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  • Jennifer M Mueller-Phillips
    The Effect of Joint Auditor Pair Composition on Audit...
    research summary posted June 26, 2017 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 11.07 Attempts to Measure Audit Quality, 15.0 International Matters in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effect of Joint Auditor Pair Composition on Audit Quality: Evidence from Impairment Tests
    Practical Implications:

    Regulators are constantly trying to find ways to improve audit quality. The findings in this paper are useful to policymakers in understanding the benefits of a joint audit. It is also useful to companies and investors who are interested in what audit pairs provide a superior audit. 

    Citation:

    Lobo, Gerald J., L. Paugam, D. Zhang, and J. Francois Casta. 2017. “The Effect of Joint Auditor Pair Composition on Audit Quality: Evidence from Impairment Tests”. Contemporary Accounting Research 34.1 (2017): 118.

    Purpose of the Study:

    Regulators across the globe have been trying to find ways to increase audit quality, and one idea that has been proposed is requiring joint audits. Currently, joint audits are mandatory in France for any company preparing consolidated financial statements. This paper examines whether the auditor pair composition is related to audit quality. The three auditor compositions are Big4-Big 4 (BB), Big4-non-Big 4 (BS), and non-Big 4 non-Big 4 (SS). For the purposes of this study only BB and BS pairs are analyzed. The impairment of goodwill is examined to measure audit quality. This is due to management’s large discretion for the impairment of goodwill. The way auditor’s handle the impairment of goodwill often highlights how well they are maintaining objectivity and transparency of the auditor’s tests. It is important to note in BS pairs the Big 4 firm is most likely to be the one performing the impairment test.

    Design/Method/ Approach:

    The sample includes French firms from the SBF 250 index for the years 2006-2009. There were a total of 551 observations for the BB and BS pairs. The authors examined how the auditor pair type affected recognition of economic impairment and transparency of impairment-related disclosures.

    Findings:

    Overall, the authors find that BS audit pairs are associated with having a higher audit quality when compared to BB audit pairs. The authors believe this is due to a better coordination and development of a hierarchy in BS audit pairs and a higher incentive for better audit quality from the Big 4 firm in BS audit pairs. This is because the Big 4 firm in BS audit pairs are at a higher risk of reputational harm, than if they are paired with another Big 4 auditor in a BB audit pair.

    Specifically, the authors find the following:

    • In situations where low-performance indicators are present, BS audit pairs are more likely to recognize an impairment loss and recognize a larger impairment loss than BB pairs.
    • BS audit pairs are more likely to be more transparent in the disclosure of impairment for goodwill. On the other hand, BB pairs are more likely to show reductions in impairment-related disclosures when they book an impairment.
    Category:
    Audit Quality & Quality Control, Audit Team Composition, International Matters
    Sub-category:
    Attempts to Measure Audit Quality
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  • Jennifer M Mueller-Phillips
    Audit Fee Differential, Audit Effort, and Litigation Risk:...
    research summary posted June 26, 2017 by Jennifer M Mueller-Phillips, tagged 02.01 Audit Fee Decisions, 15.0 International Matters in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Audit Fee Differential, Audit Effort, and Litigation Risk: An Examination of ADR Firms
    Practical Implications:

    There are numerous factors that go into a firm’s decision to cross-list on foreign stock exchanges. One factor firms should consider regarding entrance into the U.S. stock exchange is an increase in audit fees. The evidence from this study indicates this increase can be traced back to costs from the legal environment and increased audit effort. 

    Citation:

    Bronson, Scott N., A. Ghosh, and C. E. Hogan. 2017. “Audit Fee Differential, Audit Effort, and Litigation risk: An Examination of ADR Firms”. Contemporary Accounting Research 34.1 (2017): 83.

    Purpose of the Study:

    U.S. investors rely on financial statements by foreign firms cross-listed on U.S. stock exchanges. Therefore, these financial statements must comply with accounting standards from the entity’s home country and U.S. standards. Previous studies have identified that audit fees are higher for cross-listed firms and attributed this to added litigation costs. This study examines if there are additional factors causing the audit fees to be higher for cross-listed firms. Specifically, about whether an increase in audit effort is incrementally related to price increases and if audit effort varies based on the stringency of an entity’s home country regulations. The authors presume the additional audit effort will result from the attestation of U.S. GAAP reconciliations and foreign auditor attestation of U.S. audit and independence standards.

    Design/Method/ Approach:

    The final sample consists of 36,646 observations and only includes entities audited by Big 4 firms. Compustat was used to find U.S.-based publicly traded firms, a list of foreign firms cross-listed in the United States was obtained from Bank of New York Mellon, and foreign non-cross listed publicly traded firms was listed in Worldscope and Compustat Global. The analysis was run using a regression of audit fees.

    Findings:

    The authors find the following:

    • Cross-listed firms in the United States do in fact pay significantly higher fees relative to other firms.
    • This total fee difference includes both incremental costs in legal environment and audit effort. The authors attributed 29% to 48% of this additional incremental costs as the additional audit effort required.
    • Cross-listed firms in countries with more stringent audit oversight pay a lower incremental audit fee compared to cross-listed firms in countries with more lax audit oversight.
    Category:
    Client Acceptance and Continuance, International Matters
    Sub-category:
    Audit Fee Decisions
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  • Jennifer M Mueller-Phillips
    The Joint Effects of Multiple Legal System Characteristics...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 01.02 Changes in Audit Standards, 15.04 Audit Firm Rotation in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Joint Effects of Multiple Legal System Characteristics on Auditing Standards and Auditing Behavior
    Practical Implications:

    Whether or not the ISA should be adopted by the United States is a greatly contested topic. This study is helpful for regulators and standard-setting boards in the United States about the potential effects of the adoption of ISA and mandatory audit rotation for the United States. This information is also applicable for other countries when making these decisions as well.

    Citation:

    Simunic, Dan A., M. Ye, and P. Zhang. 2017. “The Joint Effects of Multiple Legal System Characteristics on Auditing Standards and Auditor Behavior”. Contemporary Accounting Research 34.1 (2017): 7.

    Purpose of the Study:

    This paper examines the impacts of legal characteristics and auditing standards on audit behavior. Then based on this information the authors determine what the optimal auditing standards would be under different legal regimes. The two legal characteristics examined are vagueness in interpreting audit standards by courts and the expected damage award size in lawsuits against auditors for a failed audit. In recent years there has been a large number of countries adopting the International Standards on Auditing (ISA). Specifically, this study addresses whether or not ISA can be applied efficiently for all countries, and whether or not it adds value to the country that adopts the standards. 

    Design/Method/ Approach:

    The authors begin the analysis by determining the audit quality based on auditing standards and the legal system by using a single-period auditing model with risk-neutral players. After that the optimal auditing standards which maximize audit quality for a specific legal system were determined. The effect of auditor rotation on audit quality was found by adding contingent fees into the model.

    Findings:

    Overall, the authors find that audit quality is affected by both auditing standards and characteristics of legal systems. The optimal audit standards for a particular country also change depending on the legal system.

    Specifically, the authors find:

    • In situations where the expected damages are low, the audit standards are not able to increase audit quality. This is also true for a vague interpretation of audit standards by the courts. Simply adopting a set of rules, such as the ISA, does not determine audit quality.
    • Mandatory auditor rotation can improve audit quality and is more beneficial in countries that have tough and vague auditing standards.

    In regards to ISA the authors find:

    • In places that already have similar standards and legal systems, such as Canada, ISA can be effectively implemented.
    • However, in countries that have a weak legal system, such as China, it is not likely the adoption of ISA will affect audit quality.
    • It is hypothesized by the authors that due to the litigious legal environment of the United States the adoption of ISA would decrease audit quality. 
    Category:
    International Matters, Standard Setting
    Sub-category:
    Changes in Audit Standards
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  • Jennifer M Mueller-Phillips
    Factors Influencing Recruitment of Non-Accounting Business...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 13.0 Governance in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Factors Influencing Recruitment of Non-Accounting Business Professionals into Internal Auditing
    Practical Implications:

    Internal audit plays a critical role in maintaining corporate governance. This study examines factors that lead into non-accounting business professionals’ willingness to work in the internal audit function. This is an effort to provide guidance to the internal audit profession on how to better recruit students and non-accounting business professionals into internal audit roles. 

    Citation:

    Bartlett, Geoffrey D., J. Kremin, K. K. Saunders, D. A. Wood.2017. “Factors Influencing Recruitment of Non-Accounting Business Professionals into Internal Auditing”. Behavioral Research in Accounting 29.1 (2017): 119.

     

    Keywords:
    internal audit; hiring decisions; business professionals; outsourcing; management training ground.
    Purpose of the Study:

    An effective component of corporate governance for many entities is a strong internal audit function. According to recent studies stakeholders are generally dissatisfied with their current internal audit division. Additionally, prior research also indicates that companies face difficulties in recruiting for internal audit roles. This study examines the perception of the profession and factors affecting non-accounting business professionals’ willingness to work within internal audit.

    Design/Method/ Approach:

    The research project contains two different studies. The first study had a final sample size of 502 and the participants were undergraduate and graduate non-accounting business students from four different universities. The participants were read job descriptions and their responses were used as data. The second test included 46 students from across the country. They were provided a survey and asked what would make a career in internal audit more appealing to them.

    Findings:

    The authors find the following from the first study:

    • Business professionals have positive perceptions of internal auditing. These perceptions include internal auditors being respected and highly compensated, while performing meaningful work and having abundant career opportunities.
    •  Business professionals believe other business professionals hold negative stereotypes of internal auditing.
    • Business professionals are less willing to apply for positions in internal auditing than similar positions outside of internal audit.
    • Business professionals are not more inclined to work in internal audit even if the structure of their job is varied.

    The authors find the following from the second study:

    • Students with lower academic performance would be more interested in internal auditing if they were paid more.
    • Students with higher academic performance would be more interested in internal auditing if they performed less boring/tedious work, worked in a preferred company, and if they had a better understanding of the profession.
    Category:
    Corporate Matters, Governance
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  • Jennifer M Mueller-Phillips
    Does Charismatic Client Leadership Constrain Auditor...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 09.01 Audit Scope and Materiality Judgments in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Does Charismatic Client Leadership Constrain Auditor Objectivity?
    Practical Implications:

    The potential threat of constrained auditor objectivity due to charismatic leadership is one that has not previously been addressed before. Therefore, auditors should be proactive in making sure they are aware of this threat while working on various audit engagements. Additionally, audit firms should pay attention because it is unlikely that there are any mitigating strategies in place to combat the threat within the firm. 

    Citation:

    Svanberg, Jan, and P. Ohman. 2017. “Does Charismatic Client Leadership Constrain Auditor Objectivity?”. Behavioral Research in Accounting. 29.1 (2017): 103.

    Keywords:
    auditing; auditor objectivity; charismatic client leadership; client identification
    Purpose of the Study:

    An auditor’s objectivity can be negatively affected by various financial or social characteristics of the client. This study examines whether or not auditor objectivity is constrained by perceived charismatic leadership of management. The initial assumption is that perceived charismatic client leadership will in fact negatively affect auditor objectivity. This threat is particularly concerning because it can rapidly materialize and is unable to be addressed by auditor rotation. Previous studies have focused on the financial size of clients as an indicator of possible problematic relationships between the auditor and client. If the initial assumption in this study is correct than this will suggest that charismatic leadership plays a role in auditor objectivity along with the financial size of the firm. 

    Design/Method/ Approach:

    The sample consists of 1,000 Swedish auditors randomly selected using a Revisorsnamnden register. There was a 19.9% response rate to a questionnaire that was sent out on September 2013. The majority of respondents were male partners or managers. The questionnaire was a cross-sectional survey where auditors were asked to recall their largest client’s leader, and then to assess the extent to which the leader is charismatic. A regression model was then used to test the hypothesis.

    Findings:

    Overall, the authors find that there is a positive relationship between constrained auditor objectivity and the extent to which the auditor perceives the client leaders as charismatic. This suggests that client identification is not necessarily the only social factor leading to constrained objectivity.     

    Additionally, the authors find the following:

    • Stronger levels of professional identification are not associated with more objective judgment.
    • Auditors for Big 4 firms are more objective when compared to auditors in smaller audit firms.
    Category:
    Auditor Judgment, Independence & Ethics
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind
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  • Jennifer M Mueller-Phillips
    An Investigation of Ethical Environments of CPAs: Public...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 04.04 Moral Development and Individual Ethics Decisions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    An Investigation of Ethical Environments of CPAs: Public Accounting versus Industry
    Practical Implications:

    Overall, having a clear understanding of ethical environment perception is important because it shapes behavior, influences views of reality, and identifies the relative strengths and weaknesses of ethical environments. The results from this study suggests organizations in industry may need to place an additional emphasis on developing and strengthening their ethical environments. They can accomplish this goal by providing ethics training, incentivizing ethical behavior, and having an ethical leadership style.

    Citation:

    Bobek, Donna D., D. W. Dalton, B. E. Duaghterty, A. M. Hangeman, and R. R. Radtke.2017. “An Investigation of Ethical Environments of CPAs: Public Accounting versus Industry”. Behavioral Research in Accounting 29.1 (2017): 43.

    Keywords:
    ethical environment; public accounting; Big 4 firms
    Purpose of the Study:

    After numerous accounting scandals occurred at the turn of the 21st century, many argued the decline in ethical values and ethical environments within the accounting profession were to blame. This study investigates certified public accountants’ (CPAs) perceptions of the ethical environments in which they work. The authors compare CPAs in public accounting vs. CPAs in industry as well as CPAs working at Big 4 firms vs. CPAs working at international, national, regional, and local public accounting firms. It is hypothesized by the authors that accountants who work in public accounting will have a stronger perception of ethical environment than industry CPAs will. This is due to public accounting firms’ emphasis on professionalism, whereas industry tends to focus on commercialism. 

    Design/Method/ Approach:

    There are 904 participants from 4 different states. 803 of these participants work in public accounting while the remaining 101 are from industry. Respondents of the study assessed the ethical environment of their work ethic on a sliding scale. Regression analytics were performed on the results to test the perception of ethical environments

    Findings:

    The authors find the following:

    • CPAs working at public accounting firms perceive significantly stronger ethical environments compared to CPAs working in industry.
    • CPAs working at Big 4 public accounting firms perceive significantly stronger ethical environments compared to CPAs working at international/national, regional, and local public accounting firms.
    Category:
    Independence & Ethics
    Sub-category:
    Moral Development and Individual Ethics Decisions
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  • Jennifer M Mueller-Phillips
    Trust and Professional Skepticism in the Relationship...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 08.04 Auditors’ Professional Skepticism in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Trust and Professional Skepticism in the Relationship between Auditors and Clients: Overcoming the Dichotomy Myth
    Practical Implications:

    The findings from this study have direct implications for practitioners and policy makers. Current legislation efforts separate the auditor from the client and are not effective in raising the client’s perception of professional skepticism. Instead, the authors propose regulators giving auditors and clients sufficient leeway to establish identification-based trust.

    Citation:

    Aschauer, Ewald, et al. “Trust and Professional Skepticism in the Relationship between Auditors and Clients: Overcoming the Dichotomy Myth.” Behavioral Research in Accounting 29.1 (2017): 19.

    Keywords:
    auditing; trust; professional skepticism; coexistence
    Purpose of the Study:

    Professional skepticism is a key attribute for an auditor to have. Broadly, this study examines how the relationship between auditors and client managers affect professional skepticism. Specifically, if an auditors’ identification-based trust causes the client to view the auditor as having higher or lower professional skepticism. The authors in this paper define identification-based trust as interpersonal trust. Research in prior studies have reached different conclusions regarding the effects of identification-based trust on professional skepticism, so it is somewhat of a contested subject.

    Design/Method/ Approach:

    There were two studies that took place. In Study 1 the authors sent emails to selected auditors, managers and partners, inviting them to be interviewed for the research project along with their clients. Both the auditors and corresponding clients were interviewed separately about the general mechanisms of their relationship. The purpose of this study was to develop a hypothesis.

    In Study 2 the authors contacted 6,500 auditors in Germany by phone encouraging them to take a survey with their clients. The final sample size was comprised of 233 auditor/client groups. The auditors and clients were sent questionnaires and the data collected from the results were analyzed through an ordinary least squares regression.

     

    Findings:

    The overall finding of this study is that auditors’ identification-based trust in their clients is positively related to the clients’ perceptions of the auditors’ professional skepticism.

    The authors find:

    • Auditors may feel uncomfortable about this identification-based trust and compensate by increasing their professional skepticism.
    • Identification-based trust improves the information exchange between auditor and client which leads to a higher perception of professional skepticism by the client.
    • Identification-based trust reduces opportunism in the auditing process and allows for there to be more efficiency in areas such as negotiation.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Independence & Ethics
    Sub-category:
    Auditors’ Professional Skepticism
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  • Jennifer M Mueller-Phillips
    Inferring Remediation and Operational Risk from Material...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 14.0 Corporate Matters in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Inferring Remediation and Operational Risk from Material Weakness Disclosures
    Practical Implications:

    This study makes important contributions regarding management’s disclosure of material weakness deficiencies. Currently, only audit-related risks are required to be addressed in material weakness deficiency disclosures. However, this study indicates that nonprofessional investors also take non-audit-related risks into consideration when making a financial reporting risk assessment. Managers do have the discretion to provide information about non-related audit risks through nonaudited disclosures. The authors suggest that in doing so managers can mitigate investors’ negative reaction the material weakness from lack of communication.

    Citation:

    Asare, S. K., and A. M. Wright. 2017. Inferring Remediation and Operational Risk from Material Weakness Disclosures. Behavioral Research In Accounting

    Keywords:
    material weakness; financial reporting risk; mediation analysis; investors’ judgments
    Purpose of the Study:

    Material weakness disclosures, entity-level and account-specific, have a negative impact on nonprofessional investors financial reporting risk assessments. The authors define financial reporting risk as “an investor’s exposure to loss as a result of relying on audited financial reports generated from an ineffective ICOFR” for the purpose of the study. Prior studies have indicated that nonprofessional investors assess a higher financial reporting risk for entity-level material weakness disclosures compared to account-specific. Broadly, the primary purpose of this study is to examine audit-related and non-audit-related risks in explaining the relationship between the type of material weakness and the investor financial reporting risk assessment. The audit-related risks are as follows:

    • Information risk is the pre-audit potential for financial misstatements due to the material weakness.
    • Verification risk is the auditor’s ability to audit around the material weakness.

     

    The non-audit-related risks are as follows:

    • Remediation risk is management’s ability to remediate the weakness.
    • Operational risk is management’s loss of operational effectiveness do to the material weakness.

     

    Special attention in this paper is given to the relational effects between non-audit-related risks resulting from material weakness disclosures and nonprofessional investors financial reporting risk assessment.

    Design/Method/ Approach:

    The 181 participants in the study were all nonprofessional investors. Each participant received the following from a hypothetical company: general financial information, an audit report, and an adverse opinion on ICOFR, either on an entity-level or account-specific material weakness. Then participants were asked to evaluate the investment’s attractiveness and respond to several questions involving audit-related and non-audit-related risks. The authors used mediation analysis to evaluate the results. 

    Findings:

    The authors find the following:

     

    • The type of material weakness has a direct effect on information, verification, remediation, and operational risks. Nonprofessional investors consider entity-level material weaknesses as presenting higher audit-related and non-audit related risks compared to account-specific material weaknesses.
    • Subsequently, these higher audit-related and non-audit related risks directly cause the nonprofessional investor’s assessment of financial reporting risk to increase.
    • Thus, non-audit-related risks from material weaknesses do in fact have an impact on a nonprofessional investor’s financial reporting risk assessment.
    Category:
    Corporate Matters, Risk & Risk Management - Including Fraud Risk
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  • Jennifer M Mueller-Phillips
    The Effect of Partner Communications of Fraud Likelihood and...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 06.08 SAS No. 99 Brainstorming – effectiveness, 08.04 Auditors’ Professional Skepticism, 09.10 Prior Dispositions/Biases/Auditor state of mind in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors’ Professional Skepticism
    Practical Implications:

    Based on previous studies and preconceived notions, the finding that partners expressing their own views about the low likelihood of fraud had no effect on professional skepticism was surprising. This suggest that partner’s concern of not expressing this opinion to the team because it would lower the overall professional skepticism may be unwarranted. The evidence from this study indicates that partners can raise professional skepticism within the team by communicating management’s view of low likelihood of fraud, however it is not recommended for partners to use this approach every single time. Also, encouraging both outward and internal skeptical orientation can raise professional skepticism as well.

    Citation:

    Harding, N, and K. T. Trotman. 2017. The Effect of Partner Communications of Fraud Likelihood and Skeptical Orientation on Auditors’ Professional Skepticism. Auditing, A Journal of Practice and Theory 36 (21): 111-131.

    Keywords:
    Professional skepticism; fraud; partner communication; inward versus outward orientation; trait skepticism
    Purpose of the Study:

    Professional skepticism is a key attribute for auditors, and as such firms have been exploring ways to enhance professional skepticism within audit teams. This study investigates the impact of partner communications, specifically partner attribution and skeptical orientation, on professional skepticism during fraud brainstorm meetings. Partner attribution refers to the following choices of communication regarding the likelihood of fraud:

    • Own view there is a low probability of fraud
    • Management’s view there is a low probability of fraud
    • Not making any view known

     

    The partner can also encourage different types of skeptical orientation. The two addressed in this paper are:

    • The traditional view of outward skepticism which focuses on the veracity of management representations.
    • Inward skepticism which focuses on the accuracy of one’s own judgments as an auditor.
    Design/Method/ Approach:

    Participants in the two studies were comprised of 88 managers and seniors from the Big 4 firms. The first study examined the effects that partner attribution had on professional skepticism. Alternatively, the second study examined the effectiveness of encouraging outward versus internal skeptical orientation. The analysis included a 2x2+1 design for each of the two judgments.

    Findings:

    The authors find the following related to partner attribution:

    • There are increased levels of professional skepticism in situations where the partner communicates management’s view of a low probability of fraud. The authors believe this may be the result of auditor’s trying to find evidence that contradicts management’s view.
    • There are no significant changes in skeptical skepticism in situations where the partner communicates his/her own view of a low probability of fraud or no view at all.

     

    The authors find the following related to skeptical orientation:

    • There is no advantage in encouraging either an outward versus internal skeptical orientation. Neither is more effective than the other in elevating professional skepticism.
    • However, encouraging outward and internal skeptical orientation together can increase the level of professional skepticism.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Auditors’ Professional Skepticism, Prior Dispositions/Biases/Auditor state of mind, SAS No. 99 Brainstorming – effectiveness
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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 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    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
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