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    Firm-Level Formalization and Auditor Performance on Complex...
    research summary posted October 13, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 09.0 Auditor Judgment 
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    Title:
    Firm-Level Formalization and Auditor Performance on Complex Tasks.
    Practical Implications:

    This study augments prior research by providing evidence of these same effects while measuring formalization in terms of where participants gained their prior audit experience. These results are relevant to organizations as they make decisions to add policies, procedures, or tools that may alter the level of formalization in their decision processes. The results may also be of interest to professionals seeking a work environment that is best suited to their goals and abilities. Several approaches may be used to mitigate the potentially negative implications of formalization. For example, firms might encourage the development of audit judgment by including opportunities for judgments that go beyond prescribed patterns.

    Citation:

    Stuart, I. C., and D. F. Prawitt. 2012. Firm-Level Formalization and Auditor Performance on Complex Tasks. Behavioral Research in Accounting 24 (2): 193-210.

    Keywords:
    audit structure, auditing, formalization, task performance
    Purpose of the Study:

    Formalization is an integral component of organizational structure. Firms choose different levels of formalization to increase the consistency of routine decisions and to bring uniformity to decision process outcomes. While formalization can have positive effects in many decision making contexts, the behavioral consequences of formalization must be carefully considered to assess properly the consequences associated with chosen levels of formalization. The influence of decision process formalization on knowledge acquisition, integration, and application and the tendency for decision makers to rely inappropriately on prescribed processes and procedures are issues of particular relevance to organizations providing guidance to professionals with relatively little experience.

    This study takes a first step in exploring the impact of decision process formalization (hereafter referred to only as formalization) on the development of an organization’s human resources by examining the relationship between the degree of firm-wide formalization and the individuals’ performance on tasks of varying complexity. Since auditors perform different tasks as they gain experience, one might think that the managers’ performance on tasks would not be affected by the formalization of tasks they performed as staff; however, the authors argue that since knowledge can be transferred across tasks, the effect of task formalization on knowledge acquisition has broad implications on the performance of auditors throughout the firm. Auditors who begin their careers in a formalized setting may lose opportunities to learn, which will hinder their future performance when they perform different tasks that may not be as formalized.

    Design/Method/ Approach:

    Practicing auditors from two Big 4 firms (12 locations of the less formalized firm and 11 locations of the formalized firm) participated in the study. The overall response rate was 47 percent. The data analysis reported in the following section was performed on a final sample of 81 auditors (45 from the formalized firm and 36 from the less formalized firm). The average experience level of the auditors was 43 months. The evidence was gathered prior to December 2011.

    Findings:

    This study posits that there are differential opportunities for development of professional judgment depending on a firm’s choice of the level of formalization. The results indicate that auditors from both firms performed equally well on relatively simple tasks. However, auditors from less formalized firms outperformed auditors from formalized firms on complex audit tasks. Differences in participant characteristics (months of experience, motivation, and ability) did not explain between-firm differences in auditor performance. 

    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment