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    An Accountability Framework for Financial Statement Auditors...
    research summary posted March 30, 2015 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.01 Supervision and Review – Effectiveness, 11.06 Working Paper Review – Conduct, Biases and Predispositions 
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    Title:
    An Accountability Framework for Financial Statement Auditors and Related Research Questions
    Practical Implications:

    In conjunction with the changes discussed in the paper, as listed below, the authors hoped that their initial research would encourage other scholars to look into auditor accountability and formulate proposals of their own through examining intended and possible unintended consequences of the research questions identified.

    Citation:

    Peecher, M. E., I. Solomon, and K. T. Trotman. 2013. An accountability framework for financial statement auditors and related research questions. Accounting, Organizations and Society 38 (8).

    Purpose of the Study:

    In the past, public company auditing in many countries around the world was self-regulated but due to some major corporate collapses, worldwide changes were implemented. These changes led to entirely new regulatory bodies such as the Public Company Accounting Oversight Board and the Financial Reporting Council in the United Kingdom. Since these changes occurred, some believe audit quality has suffered. This paper attempts to address two overarching questions throughout it. (1) What kind of accountability framework could regulators use to motivate auditors to improve audit quality? (2) What accountability framework could regulators use to evaluate how well auditors have completed their duties? Based on these questions and the analyses of various research topics in psychology, neuroscience, economics and accounting, this paper hopes:

    • To establish that forward-looking estimates are the basis for most financial statement information and that some of these estimates are highly uncertain.
    • To propose an accountability framework with two dimensions:
      • Rewards versus penalties
      • Processes versus outcomes
    • To show that auditors’ current regulatory accountabilities are generally in the form of penalties rather than rewards and depend heavily on audit outcomes rather than attributes of auditors’ judgment processes.
    • To provide evidence that questions the suitability of the current system for improving the quality of auditors’ judgments and the quality of evaluations of those judgment made by inspectors.
    • To identify four potential changes for improvement in the quality of audits.
    Design/Method/ Approach:

    The authors use data and research from a variety of backgrounds including psychology, neuroscience, accounting, and economics and create new exhibits based on that information.  This information is gathered from a variety of journals across a large segment of time. The authors also utilized research questions in the article and attempted to answer each one as they presented it. 

    Findings:

    Based on preliminary research, the authors found:

    • It would be beneficial to identify new ways to reward financial statement auditors.
    • In certain instances steps should be taken to reframe auditors’ current incentives in reward terms.
    • Audit quality would likely increase if auditors were more accountable for the judgment-process quality.

    Based on research regarding the first proposed change, to introduce an auditor judgment rule, the authors found:

    • Practitioner risk taking, compounded with practitioner research and development on ways to improve existing practices, are reduced without a judgment rule.
    • Fear of liability makes it difficult to attract and retain the most talented individuals
    • Market mechanisms would penalize nonperformance even if a judgment rule was introduced.

    Based on research regarding the second proposed change, to add a concurrent element to regulators’ inspections, the authors found:

    • Using retrospective verbal or written accounts of participants’ judgment processes often entail stylization, bias, and omissions due to lapses in memory.
    • Audit working papers are stylized to reduce ambiguity, create a desired portrayal of the judgment process, and give a persuasive account of the auditor’s conclusions.
    • Training and quality-control benefits come from including concurrent reviews of subordinate auditors’ work, as opposed to relying on exclusively retrospective work.

    Based on research regarding the third proposed change, to encourage auditors to be skeptical of their own judgment processes, the authors found:

    • When asked to take the position of a “reasonable investor,” managers were far more conservative than they were with their regular decisions.

    Based on research regarding the fourth proposed change, to reward auditors who take stands on financial reporting quality, the authors found:

    • Providing significant and direct rewards for auditors who uncover fraud has the potential to motivate helpful innovation by auditors to actively search for fraud.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Supervision & Review – Effectiveness, Working Paper Review – Conduct - Biases & Predispositions