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  • Jennifer M Mueller-Phillips
    Commentaries on Big Data's Importance for Accounting and...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Commentaries on Big Data's Importance for Accounting and Auditing.
    Practical Implications:

    This set of commentaries presents a strong challenge to the accounting and auditing profession. Perhaps the greatest risk is the slow pace of adjustment of auditors and accountants to the new realities of Big Data/business analytics, which most accounting firms today would agree is absolutely essential to managing and maintaining competitive advantage. Academics, as educators, certainly must revamp their accounting and auditing curricula to provide the necessary skills for Big Data in the accounting and auditing profession. Researchers, too, have a responsibility to analyze Big Data datasets and to generate results that would better understand the contribution of Big Data for operations and decision making, and how the benefits of Big Data might flow to firm managers, company stakeholders, and the public at large.

    Citation:

    Griffin, P. A., and A. M. Wright. 2015. Commentaries on Big Data's Importance for Accounting and Auditing. Accounting Horizons 29 (2): 377-379.

    Keywords:
    management control, accounting standards, Big Data
    Purpose of the Study:

    The commentaries in this forum on Big Data confront one of the profession’s most pressing challenges. How should the accounting profession respond to Big Data? Big Data and business analytics now permeate almost all aspects of major companies’ decision making and business strategies. A large U.S. company, for example, might process a billion data elements every day to understand its competitive environment. Moreover, by its very nature, Big Data cannot avoid running head-on into the traditional systems of accounting and auditing that have served the profession so well in the past.

    This issue presents eight commentaries by expert academics and business professionals, who have studied and thought much about the core issues and challenges. Collectively, these commentaries not only define and frame the important issues for accounting and auditing but, also, they identify many feasible, yet difficult, pathways forward, wherein Big Data and traditional accounting and auditing might meld to better serve firms, stakeholders, and the public. These commentaries also identify controversies within the field that imply hard choices. At minimum, the expectation is that these commentaries will stimulate a healthy discussion on the topic among students, academics, and professionals. In this way, they will also serve a key aim of this journalto bridge the gap between theory and practice.

    Design/Method/ Approach:

    This article is a commentary.

    Findings:
    • Vasarhelyi, Kogan, and Tuttle (2015) argue strongly that Big Data matters fundamentally because it changes radically what the profession means by information.
    • Warren, Moffat, and Byrnes (2015) continue this theme but focus mostly on behaviors internal to the firm. Big Data will affect the design and operation of management control systems, they contend, by helping identify behaviors correlated with specific goal outcomes, which would prompt formulation of new performance measures.
    • Krahel and Titera (2015), on the other hand, offer a more sobering hypothesis, contending that current accounting and auditing standards, which emphasize presentation, aggregation, and sampling, are headed in the wrong direction. They state, Aggregation and arbitrary allocations made on static, paper-based financial statements are artifacts of a bygone era of high transmission costs and slow data collection speeds.”
    • Several commentaries discuss how Big Data will change auditing.
    • Brown-Liburd, Issa, and Lombardi (2015) also raise challenges for the auditing profession, but these relate more to its behavioral repercussions; in particular, how Big Data might affect the quality of auditors’ judgments.
    • Zhang, Yang, and Appelbaum (2015) develop their views around the four Vs of Big Datavolume, velocity, variety, and veracity.
    Category:
    Standard Setting
    Sub-category:
    Changes in Audit Standards
  • Jennifer M Mueller-Phillips
    Big Data in Accounting: An Overview.
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 01.02 Changes in Audit Standards, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.09 Impact of Technology on Audit Procedures, 09.0 Auditor Judgment in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Big Data in Accounting: An Overview.
    Practical Implications:

    The availability of Big Data will precipitate substantive changes in accounting education, research, and practice. In education, in particular accounting and auditing, the use of Big Data will increase the statistical and IT content in curricula, probably breaking the current set of limitations represented in the CPA exam. Research in the more traditional fields in accounting, such as capital markets research, will benefit from dimensional increases in data availability and will be conditional on improvements of the researcher’s skill sets in areas such as modeling, statistics, and text mining. Practice, in particular internal audit departments, will be the leading facilitator of accounting Big Data usage, while attempting to keep abreast or in sync with the developments in corporate data utilization in fields like marketing, supply chain, and customer services.

    Citation:

    Vasarhelyi, M. A., A. Kogan, and B. M. Tuttle. 2015. Big Data in Accounting: An Overview. Accounting Horizons 29 (2): 381-396.

    Keywords:
    analytics, audit judgment, enterprise data ecosystem, reporting, standards, storage
    Purpose of the Study:

    The term Big Data is fairly new but seems to be applied in almost every area of human activity at the moment. It is not defined in the rigorous meaning of the word, and it is usually used under the assumption that the readers understand it at the intuitive level. The reason for this popularity is the exponentially growing amount of information made available by developments in computing and telecommunications technology, particularly the Internet and environmental sensing. This paper sheds light on the meaning of Big Data in the accounting and auditing domains.

    Design/Method/ Approach:

    This article is a commentary.

    Findings:
    • The definition of Big Data is conditional on the environment being used.
    • Processing needs are nonlinear with the size of data. Even small datasets may be computationally difficult if models are complex.
    • There is a progressive extension of the feasible dataset. Inclusion of sources is mainly an economic and legal issue and not one of feasibility.
    • Newly included data structures contain a wide set of not previously determined/used parameters, which by themselves may be informational.
    • Extended, nontraditional data sources may substantively change the domains of accounting and auditing.
    • Linkages of traditional extended data, as found in ERPs, to new sources of data may provide very strong confirmatory evidence for economic activity.
    • Accounting, auditing, and management extensions into Big Data usage overlap and present powerful opportunities in the next decade but also the re-conceptualization of functions in an age of computer intelligence and automation.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Standard Setting
    Sub-category:
    Changes in Audit Standards, Changes in Reporting Formats, Changes in Reporting Formats, Impact of Technology on Audit Procedures Confirmation – Process and Evaluation of Responses
  • Jennifer M Mueller-Phillips
    Consequences of Big Data and Formalization on Accounting and...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 01.02 Changes in Audit Standards, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Consequences of Big Data and Formalization on Accounting and Auditing Standards.
    Practical Implications:

    In light of cost reductions in data generation, storage, retrieval, and transmission, the inherent compromises within the paper paradigm are of little benefit. Users are entitled to more in-depth, granular values that they can manipulate, drilling down and up for more or less detail where needed. Financial reporting standards that govern presentation and arbitrary aggregation must likewise give way to rules regarding the limits and frequency of data transmission, as well as the quality of those data. 

    Audit standards must change as well. Error detection and risk quantification are no longer sufficient targets, but must be seen as small components of an audit of broader scope. The deep analysis of tremendous volumes of data and potentially thousands of exception reports necessitates a different paradigm of reporting and assurance. The role of auditing standards, far from being diminished in the face of increasing automation, must shift from governing sampling procedures to embracing the broader, deeper data availability and analysis of the modern era in an effort to create a better, more thorough audit.

    Citation:

    Krahel, J. P., and W. R. Titera. 2015. Consequences of Big Data and Formalization on Accounting and Auditing Standards. Accounting Horizons 29 (2): 409-422.

    Keywords:
    accounting standards, auditing standards, Big Data, continuous audit, materiality
    Purpose of the Study:

    The level, breadth, and quality of externally presented financial information have always represented a compromise between the preparer’s cost and the user’s benefit. While preparer costs vis-a`-vis data collection and transmission have decreased significantly, the compromises made in the paper-based era have persisted, creating a set of anachronistic accounting practices that, in the authors’ view, unfairly handicaps statement users. A similar effect can be observed in auditing practices. While data availability and standardization have increased, audit standards continue to focus on sampling and other practices indicative of a low-information environment. This paper will address the problems that result from such anachronisms, present a set of axes along which accounting and auditing standards must evolve, describe the avenues through which such changes can be accomplished, and discuss the new paradigm from academic and practical perspectives.

    Design/Method/ Approach:

    This article is a commentary.

    Findings:
    • Accounting and reporting standards must adapt to deal with the frequent (possibly even continuous) transmission of granular data, not only their presentation in the aggregate.
    • Such standards need to consider addressing company-specific data, as well as macro-level data that may be important to the analysis of a company’s financial condition. They also need to consider enhancing historical reporting to include other data elements that may enable predictive analysis by users.
    • Auditing standards must address situations where data are abundant, not only where data are sparse. The concept of materiality in relation to a company’s financial statements, taken as a whole, needs to be reevaluated.
    • Auditing standards must also do more to address the concept of process auditing. When data are available on a continuous basis, the processes generating those data must be continuously assured. Internal and external auditor competencies must be broadened to include more advanced types of data analytics. 
    • All parties along the financial reporting value chain must recognize the latent value in unstructured and semi-structured data.
    • Care must be taken to minimize the expectations gap between users and auditors in the face of increasing data and analytical capacity. A user’s role (and responsibility), which could change, must also be considered.
    Category:
    Engagement Management, Standard Setting
    Sub-category:
    Changes in Audit Standards, Changes in Reporting Formats, Changes in Reporting Formats, Materiality & Scope Decisions
  • Jennifer M Mueller-Phillips
    The Effect of Auditing Standard No. 5 on Audit Report Lags.
    research summary last edited September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 01.04 Impact of 404, 01.05 Impact of SOX, 01.06 Impact of PCAOB, 12.0 Accountants’ Reports and Reporting, 12.06 Consequences of Adverse 404 Opinions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effect of Auditing Standard No. 5 on Audit Report Lags.
    Practical Implications:

    The findings support the regulators’ contention that the new top-down, risk-based approach under AS5 makes the audit process timelier and efficient by decreasing audit report lags and facilitating firms’ efforts to meet the reporting deadline set by the SEC, especially when the firms have an effective internal control system. However, the firms with material internal control problems that persist either at the company level or at the accounts/transaction level continue to experience larger reporting lags in the post-AS5 years compared with the clean SOX 404 firms. The results are generally consistent with auditors focusing more on critical risk areas associated with ineffective internal controls and applying principle-oriented top-down, risk-based audit procedures to minimize risk, which requires increased audit efforts and longer audit time to accomplish their work properly.

    Citation:

    Mitra, S., H. Song, and J. S. Yang. 2015. The Effect of Auditing Standard No. 5 on Audit Report Lags. Accounting Horizons 29 (3): 507-527.

    Keywords:
    AS5, audit report lags, PCAOB, SOX 404
    Purpose of the Study:

    This study investigates whether the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 5 (AS5), which was introduced in June 2007, makes the audit process timelier in an extended post-AS5 period from 2007 to 2011 relative to a pre-AS5 period of 20062007. For this, the authors focus on evaluating the AS5 effect on audit report lags (ARL) both for the firms with material internal control weaknesses (ICW) and the firms with a clean SOX 404 opinion (non-ICW). ARL, a proxy for audit effort, has long been an important topic of academic research because ARL is considered critical in influencing timely judgment and decision making by financial statement users.

    First, the authors investigate the impact of the change from AS2 to AS5 on audit report lags over an extended period from 2006 to 2011. Second, they compare the effect of AS5 on report lags separately for the large accelerated filers and accelerated filers given significant differences in the 10-K filing deadlines for these two types of filers. Third, they examine the impact of AS5 on audit report lags for firms with internal control weaknesses (ICW) with separate analyses for firms with company-level control weaknesses and for firms with account-specific control weaknesses.

    Design/Method/ Approach:

    The analyses are conducted for the period from 2006 to 2011, which covers the AS2 period of 20062007 and the AS5 period of 20072011. The sample comprises 2,062 AS2 observations (divided between 1,877 non-ICW and 185 ICW observations) and 9,200 AS5 observations (divided between 8,870 non-ICW and 330 ICW observations). The authors use Compustat Annual and Business Segment files to gather information.

    Findings:
    • Audit report lags in the AS5 years were significantly lower than those in the AS2 years; the report lags decline, on an average, by 1.85 days.
    • ICW firms, in general, have larger report lags than the clean SOX 404 firms, but AS5 does not have an incremental effect on the report lags for the ICW firms, indicating the report lags decline only for the firms with a clean SOX 404 opinion.
    • Separate analyses for the ICW firms with company-level and account-specific material weaknesses show that audit report lags for those firms do not significantly change between the AS2 and AS5 periods and continue to be higher compared with those for the clean SOX 404 firms.
    • Additional tests using a constant sample of firms demonstrate a learning curve effect of AS5 in reducing report lags in the post-AS5 period both for the full sample and for the firms with a clean SOX 404 opinion.
    • The report lags significantly decline in both the early and late AS5 periods for both the large accelerated filers and accelerated filers and for the full constant sample.
    • Overall, the results show that the new top-down, risk-based approach under AS5 makes the audit process more efficient and timelier by decreasing audit report lags.
    Category:
    Accountants' Reporting, Standard Setting
    Sub-category:
    Changes in Audit Standards, Consequences of Adverse 404 Opinions, Impact of 404, Impact of PCAOB, Impact of SOX
  • Jennifer M Mueller-Phillips
    Rethinking Decision Usefulness.
    research summary posted September 15, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 15.0 International Matters in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Rethinking Decision Usefulness.
    Practical Implications:

    This study provides critical insights of how standard setters develop new standards and that this process lacks potent theories. In rethinking decision usefulness to make it a useful concept and not an empty slogan for regulating financial reporting, the authors believe a return to the older notion of accountability is worth considering. Providing economic “facts” pertaining to the relationships between corporations and the citizenry that must make decisions about them, rather than “decision useful” information, may be a more useful way to think about the mission for a public regulatory body.

    Citation:

    Williams, P.F., and S.P. Ravenscroft, 2015. Rethinking Decision Usefulness. Contemporary Accounting Research 32 (2): 763-788.

    Keywords:
    financial auditing standards, development & legitimacy, usefulness of information
    Purpose of the Study:

    Financial reporting policy-making is centered amongst decision usefulness. Policy makers mandate reporting based on which technique they believe will produce the most useful information for economic decision making by certain designated users. Both the IASB and FASB enunciate the position in statement of financial accounting concepts in similar vein “…provide useful information to investors, creditors and other stakeholders in making decisions...”. At its core regulatory standards are intended to control conditions linked to the purpose of the legislation that the regulatory agency is established to execute. That is if A signifies a certain act and X signifies the risk, than the agency takes X to count in favor of doing A. Any agency to whom it transfers authority, such as the IASB, face an equal situation. They must determine whether X provides evidence in favor of doing A where A is to act to set a standard that enforce firms to prime their financial reporting in particular ways and proscribes others. The standard setters must “translate” decision useful information into standards. Unfortunately in accounting criterion guidance lacks specificity and verifiability. Currently, in their foundational concept statements both the FASB and IASB identify “decision usefulness” as just an X. Accounting setters reflect a normative judgment about protecting stakeholders and insuring fair dealing in securities as desirable ends of financial reporting. But to be a justifiable criterion, accounting standard setters’ X also must contain a factual element. Accounting standard setters should be able to establish objectively that property of accounting information which procure a legitimate matter for releasing a standard.

    This study investigates whether decision usefulness currently articulates a sufficient coherent basis for accounting as social, regulatory practice.

    Design/Method/ Approach:

    This article is a commentary. The authors adopt a number of references to enhance the debate around decision usefulness. These references can be classified into: [1] articles that provide insights in the (juridical) position of audit standard setter, [2] articles that relate to individual differences of users [micro realm], [3] articles that can be classified in holistic (economic) theories [macro realm] and lastly [4] theoretical support for different metaphor(s) in accounting standard setting.   

    Findings:
    • The authors conviction is that currently the decision usefulness serves more as a legitimating myth rather than providing a coherent rationale for making public policy.
    • The authors provide useful insights in the “gap” of explicitly stated “decision usefulness”. Several leading academics promote the notion that decision usefulness implied a move from normative basis of accounting to a descriptive or positive grounding that was amenable to empirical validation. Practitioners are not entirely convinced about these arguments.
    • The authors stated that when considering the substantial research about human decision making and the complexity and unpredictability of open systems such as global economy, they demonstrate the remoteness of the possibility of ever identifying any X that definitively counts in favor of A versus any other potential A.
    • Accountability is more descriptive of what accountants actually do 1 and the manner by which accounting rules are actually promulgated. Rather than classify accountability under decision usefulness the converse might appear to be more intellectually defensible.
    Category:
    International Matters, Standard Setting
    Sub-category:
    Changes in Audit Standards
  • Jennifer M Mueller-Phillips
    “Twisting words”? A study of the construction and rec...
    research summary posted July 27, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    “Twisting words”? A study of the construction and reconstruction of reliability in financial reporting standard-setting.
    Practical Implications:

    First, the authors present a long-term case study of the development of the idea of reliability in accounting literature and standard-setting which adds to histories of conceptual thinking in financial reporting. Hence, by following the decision-making of the standard setting bodies regarding the qualitative characteristics of their framework, this paper contributes to the scarce empirical literature on actual processes of standard-setting in accounting.

    Citation:

    Erb, C., & Pelger, C. (2015). “Twisting words”? A study of the construction and reconstruction of reliability in financial reporting standard-setting. Accounting, Organizations & Society 40: 13-40.

    Keywords:
    standard setting, reliability, representational faithfulness
    Purpose of the Study:

    Qualitative characteristics serve to operationalize the objective of financial reporting and aim at shaping accounting discourses of standard-setters and their constituents. In the recent revision of their conceptual frameworks, the IASB and FASB decided to replace reliability”, arguably one of the most important properties of accounting, with ‘”representational faithfulness”. Although the boards considered the move to representational faithfulness to be a change in terms rather than in substance, simply reflecting a better terminology of the boards’ understanding, the boards’ constituents were heavily opposed to this alteration. The aim of the present paper is to shed light on the boards’ decision through a historical analysis of how reliability appeared in standard-setting and by tracing its abandonment in detail. In this paper the authors show that the construction and reconstruction of reliability followed from the standard-setters’ aim to extend the boundaries of appropriate financial reporting by changing conceptual language.

    Design/Method/ Approach:

    For this historical study, the authors examined official pronouncements, studies and other publications by professional institutions (AICPA) and research committees (AAA) in the US. They also carried out a thorough manual search of accounting journals for articles and other contributions concerning qualitative characteristics. The latter task was independently performed by both authors. The journals examined were Journal of Accountancy [19601985], Journal of Accounting Research [19631980] and The Accounting Review [19601980], the leading professional and academic accounting journals during that time. In total, the authors identified 36 relevant articles, seven monographs, two contributions from a collected edition and one statement from an institution formally in charge of standard-setting.

    Findings:

    Reliability was constructed in stand setters’ previous frameworks as a compromise between the traditional (evolutionary) practitioner idea embodied in the concept of verifiability and more recent academic notions of faithful representation. As constituents continuously ignored the faithful representation part of reliability and repeatedly used their understanding along the lines of verifiability to dismiss fair value accounting, the standard-setters reconstructed reliability to establish a single focus on faithful representation. However, the standard-setters’ attempt to alter traditional practical understandings by using ever higher levels of abstraction led to very different views among constituents and board members about what “faithful representation” means and what it implies. Hence, the standard-setters ‘construction and reconstruction of “reliability” against traditional understandings of verifiability by employing ever higher (more academic) levels of abstraction appears to be a permanently failing project.

    More specifically, the authors reveal that some board and staff members pressed the change towards faithful representation to eliminate a major hindrance to the expansion of fair value accounting. These actors’ ultimate success was due to confusion amongst and indifference by other board members as well as the strong position of the staff in pushing the change. The intensive public consultation carried out by the boards paradoxically served to decouple the standard-setters’ world from everyday accounting practice.

    Category:
    Standard Setting
    Sub-category:
    Changes in Audit Standards
  • Jennifer M Mueller-Phillips
    Balancing the Costs and Benefits of Auditing and Financial...
    research summary posted March 30, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 01.03 Impact of New Accounting Pronouncements, 01.04 Impact of 404 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Balancing the Costs and Benefits of Auditing and Financial Reporting Regulation Post-SOX, Part I: Perspectives from the Nexus at the SEC
    Practical Implications:

    The results of this study are important because they illuminate the impact of new accounting rules on standard setters and companies abiding by these rules (in this case, the specific context was the implementation process related to SOX Section 404). The study suggests that a number of steps are required in order to perfect the guidance. It is important to understand the meaning and intentions behind authoritative literature in order to follow it. The observations suggest that the process for implementing new guidance has room for change, yet has evolved over time to increase effectiveness. The findings are specific to the implementation for assessment and auditing of internal controls for public companies.

    For more information on this study, please contact Zoe-Vonna Palmrose (zv.palmrose@marshall.usc.edu).

    Citation:

    Palmrose, Z.-V. 2010. Balancing the Costs and Benefits of Auditing and Financial Reporting Regulation Post-SOX, Part I: Perspectives from the Nexus at the SEC. Accounting Horizons 24 (2):313-326.

    Purpose of the Study:

    Sarbanes-Oxley (SOX) Section 404 adds requirements for disclosures discussing management’s assessment of internal controls. Zoe-Vonna Palmrose served as the Deputy Chief Accountant for Professional Practice in the Office of the Chief Accountant. From August 2006 to July 2008, Palmrose observed the effects of SOX Section 404 on practice. The paper describes her observations related to:

    • The purpose of SOX Section 404.
    • Initial implementation efforts related to SOX Section 404.
    • Improvements for the implementation of SOX Section 404. These improvements primarily focus on the cost-benefit for smaller companies that had to report under SOX Section 404.
    • Overall cost-benefit effect on SOX Section 404 filers.
    Design/Method/ Approach:

    The author collected data through personal experiences from August 2006 through July 2008. She observed and recorded information related to SOX Section 404 during her time as the Deputy Chief Accountant in the Professional Practice Group.

    Findings:
    • The author finds that SOX Section 404 does not require a company to implement adequate internal controls because previous standards released in 1977 already accomplished that objective. Instead, SOX Section 404 requires disclosure of management’s assessment of the adequacy of its internal controls. The assessment is based on whether the internal controls can provide reasonable assurance about the reliability of the financial statements. SOX Section 404 does not allow management to disclose that its internal controls are effective if it determines material misstatements exist in the financial statements. The guidance also requires that a registered PCAOB auditor opines on management’s assessment of internal controls.
    • The author finds that the problems associated with the initial implementation of SOX Section 404 arose because it was issued from the top down. Few companies were reporting on internal controls before SOX required public companies to do so. The author observes that AS No. 2 was initially poorly suited for reporting on internal controls because it was difficult to determine the respective responsibilities of the auditor and management. In June 2006, the PCAOB clarified the standard in response to this confusion.
    • The author finds that the PPG aided the amendment to AS No. 2, accomplished in AS No. 5. Furthermore, an open meeting between the SEC and the PCAOB was primarily held to discuss how to make management and the auditor’s responsibilities more effective with respect to the responsibilities of each party.
    • The author finds that deferring implementation of SOX Section 404 for smaller public companies allowed the implementation flaws to be discovered before smaller companies were harmed.
    • The author finds that audit fees rose in order to compensate for the added work for the auditors. Cost-benefit relationships were analyzed in order to determine the effectiveness of the work to be completed.
    Category:
    Standard Setting
    Sub-category:
    Changes in Audit Standards, Impact of 404, Impact of New Accounting Pronouncements
  • Jennifer M Mueller-Phillips
    The effect of Auditing Standard No. 5 on audit fees
    research summary posted March 11, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 07.0 Internal Control, 07.05 Impact of 404 on Fees and Financial Reporting Quality in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The effect of Auditing Standard No. 5 on audit fees
    Practical Implications:

    The results provide support for regulators’ expectations about AS5’s overall fee-saving (but not their expectations of greater savings for smaller, less complex companies). The authors conclude that overall, there was a reduction in audit fee under the AS5 standard, but mainly for complex firms.

    For more information on this study, please contact Jagan Krishnan.

    Citation:

    Krishnan, J., J. Krishnan, and H. Song. 2011. The effect of Auditing Standard No. 5 on audit fees. Auditing: A Journal of Practice & Theory 30(4): 1-27.

    Keywords:
    audit fee; AS5; audit quality; PCAOB; SOX 404.
    Purpose of the Study:

    In light of the controversy over implementation cost surrounding Auditing Standard No. 2 (AS2), the PCAOB responded by superseding AS2 with Auditing Standard No. 5 (AS5), An Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial Statements, effective for fiscal years ending November 15, 2007.  This paper examines the effect of the change from AS2 to AS5 on audit fees. The paper seeks to answer the following questions:

    • Were audit fees lower in the first two years of adoption of AS5 (other things being equal) compared to AS2?
    • More specifically, did AS5 have an impact on audit fees for firms with material weaknesses in internal control?
    • Was there was a difference in fee changes across client size/complexity groups?
    Design/Method/ Approach:

    The study’s primary tests are based on a comparison of audit fees in 2006 (the last year of AS2 audits) with audit fees in 2007–2008 (the first two years of AS5 audits) for a sample of ‘‘stable’’ auditor-client relationships.  Thus, the sample period was 2006-2008. The authors employ a longitudinal sample of firms (the ‘‘full sample’’) that had the same auditor over the four-year period 2005–2008, thus including a year prior to the sample period. Additionally, the study examines the fee trends for a ‘‘clean sample’’ consisting of firms that had clean ICFR opinions throughout our sample period.            

    Findings:

    Overall, the authors find AS5 had a statistically negative effect on audit fees.

    • After controlling for previously identified covariates of audit fees, the authors find audit fees were lower in the first two years of AS5 implementation as compared with the last year of AS2 (4.11 percent and 3.92 percent, based on the median firm, for the full and clean samples, respectively)
    • Consistent with previous work, this study finds that firms with adverse opinions on internal control pay higher fees than those with clean opinions. However, the premium paid by client with adverse opinions is smaller under AS5 than under AS2, which is consistent with a reduction in over auditing or over-conservatism in reporting material weaknesses.
    • Contrary to the expectation that less complex firms would benefit from AS5, this study reports a reduction in audit fee under the AS5 standard mainly for complex firms.
    Category:
    Internal Control, Standard Setting
    Sub-category:
    Changes in Audit Standards, Impact of 404 on Fees and Financial Reporting Quality
  • Jennifer M Mueller-Phillips
    The Use of Business Risk Audit Perspectives by Non-Big 4...
    research summary posted March 10, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 06.0 Risk and Risk Management, Including Fraud Risk, 06.05 Assessing Risk of Material Misstatement in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Use of Business Risk Audit Perspectives by Non-Big 4 Audit Firms
    Practical Implications:

    The first implication is a call for proportionality and flexibility to adopt an audit approach that meets the client-audit firm context. SMP auditors told us that they struggle with achieving proportionality by not performing some audit procedures such as entity-level analytical procedures for smaller clients, because they feel obliged to perform these procedures to comply with documentation requirements of the auditing standards or of regulators and oversight bodies. Such experiences may result in inefficient, ‘‘check-the-box’’ audits in order to satisfy perceived documentation requirements for review purposes.

    The second implication is that standard setters should be aware that the type and/or scope of the assurance engagement might also vary by jurisdiction. For example, in a jurisdiction with a close book-tax alignment, the clients’ and users’ expectations about the type and scope of assurance may interact with the prescribed standards in shaping audit practice.

    For more information on this study, please contact Niels van Nieuw Amerongen.

    Citation:

    Van Buuren, J., C. Koch, N. v. Nieuw Amerongen, and A. M. Wright. 2014. The Use of Business Risk Audit Perspectives by Non-Big 4 Audit Firms. Auditing: A Journal of Practice and Theory 33 (3): 105-128

    Keywords:
    business risk auditing, small and medium-sized audit practices (SMPs), auditing standards, audit methodology
    Purpose of the Study:

    The purpose of this study is to examine the extent of use of business risk perspectives by Small and Medium-sized audit Practices (SMP) and to investigate the conditions and factors affecting the application of such practices. We neither focus on the degree of compliance with standards nor on the audit quality differences among audit firms. Rather, we want to document variation in practices and, in particular, the relative reliance on Business Risk Audit (BRA) forms of evidence, since current auditing standards allow great flexibility in the choice of audit approaches on an audit engagement.

    Investigating SMPs is expected to provide new insights because SMP auditors face an audit environment that is very challenging in the use of business risk perspectives. For instance, SME clients often do not have formalized entity-level controls for assessing (client) business risks. Also, clients of such firms vary considerably in size and complexity, which may affect the cost-effectiveness of various forms of BRA evidence. We examine whether business risk assessments are proportionally applied. That is, we investigate whether the extent of consideration of business risks is dependent upon cost-effectiveness in the client setting. For instance, for large clients, the complexity of the engagement likely requires a focus on business risks and entity-level evidence, while for small clients, it may be more cost-effective to primarily rely on substantive tests at the assertion-, account or cycle level. In this respect, we consider a continuum of audit approaches, ranging from a substantive-based audit approach to a full-scope business risk audit, to explain differences in the use of business risk perspectives in SMP’s audit planning.

    Design/Method/ Approach:

    To examine these issues, we use a semi-structured interview approach involving 38 highly experienced auditors in Germany and in The Netherlands. This approach allows us to gather rich, detailed data of auditors’ experiences in the field.

    Findings:

    The findings indicate limited application of business risk perspectives by SMPs. Although SMPs regularly assess business risks, they are divided in their experiences and perceptions about the usefulness of business risk perspectives and rarely apply the knowledge of business risks for analytical procedures. We also find that many SMP auditors find it challenging to rely on entity-level controls that are often informal in SMEs or that are established by an owner-manager. Our results suggest that SMP auditors more often choose a systems-based or primarily substantive audit approach, as compared to the broad BRA approach. The findings indicate that the use of business risk perspectives is driven by consideration of the tradeoff between audit effectiveness and efficiency. Auditors with larger and more complex clients apply business risk perspectives more extensively. Further, auditors identify other factors that may affect the use of a business risk audit approach, such as tax-book alignment, enforcement by audit supervisory authorities, prior working exposure to BRA through experience with Big 4 audit firms, audit client tenure, and investments in training and databases.

    Category:
    Risk & Risk Management - Including Fraud Risk, Standard Setting
    Sub-category:
    Assessing Risk of Material Misstatement, Changes in Audit Standards
  • Jennifer M Mueller-Phillips
    An Inductive Typology of Auditing Research
    research summary posted March 4, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    An Inductive Typology of Auditing Research
    Practical Implications:

    This study has certain limitations that could be tackled in future research: in particular, the sample is based on published articles from 25 journals, therefore neglecting other journals and “grey literature”. However, this inductive typology could be further applied to present a structured framework of auditing research, and to analyze trends and emerging issues in comparative and/or longitudinal studies, research reports, and the like. Future investigations of the way research themes emerge and evolve should certainly contribute to a better understanding of auditing research.

    For more information on this study, please contact Cedric Lesage.

    Citation:

    Lesage, C. and H. Wechtler. 2011. An Inductive Typology of Auditing Research. Contemporary Accounting Research 29 (2): 487-504. 

    Keywords:
    typology; auditing research theme
    Purpose of the Study:

    A global picture of a specific complex domain in social sciences can be provided by typologies. Despite the usefulness and subsequent applications of the typologies proposed in past research, there are four concerns. First, the SK typology is arguably less efficient for structuring auditing research knowledge 30 years later. Second, the studies cited earlier concerned either a single journal, or a single period. Third, previous typologies are concept-driven rather than data-driven classifications. Fourth, they are practice-oriented rather than research-oriented. Taking these main concerns into consideration, the authors implement the study with the purpose to propose an updated, inductive, and comprehensive typology of auditing research. 

    Design/Method/ Approach:

    The study covers 25 main journals over all their years of publication from 1926 to 2005, and uses a computer-based content analysis of the abstracts of 3,143 selected articles. The authors first investigate how the identified keywords have changed since 1926, highlighting three key periods; then they provide a comprehensive typology of 16 major themes in auditing research, with the relative importance, significant keywords and periods, and the main contributory journals presented for each scheme. After that, the authors analyze trends in the popularity of each research theme over time and examine the contribution of individual journals to each theme.

    Findings:

    Compared with previous studies, this study’s typology is the first to be data-driven and covers the whole period between 1926 and 2005, comprising 3,143 auditing research articles. As a result, this new typology of auditing research themes provides a more representative picture of actual academic production than existing typologies, which are all based on a predefined practitioner’s structure. As an illustration, the authors have applied it to analyze trends in research themes and the most contributory journals to auditing research.

    Category:
    Standard Setting
    Sub-category:
    Changes in Audit Standards