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    Effects of Technical Department’s Advice, Quality A...
    research summary posted May 7, 2012 by The Auditing Section, last edited May 25, 2012, tagged 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments 
    Effects of Technical Department’s Advice, Quality Assessment Standards, and Client Justifications on Auditors’ Propensity to Accept Client-Preferred Accounting Methods
    Practical Implications:

    The results of this study are important for audit firms to consider when outlining best practices for their technical department.  They highlight the role and limitations of in-house consultation and advice in enhancing auditors’ decisions, and suggest that the nature of advice sought by, and presented to, auditors matters. Technical advice that merely reduces ambiguity may not be sufficient to counteract auditors’ bias toward accepting client-preferred methods. In fact, such advice could lead to an unintended consequence of bolstering auditors’ support for client-preferred methods. Explicit recommendations to use the most appropriate methods and reference to QAS should be included as well.


    Ng, T.B. and P. G. Shankar. 2010. Effects of Technical Department’s Advice, Quality Assessment Standards, and Client Justification on Auditors’ Propensity to Accept Client-Preferred Accounting Methods. The Accounting Review 85 (5): 1743-1761.

    Advice, quality assessment, justification, auditor judgment
    Purpose of the Study:

    Current standards require auditors to discuss with listed companies’ audit committees their judgments about the appropriateness or quality, not just acceptability, of the accounting principles and estimates in audited financial statements. The spirit of such standards advocates for the use of the most appropriate accounting method. However, prior research suggests that auditors continue to accept client-preferred methods, even when they may not be the most appropriate. This paper investigates whether the effectiveness of quality assessment standards (QAS) is weakened or strengthened by: 

    • Advice from the audit firm’s technical department. Both the presence and type of advice should impose reasonableness constraints on auditors’ tendency to accept client-preferred accounting methods.
    • The strength of client justification for their preferred accounting methods. Strong client justifications are more likely to persuade auditors, so the combined effect of QAS and advice from the audit firm’s technical department should be higher in these circumstances. 

    The authors derive their expectations from the psychology literature pertaining to motivated reasoning. The theory of motivated reasoning suggests that auditors with pro-client directional goals are likely to support their client-preferred method within reasonableness constraints, (i.e., as long as it is justifiable).

    Design/Method/ Approach:

    The research evidence was collected in the mid-2000s. Audit seniors, supervisors, and managers from two Big 4 firms in Singapore participated in the experiment. Auditors completed a simulated task involving the decision to accept the client-preferred method of accounting for an ambiguous sales contract. In the first stage, the authors randomly assign participants to one of four possible conditions, where QAS is present or absent, and client justification strength is strong or weak.  In the second stage, participants within each of these four conditions were randomly provided with two types of technical advice, with an explicit recommendation or without. At the end of both stages, participants made several judgments about the case, including whether to accept the client-preferred method.

    • The authors find that auditors’ propensity to accept the client-preferred method in the absence of technical advice (stage 1) is significantly influenced by client justification strength, but not by the presence of QAS.
    • The authors find that auditors’ propensity to accept the client-preferred method is reduced by the presence of QAS only when client justification is strong and explicit technical advice is provided (stage 2).
    • Subsequent analysis suggests that auditors strategically use technical advice to increase support for the client-preferred method unless QAS is present, explicit technical advice is provided, and client justification is strong.
    Auditor Judgment
    Impact of Consultation on Judgments
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