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  • Jennifer M Mueller-Phillips
    Costs and Benefits of Requiring an Engagement Partner...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience, 15.0 International Matters, 15.01 Audit Partner Identification by Name 
    Title:
    Costs and Benefits of Requiring an Engagement Partner Signature: Recent Experience in the United Kingdom
    Practical Implications:

    Requiring engagement partners to sign their names to audit reports appears to result in increased audit quality, earnings informativeness, and audit fees, suggesting that the signature requirement emphasizes personal accountability for engagement partners. Requiring the identification of engagement partners in audit reports would likely have similar effects. Thus, there are both costs and benefits that the PCAOB should consider in making its decision regarding partner identification.

    For more information on this study, please contact Chan Li: chanli@katz.pitt.edu.

    Citation:

    Carcello, J. V. and C. Li. 2013. Costs and benefits of requiring an engagement partner signature: Recent experience in the United Kingdom. The Accounting Review 88 (5): 1511-1546.

    Keywords:
    PCAOB; engagement partner signature; United Kingdom; audit quality; audit fees; costs and benefits.
    Purpose of the Study:

    The Public Company Accounting Oversight Board (PCAOB) is considering requiring the identification of the engagement partner in audit reports. Proponents of the proposal argue that it will increase accountability and transparency, which will result in improved audit quality. Opponents argue that engagement partner identification is unnecessary, as audit firms’ quality control systems and the threats of sanctions by regulators and private litigation are sufficient to hold partners accountable. Identifying engagement partners is similar to them signing audit reports in their own name, which the U.K. began requiring in 2009. Because of the similarities between the U.K. and the U.S., it is likely that the effects of requiring engagement partner identification in the U.S. will be similar to the effects of requiring the engagement partner to sign the audit report in the U.K. Therefore, the authors investigate the benefits and costs of requiring partner signatures in the U.K. in the form of changes in audit quality and audit fees. The results are likely informative of the benefits and costs of requiring partner identification in the U.S.

    Design/Method/ Approach:

    Using publicly-disclosed data on companies listed on the London Stock Exchange (LSE) between 2008 and 2010 (the years surrounding the implementation of the signature requirement), the authors examine audit quality changes using the following measures:

    • Abnormal accruals
    • Likelihood of meeting earnings thresholds
    • Earnings informativeness
    • Likelihood of qualified opinions

    The authors also examine the change in audit fees following the implementation of the signature requirement.

    Findings:

    The authors find that following the implementation of the signature requirement, abnormal accruals and the likelihood of meeting earnings thresholds decrease in the U.K. These results suggest that audit clients’ earnings management declines due to the signature requirement. Further, the association between return on assets and stock market returns increases following the signature requirement, implying that reported earnings becomes more informative of firm value to investors following the implementation of the signature requirement. The likelihood of audit clients receiving a qualified audit opinion following the signature requirement also increases, suggesting that audit reporting becomes more conservative with the signature requirement. Finally, audit fees increase with signature requirement. Thus, signature requirement appears to result in higher fees for audit clients. These changes do not occur for U.S. firms or other European firms during the same period and do not occur for the U.K. in the period prior to the introduction of the signature requirement, providing evidence that the changes in the U.K. are the result of the signature requirement.

    Category:
    Accountants' Reporting, International Matters
    Sub-category:
    Audit Partner Identification by Name, Changes in Reporting Formats
  • Jennifer M Mueller-Phillips
    The Validity of Auditor Industry Specialization Measures
    research summary posted June 15, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    The Validity of Auditor Industry Specialization Measures
    Practical Implications:

     This study draws attention to the potentially large issues involved with inconsistencies in the measurement of auditor industry specialization with a focus on audit fees and audit quality. The findings of this study suggest that audit fee-based measures should probably be prioritized by researchers and that previous empirical findings based on other measurement variables need to be re-examined. Results also show that choosing a market share approach or a portfolio approach has very significant consequences, so the decision should not be made absent-mindedly. Furthermore, the choice of absolute versus relative measures of ISP if not neutral, either, and the sensitivity tests indicated that ISP calculations are very sensitive to the industry classification used.

    Citation:

     Audousset-Coulier, S., A. Jeny, and L. Jiang. 2016. The Validity of Auditor Industry Specialization Measures. Auditing: A Journal of Practice and Theory 35 (1): 139-161.

    Keywords:
    auditor industry specialization and construct validity
    Purpose of the Study:

    Industry specialist auditors are auditors who have developed a specific expertise and are therefore able to provide high quality and more efficient services to their clients. Despite being widely examined in literature, the effect of auditor industry specialization (ISP) has no wholly agreed upon degree of measurement with empirical results exhibiting inconsistencies and uncertainties.  In fact, a multiplicity of measures of industry specialization has been developed over the years. These inconsistencies found with the measurement of auditor industry specialization have led to issues in audit pricing and audit quality. The audit pricing models inconsistencies, in particular, are a challenge for researchers in archival auditing research; the results of their studies are highly sensitive to ISP measures. This study focuses on the measurement issues of ISP, with the hope to be the first study to conduct a comprehensive test of the consistency among different combinations of measurement variables, such as audit fee, client size, and number of clients, and approaches, such as absolute or relative market shares, absolute or relative portfolio shares, and weighted market shares. 

    Design/Method/ Approach:

    The authors use an audit pricing model and an earnings quality model as their empirical fields of study to present empirical evidence about the consequences of using different proxies for ISP on audit pricing and earnings quality research results. The data, which is from 2000 to 2010, is used to compute 30 different measures of ISP in order to test their internal and external construct validity.  

    Findings:
    • The authors find that the choice of the type of measure used to identify industry specialists has a significant influence on the designation of auditors as industry specialists.
    • The authors show that the use of five different assignment approaches modifies the classification of auditors as specialists or not.
    • The authors show that the use of different calculating variables to compute these shares also leads to significant differences of classification.
    • The authors find in the audit pricing model test that the alternative use of the 30 ISP variables in an audit fee model leads to the determination of a significant ISP fee premium in 14 cases, to the determination of a fee discount in 6 cases, and to nonsignificant results in 10 cases.
    • The authors find in the earnings quality test that industry specialization is found to significantly reduce the level of discretionary accruals in only five cases compared to the 21 cases where ISP measures were associated with higher levels of discretionary accruals and with nonsignificant results found in four cases.
    Category:
    Audit Quality & Quality Control, Audit Team Composition
    Sub-category:
    Industry Expertise – Firm and Individual
  • Jennifer M Mueller-Phillips
    Do Industry-Specialist Auditors Influence Stock Price Crash...
    research summary posted May 31, 2016 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience, 11.07 Attempts to Measure Audit Quality 
    Title:
    Do Industry-Specialist Auditors Influence Stock Price Crash Risk?
    Practical Implications:

    This study shows that industry specialists reduce a specific type of risk, stock price crash risk, which has become increasingly important following the Enron scandal and the recent financial market crisis. It also shows that the effects of opacity and conservatism on crash risk are moderated by auditor quality, furthering the emerging literature on the determinants of crash risk. 

    Citation:

    Robin, J. Ashok and Hao Zhang. 2015. Do industry-specialist auditors influence stock price crash risk? Auditing: A Journal of Practice and Theory 34 (3): 47-79.

    Keywords:
    Auditor quality, industry specialization, crash risk
    Purpose of the Study:

    In the past, a great deal of research has been done examining the idea that high-quality auditors benefit reporting quality in a variety of ways.  Other research has been done to focus on direct economic consequences for investors.  Some of this research has found that high-quality auditors can reduce the cost of debt, lower equity costs, diminish IPO underpricing, and even influence loan syndicate structure.  One issue that has not been examined, however, is whether high-quality auditors can reduce the crash risk for equity investors.  This paper focuses on this question.  Because crash risk is primarily caused by bad news hoarding, the authors believe that high-quality auditors can function as information mediators and reduce the crash risk in the following ways:

     

    • High-quality auditors are more likely to uncover bad news and suppress the mangers’ bad-news hoarding activities due to their greater capability
    • High-quality auditors have stronger incentives to disclose bad news in a timely manner and suppress managers’ bad-news hoarding activities

     

    In addition to mediating some of the bad news, the authors also believe that high-quality auditors also reduce crash risk by decreasing agency costs, decreasing malfeasance by managers, improving operating decisions, and decreasing expropriation.  This study could prove very valuable to investors, as crash risk is an important consideration in portfolio management. 

    Design/Method/ Approach:

    The research evidence is collected from a twenty-year sample period ranging from 1990-2009.  The authors obtained stock return data from the Center for Research in Security Prices (CRSP) database.  Accounting data and auditor characteristics were obtained from the Standard and Poor’s Compustat database. After making exclusions based on a number of criteria, the final sample amounted to 58,365 firm-year observations. Regression models were run on these observations to arrive at the author’s findings. 

    Findings:
    • The authors find that across all six models tested, to a statistically significant degree, stock price crash risk is lower for firms audited by industry-specialist auditors.
    • Results also indicated that crash risk is higher in firms with higher standard deviation and mean of stock returns, younger age, higher ROA, greater intangible assets, greater share turnover, and lagged negative skewness.
    • Concentrated institutional ownership can induce effective monitoring and lead to lower further crash risk.
    • Conservatism is negatively and significantly related to crash risk.
    • Auditor specialization provides benefits beyond reporting benefits.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Attempts to Measure Audit Quality
  • 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
    Audits of Complex Estimates as Verification of Management...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience, 11.09 Evaluation of Evidence 
    Title:
    Audits of Complex Estimates as Verification of Management Numbers: How Institutional Pressures Shape Practice.
    Practical Implications:

    Based on the interviews and problems identified, the authors conjecture that potentially suboptimal auditing methods are being used to evaluate complex estimates which are an important and growing part of the financial statements. This may be negatively impacting audit quality. More specifically, auditors over-rely on management estimates because they lack the knowledge and incentives to behave otherwise. This possibility has direct consequences for auditor professional skepticism because increasing professional skepticism may be less effective unless auditors are also given the requisite knowledge to properly use it. These problems are reinforced by auditing standards and regulators which generally outline/criticize the current auditing methods without suggesting new or better ones.  

    Citation:

    Griffith, E., J. Hammersley, and K. Kadous. 2015. Audits of Complex Estimates as Verification of Management Numbers: How Institutional Pressures Shape Practice. Contemporary Accounting Research 32 (3): 833-863.

    Keywords:
    Complex Estimates, Subjectivity, Institutional Theory, Valuation Specialists, Professional Skepticism, Interviews
    Purpose of the Study:

    Complex estimates are increasingly important to financial statements and of growing concern to both regulators and investors. While auditors have well-established procedures for auditing more objective account balances (i.e., valued at historical cost), little is known about the process auditors use to evaluate more subjective, complex estimates. This article conducts interviews with experienced audit personnel to determine how auditors evaluate such estimates, determines the problems with such approaches, and uses “institutional theory” to theorize the reason such problems exist and persist. The authors consider the influence of both audit firms themselves and regulators (i.e., information from PCAOB inspection reports) on auditors’ complex estimate audit procedures.

    Design/Method/ Approach:

    The authors conducted semi-structured phone interviews with experienced audit personnel. Participants are from 6 large accounting firms with at least manager level experience. Interviews were conducted between October and November 2010. The authors analyzed the audit process steps discussed by participants for complex estimates and coded these steps according to the PCAOB auditing standards related to accounting estimates (AU 342 and 328).  For steps that could not be appropriately classified into ones discussed by the auditing standards, the authors developed additional classifications.

    Findings:

    While auditing standards allow for different approaches to evaluating complex estimates (e.g., testing management process, preparing independent estimate, etc.), the authors find that auditors usually just test management’s process (i.e., verifying inputs such as historical cost, understanding who and how estimate is generated, testing controls surrounding process, and testing sensitivity of assumptions used).  

    Based on institutional theory, the authors theorize two key reasons that auditors mainly use management process verification when auditing complex estimates instead of other (potentially more creative and skeptical) approaches. The reasons are:

    • Both audit firm policies and professional standards generally emphasize management process verification techniques over other potential techniques. Additionally, regulators (i.e., PCAOB) reinforce/encourage this behavior because inspection findings largely focus on problems with auditing management’s process instead of suggesting alternative, superior auditing methods.
    • Audit firms employ valuation specialists who have the necessary knowledge to more critically analyze complex estimates. This fact means that financial statement auditors generally do not have the necessary knowledge to critically analyze management’s models or develop an independent expectation. When auditors do use such specialists, they over-rely on their work.
    • Given the lack of guidance regarding complex estimates, firms tend to use practices that have been previously legitimized. For auditing of complex estimates, verification (which works well to audit less subjective accounts) is used to audit more subject complex estimates. Auditing standards also mainly emphasize verification.
    • Given inspection pressures, firms find it safer and more legitimate to mimic each other’s policies and procedures for auditing complex estimates instead of develop new ones.
    Category:
    Audit Quality & Quality Control, Audit Team Composition, Auditing Procedures - Nature - Timing and Extent, Auditor Judgment
    Sub-category:
    Adequacy of Evidence, Auditors’ Professional Skepticism, Evaluation of Evidence, Impact of potential post-audit review (e.g. PCAOB - internal firm inspections), Sustainability ServicesTraining & General Experience, Use of Specialists (e.g. financial instruments – actuaries - valuation)
  • Jennifer M Mueller-Phillips
    Perspective Taking in Auditor-Manager Interactions: An...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    Perspective Taking in Auditor-Manager Interactions: An experimental investigation of auditor behavior.
    Practical Implications:

    The results of this study are important for firms to consider in hiring and training practices as the evidence supports increased perspective taking improves auditor performance and ultimately audit quality. Audit firms may benefit from hiring auditors with prior experience in the corporate world and involvement in financial-reporting, and should continue efforts to hire more “boomerangs.” Audit firms can measure dispositional (i.e., trait) perspective taking among current employees and use this measure in determining staffing assignments. In terms of training design, audit firms can consider implementing training targeted toward role-taking. Finally, audit firms can also encourage perspective taking in other ways, for example, by including perspective taking prompts in audit programs.

    Citation:

    Church, B. K., M. Peytcheva, W. Yu, and O. Singtokul. 2015. Perspective taking in auditor-manager interactions: An experimental investigation of auditor behavior. Accounting, Organizations and Society 45: 40-51.

    Keywords:
    perspective taking, role-taking experience, individual difference, experimental economics
    Purpose of the Study:

    This study investigates how taking the perspective of client management affects auditors’ assessment of managers’ reporting choices and whether successful perspective taking can lead to enhanced financial-reporting quality and audit quality. Perspective taking involves taking the point of view of another, and understanding another’s thoughts, attitudes, or concerns in a specific situation. Perspective taking has been shown to improve individual judgment and decision making, thus the authors of this study investigate whether these benefits extend to the audit setting when auditors take on the role and perspective of client management. Audit firms have been increasing recruiting of former employees (or “boomerangs”), asserting the knowledge and experience auditors gain while in industry is an asset to the auditor and the firm. This study provides evidence supporting that prior role experience is a reason why “boomerangs” are successful.

    Design/Method/ Approach:

    The participants in this experimental study were students at a public university, mostly at the undergraduate level in business or economics. The evidence for this study was collected prior to September 17, 2012. The authors conduct two multi-round experiments providing participants monetary incentives designed to mimic the auditing context. In the first experiment, participants either took on a manager role followed by an auditor role or remained in the auditor role for the entire experiment. In the second study, participants took on an auditor role for the entire experiment and perspective taking disposition was measured. The task involved estimating earnings and making decisions regarding accepting or rejecting manager reported earnings values.

    Findings:
    • Overall, the authors find that perspective taking is beneficial to auditor performance and audit quality. Further, role-taking (i.e., taking the role of another) stimulates perspective taking.  
    • The authors find auditors with role-taking experience as a manager more accurately estimate managers’ reported earnings, compared to auditors without the role-taking experience. Auditors with role-taking experience also make better reporting decisions, in terms of whether to accept or reject manager reported earnings.
    • The authors find dispositional perspective taking (i.e., an individual’s natural ability to spontaneously take the viewpoint of another) influences auditor performance. Auditors with high perspective-taking disposition are better able to judge managers’ reported earnings than auditors with low perspective taking disposition.
    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind, Sustainability ServicesTraining & General Experience
  • Jennifer M Mueller-Phillips
    Aggregate Quasi Rents and Auditor Independence: Evidence...
    research summary posted July 30, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    Aggregate Quasi Rents and Auditor Independence: Evidence from Audit Firm Mergers in China.
    Practical Implications:

    The findings of this study have policy implications for regulators in China and other emerging economies with regard to administering the auditing profession and improving the corporate governance of public companies by fostering auditor independence. One policy implication of this finding is that simply increasing audit firm size fails to enhance auditor independence. The experience of mature markets suggests that, in addition to public regulatory enforcement, other mechanisms, such as private litigation against auditors and improved disclosures on audit services, are helpful in ensuring a well-functioning audit market.

    Citation:

    Chan, K. H., and Wu, D. 2011. Aggregate Quasi Rents and Auditor Independence: Evidence from Audit Firm Mergers in China. Contemporary Accounting Research 28 (1): 175-213.

    Keywords:
    consolidation & merger of corporations, auditor independence, aggregate quasi rents, audit quality
    Purpose of the Study:

    Prior research suggests that large audit firms have more aggregate quasi rents, which are defined as audit fees in excess of audit costs, to serve as collateral against opportunistic behavior on the part of auditors. Audit firm size affects not only auditor independence, but also auditor competence, which makes clear inferences on the relationship between audit firm size and independence difficult. The economic and regulatory changes in China’s audit market induced a large number of audit firm mergers in a short period of time, thus enabling the authors to investigate the impact of mergers on audit quality in a similar environment for an important economy. In the multi-license mergers, mergers occur between two (or more) accounting firms that are licensed to audit listed companies; in the single-license mergers, an accounting firm with such a license merges with non-licensed firms.

    Using data on audit firm mergers in China, the authors investigate the empirical relationship between audit firms’ aggregate quasi rents at stake and auditor independence in a setting that allows us to mitigate potential problems. However, they do have an immediate and significant impact on audit firm size and auditors’ aggregate quasi rents. Therefore, the changes in audit quality that occur immediately after mergers take place can be attributed mainly to changes in auditors’ independence rather than competence. The authors investigate the differences in independence between the pre-merger and immediate post-merger periods of the auditors in the same audit firms.

    Design/Method/ Approach:

    The authors collect data for audit firm mergers that took place between 1999 and 2006 from the CICPA and several leading financial newspapers. Client firm financial statement and stock market data are from the China Stock Market & Accounting Research database (CSMAR). The sample consists of 59 cases, including 21 multi-license mergers (MULTI hereafter) and 38 single-license mergers (SINGLE hereafter).

    Findings:

    The evidence indicates that an increase in audit firm size does not necessarily lead to an improvement in auditor independence. What matters is the size of the public clientele, where the quasi rents are more likely to serve as collateral against auditor malfeasance.

    • The level of independence, and thus audit quality, is determined by the auditor’s trade-offs between the costs and benefits of opportunistic behavior.
    • Audit firms involved in MULTI mergers are more likely to issue MAOs (modified auditor opinions) to their clients after the mergers.
    • This increased propensity to issue MAOs is significantly related to the change in audit firm size after the mergers.
    • There is no evidence to suggest any significant change in the issuance of MAOs among audit firms involved in SINGLE mergers.
    • The different effects of mergers on audit quality support the theory that auditor independence is a positive function of the aggregate quasi rents a stake.
    • The increase in MAOs is positively correlated with the change in the size of listed clientele that results from multi-license mergers.
    Category:
    Audit Quality & Quality Control, Independence & Ethics
    Sub-category:
    Sustainability ServicesTraining & General Experience
  • Jennifer M Mueller-Phillips
    The O*NET: A Challenging, Useful Resource for Investigating...
    research summary posted November 17, 2014 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, 11.05 Training and General Experience 
    Title:
    The O*NET: A Challenging, Useful Resource for Investigating Auditing and Accounting Work
    Practical Implications:

    By exploring the O*NET database, the authors discover its potential professional accounting applications. Because of its extensive listing of required occupational skills and knowledge, the O*NET provides a useful starting point for writing accounting job descriptions. The O*NET’s focus on entry-level positions makes it an important resource for recruiting accounting professionals. Its data can help structure and clarify the recruiting process by helping to build descriptions of required knowledge, ability and skills and required competencies. Data can also contribute to designing compensation and performance evaluation systems by defining the required knowledge, skill and abilities required for accounting positions, and, in determining appropriate compensation. Existing or proposed accounting positions can be assessed, i.e., benchmarked, against the standardized O*NET occupational categories of accounting work, as a means of determining their minimal requirements, organizational rank, or compensation.

    For more information on this study, please contact Dan N. Stone.

    Citation:

    Scarlata, A. N., D. N. Stone, K. T. Jones, and C. C. Chen. 2011. The O*NET: A Challenging, Useful Resource for Investigating Auditing and Accounting Work. Accounting Horizons. 25 (4): 781-809

    Keywords:
    auditor employment, entrants, occupations, professional accountancy, recruiting
    Purpose of the Study:

    This paper introduces a data resource, the O*NET, that partially fills the need for a publicly available database that is relevant to investigating accounting and auditing work. The O*NET is a unique occupational data resource regarding U.S. worker attributes, attitudes, knowledge and skill, and job characteristics.  The O*NET was released in 1998, with subsequent annual updates. It provides detailed occupational information from multiple sources both within and outside each profession. Unfortunately, the O*NET is an underused resource, potentially due to complexity and user “unfriendliness”. The authors describe the database and share potential applications for professional accountants and academic researchers.

    Design/Method/ Approach:

    The Occupational Information Network database (O*NET), a publicly available employment and occupation resource created and maintained by the U.S. Department of Labor, contains considerable relevant data on accountants’ and auditors’ work and employment. The authors explore data from the O*NET database (Version 15.0, released in June 2010), which includes about 1,100 occupations. They consider the history, organization and validity of the O*NET, as well as its potential value in non-accounting, professional accounting, and scholarly accounting applications. 

    Findings:
    • The O*NET provides an important publicly available, longitudinal and cross-sectional resource for investigating accountancy employment and work. 
    • The content model, around which the O*NET is organized, includes six “domains” or categories of data, each of which identifies a related set of activities and characteristics of workers and occupations. Data is in the following domains: 1) Worker characteristics, 2) Worker requirements, 3) Experience Requirements, 4) Workforce Characteristics, and 5) Occupation-Specific Information.
    • Data is collected and updated annually from multiple sources including job analysts, surveys of employers and employees, and labor economists’ employment projections.
    • Users of the O*NET include scholars, state employment agencies, employers, career counselors and job seekers.
    • The O*NET provides research opportunities for both accounting professionals and academics.
    • The limitations of the O*NET include overly broad categories of accounting work, issues related to biases and construct validity, and poor organization and unfriendly interface. 
    Category:
    Audit Quality & Quality Control, Audit Team Composition
    Sub-category:
    Staff Hiring - Turnover & Morale, Sustainability ServicesTraining & General Experience
  • Jennifer M Mueller-Phillips
    Do Manages Intend to Use the Same Negotiation Strategies as...
    research summary posted November 5, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.04 Interactions with Client Management, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    Do Manages Intend to Use the Same Negotiation Strategies as Partners?
    Practical Implications:

    The findings of this study are important for audit firms to consider when resolving financial reporting issues with client management. The overall pattern of our results illustrates that audit managers and audit partners intend to use different negotiation strategies and, therefore, substituting managers for partners in order to increase audit efficiency may in some contexts undermine audit effectiveness. Indeed, concern is warranted based on these results that suggest that a manager’s intended strategy entering negotiations with client management may be, pending context, substantially different and more client-outcome-oriented than the partners’ intended strategy would be. This could be worrisome for audit partners if they are not aware of negotiations that managers are undertaking on their own while out in the field. From a practice perspective, partners need to be aware of circumstances where managers negotiate with client management, since the tactics employed and potentially the outcomes obtained by the manager may be different than if the partner had been involved. Thus, based on our findings, audit partners may be the more effective negotiators and, thus, will have better negotiated outcomes than less experienced managers.

     

    For more information on this study, please contact Susan McCracken.

    Citation:

    McCracken, S., S.E. Salterio, and R.N. Schmidt. 2011. Do managers intend to use the same negotiation strategies as partners? Behavioral Research in Accounting 23 (1): 131-160.

    Keywords:
    Negotiation, strategy, experience, power, surrogate, auditor
    Purpose of the Study:

    Auditor-client management (ACM) negotiations frequently occur between the audit partner and the Chief Financial Officer, but there is also evidence that the audit manager attempts to negotiate resolutions to issues in order to increase audit efficiency, to increase the manager’s image of competence with the partner or in response to time pressures. Given the importance of ACM negotiations to the resulting financial statements shown in previous work in the ACM negotiation area, as well as the tendency for managers to conduct these negotiations in place of the partners, it is important to determine whether partners and managers intend to utilize similar or different negotiation strategies. From a practice perspective, if audit partners’ and managers’ intended negotiation strategies are different, then audit effectiveness may be compromised when managers undertake ACM negotiations. However, if the intended negotiation strategies of the partner and manager are the same, then there would be evidence to suggest that improvements in audit efficiency may be achieved by having managers undertake the ACM negotiations. Furthermore, from a research perspective, if there are differences in intended negotiation strategies between partners and managers, then results from prior studies that utilize managers as participants may not generalize to audit partners.

    Design/Method/ Approach:

    The experimental research evidence was collected in 2005. The authors measured the level of auditor participants (audit manager or audit partner) and manipulated the client management’s initial accounting position flexibility and ACM relationship in the experimental case context. After reading the case, participants were asked to indicate their likelihood of employing each of the 25 tactics related to the five negotiation strategies (expanding the agenda, problem solving, contending, compromising and conceding) in an upcoming negotiation with the client.

    Findings:
    • The integrative strategies’ results show that partners are less likely than managers to use the integrative strategy “expanding the agenda”. While less conclusive, our results also suggest that partners are less likely than mangers to use the integrative strategy “problem solving”. We find that this difference in planned strategy is not due to years of experience, but rather both of these findings are consistent with the power/status theory in the generic negotiation literature.
    • The distributive strategies’ results show that managers are less likely to use the contending strategy and more likely to use the concessionary and compromising strategies than partners. Our conclusions, however, must be qualified by the interaction of level with the accounting context factors embedded in the experimental case (prior client relationship and flexibility of client’s initial accounting position). An exception is the less commonly used concessionary strategy where we find managers are more likely to intend to use this strategy than the partners, irrespective of the accounting context. When examining the pattern of the interactions, we see a greater reaction to the accounting context by the partners than by the managers, again, likely due to partners’ greater experience and power/status in negotiations
    Category:
    Audit Quality & Quality Control, Engagement Management
    Sub-category:
    Interactions with Client Management, Sustainability ServicesTraining & General Experience
  • Jennifer M Mueller-Phillips
    Auditors’ Overconfidence in Predicting the Technical K...
    research summary posted October 22, 2014 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience 
    Title:
    Auditors’ Overconfidence in Predicting the Technical Knowledge of Superiors and Subordinates
    Practical Implications:

    In this study, we show that both subordinates and superiors are overconfident in predicting other auditor’ knowledge and that this overconfidence effect interacts with task difficulty. Inaccuracy in assessing the technical knowledge of other specific auditors has the potential to degrade audit quality. Likewise, incorrect assessments of the technical knowledge of groups of auditors may distort the audit firms understanding of training needs of auditors. More accurate and objective assessments of interpersonal knowledge of other auditors are needed to enhance audit quality.

    For more information on this study, please contact Hun-Tong Tan.

    Citation:

    Han, J., K. Jamal, and H-T. Tan. 2011. Auditors’ overconfidence in predicting the technical knowledge of superiors and subordinates. Auditing: A Journal of Practice & Theory 30(1): 101-119.

    Keywords:
    technical knowledge; overconfidence; auditor rank.
    Purpose of the Study:

    Prior research documents that auditors are overconfident in predicting the technical knowledge of subordinates. Overconfidence is also thought to be affected by task difficulty.

    Overconfidence on the part of subordinates has implications for audit effectiveness and/or efficiency. Audit workpaper preparers (i.e., subordinates) stylize workpapers both to manage their reputations with their superiors and to conserve cognitive effort. Prior research shows that auditors who report to a superior whom they perceive to be less technically competent (or alert to conclusion errors) may, at the margin, devote less attention to conclusion errors in workpaper preparation, with adverse effects on audit effectiveness. Subordinates who are overconfident in the knowledge of their superiors may actually exert more cognitive effort than otherwise, and may be less likely to stylize their work as a means of reputation management. Likewise, the extent to which superiors scrutinize the work of their subordinates is affected by their perceptions of the subordinate’s technical knowledge. Incorrect perceptions about subordinate technical knowledge can lead to inefficient audit review processes. In practice, auditors perform a variety of tasks that vary in difficulty. Understanding how task difficulty may moderate auditors’ overconfidence is important to assess the implications of overconfidence in actual audit settings.

    We extend the literature on auditors’ overconfidence in three ways.

    First, we examine whether auditors’ overconfidence in predicting the technical knowledge of another auditor varies as a function of the hierarchical rank of the auditor making the prediction relative to the target—i.e., whether it is the superior making a prediction of a subordinate, or a subordinate making a prediction of a superior. Subordinates are the main frontline collectors and recorders of audit data and, thus, whether subordinates are overconfident in predicting the technical knowledge of their superiors is important.

    Second, we examine whether overconfidence effects vary as a function of task difficulty. This issue is important because in practice, auditors perform a variety of tasks that vary in difficulty.

    Third, prior research focuses on auditors’ overconfidence in predicting the technical knowledge of specific individual auditors. We examine whether this effect replicates when auditors make predictions about groups of auditors. 

    Design/Method/ Approach:

    We conducted an experiment.. Participants were 14 audit managers and 28 audit seniors from a major public accounting firm. They comprised 14 natural teams of one audit manager and two audit seniors, who worked on the same team for audit assignments. The participants work on two technical audit tasks. One of these tasks is a relatively easy error frequency (EF) task. The other, more difficult task related to an accounting entry for a firm which has entered into an interest rate swap (IRS) agreement with another firm.

    Findings:
    1. Audit managers are overconfident in predicting individual audit seniors’ knowledge for the more difficult IRS task, but not for the less difficult EF task.
    2. However, the pattern reverses when audit seniors predict audit managers’ knowledge. Audit seniors are overconfident in the individual audit managers’ knowledge for the EF task but not for the IRS task.
    3. Auditors’ predictions of groups of other auditors replicate their predictions of individual auditors.
    4. Hence, auditors’ overconfidence in other auditors’ knowledge is jointly affected by the predicting direction (whether subordinates predict superiors’ knowledge; or whether superiors predict subordinates’ knowledge) and task difficulty.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Sustainability ServicesTraining & General Experience

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