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

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

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

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

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

Based on preliminary research, the authors found:

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

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

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

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

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

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

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

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

• Providing significant and direct rewards for auditors who uncover fraud has the potential to motivate helpful innovation by auditors to actively search for fraud.

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The results of this study are important for audit firms to consider when designing their audit review process.  The evidence indicates that reviewers’ personal biases do impact the way they review subordinate’s workpapers.  Furthermore, it indicates that reviewers that place great importance on preparer/reviewer alignment may sign-off on preparer workpapers that are of lower quality with respect to judgment/conclusion decisions.  An additional concern is that biases may have the potential to cause preparers to focus more on satisfying the reviewer’s preferences and beliefs opposed to performing the necessary procedures and documentation to satisfy auditing and accounting standards.  The study suggests the importance of proper training on the review process and how biases may impact conclusions. 

Tan, H. and P. G. Shankar. 2010. Audit reviewers’ evaluation of subordinates’ work quality. Auditing: A Journal of Practice and Theory 29 (1): 251-266

The audit workpaper review process is an essential component of the audit as it enhances audit quality and ensures that the judgments and decisions made by the audit team are reasonable and consistent with applicable auditing and accounting standards.  However, reviewers are subject to personal biases and preferences for accounting positions, which has the potential to impact the overall effectiveness of the workpaper review process.  This paper addresses this concern by investigating whether reviewer’s evaluations of preparers’ work quality are influenced by three factors: 

• The reviewer’s initial opinion regarding the audit task performed by the preparer
• The strength of the justification underlying the preparers’ conclusions with respect to the audit task
• The importance that the subordinates’ work is aligned with the superiors’ preferences and pre-conceived opinion with respect to the audit task 

The authors motivate their expectations based on the psychology literature discussing “opinion congruence.”  The opinion congruence effect results when an individual’s prior/initial beliefs influence their evaluations of argument quality.  This has the potential to impact audit reviewers as their review comments/decisions may not be based on assessing the justifications for the conclusions reached by the preparer (and client), but on their own prior beliefs regarding audit procedures and accounting positions. 

The research evidence is collected in the mid-2000s time period.  The authors use a group of audit seniors and audit managers from all Big 4 firms to complete a simulated task involving auditing the allowance for doubtful accounts for a computer sound card manufacturer.  Participants are assigned the role of reviewer where they had to assign a “quality” rating to memos written by the in-charge on the simulated audit engagement. 

• The authors find that reviewers assign higher quality ratings for those memos that were consistent with their decision for the treatment of the allowance account. 
• The authors find that the quality rating is higher (holding opinion congruence constant) when the preparers’ conclusions are well justified (i.e. have stronger justification). 
• The authors find that when the reviewer places great importance on ensuring the subordinate conducts the work consistent with their beliefs/expectations, assigned ratings were greater for memos aligned with their opinion for the accounting treatment even when the justifications were very weak.

Evaluating multiple causally arranged evidence sets may precipitate an auditor’s inability to accurately discern the source that pertains to specific information. Susceptibility to source misattributions may cause auditors to inadvertently evoke erroneous client information when rendering memory-based auditing judgments for a client and, therefore, create the potential for impaired judgment quality. Although working papers can serve to curtail informational misattributions, such as those created by MCEs, auditors can become overconfident in the accuracy of their memories and not thoroughly reexamine the working papers for verification. Subsequent to rendering an auditing decision, auditors concurrently working on multiple clients should consider reducing reliance on memory and tailoring working paper review to ensure the relationship between a decision for a certain client and its evidence.

Grossman, A. M., and R. B. Welker. 2011. Does the Arrangement of Audit Evidence According to Causal Connections Make Auditors More Susceptible to Memory Conjunction Errors? Behavioral Research in Accounting 23 (2): 93-115.

Accounting firms traditionally arrange working paper evidence in accordance with audit planning procedures or in such a way as to facilitate the preparation of the financial statements. Causally connected pieces of evidence can be widely interspersed within these organizational arrangements. For example, a client’s financial ratios may be grouped together to facilitate the performance of preliminary analytical procedures; however, different ratios may correspond to different business processes within the company. The interspersion of causally connected evidence can complicate the task of extracting pertinent causal relationships for audit decision making.

Considering the potential for auditors’ susceptibility to memory conjunction errors (MCEs), and their potential effect on auditor judgment, it is important to discover under what circumstances auditors’ propensity toward MCEs is exacerbated. The present study demonstrates that audit evidence organized in a causally relevant arrangement can increase auditors’ susceptibility to MCEs. When evidence is arranged in a causally relevant manner, as opposed to a traditional working paper format (i.e., grouped by accounting cycles), deficiencies in encoding from use of schemata may impede later retrieval of specific items of evidence associated with the source client. Causally arranged evidence may cause auditors to draw incorrect inferences that schematic-consistent pieces of evidence that actually originated from other clients were part of the evidence set of the source client.

Experimental participants were 72 auditors or former auditors. They had an average age of 38 years, an average of 9.8 years of auditing experience, and an average of 7.1 years of supervisory experience. Sixty-four percent were male, 51 percent had achieved manager or partner positions, and 58 percent currently held an auditing position. The experiment involved a 4 x 2 design and included three phases. The evidence was gathered November 2011.

The results of this study do not refute the benefits of causally arranged evidence on judgment quality; however, they do suggest that evidence so arranged may elicit a potentially detrimental effect on judgment quality, particularly for practitioners simultaneously conducting multiple audits. Specifically, the results of this study indicate that arranging audit information according to causal connections, as opposed to a more traditional working paper arrangement of information (grouped by market/industry background, auditing procedures, and current-year activity), fosters an increased propensity toward MCEs. Causal ordering of information may allow auditors to decrease the amount of cognitive effort involved in determining relationships among information items, but it may also create a shallower encoding of the individual evidence items and weaker linkages in memory between the evidence items and the client source of the evidence. With weak memory of evidence specifics, auditors may gauge whether they recognize evidence on the basis of its familiarity with storylines extracted from previously encountered evidentiary matter. Causal connectivity between the evidence and a client’s storyline may produce feelings of familiarity and lead auditors to attribute the evidence to that client rather than to the actual source client.

http://www.auditingresearchsummaries.org

The results of this study are important for firms to consider as they show that preparer’s perceptions of reviewers impact the preparer’s response to review notes. Audit firms should try to help their supervisors understand what they can do to exude more referent or expert power and less coercive power. Further, firms should allow subordinates to provide feedback to supervisors in order for them to understand how they are being perceived so they can take the necessary steps to alter the perception. 

Fedor, D. B. and Ramsay, R. J. 2007. Effects of Supervisor Power on Preparers' Responses to Audit Review: A Field Study. Behavioral Research in Accounting 19 (1): 91-105.

The audit review process has three primary purposes, controlling the quality of work, ensuring the appropriate conclusions are reached, and allowing for formal structured interaction between team members. Providing corrective feedback to employees is a very important part of the review process and allows for employees to be informed on how their performance stands in relation to productivity and quality standards. The purpose of this study is to understand how recipients respond to the corrective feedback.  The auditor being reviewed is expected to respond differently based on their perception of the source of a reviewer’s influence (i.e. social power).  Reviewers can possess three different types of social power:

• Referent: reviewer’s influence is based on personal acceptance or approval
• Expert:  reviewer’s influence is based on their knowledge or expertise
• Coercive: reviewer’s influence is based on the ability to punish or reward the reviewee

Preparers can respond in three ways:

• Performance improvement: improve knowledge or increase motivation
• Feedback seeking: follow up on review points they do not understand
• Impression management: responding in ways intended to improve the reviewer’s impression of them rather than the actual quality of work           

The authors motivate their expectations based on the characteristics of the three dimensions of power. Referent power is positively related to organizational outcomes, people like spending time with referent people; they are easily approachable, and perceived as important. Therefore, referent power should have a positive relationship with all three responses. Expert power is also positively associated with organizational outcomes; experts are seen as possessing valuable and useful information, and others want to stay in their “good graces”. Therefore, Expert power should have a positive relationship with all three responses. Coercive power is negatively related to organizational outcomes and results in avoidance in order to stay out of harm’s way. Therefore, Coercive power is predicted to have negative relationships with all responses.

Data was collected prior to 2006 from subordinate auditors in the big six accounting firms. Respondents had 4 to 108 months of audit experience (average of 22 months). A ten page survey was filled out based on a specific recent performance review selected by each participant. Participants responded to a number of questions using a scale from 1 to 7.

• Referent power has a positive relationship with performance improvement, feedback seeking, and impression management
• Expert power has a positive relationship with feedback seeking
• Coercive power has a negative relationship with performance improvement and feedback seeking
• When a reviewer is seen as coercive, the negative relationship between coercive power ad performance improvement is much stronger when the reviewer is not regarded as an expert than when the reviewer is regarded as an expert.

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

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

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

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

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

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

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