of the past by investigating the clients’ current negotiation tactics, not the tactics of the past. This paper also introduces the level-of-aspiration theory into consideration for auditor negotiation literature.

    Citation:

    Bergner, J. M., S. A. Peffer and R. J. Ramsay. 2016. Concession, Contention, and Accountability in Auditor-Client Negotiations. Behavioral Research in Accounting 28 (1): 15-25

    Keywords:
    auditor-client negotiations, accountability, concurring partner review, and level-of-aspiration theory.
    Purpose of the Study:

    This study focuses on investigating how tactics employed by a client during negotiations impact experienced auditors’ propensity to waive material adjustments and whether the salience of a concurring partner review (CPR) can affect these negotiations. The audit profession as a whole remains fixated upon auditor independence and financial statement quality, so it is important to examine potential tactics by a client since negotiations directly affect the resulting financial statements. The authors of this study hope to expound upon existing literature by examining how a client who is concessionary or contentious during the negotiation may affect its outcome. In addition, they study whether a CPR reduces auditors’ propensities to waive material adjustments. 

    Design/Method/ Approach:

    The authors conduct an online experiment in which auditors make decisions about the audit of a hypothetical client. They manipulate two independent variables: client tactics and CPR salience.

    Findings:
    • The authors find that auditors are more likely to waive material adjustments when clients use contending tactics during negotiations. This particular results varies from previous studies that examined negotiation outcomes involving contentious clients. The former studies examine pre-negotiation situations where the client has been contentious in the past, this study finds that auditors react differently when the client is being contentious during the current negotiation.
    • The authors find that the level-of-aspiration (LOA) theory may describe auditors’ decisions regarding contentious clients. Reciprocity theory has been used in the past but does not explain these results. Reciprocity theory predicts that auditors will respond to a contentious client by becoming more contentious, while LOA predicts the opposite. Because this study finds that the auditor conceded to the wishes of the contentious client, the results follow LOA.
    • The authors find that the presence of an existing quality control procedure mitigates the auditors’ propensity to waive material adjustments.
    Category:
    Audit Quality & Quality Control, Engagement Management
    Sub-category:
    Interactions with Client Management, Management/Staff Interaction
  • Jennifer M Mueller-Phillips
    The Influence of Mood on Subordinates’ Ability to Resist C...
    research summary posted August 30, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions, 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
    Title:
    The Influence of Mood on Subordinates’ Ability to Resist Coercive Pressure in Public Accounting
    Practical Implications:

     This study should give pause to investors, auditors and regulators about the potential willingness of subordinate auditors to acquiesce to a superior’s unethical request. As such, the accounting profession should make sure to have a better understanding of the nature of and solutions to the problem such as changes in firm/team culture, personnel placement, etc. Additionally, audit firms can better use this information to understand which employees may be most susceptible to such negative influence and preempt such events.

    Citation:

     Johnson, E. N., D. J. Lowe, and P. M. Reckers. 2016. The Influence of Mood on Subordinates’ Ability to Resist Coercive Pressure in Public Accounting. Contemporary Accounting Review 33 (1): 261-287.

    Keywords:
    Affect, Mood States, Unethical Acts, Obedience Pressure, Superior-Subordinate Relationships
    Purpose of the Study:

    This study examines the relationship between subordinate auditors’ various affective states (i.e. mood/emotion) and their effect on auditors’ willingness to comply with a superiors’ unethical directive in six common auditing scenarios.  The authors also employ more real-world event triggers and scenarios compared with previous research.  This study seeks to better refine and test the broad constructs of mood used in previous research.

    Design/Method/ Approach:

    Sample: 118 audit seniors from two large international public accounting firms

    Experiment: Create a broad distribution of arousal, fear and insignificance among participants by manipulating two aspects of the audit client CEO (high/low dominance and high/low prestige) and one aspect of the auditor (above/below average work-life history).

    Analyses: 2x2x2 between subjects ANOVA using median splits on each measured variable: fear, insignificance and arousal

    Findings:

    Regardless of affective state manipulations, the audit seniors express a high level of willingness to comply with a superiors’ unethical direction.  However, this willingness to comply is increased when auditors are made to feel more insignificant (i.e. weak/low power position relative to others) and fearful (i.e. elevated uncertainty and lower perceptions of control regarding future events and circumstances) but decreased when auditors are in an active, positive mood state (i.e. arousal).  Interestingly, these results obtain despite significant doubt by the firms’ senior management who reviewed the task that any of their subordinates would express willingness to engage in such behavior.  As such, auditors may be more willing to engage in or overlook unethical behavior than previously thought.  

    Category:
    Audit Quality & Quality Control, Audit Team Composition, Independence & Ethics
    Sub-category:
    Management/Staff Interaction, Moral Development and Individual Ethics Decisions, Staff Hiring - Turnover & Morale
  • Jennifer M Mueller-Phillips
    Fear and Risk in the Audit Process
    research summary posted November 24, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
    Title:
    Fear and Risk in the Audit Process
    Practical Implications:

    Our analysis of fear helps better understand the relationship between comfort, confidence and fear in the audit process from the perspective of risk. On one hand, it suggests that confidence (self-confidence, confidence in work instrument and confidence in colleagues) without fear is a risky cocktail for auditors, who will not be sufficiently vigilant in carrying out their mission. On the other hand, it shows that fear without confidence is also a dangerous combination, which may induce auditors to maintain at a distance (and thus ignore) the inherent risks of their responsibilities. Ultimately, a sense of fear curbed by confidence and a sense of confidence tempered by fear is what enables public accountants to develop their ‘practical intelligence’, and thus to become comfortable without overlooking the risks of their job. Accordingly, the main implication which falls out of our study is the necessity for audit firms and audit regulators to create the conditions for the development among auditors of the right mix of fear and confidence.

    For more information on this study, please contact Henri Guénin-Paracini.

    Citation:

    Guénin-Paracini, H., Malsch B. and A. Paillé-Marché. 2014. Fear and risk in the audit process. Accounting, Organizations and Society 39 (4): 264-288

    Keywords:
    Auditors, audit process, fear, risk, practical intelligence, defensive strategies
    Purpose of the Study:

    While a number of studies have highlighted the role played by the feeling of comfort in audit work, comfort, in real audit settings, only arises at the very end of the audit task. The rest of the time, auditors seek to feel comfortable, but are inhabited primarily by fear. This became apparent to us in the course of an ethnographic study aimed at better understanding the work performed by auditors in the field. Of course, fear is not experienced by auditors all day long; it varies in intensity from individual to individual and depending on the circumstances; however, in general, public accountants have to deal with this emotion. If one considers that fear is the emotional experience of risk, this should hardly come as a surprise. In the post-Enron climate and after the enactment of the Sarbanes-Oxley Act, the risks associated with auditing have increased dramatically. Yet, associated with the perception of risk, the experience of fear and the role that fear plays in risk management processes have largely been overlooked in the literature. Our paper aims to ‘emotionalize’ and challenge the dominant cognitive orientation adopted by academics and regulators in their understanding of audit risks and auditors’ skepticism. It seeks better understand the role played by fear in audit practice, focusing specifically on the following questions: 1) What exactly is it that auditors worry about? 2) How do auditors manage fear in the field? 3) How does fear shape, and how is it shaped by, auditors’ work activity?

    Design/Method/ Approach:

    The research evidence was collected as part of a field study.

    • Seven audit teams including nine partners, five managers, 11 seniors and 19 assistants, were monitored in real time in June and July 2002 and between November 2003 and July 2004 (455 hours of observation).
    • Numerous documents were examined.
    • Interviews were conducted with four partners, three managers, eight seniors and 16 assistants.

    The psychodynamics of work theory of Dejours was used to interpret the data.

    Findings:
    • Confronted with technical knowledge and methodological standards’ limitations, auditors are nevertheless asked to certify the unknowable (i.e. to turn uncertainties into quasi certitudes), while being often reminded by the media that a failure on their part can have serious consequences. This ‘impossible mission’ creates fear within them. They are afraid of not detecting significant anomalies (a risk always present in auditing), and feel anxious about the judgments that they and others may pose over their possible mistakes.
    • Auditors manage their fear in two different ways. On one hand, they cultivate it through informal and formal techniques to stimulate vigilance, encourage self-surpassment, mitigate the ‘anesthetizing’ effect of habit, and maintain reputation. On the other hand, they strive to alleviate their fear before the end of each audit engagement, in order to convey their conclusions with a certain degree of comfort.
    • In the field, auditors finally become comfortable (i.e. quell their fear) either by mobilizing their ‘practical intelligence’ (which helps them handle that which, in their mission, cannot be obtained through the strict execution of standardized procedures) or by adopting defensive strategies (such as distancing themselves from work-related problems, mechanically applying audit methodologies, or relaxing their conception of a job well done). 

     

    Category:
    Audit Quality & Quality Control, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Assessing Risk of Material Misstatement, Management/Staff Interaction, Prior Dispositions/Biases/Auditor state of mind
  • 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
    Prior Exposure to Interviewee’s Truth-Telling &...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.04 Management Integrity, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
    Title:
    Prior Exposure to Interviewee’s Truth-Telling (Baselining) and Deception-Detection Accuracy in Interviews
    Practical Implications:

    Although baselining appears to affect behaviors an interviewer perceives as deceptive, this study does not find evidence that baselining improves the accuracy of deception detection.  However, baselining does appear to increase the accuracy of identifying truthful interviewees.  The authors suggest that training interviewers in deception detection might improve the accuracy of their detection rates.  They note that very few participants in their study had had training in detecting deception and that future research may prove useful in this area.

    For more information on this study, please contact Chih-Chen Lee.
     

    Citation:

    Lee, C-C. and R. Welker. 2011 Prior Exposure to Interviewee’s Truth-Telling (Baselining) and Deception-Detection Accuracy in Interviews. Behavioral Research in Accounting 23 (2): 131-146.

    Keywords:
    Deception detection; baselining; audit interviews.
    Purpose of the Study:

    This study examines if the effect of baselining (acquiring knowledge of an interviewee’s truth-telling behavior prior to attempting to detect deception) increases the ability of an interviewer to accurately assess deception during an interview.  Specifically, the authors examine:

    • Whether interviewers identify different indications of deceptive behavior for familiar interviewees than for unfamiliar interviewees; and
    • If deception detection is more accurate in an interview with a familiar (baselined) interviewee than an unfamiliar (non-baselined) interviewee.
       
    Design/Method/ Approach:

    208 students in junior level accounting courses were randomly paired into dyads consisting of an interviewer and interviewee.  The dyads were then divided into three treatment groups.  In one group, the interviewer baselined the interviewee engaging the interviewee in multiple truthful dialogues prior to a focal interview with the same interviewee where the interviewee may have either been honest or dishonest (interview of same person).  In the second group, the interviewer observed the truth telling behavior of one interviewee before the focal interview with a different interviewee (interview of different person).  In the third group no prior interview took place before the focal interview (No prior interview).  The interviewer’s task in all groups was to determine which interviewee statements in the focal interview were truthful and, which were deceptive.  The data were collected prior to 2011.

    Findings:
    • Interviewers who were familiar with the interviewee (baselined “interview of same person” group) perceived more behaviors as indicative of deception than did interviewers in either the “interview of different person” group or “no prior interview” group (9.8 behaviors indicative of deception compared to 8.0 behaviors indicative of deception, on average).
    • Interviewers of familiar interviewees identified behaviors such as providing irrelevant information, negative comments, and scratching as being more suspicious than did interviewers in either of the other groups.  Additionally, interviewers of familiar interviewees found the act of smiling to be a less suspicious behavior than did interviewers in the other two groups.  This indicates that familiarity with an interviewee affects which behaviors an interviewer identifies as suspicious.
    • No statistical difference was found in deception detection accuracy between the three groups indicating that familiarity (baselining) did not improve the accuracy of deception detection.
    • However, the interviewer’s accuracy of assessing an interviewee’s truthfulness was much higher when the interviewer was familiar with the interviewee.
       
    Category:
    Audit Quality & Quality Control, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Models, Management Integrity, Management/Staff Interaction
  • Jennifer M Mueller-Phillips
    Gathering Evidence through Enquiry: A Process Improvement...
    research summary posted September 19, 2013 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
    Title:
    Gathering Evidence through Enquiry: A Process Improvement Focus
    Practical Implications:

    Given the results, the study provides evidence that there may need to be some additional guidance or tools used by auditors to stimulate the planning of client inquiries in order enhance the reliability of audit evidence obtained from client inquiry.  Auditors may benefit from having some high-level guidelines and framework to prepare and plan for meetings where they will be inquiring of management.  There would be benefits to providing a loose framework of items to consider before making an inquiry of management. This could increase the reliability of the inquiries as a form of evidence.  If the information obtained through inquiry is more reliable, the judgments and decisions that an auditor makes based on the inquiries may achieve a higher level of audit quality.

    For more information on this study, please contact Guoping Liu.
     

    Citation:

    Liu, Guoping. 2012. Gathering Evidence through Enquiry:  A Process Improvement Focus.   Behavior Research in Accounting 24 (2): 153-175.

    Keywords:
    Audit enquiry, cognitive planning, decision aids, experiment
    Purpose of the Study:

    As the accounting guidance continues to implement standards that require client management to make even more estimates in their financial statements, auditors have to rely on inquiries of client management as means of obtaining of audit evidence.  The critical aspect of this notion is how to make information obtained from management inquiries a more reliable form of audit evidence.  In order to make the evidence more reliable, it is important to determine what improvements in the inquiry process need to be made. 

    Audit inquiries are a key aspect of seeking information regarding the company’s financial and non-financial information.  Inquiries could include obtaining information regarding significant fluctuations in financial information, changes in the business, assumptions made in estimates, the rationale behind complex business transaction as well as other aspects about a client.

    The authors develop two types of decision aids and examine how these aids impact the inquiry process in which auditors engage with management.  The author believes that these decision aids may help improve how auditors plan for inquiries of client management as opposed to explicitly indicating how the inquiry process should occur.   The two types of decision aids are:

     

    • Theory-based decision aid:    This is based on psychology-based theory that someone who plans for the inquiry procedure by creating a mental simulation of its conversation with management will be better prepared to successfully completes the inquiry process.  Cognitive planning could ultimately improve the task performance (but not by prescribing specific behavior) by providing only simple task instructions to assist in planning for an inquiry. 
    • Practice-based decision aid:  This is based on the CICA 360 model that focuses on providing a basis for developing a practice-aid for the planning of client management inquiry,  This model focuses on the reliability of the evidence obtained through the inquiry including the reliability of the interviewee, the effectiveness of the interviewer, the quality of the information, the credibility of the findings noted, and how the information is integrated and synthesized by the auditor into the audit evidence.  The author develops a list of matters to consider in preparing for the client management inquiry.  Using a practice-based planning tool, the auditors will improve how auditors plan for the inquiries as compared to performing a checklist of required steps in carrying the inquiry task.


     

    Design/Method/ Approach:

    The participants consisted of 150 Master-level students (from two Canadian universities) who have approximately 6-24 months of audit experience.  The experiment was a 1x3 between-subject research design.  The participants were divided into one of three groups:  base, cognitive planning and practice aid groups.  The base group was provided the background information and then given the instruction to describe how they would perform the inquiry of management.  The cognitive planning group was given more instruction than the base group and was instructed to consider the information the auditor would like to obtain, how to obtain such information during the inquiry, and sequence of steps to carry out the inquiry.  The group is then asked to describe how they would perform the inquiry of management.  The practice group was given the practice-aid that listed the matters to consider in planning the inquiry in detail

    Findings:
    • Comparing the results of the cognitive planning group to the base group, the author finds that the cognitive planning group planned to pose more questions of a larger and more diverse group of the client.  This group also planned to extend their audit procedures beyond inquiry to corroborate the information obtained from management during the inquiry. 
    • When comparing the results of the cognitive planning group to the practice aid group, the results are similar with regard to their planned questions and number of interviewees; however, there was less focus on corroboration outside of inquiring of management
       
    Category:
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent
    Sub-category:
    Management/Staff Interaction
  • The Auditing Section
    The Effects of Ingratiation and Client Incentive on Auditor...
    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, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction 
    Title:
    The Effects of Ingratiation and Client Incentive on Auditor Judgment
    Practical Implications:

    The results of this study are especially important for auditors, suggesting that clients’ incentives and ingratiation of the auditor can influence audit decisions.  Client incentives influence auditor judgment by affecting client credibility. Client ingratiation towards the auditor can influence auditor judgment by inducing positive affect toward the client, which can increase the likelihood auditors will comply with client requests (thus affecting audit quality). Finally, the results show that student participants were less trusting of the client than audit professional participants. This finding is consistent with prior accounting research that shows that as auditors gain more experience, they are less skeptical.

    Citation:

    Robertson, J.C. 2010 The effects of ingratiation and client incentive on auditor judgment. Behavioral Research in Accounting 22 (2): 69-86.

    Keywords:
    Auditor judgments; client incentive; ingratiation
    Purpose of the Study:

    Ingratiation is a strategic influence tactic through which the ingratiator attempts to induce positive affect, which in turn influences judgments such that the target is more likely to comply with the ingratiator’s request. (“Affect” is a broad term encompassing positive and negative valuations and moods.) This study examines how ingratiation affects auditor judgment. In addition, this study examines whether the aforementioned relationship is sensitive to differences in the client’s incentive to influence the auditor. Specifically, this paper examines the following: 

    • Integration. Psychology research shows that ingratiation is applicable to many settings in the corporate environment and is generally a successful influence tactic when seeking compliance with both implicit and explicit requests.
    • Client Incentive and Credibility. Clients’ incentives can have a negative impact on the success of using ingratiation on others, by leading the target(s) to question the credibility of the ingratiator. Source credibility theory indicates sources perceived to be of high credibility are more persuasive than those perceived to be of low credibility. Therefore, the credibility of the ingratiator contributes to the success of ingratiation as an influence tactic.
    Design/Method/ Approach:

    Participants included both audit practitioners and graduate accounting majors and data was collected in the early 2000s. Participants were provided background information about a hypothetical audit client and a description of the assigned client incentive level (either low or high, based on the absence or presence of financial incentives to meet EPS targets to earn bonuses). Next, participants
    performed an audit task that required them to determine the likelihood that they would recommend an adjusting journal entry to write down the inventory. In this stage, the CFO either ingratiated or did not ingratiate the auditor. The final stages of the experiment included participants’ assessment of their affect toward the CFO and a measure of the participants’ level of professional skepticism.

    Findings:
    • Auditors felt stronger positive affect toward the ingratiating client than the non-ingratiating client; however, ingratiation did not affect auditor judgments.
    • Auditors are more likely to propose adjustments when the client has high incentive to influence the auditor than when the client has low incentive.
    • When the client ingratiates the auditor, the auditor will be less likely to propose an audit adjustment when the client has low incentives, compared to when the client has high incentives.
    • Auditors experience stronger positive affect toward clients with low incentive than clients with high incentive.
    • Results indicate that graduate students were less likely to comply with client requests than professionals at least in part because of higher professional skepticism than professionals.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Management/Staff Interaction
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  • The Auditing Section
    Accounting Firm Culture and Governance: A Research Synthesis
    research summary last edited May 25, 2012 by The Auditing Section, tagged 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction, 11.12 Impact of National Office on Auditor Decisions, 11.13 Partner incentive schemes 
    Title:
    Accounting Firm Culture and Governance: A Research Synthesis
    Practical Implications:

    The article provides a broad summary of prior audit firm culture and governance research with an additional focus on areas for future research.  This literature review is important for accounting firms considering or expanding quality-oriented tone at the top initiatives.  In addition, this review of accounting firm governance structures includes methods for accounting firms to mold, mentor, manage, train and reward employees to improve firm performance and audit quality. 

    Citation:

    Jenkins, J.G., D.R. Deis, J.C. Bedard, and M.B. Curtis. 2008. Accounting Firm Culture and Governance: A Research Synthesis Behavioral Research in Accounting 20 (1): 45-74.

    Keywords:
    organizational culture, governance, ethics, audit firm management, audit firm quality control, culture assessment
    Purpose of the Study:

    This paper summarizes the academic literature related to accounting firm culture and governance.  The authors motivate the study as a response to the PCAOB’s intent to revise the standards on accounting firm quality control.  The authors argue that recent audit failures demonstrate the potential consequences of the cultural tension in audit firms between revenue generation and quality service.  Regulators stress that the “tone at the top” can establish the role of the audit as for the public good rather than as a mere commodity by encouraging objectivity, independence, professional skepticism and accountability to the public.  This paper addresses the concern that greed can change accounting firm’s emphasis on delivering professional services to an emphasis on profitability.  The authors addressed the following topics: 

    • the role of audit firm culture and how it impacts audit quality.
    • various governance and control mechanisms within accounting firms, including consultation policies, ethics training, and independent monitoring boards.  

    This paper is based on a literature synthesis prepared by the auditing section of the American Accounting Association (AAA) for the Public Company Accounting Oversight Board (PCAOB).

    Design/Method/ Approach:

    The authors presented a research overview of several topics based on a review of recent accounting literature.  The results of the review were summarized in topical areas relating to culture and governance.  The authors also presented a research agenda for each topical area in which they suggested a variety of research issues to stimulate future research.  Topical areas include: The Roles of Culture, Conflicts between Organizational and Individual Goals, The Roles of Subcultures within Organizations, Social Influence, Mentoring, Communicating Culture to the Outside, Measuring Culture, Control Mechanisms within Firms, Policies Related to Consultation, Ethics Training, Independent Monitoring Boards.

    Findings:
    • Firm employees undergo a socialization process in which they are molded to the organizational culture (the firm’s set of beliefs and values).  Regulators encourage firms to use this acculturation process to stress the importance of high quality audits and taking difficult stands on issues involving earnings management, fraud or illegal acts, or contentious accounting issues.  The authors offer suggestions for future research to improve understanding in this area.
    • Subcultures may develop in firms based on functional areas (tax, audit, and consulting), individual offices in large firms (particularly foreign firm offices or firms acquired in a merger), or the influence of non-accounting professionals.  Cultural complexities may arise from power imbalances or from national political, public policy and legislative differences.
    • Social influence pressures and power from accounting firm superiors manifest in areas such as engagement time budgets and performance reviews.  Using their power, superiors positively or negatively affect the work efforts of subordinate auditors.  Firm culture can moderate or exacerbate the influence of social influence pressure and power and affect audit quality, client relationships, and employee retention.
    • The goal of accounting firm governance is to achieve goal congruence among the individuals and the organization and to foster consistency and firm-wide policies through authority structures, rules, procedures, and incentive systems.  Research suggests that partner compensation schemes should be based on more than revenue generation alone.  Partners should be focused on limiting firm risks through using a larger pool of revenue for partner compensation schemes, focusing on technical expertise among audit teams, and recognizing the importance of audit quality in the face of budgetary pressures. 
    • Ethics training may direct and alter employee behavior.  However, firms appear to rely primarily on colleges to educate their members.  Since the effects of ethics training may deteriorate over time, firms should consider supplementing this exposure with periodic reinforcement.    

    The authors suggest that their literature review reveals that accounting firm governance is a largely unexplored research topic and that accounting firms have unique ownership structures and operating characteristics in comparison to other large organizations.   

    Category:
    Audit Quality & Quality Control
    Sub-category:
    Management/Staff Interaction, Impact of National Office on Auditor Decisions, Partner incentive schemes
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