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    The Effects of Prior Manager-Auditor Affiliation and PCAOB...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.06 Board/Audit Committee Processes 
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    Title:
    The Effects of Prior Manager-Auditor Affiliation and PCAOB Inspection Reports on Audit Committee Members’ Auditor Recommendations
    Practical Implications:

    This paper provides evidence indicating that audit committee members recognize the potentially harmful effects of a manager-auditor relationship on auditor independence. It also supplies insight into the audit committee’s auditor selection and audit quality assessment process. 

    Citation:

    Abbott, L. J. V. L. Brown and J. L. Higgs. 2016. The Effects of Prior Manager-Auditor Affiliation and PCAOB Inspection Reports on Audit Committee Members’ Auditor Recommendations.  Behavioral Research in Accounting 28 (1): 1-14. 

    Keywords:
    audit committees, auditor selection, PCAOB auditor inspections, audit affiliation and audit quality.
    Purpose of the Study:

    The authors of this paper investigated the extent to which audit committee members utilize Public Company Accounting Oversight Board (PCAOB) inspection reports and consider a prior manager-auditor affiliation in their auditor selection decisions when management has recommended an auditor. The audit committee is directly responsible for the appointment, compensation, an oversight of the external auditor. When performing this duty, audit committees are to annually assess the auditor’s qualifications, independence, and performance and to avail themselves of any information sources necessary to make that assessment. It is likely that audit committees utilize PCAOB inspection reports to assess auditor performance. Prior archival research has only examined the use of PCAOB reports indirectly, and the results were hampered by the confounding effects of auditor brand name, auditor switching costs, and attempts by the auditor to de-emphasize the PCAOB’s report findings. This behavioral setting has a unique benefit by eliminating these confounding effects, providing direct evidence about whether audit committee members find PCAOB inspection reports useful in the context of the auditor selection decision. 

    Design/Method/ Approach:

    The authors conducted an experiment with 118 financially literate participants, acting as surrogates for audit committee members. The study also utilizes a 2 x 2 research design with manipulated auditor competence and independence constructs. 

    Findings:
    • The authors find that auditors with unfavorable inspection reports receive less favorable hiring recommendations, and auditors with management affiliations also receive less favorable hiring recommendations.
    • The authors find that the impact of auditor affiliation on participants’ judgments is context specific: it manifests itself only when the auditor is deemed to be competent via a favorable inspection report.
    • The authors find that there does not appear to be an auditor affiliation effect in the presence of an incompetent auditor with an unfavorable inspection report. 
    Category:
    Governance
    Sub-category:
    Board/Audit Committee Processes