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    Do auditor judgment frameworks help in constraining...
    research summary posted November 14, 2016 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments, 09.12 Impact of potential post-audit review - e.g., PCAOB, internal firm inspections 
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    Title:
    Do auditor judgment frameworks help in constraining aggressive reporting? Evidence under more precise and less precise accounting standards
    Practical Implications:

    By examining the cognitive impact of the different judgment frameworks, this study provides academics, practitioners, and regulators with important insight into why counterfactual reasoning and a structured thought process differentially enhance auditors’ professional skepticism. 

    Citation:

    Backof, A. G., E. M. Bamber and T. D. Carpenter. Do auditor judgment frameworks help in constraining aggressive reporting? Evidence under more precise and less precise accounting standards. Accounting, Organizations and Society 51: 1-11. 

    Keywords:
    auditing, accounting standard precision, judgment frameworks, psychological distance, and abstract mindsets.
    Purpose of the Study:

    Auditors are being called on to exercise substantially more professional judgment during the financial reporting process due in part to the global trend towards less precise accounting standards; consequently, the Advisory Committee on Improvements to Financial Reporting (CIFiR) recommended that the Public Company Accounting Oversight Board (PCAOB) develop guidelines on how the PCAOB plans to evaluate the reasonableness of judgments made based on PCAOB auditing standards. Although the PCAOB has not yet done this, audit firms have developed their own judgment frameworks based on CIFiR’s identification of key components underlying reasonable accounting judgments. Further, the Center for Audit Quality (CAQ) recently published a professional judgment resource that audit firms can use to enhance their professional judgment process. This study examines how alternative specification of these judgment frameworks affect auditors’ constraint of management’s aggressive financial reporting under accounting standards that differ in their level of precision.

    Design/Method/ Approach:

    The authors conduct an experiment using a 2 x 4 factorial design to investigate these issues. A number of audit managers and partners from a Big 4 accounting firm participated in a case requiring them to audit management’s lease classification decision. The setting is created to be on where auditors stand to benefit from a well-reasoned judgment process that includes the consideration of alternatives and focuses auditors on the big picture economics rather than the transactional details.  

    Findings:
    • The authors find that the judgment frameworks are more effective under less precise standards. In particular, the pro/con framework based on CIFiR’s recommendation to consider the “pros and cons for reasonable alternatives” effectively enhances auditors’ skepticism of aggressive reporting under less precise standards, but not more precise standards.
    • The authors’ evidence suggests that both the pro/con why framework and pro why framework lead to an even greater reduction in auditors’ allowance of aggressive reporting under less precise standards; however, only the pro why framework curbs aggressive reporting under more precise accounting standards. 
    Category:
    Auditor Judgment
    Sub-category:
    Impact of Consultation on Judgments, Impact of potential post-audit review (e.g. PCAOB - internal firm inspections)