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  • Jennifer M Mueller-Phillips
    Does Mandatory IFRS Adoption Improve the Information...
    research summary posted April 17, 2014 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 15.0 International Matters, 15.02 IFRS Changes – Impacts in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Does Mandatory IFRS Adoption Improve the Information Environment?
    Practical Implications:

    The results of this study have important implications for the debate on the globalization of accounting standards and for regulators that are considering a transition towards IFRS. Although the effects of IFRS adoption are not homogenous for all firms, the adoption of one set of accounting standards is likely to generate both information and comparability effects and improve the quality of information intermediation in capital markets.

    For more information on this study, please contact Joanne Horton.
     

    Citation:

    Horton, J., G. Serafeim, and I. Serafeim. 2013. Does Mandatory IFRS Adoption Improve the Information Environment? Contemporary Accounting Research 30 (1).

    Keywords:
    international financial reporting standards; impact analysis; earnings forecasting; quality.
    Purpose of the Study:

    With over 120 countries requiring or permitting the use of IFRS by publicly listed companies, the idea of pushing for mandatory IFRS adoption has become a popular topic. Mandatory IFRS adoption has the potential to improve worldwide financial reporting quality and contribute to better functioning capital markets. Potential benefits includes facilitating cross-border comparability, increase reporting transparency, decreasing information costs, and improving the efficiency of the markets. The idea relies on the presumption that mandatory IFRS adoption provides superior information to market participants and/or increased accounting comparability compared to previous accounting regimes. This study examines whether such a global transition towards a single set of accounting standards has been met by these presumed benefits. Based on prior research the authors derived these three hypotheses to test:

    1.    Mandatory IFRS adoption provides comparability benefits and as a result affects analyst earnings forecast accuracy for firms adopting IFRS mandatorily.
    2.    Mandatory IFRS adoption provides information quality benefits and as a result affects analyst earnings forecast accuracy for firms adopting IFRS mandatorily.
    3.    The increase in forecast accuracy following mandatory IFRS is associated with increased opportunities for firms to manage earnings towards a target.
     

    Design/Method/ Approach:

    To test the three hypotheses above, the authors first needed to verify that adoption of IFRS improves the information environment for the firms in the sample. Specifically, the authors tested for difference in forecast errors before and after mandatory IFRS compliance for nonadaptors, mandatory adaptors, and voluntary adaptors. To test for the effect of IFRS adoption, several models were developed to analyze firm data and forecasting information. Other analysis is conducted to determine whether improvements in information environment could be driven by factors outside of IFRS adoption.   

    Findings:
    • The information environment improves for mandatory adopters.
    • The larger the difference between IFRS earnings and local GAAP earnings the larger is the improvement in the information environment.
    • Forecast accuracy improves more for analyst-firm pairs that are affected by either information or comparability benefits.
    • There is no evidence suggesting that the increase in forecast accuracy is driven by earnings manipulation.
       
    Category:
    International Matters, Standard Setting
    Sub-category:
    Changes in Audit Standards, IFRS Changes – Impacts
  • Jennifer M Mueller-Phillips
    Does Recent Academic Research Support Changes to Audit...
    research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 01.02 Changes in Audit Standards in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Does Recent Academic Research Support Changes to Audit Reporting Standards?
    Practical Implications:

    This study reviews academic literature to not only offer insights into how well recent audit reporting initiatives gives users the information they need to understand the audit, but also suggest future research that academics can perform to help standard setters improve the auditor’s report.  The authors argue that (1) disclosure of the audit partner’s name does close the information gap, (2) disclosures related to auditor independence and tenure only partially closes the information gap, and (3) auditor commentary on going concerns does not close the information gap; however, not enough is known about how well either (4) disclosure of critical or key audit matters or (5) assurance on other information in the audit report closes the information gap.  These insights may be of interest to stakeholders in the standard setting process who wish to evaluate the success of currently enacted audit reporting initiatives and the potential costs and benefits of proposed audit reporting initiatives.

    Citation:

    Bédard, J., P. Coram, R. Espahbodi, and T.J. Mock. 2016. Does Recent Academic Research Support Changes to Audit Reporting Standards?. Accounting Horizons 30 (2): 255-275.

    Keywords:
    audit reporting model, audit report, auditing, information gap.
    Purpose of the Study:

    Regulators interested in improving the informativeness of the auditor’s report have recently proposed/required new disclosures to be made by the auditor to help information users better understand the audit.  Academic researchers studied whether these new disclosures fulfill their intended purpose and/or have unintended consequences.  The purpose of this study is to synthesize the academic literature related to the new disclosures in order to identify (1) whether the benefits of specific new disclosures outweigh the costs, (2) whether further changes to the auditor’s report are needed, and (3) where more research is needed to better understand the effects of the new disclosures.  Thus, this study serves as a means of communicating the findings of academic research to standard setters in order to enable academics to better fulfill their information-gathering role in the standard setting process.

    Design/Method/ Approach:

    The author perform a review of the academic literature relevant to PCAOB, IAASB, and U.K. FRC audit reporting initiatives, specifically focusing on (1) disclosure of critical or key audit matters, (2) assurance on other information in the audit report, (3) auditor commentary on going concerns, (4) disclosure of audit partner name, and (5) disclosures related to auditor independence and tenure.  They obtain research published, posted online, or presented at conference(s) from 2007 through mid-2015, but mostly after 2011.

    Findings:
    • Not enough is known about how well disclosure of critical or key audit matters gives users the information they need to understand the audit.
      • Experimental evidence suggests that Critical Audit Matters (CAMs) disclosed in the auditor’s report may (1) draw users’ attention to areas discussed in the CAMs, (2) scare some nonprofessional investors away from companies with CAMs, (3) influence auditor liability and legal damages in unintended ways, (4) and discourage auditors from bringing problems to the attention of passive audit committees.  Furthermore, experimental evidence suggests that (1) the impact of additional disclosure from the auditor upon users may vary depending upon management disclosures and (2) managers may be reluctant to share information about accounting estimates with auditors who are required to make additional disclosures about these estimates.
      • Preliminary archival evidence from the U.K. is mixed in terms whether CAMs have a positive association with audit fees and audit quality, but suggests CAMs have no relationship with financial statement’s informativeness. 
      • Research about the French justifications of assessments disclosure suggests that they are generally boilerplate and uninformative, and they have no impact on audit quality (after the year of implementation).
      • Archival research from the U.S. on the effect of explanatory language on unqualified audit reports suggests that (1) some types of explanatory language provide information about financial reporting quality and (2) non-going concern explanatory language can increase/decrease disagreement among investors.
      • A review of stakeholder responses to the IAASB’s proposed audit reporting initiatives suggests that stakeholders generally approved of the changes, but had differing opinions of how much change was needed.
    • There is no evidence available about whether assurance on other information in the audit report gives users the information they need to understand the audit.
    • Auditor commentary on going concerns appears to not give users the information they need to understand the audit.
      • Although most studies find the going concern audit reports useful, one study finds them not incrementally valuable when they merely focus users’ attention on management’s going concern disclosures.
    • Disclosure of the audit partner’s name does give users the information they need to understand the audit.
      • Although some studies provide mixed evidence about whether disclosing the audit partner’s name increases audit quality, other studies suggest that (1) different audit partners are associated with different levels of audit quality and (2) the restatement history of the audit partner may scare off some potential investors.  However, higher audit fees appear to be the cost of disclosing this useful information.
    • Disclosures related to auditor independence and tenure give users some of the information they need to understand the audit.
      • Although a review of prior research suggests no link between non-audit services (NAS) and auditor independence, a recent study found that total NAS fees are associated with higher (lower) audit quality for issuers (non-issuers).
      • Although a review of prior research does not find decreased audit quality for firms with longer audit firm tenure, a recent study suggests that long audit firm tenure is only associated with decreased audit quality for audits of non-issuers.
    Category:
    Standard Setting
    Sub-category:
    Changes in Audit Standards, Changes in Reporting Formats
  • Jennifer M Mueller-Phillips
    Does the Identity of Engagement Partners Matter? An Analysis...
    research summary posted January 20, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 01.03 Impact of New Accounting Pronouncements, 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions, 15.0 International Matters, 15.01 Audit Partner Identification by Name in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions.
    Practical Implications:

    Auditor aggressive/conservative reporting style may be a systematic audit partner attribute and non-randomly distributed across engagements. Particular market participants (in this case, lenders) appear to recognize and price these differences in reporting style. While the particular mechanism through which these different reporting styles occur is not possible to determine, the results suggest the importance of individual audit partners in influencing audit reporting decisions. Therefore, current regulations in both the US and EU to identify the individual partner’s identity could potentially offer valuable information to market participants.

    Citation:

    Knechel, W. R., A. Vanstaelen, and M. Zerni. 2015. Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions. Contemporary Accounting Research 32 (4):1443-1478.

    Keywords:
    auditor attributes, reporting style, auditor identification, audit quality, going concern opinion, Type I error, Type II error, credit risk, insolvency risks, statutory audits
    Purpose of the Study:

    Current debate exists as to whether requiring individual auditor identification would enhance audit quality and, if so, whether investors understand and respond to these differences. This study provides empirical evidence to support the assertions that:

    1. Reporting style (i.e. consistently conservative or aggressive reporting) is an individual partner attribute that systematically differs between partners.  
    2. Investors understand and respond to these differences when assessing a company’s risk.

    This study is especially relevant given both the EU’s decade old requirement to disclosure of audit engagement partner and the recent, similar PCAOB requirement that US audit partners do the same.

    Design/Method/ Approach:

    The authors use archival methods. They acquired panel data between 2001  2008 of the total clienteles of individual Big 4 audit partners of statutory audits for small, private companies in Sweden. This excludes non-Big 4 auditors and joint auditors.

    Findings:

    In general, the frequency of Type I and II reporting errors is correlated over time for an individual partner both (1) across time for the same client and (2) between clients. As such, aggressive or conservative accounting appears to be a systematic partner attribute. Regarding investors, they appear to understand that partner reporting style is systematic across time and between clients and penalize firms audited by partners with a history of aggressive reporting via higher interest rates, lower credit ratings, and higher credit/insolvency risk. These results are, generally, economically significant.

    More specific results include:  

    • Predictive ability of both accruals and cash flows on future OCFs are lower when prior reporting errors of either Type have previously occurred.
    • Prior aggressive reporting results in lower persistence of current accrual estimates.  
    • Type I (Type II) reporting errors are negatively (positively) associated with abnormal accruals.
    • Conservative accrual reporting is positively (negatively) associated with Type I (Type II) reporting errors in all settings. Aggressive accrual reporting is positively (negatively) associated with Type II (Type I) reporting errors in low-risk settings.  
    • Clients of partners with aggressive reporting style have higher implicit interest rates, lower credit ratings, higher assessed insolvency risk, and lower Tobin’s Q. Conservative reporting styles has no effect on these credit measures.  
    • Past partner reporting style differentially affects market reaction to a new Going Concern Opinion.
    • Past partner Type II reporting errors has an economically marginally-significant effect on insolvency risk.
    Category:
    Accountants' Reporting, Audit Team Composition, International Matters, Standard Setting
    Sub-category:
    Audit Partner Identification by Name, Changes in Audit Standards, Diversity of Skill Sets (e.g. Tenure & Experience), Going Concern Decisions, Going Concern Decisions, Impact of New Accounting Pronouncements
  • The Auditing Section
    From Inspection to Auditing: Audit and Markets as Linked...
    research summary posted May 4, 2012 by The Auditing Section, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    From Inspection to Auditing: Audit and Markets as Linked Ecologies
    Practical Implications:

    This study provides insight into the way the auditing market has evolved in Russia and how modern-day audits differ from Soviet-era  inspections. The author also focus on what services (i.e., consulting, tax) Russian businesses feel their auditors should provide, and how prestige is gained in the Russian audit markets. The results of this study should be of interest to accounting firms considering either initial entry into Russia or expanding current services in Russia.

    Citation:

    Mennicken, A. 2010. From Inspection to Auditing: Audit and Markets as Linked Ecologies. Accounting, Organizations and Society 35 (3): 334-359.

    Keywords:
    International matters, business and politics, markets, auditing procedures, consulting firms, professionalization, auditing, Russia (federation), other management consulting services, marketing consulting services, administrative management and general management consulting services, neoliberalism, and Russia (federation) – economic conditions 1991-
    Purpose of the Study:

    This study examines the transition from Soviet government inspections to capitalist auditing in Russia over the period 1985 to 2005. The author discusses how auditors marketed their services – including consulting and tax advising services. Additionally, the study includes some discussion of what constitutes “audit quality” in Russia (e.g. firm size and similarities in approach with Big Four accounting firms). The author notes that in Russia, audits are merely “tolerated” while consulting and tax services are marketed as the “value added” services auditors can provide.

    Design/Method/ Approach:

    The author analyzed legal documents, accounting and audit journals, accounting and audit textbooks, newspapers and business magazines dating from 1985 to 2008. Additionally, the author carried out 48 in-depth interviews in Moscow between 2001 and 2002 with former Soviet financial inspectors, Russian auditors, state regulators, representatives of new professional associations, academics, and other professionals. In addition, the author observed employees of two large Russian audit firms (one for two months and the other for 2.5 months) and observed employees of the International Center for Accounting Reform for one month.

    Findings:
    • The audit profession in Russia has transitioned from Soviet-era inspections where they merely reported exceptions to external users to an environment where they focus more on adding value by providing reports directly to company management.
    • Modern day auditing in Russia consists of providing value added services to the client, such as consulting services and tax advice. However, the financial statement audit remains secondary to these services.
    • Rankings of audit firms by the popular business press in Russia are seen as a way to gain exposure, market services, and acquire new clients. These rankings are often dependent upon audit firm size and similarities to the Big Four international      accounting firms.
    Category:
    Standard Setting
    Sub-category:
    Changes in Audit Standards
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  • Jennifer M Mueller-Phillips
    Hybridized professional groups and institutional work: COSO...
    research summary posted February 16, 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 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Hybridized professional groups and institutional work: COSO and the rise of enterprise risk management
    Practical Implications:

    The results of this study provide insights into the rise of COSO’s ERM framework.  More broadly, it highlights key features that enabled the ERM framework to successfully diffuse internationally.

    Practitioners looking to “popularize” an idea or new business tool in their organization might benefit by considering a wide variety of activities to (1) disrupt the use of existing organizational practices; (2) create (or adopt) a tool with characteristics that are more likely to pique organizational members’ interest and encourage their actual use of the tool; and (3) maintain and provide guidance to address problem areas that might affect adoption.  The use of groups that span multiple functional domains – either within an organization or beyond an organization’s boundaries – might also be strategically used to further the creation, adoption and implementation of ideas and business tools in an organization.

    For more information on this study, please contact Christie Hayne.

    Citation:

    Hayne, C. and C. Free. 2014. Hybridized professional groups and institutional work:  COSO and the rise of enterprise risk management. Accounting, Organizations and Society 39 (5): 309-330.

    Keywords:
    Risk management; COSO; Hybridized professional groups; Diffusion; Institutional work
    Purpose of the Study:

    In 2004, the Committee of Sponsoring Organizations (COSO) released a framework purporting to help organizations manage risk (titled “Enterprise Risk Management – Integrated Framework”). The purpose of this study is to understand how and why COSO’s framework emerged as the dominant standard in the field.  Not only has COSO’s enterprise risk management (ERM) framework been criticized for being especially challenging for organizations to successfully implement but it has also been seen to be not markedly different from other competing frameworks. Despite this, COSO’s ERM framework has been consistently named as a world-level template for best practice and thus has received attention from organizations across the world.

    This study is important because though a significant collection of research has examined the diffusion of important management tools, it has focused on the features of the tool or the characteristics of adopting organizations to explain their dominance.  Instead, we focus on an under-explored perspective by examining the “supply side” such that COSO (which we conceive of as a hybridized professional group) performed a number of activities (what we call institutional work) to create, distribute and promote their ERM framework. 

    Design/Method/ Approach:

    Between May 2010 and September 2012, the authors conducted field research by interviewing key individuals holding authorship, guidance or oversight roles throughout the creation of COSO’s Enterprise Risk Management – Integrated Framework.  Many of the interview participants had prior or current relationships with COSO, but some individuals had no formal connections to COSO and were instead drawn from industry and/or practice.  The authors consulted a variety of COSO’s “thought papers” and guidance including the Enterprise Risk Management – Integrated Framework, Internal Control – Integrated Framework and more recent ERM-related guidance.  The authors also reviewed four practitioner focused magazines in order to trace and understand the growing prevalence of key risk terminology.

    Findings:
    • The authors find that COSO employed a comprehensive collection of political, cultural and technical activities to facilitate the diffusion of their ERM framework. This institutional work included activities such as (1) highlighting deficiencies in organizations’ existing ways of mitigating risk, (2) designing a risk framework with the same look and feel of COSO’s previously successful internal control framework, (3) designing an abstract and flexible framework that would appear relevant to a wide group of potential adopters, (4) leveraging a large network of supporters through the five professional accounting bodies associated with COSO, and (5) continuing to develop accessible how-to guides and conducting other promotional activities aimed at generating mass market awareness. Indeed, the popularization of COSO’s ERM framework is explained through varied and overlapping types of institutional work.
    • Unlike other management tools that are created by one group of individuals and then popularized by another, the authors identify COSO as a unique group that was able to traverse both the creation and dissemination role.  Presented as a “hybridized professional group”, COSO brought together consultants that understood organizations’ challenges with risk management, university professors that were familiar with emerging research, and members from industry that spoke to the needs and preferences of key corporates. COSO’s composition not only benefited from members drawn from diverse industries but they also held a range of job positions and functional expertise (e.g., internal control, risk, financial management).
    Category:
    Risk & Risk Management - Including Fraud Risk, Standard Setting
    Sub-category:
    Changes in Audit Standards
  • Jennifer M Mueller-Phillips
    Privacy Auditing Standards
    research summary posted June 15, 2016 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:
    Privacy Auditing Standards
    Practical Implications:

    This paper played the vital role of beginning the conversation on privacy audit standards. From this starting point, more research can be done on the effectiveness of privacy audits, issues with privacy audits, differences in effectiveness between various audit providers, whether more extensive regulation tends to increase or decrease the use of international best practice in privacy audits, studying the causes and effects of privacy breaches in other research methodologies, and the effect of privacy audit fees on privacy audits, just to name a few.

    Citation:

    Toy, A. and D.C. Hay. 2015. Privacy Auditing Standards. Auditing: A Journal of Practice and Theory 34(3): 181-199.

    Keywords:
    privacy audits, information privacy, data protection, international comparability, and assurance services
    Purpose of the Study:

    Privacy of personal information has been an issue of rising importance in the 21st century, especially after the revelations by Edward Snowden regarding the collection of certain data about telephone and Internet activities of ordinary citizens. Also, action by regulators has resulted in the imposition of fines based on privacy violations, which has led to privacy audits becoming increasingly implemented as a response to privacy problems. This paper examines the extent of convergence of the standards used in privacy audits conducted by various privacy auditors. It is the position of the authors that generally accepted criteria would improve the usefulness of privacy audits because users would be able to assess the relevance of privacy audits to entities that operate across different countries and to compare the audits with privacy audits in other countries; furthermore, if consistent standards are not developed it would fall on the user to adjust his or her understanding of the findings in the audit report based on a range of technical differences between standards used in different privacy audit reports. Within this paper, the authors suggest a set of fundamental principles for information privacy that could serve as suitable criteria for privacy audits.

    Design/Method/ Approach:

    To illustrate the need for consistency among privacy audits, the authors assess 30 privacy auditing reports in five countries and examine the consistency among them and their consistency with the fundamental principles the authors are proposing. 

    Findings:
    • The authors find that of the 30 audit reports analyzed, two applied four of the suitable fundamental privacy principles.
    • Sixteen of the audit reports did not apply any of the fundamental privacy principles, which could be due to legitimate reasons for the scope of these audits due to the legal mandate within a particular country to conduct a privacy audit.
    • The fundamental principles of Legitimacy and Respect for Context were not used as criteria in any of the audit reports.
    • Although some standards embody aspects of the fundamental principle of Respect for Context, the broad definition of this principle as a fundamental principle is not captured in its entirety by the national legislation in any of the countries from which audit reports were sourced.
    • Overall, there has been a significant divergence between standards used by different privacy audits.
    Category:
    Standard Setting
    Sub-category:
    Changes in Audit Standards
  • 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
    The effect of an Audit Judgment Rule on audit committee...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 13.0 Governance, 13.05 Board/Audit Committee Oversight in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates.
    Practical Implications:

    The findings of this study have important implications for practice. Although prior research has suggested that an audit judgment rule may improve audit quality, findings from this research suggest that audit quality may decrease. This is seen indirectly by the audit committee members’ belief that accounting estimates become less conservative and due diligence decreases when there is an audit judgment rule. However, this was not directly tested, and future research is needed to determine whether audit judgment rules are beneficial or not.

    Citation:

    Kang, Y.J., A.J. Trotman, and K.T. Trotman. 2015. The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates. Accounting, Organizations and Society 46: 59-76.

    Keywords:
    audit judgment rule, professional skepticism
    Purpose of the Study:

    The purpose of this study is to examine how a proposed audit judgment rule impacts the professional skepticism of the members of an audit committee. Prior research has suggested that an audit judgment rule be implemented that requires courts and inspectors to not second-guess auditors’ reasoned judgments when they are made in good faith and in a rigorous manner. Currently, the concern is that auditors are engaging in defensive auditing and fearful of using innovative approaches to auditing accounting estimates. By examining the audit committees reaction to the proposed rule, the researchers are able to examine how audit committees believe this change impacts audit quality and how it impacts the behavior of the audit committee.

    Design/Method/ Approach:

    Data for this paper was collected prior to March 2015 by using an experiment with audit committee members from Australia. All participants had been on an audit committee in the past, and on average they had been on audit committees for 10.33 years.

    Findings:

    With the introduction of the audit judgment rule, there was an increase in perceived accountability in ensuring the reasonableness of the financial statements from the audit committee members. This was due to a belief that accounting estimates become less conservative and due diligence decreases. This increase in perceived accountability did not necessarily lead the audit committee members to act more professionally skeptical by asking more probing questions. However, the audit committee was more comfortable when they used innovative techniques in developing their accounting estimates. This was due to a belief that innovation leads to improved audit quality. Additional analysis demonstrates that former audit partners showed greater skepticism (by asking more probing questions) than other audit committee members.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Governance, Standard Setting
    Sub-category:
    Auditors’ Professional Skepticism, Board/Audit Committee Oversight, Changes in Audit Standards
  • 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 Effect of Auditing Standard No. 5 on Audit Report Lags.
    research summary posted 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