The results of this study provide practical guidance for firms as management determines the staffing of audit engagements and the timing of the workpaper review.  Managers are able to conduct a more effective review when they are familiar with their subordinates.  This suggests that there are benefits from staffing audits with associates who have prior experience working with the manager on the engagement.  The benefits of familiarity include better team performance (and thus higher quality audits).  The familiarity also allows the manager to better gauge the associate’s ability and competence, which enables the manager to focus on areas of deficiencies, which also increases team performance. 

The study also provides valuable insight regarding the timing of the workpaper review process.  Managers are able to conduct a more effective review when they complete a preliminary review of the workpapers which is followed by a discussion with the preparer.  
If the initial review of the workpapers is completed during a conversation with the preparer, it is possible that this format could increase the likelihood of an audit error occurring.  Therefore, the evidence suggests that firms should encourage managers to conduct face-to-face conversations about the workpapers after the manager completed his/her initial review.

Favere-Marchesi, M. 2006. Audit review: The impact of discussion timing and familiarity. Behavioral Research in Accounting 18 (1): 53-64.

The findings show that managers implicitly encourage auditors to underreport time when dealing with a favorable client. While CPA firms have decreased explicit incentives to underreport, these implicit incentives makes it likely that seniors are underreporting their time. This can lead to unrealistic budgets and possible costing issues for firms. Also, if a senior does not underreport they could risk getting a bad evaluation or not be assigned to desirable future engagements. These situations could lead to a reduction in raises, promotions, and continued employment.

Agoglia, C. P., R. C. Hatfield, and T. A. Lambert. 2015. Audit team time reporting: An agency theory perspective. Accounting, Organizations and Society 44: 1-14.

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The results of this study are useful for understanding the conditions under which a discussion accompanied review is worthwhile and when it is ineffective. The results of this study imply that different review processes may be better for evaluating auditor performance at different experience levels. This finding is in line with prior literature that finds that different feedback methods may be required at different levels of experience to achieve increased performance. The results of this study suggest that firms should consider  implementing discussion as a part of the review process for inexperienced auditors but not for more experienced auditors.  

Miller, C.L., D. B. Fedor and R. J. Ramsay. 2006. Effects of Discussion of Audit Reviews on Auditors’ Motivation and Performance. Behavioral Research in Accounting 18: 135-146.

The findings of this study are important for audit firms when considering how audit offices implement the normally positive tone at the top of the firms that seem to favor practices and policies that support an open error management climate (EMC). First, our results suggest that successfully establishing an open EMC is beneficial for an audit firm in most (but not all) situations examined in terms of enhancing the firm’s ability to uncover internally errors that otherwise may remain undetected in audit working papers. Our findings imply, however, that these benefits can only be achieved when an open EMC is not only stated in formal firm policies but is actually implemented and consistently applied at the individual audit office level. Second, our findings imply that increasing auditors’ willingness to report their own conceptual errors (e.g., where an ineffective procedure is employed or incorrectly implemented) is particularly challenging and requires measures to support auditors in overcoming their concerns about presenting a good impression to their firm, given that an open EMC was not sufficient by itself to increase the reporting of conceptual errors. Finally, the generally high willingness to report own errors suggests that a key question is how to enhance the likelihood that auditors will indeed self-detect these errors.

Further our findings suggest that audit regulators and inspectors need to be careful in their attempts to ensure that audit firm’s implement policies that support audit quality.  In particular, proposals that would link compensation, discipline and other within firm sanctions for audit quality reducing actions need to be considered carefully in light of the effects that such policies would have on the firm’s error management climate.  Careful delineation between repeat offenders being punished versus supporting an open learning environment for initial reporting of errors needs to be carefully considered and communicated or else the error management climate can quickly become a blame climate where errors are not reduced, just hidden better.

For more information on this study, please contact any of the authors.

Gold, A., U. Gronewold, and S. E. Salterio. 2014. Error management in audit firms: Error climate, type, and originator. The Accounting Review 89 (1): 303-330. 

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