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    The impact of anecdotal data in regulatory audit firm...
    research summary posted September 16, 2015 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.10 Impact of Quality Reviewers, 11.11 Impact of Firm and External Inspection Programs 
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    Title:
    The impact of anecdotal data in regulatory audit firm inspection reports.
    Practical Implications:

    This study should be of interest to audit regulators around the world currently employing or contemplating the employment of firm-specific reporting formats. A critical and consistent feature of firm-specific reporting is the presence of descriptions of deficiencies uncovered in the inspection process. This study serves to warn audit regulators that reporting lists of deficiencies, as in the manner currently employed by the PCAOB, can lead to misperceptions of audit firm quality. The study also serves to inform audit regulators of two decision aids that the authors found useful in counteracting such misperceptions.

    Citation:

    Wainberg, J. S., T. Kida, M. D. Piercey, and J. F. Smith. 2013. The impact of anecdotal data in regulatory audit firm inspection reports. Accounting, Organizations & Society 38 (8): 621-636.

    Keywords:
    audit firm inspection reports, audit firm quality, audit firms, audit quality
    Purpose of the Study:

    The financial scandals of the last decade have spurred the establishment of independent audit regulators in most countries possessing highly developed market-based economies. The primary goal of statutory auditor oversight has been to restore investor confidence in capital markets by promoting high quality audits of public companies. Inspections of audit firms along with annual public reporting on inspection findings are now considered routine in many jurisdictions. The form and content of these public reports can vary greatly as regulators across the globe struggle to strike a balance between their constituent’s desire for ever-greater disclosures and the confidentiality needs of audit firms in practice.

    A critical and pervasive component of firm-specific inspection reporting is the release of detailed lists of weaknesses, or deficiencies, uncovered by the regulatory inspection teams for individual audit firms. While such information is ostensibly meant to provide useful information for audit committees and other stakeholders, prior research in psychology indicates that this type of information can, in fact, lead to biased perceptions of auditor quality. As a result, the purpose of this study is to investigate whether the anecdotal information typically provided in firm-specific inspection reports can lead to misperceptions of audit firm quality and whether two decision aids can help to mitigate this problem.

    Design/Method/ Approach:

    The participants were 207 managers and other professionals attending a management training program. The participants included individuals from upper level management, middle level management, and others with significant professional experience. On average, participants had nine years of business experience. The instrument was administered online using Qualtrics research software. Participants were asked to assume the role of an audit committee member and to make a hiring decision between two audit firms that were being considered to perform the company’s year-end audit. The data was collected prior to 2013.

    Findings:

    The results indicate that the previous manner of reporting only anecdotal deficiencies by the PCAOB can lead to incorrect perceptions of audit firms. In addition, the authors find that the addition of statistical information as currently provided by the PCAOB is ineffective. That is, users continue to focus on anecdotal deficiencies in the presence of the presented statistical data. Finally, the authors find that participants are more likely to incorporate the implications of statistical data when a salience enhancement of the statistical data and a judgment orientation were introduced. These findings suggest that biases induced by the inclusion of anecdotal data in statutory audit firm inspection reports can be mitigated by incorporating these easily implemented decision aids.

    Category:
    Audit Quality & Quality Control
    Sub-category:
    Impact of Firm & External Inspection Programs, Impact of Quality Reviewers