Posts

Posts

  • Jennifer M Mueller-Phillips
    The Effect of Joint Auditor Pair Composition on Audit...
    research summary posted June 26, 2017 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 11.07 Attempts to Measure Audit Quality, 15.0 International Matters in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effect of Joint Auditor Pair Composition on Audit Quality: Evidence from Impairment Tests
    Practical Implications:

    Regulators are constantly trying to find ways to improve audit quality. The findings in this paper are useful to policymakers in understanding the benefits of a joint audit. It is also useful to companies and investors who are interested in what audit pairs provide a superior audit. 

    Citation:

    Lobo, Gerald J., L. Paugam, D. Zhang, and J. Francois Casta. 2017. “The Effect of Joint Auditor Pair Composition on Audit Quality: Evidence from Impairment Tests”. Contemporary Accounting Research 34.1 (2017): 118.

    Purpose of the Study:

    Regulators across the globe have been trying to find ways to increase audit quality, and one idea that has been proposed is requiring joint audits. Currently, joint audits are mandatory in France for any company preparing consolidated financial statements. This paper examines whether the auditor pair composition is related to audit quality. The three auditor compositions are Big4-Big 4 (BB), Big4-non-Big 4 (BS), and non-Big 4 non-Big 4 (SS). For the purposes of this study only BB and BS pairs are analyzed. The impairment of goodwill is examined to measure audit quality. This is due to management’s large discretion for the impairment of goodwill. The way auditor’s handle the impairment of goodwill often highlights how well they are maintaining objectivity and transparency of the auditor’s tests. It is important to note in BS pairs the Big 4 firm is most likely to be the one performing the impairment test.

    Design/Method/ Approach:

    The sample includes French firms from the SBF 250 index for the years 2006-2009. There were a total of 551 observations for the BB and BS pairs. The authors examined how the auditor pair type affected recognition of economic impairment and transparency of impairment-related disclosures.

    Findings:

    Overall, the authors find that BS audit pairs are associated with having a higher audit quality when compared to BB audit pairs. The authors believe this is due to a better coordination and development of a hierarchy in BS audit pairs and a higher incentive for better audit quality from the Big 4 firm in BS audit pairs. This is because the Big 4 firm in BS audit pairs are at a higher risk of reputational harm, than if they are paired with another Big 4 auditor in a BB audit pair.

    Specifically, the authors find the following:

    • In situations where low-performance indicators are present, BS audit pairs are more likely to recognize an impairment loss and recognize a larger impairment loss than BB pairs.
    • BS audit pairs are more likely to be more transparent in the disclosure of impairment for goodwill. On the other hand, BB pairs are more likely to show reductions in impairment-related disclosures when they book an impairment.
    Category:
    Audit Quality & Quality Control, Audit Team Composition, International Matters
    Sub-category:
    Attempts to Measure Audit Quality
    Home:

    http://commons.aaahq.org/groups/e5075f0eec/summary

  • Jennifer M Mueller-Phillips
    Costs of Mandatory Periodic Audit Partner Rotation: Evidence...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.03 Partner Rotation in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Costs of Mandatory Periodic Audit Partner Rotation: Evidence from Audit Fees and Audit Timeliness
    Practical Implications:

    These findings provide valuable insight on the implications of mandatory periodic audit partner rotation in the U.S. First, partner rotation has an adverse effect as it increases both audit fees and audit timeliness. Second, the incremental costs of partner rotation are felt more by non-Big 4 city industry non-specialist auditors and their clients. Third, the results suggest these audit fees and audit report lag implications are similar for the second and third incoming audit partners following rotation. 

    Citation:

    Sharma, D. S., P. N. Tanyi, and B. A. Litt. 2017. Costs of Mandatory Periodic Audit Partner Rotation: Evidence from Audit Fees and Audit Timeliness. Auditing: A Journal of Practice and Theory 36 (1): 129 – 149. 

    Keywords:
    partner rotation, partner change, audit fees, audit report lag, audit firm rotation, audit delay, and industry specialist.
    Purpose of the Study:

     The authors examine how mandatory periodic audit partner rotation in the U.S. is related to audit fees and audit timeliness. They also examine how the preceding association varies by audit firms size, client size, and audit office industry specialization. Finally, they examine if partner rotation effects on audit fees and audit report lag persist over successive partner rotations. The SEC tightened partner rotation regulations in the Sarbanes-Oxley Act of 2002 with the hopes of quicker turnover bringing a fresh perspective to, and enhancing the independence, of the audit. The accounting profession opposed the new rules, arguing that, in addition to deterioration in audit quality, there would be significant effects on audit costs and effort, learning and training costs, loss of client-specific expertise, and inefficiencies affecting both the client and auditor. To the knowledge of the authors, there had been no empirical evidence that examined the impact of partner rotation on audit production under the mandatory rotation regime at the time this article was written. 

    Design/Method/ Approach:

    The authors draw upon and utilize a method to identify partner rotation in the U.S. following Litt et al. (2014); however, they extend this study by also examining if the audit cost effects of partner rotation persist over successive audit partner rotations. The authors design tests to examine if partner rotation costs persist at each rotation, and if client-specific knowledge at the audit firm level could potentially mitigate loss of client-specific knowledge and partner rotation costs at the partner level. This design provides a relatively long-term perspective on the consequences of a series of partner rotations and addresses some challenges to partner rotation studies. 

    Findings:
    • The authors find a positive and significant association between partner rotation and audit fees.
      • When the sample is segregated by auditor size and client size, they find significant positive associations for larger clients and non-Big 4 audit firms.
    • The audit timeliness results also show a positive and significant association between audit partner rotation and audit report lag for the full sample.
    • Similar to the audit fee results, the authors detect a significant and positive association between partner rotation and audit report lag for clients of city industry non-specialist auditors.
    Category:
    Audit Team Composition
    Sub-category:
    Partner Rotation
  • Jennifer M Mueller-Phillips
    If You Want My Advice: Status Motives and Audit...
    research summary posted February 16, 2017 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    If You Want My Advice: Status Motives and Audit Consultations About Accounting Estimates
    Practical Implications:

    The finding that higher decision authority can have negative audit quality implications is relevant to audit firm policies, which often vest substantial authority in consultants, and to the ongoing debate over standards for the use of specialists. This and other findings also suggest that it may be beneficial to advocate lower decision authority. Finally, the findings can inform audit firm policies that require consultation with knowledgeable persons, as well as standard-setters and regulators whose responsibilities to provide guidance on using consultation to conduct more effective audits of financial statement estimates. 

    Citation:

    Knechel, W. R. and J. Leiby. 2016. If You Want My Advice: Status Motives and Audit Consultations About Accounting Estimates. Journal of Accounting Research 54 (5): 1331 – 1364. 

    Purpose of the Study:

    Financial reports contain many complex accounting estimates that require significant auditor judgment and can increase the risk of material misstatements. Auditors often struggle to maintain the requisite knowledge and questioning mindset necessary to effectively assess these estimates. Little is known about how the efficacy of consultation and the conditions under which consultants provide advice that might improve the audit of estimates. Consultation in auditing is pervasive and has substantial potential benefits, thus the availability of useful advice is often a necessary condition to improve the audit of estimates. In this study, the authors examine two properties of advice that are likely to help improve auditor judgment on accounting estimates: contrariness and precision. Contrariness refers to the degree to which a consultant’s advice differs from the advice-seeker’s own opinion, and precision refers to the narrowness of the range of options presented by a consultant to an advice seeker, that is, reducing the range of possible outcomes to be considered. 

    Design/Method/ Approach:

    The authors conduct an experiment with a number of audit managers and senior managers from a U.S. accounting firm. The authors manipulate status motives by priming auditors with a brief story prior to the task in which they act as a consultant to another auditor regarding the discount rate a client uses to estimate the fair value of a securitized asset. 

    Findings:
    • The authors find that a consultant’s recommendations are influenced by specialized knowledge and decision authority conditional on their status motives.
      • More specifically, when status motives are active, consultants with higher specialized knowledge are more precise but less contrary than those with lower knowledge.
    • The authors find that consultants recommend changes to the end of the range that is further from management’s preference, thus this increased precision is unlikely to influence the evaluation and ultimate quality of the estimate.
    • The authors find that precision decreases with higher decision authority and increases only when decision authority is lower and status motives are active. 
    Category:
    Audit Team Composition, Auditor Judgment
    Sub-category:
    Impact of Consultation on Judgments, Use of Specialists (e.g. financial instruments – actuaries - valuation)
  • Jennifer M Mueller-Phillips
    The Joint Effect of Unfavorable Supervisory Feedback...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Joint Effect of Unfavorable Supervisory Feedback Environments and External Mentoring on Job Attitudes and Job Outcomes in the Public Accounting Profession
    Practical Implications:

    This study demonstrates that public accounting mentors can provide an important organizational control mechanism, counseling and protecting protégés who experience unfavorable SFEs. The results of the study also suggest that public accounting mentorship training programs should communicate to potential mentors this critical organizational function. 

    Citation:

    Dalton, D. W., A. B. Davis, and R. E. Viator. 2015. The Joint Effect of Unfavorable Supervisory Feedback Environments and External Mentoring on Job Attitudes and Job Outcomes in the Public Accounting Profession. Behavioral Research in Accounting 27 (2): 53-76.

    Keywords:
    supervisor feedback environment, mentoring, job satisfaction, organizational commitment, role clarity, and turnover intentions.
    Purpose of the Study:

    The supervisory feedback environment (SFE) refers to the manner in which supervisory feedback is delivered, processed, and used on a daily basis. Favorable SFEs are helpful, consistent, and tactful, whereas unfavorable SFEs are unhelpful, inconsistent, and often inconsiderate. Preexisting literature establishes the predictable result that unfavorable SFEs have adverse effects on subordinate outcomes, including lower levels of job satisfaction, organizational commitment, and higher turnover intentions. The fundamental question addressed in this study, however, is whether public accounting mentoring support, which is external to the supervisor-subordinate relationship, can attenuate the predictable adverse effects of unfavorable SFEs. Examining the potential moderating effect of having a mentor out of the supervisor-subordinate relationship is important given the negative effects associated with unfavorable SFEs, specifically if support from external mentors diminishes protégés’ elevated stress levels leading to a diminishment in negative job outcomes attributable to unfavorable SFEs. 

    Design/Method/ Approach:

    The authors conducted a survey of public accounting professionals. 

    Findings:
    • The authors find that unfavorable SFEs are associated with lower levels of role clarity and job satisfaction, which, in turn, lead to lower organizational commitment and higher turnover intention.
    • The authors find that external mentoring moderates the negative effects of unfavorable SFEs on both role clarity and job satisfaction. In other words, the negative effects of unfavorable SFEs on both role clarity and job satisfaction are lower for employees who receive higher levels of support from external mentors. 
    Category:
    Audit Team Composition
    Sub-category:
    Staff Hiring - Turnover & Morale
  • Jennifer M Mueller-Phillips
    The Effect of Information Choice on Auditors’ Judgments a...
    research summary posted October 12, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 06.0 Risk and Risk Management, Including Fraud Risk, 06.09 Litigation Risk, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effect of Information Choice on Auditors’ Judgments and Confidence
    Practical Implications:

     Implications for the practicing audit community are developed from the findings that less experienced auditors are susceptible to the information choice effect. In situations where litigation risk is low (high) and the auditor has less experience, auditors place greater (lower) significance on information given to them by an external party than information they sought out themselves. More experienced auditors are not subject to the information choice effect. Additionally, more experienced auditors are confident in judgments based on information sought themselves, even in a setting with elevated litigation risk. The results of this study may interest audit clients providing information to auditors, auditors reviewing the work of less (more) experienced colleagues, auditors performing a critical self-review, and regulators reviewing the work of auditors.

    Citation:

     Smith, S. D., W. B. Tayler, and D. F. Prawitt. 2016. The Effect of Information Choice on Auditors' Judgments and Confidence. Accounting Horizons 30 (3): 393–408.

    Keywords:
    information choice, litigation risk, confidence, experience, judgment impact
    Purpose of the Study:

    During the course of an audit, auditors choose what information they need to search for; however, they obtain both sought and unsought information.  These auditors must then use the information obtained to make judgements and decisions that ultimately lead to an audit opinion.  Thus, the weight auditors place on the information obtained when making judgements and the auditors’ confidence in those judgements has important implications for audit quality.  The authors of this paper investigate whether it matters if information is gotten by the auditor or given to the auditor.  Understanding that the way in which information is received affects information processing, the authors examine how the auditors’ receipt of additional sought or unsought information impacts the auditors’ judgment and confidence in that judgement given judgements with different levels of importance (e.g., high vs. low litigation risk) and auditors with different levels of experience (e.g., high vs. low).

    Design/Method/ Approach:

    Evidence was obtained during the 2010’s through an experiment using 136 auditors as participants.  Participants read a case and evaluated the likelihood of obsolescence in inventory.  The researchers manipulated the (1) choice to acquire relevant information (i.e., given a choice or not given a choice) and (2) litigation risk levels (i.e., high or low).  Furthermore, they measured auditor experience, and classified participants as more or less experienced based on number of years in public accounting.

    Findings:
    • In the high litigation setting, sought information is weighed more heavily than unsought information.  This result appears to be driven by auditor experience.  Specifically, when auditor experience is low and litigation risk is high, sought information is weighed more heavily than unsought information.
    • In the low litigation setting, sought information is weighed less heavily than unsought information.  This result appears to be driven by auditor experience.  Specifically, when auditor experience is low and litigation risk is low, information is weighed less heavily than unsought information.
    • Auditor confidence in their judgment of inventory obsolescence was greater when they chose to obtain additional information than when they were just given the additional information.  This result appears to be driven by auditor experience.  Specifically, more experienced auditors had greater confidence after obtaining sought information than unsought information.  This results also appears to depend on the litigation level.  In the high litigation setting, more experienced auditors had greater confidence after obtaining sought information than unsought information.
    Category:
    Audit Quality & Quality Control, Audit Team Composition, Auditor Judgment, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Evaluation of Evidence, Litigation Risk, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    Does Disclosure of Conflict of Interest Increase or Decrease...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Does Disclosure of Conflict of Interest Increase or Decrease Bias?
    Practical Implications:

     Valuators’ judgment and decision making is currently unexplored. This study provides preliminary evidence on how valuators act in the presence of conflict of interest, and the need for conflict disclosures. The results of this study have implications for public accounting firms to the extent that they provide either fairness opinions and associated valuation judgments or are involved in some audit aspects related to mergers/acquisitions. This study contributes to accounting and psychology literature on conflict of interest disclosures and is the first study to test the biasing effects of conflict disclosure specifically targeting professionals performing familiar tasks. Further, this study extends existing literature of the topic by documenting that bias arising from disclosure of conflict of interest depends on whether the conflict of interest is aligned or misaligned with the client’s interest. This study provides the first evidence that disclosure of conflict of interest causes bias in Client-Aligned, but not in a Client-Misaligned, conflict of interest setting.

    Citation:

     Jamal, K., E. Marshall and H. Tan. 2016. Does Disclosure of Conflict of Interest Increase or Decrease Bias? Auditing: A Journal of Practice and Theory 35 (2): 89-99.

    Keywords:
    Conflict of interest, disclosure, bias, auditor independence, valuation, client advocacy, nature of conflict
    Purpose of the Study:

     Professional valuators are increasingly called upon to supply inputs that form part of the financial statements and the audit report. However, criticisms of potential conflicts of interest relating to valuators’ reports abound. One concern is that professional valuators provide expert opinions in circumstances where they are required to act in the public interest, yet are hired and paid by a client who has self interest in the outcome of the valuator’s report. This study seeks to investigate, in a valuation setting involving professional valuators, the efficacy of disclosure in curbing biases stemming from conflict of interest. Further, this study investigates whether the effect of disclosure of conflict of interest depends on the nature of the conflict of interest—specifically, whether the conflict of interest is aligned with or threatens the current client’s (seller or auditor’s) interest.

    Design/Method/ Approach:

     The authors recruited 90 experts with business valuation experience and sent these participants research instruments via courier mail. On average, participants had 13.3 years of work experience, 6.7 years of work experience in business valuation, and had worked on 38 valuation engagements. These individuals were asked to make a valuation judgment in the context of a larger fairness opinion engagement on the sale of a subsidiary. Conflict of interest was manipulated as either Client-Aligned (valuators’ interest aligned with auditors) or Client-Misaligned (valuators’ interest aligned with audit client). The results were also examined in the presence and absence of disclosure (No Disclosure, Disclosure).

    Findings:

     The study resulted in the following conclusions. • In a Client-Aligned conflict situation, disclosure of conflict of interest induces bias toward the current client (auditor), and does not produce the intended result of reducing or preventing bias. • In a Client-Misaligned conflict of interest setting where the valuator has potential future business opportunities with the buyer (audit client), the authors found evidence that valuation estimates are still biased toward the current client (auditor), regardless of disclosure. • In the Client-Aligned conflict situation, disclosure magnified bias. In contrast, in the client-misaligned conflict setting, disclosure of conflict of interest did not cause any incremental bias.

    Category:
    Audit Team Composition, Auditor Judgment
    Sub-category:
    Impact of Consultation on Judgments, Use of Specialists (e.g. financial instruments – actuaries - valuation)
  • Jennifer M Mueller-Phillips
    The Association Between Audit Partner Rotation and Audit...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 05.0 Audit Team Composition, 05.03 Partner Rotation in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Association Between Audit Partner Rotation and Audit Fees: Empirical Evidence from the Australian Market
    Practical Implications:

     The results of the study have important implications for regulators, auditors, and companies. In recent years, audit partner rotation has increased due to mandatory rotation legislation in Australia and has led to increased monetary and social costs. This study identifies the extent to which auditors pass on these costs and the relative bargaining power between an audit firm and a client, which varies across different segments of the market. This study also makes several contributions to existing literature. Specifically, this study informs the debate on the costs and benefits of audit partner rotation by focusing on the financial costs of partner rotation in the form of increased audit fees. Further, this study extends prior research that examines the impact of mandatory and voluntary partner rotation and the association between audit fees and partner rotation in different market segments. In addition, this study informs policy makers and regulators on whether and in which context the costs of audit partner rotation are passed on to clients as increased audit fees.

    Citation:

     Stewart, J., P. Kent and J. Routledge. 2016. The Association Between Audit Partner Rotation and Audit Fees: Empirical Evidence from the Australian Market. Auditing, A Journal of Practice and Theory 35 (2): 181-197.

    Keywords:
    Audit partner rotation, audit fees, voluntary partner rotation, mandatory partner rotation, audit markets
    Purpose of the Study:

     Audit partner rotation has become an accepted practice in many jurisdictions as a means of enhancing audit independence. Both regulators and professional bodies believe that greater auditor independence should lead to improved audit quality and hence improved financial reporting quality. A number of studies have examined the benefits of partner rotation in terms of its impact on audit quality, but these studies have produced mixed results and the benefits of the practice have been questioned. Given the concern that audit partner rotation may not improve audit quality, it is appropriate to consider the impact of partner rotation on audit costs and whether any increased costs are passed on to the client. This study seeks to examine the direct relation between audit fees and partner rotation using data from Australia where mandatory partner rotation after 5 years was introduced in 2006.

    Design/Method/ Approach:

     The authors used a sample of publicly traded companies selected from those listed on the Australian Securities Exchange (ASX) in 2007 for this study. Details of audit partner rotation and financial and nonfinancial data were then collected from Morningstar DatAnalysis, Connect 4 Annual Reports Collection, or company annual reports for the years 2007-2010. The authors used this information to evaluate the relation between audit partner rotation and audit fees in the year of rotation and the two years post rotation. The impact of audit partner rotation was examined as either mandatory or voluntary. The data was also examined based on stratification into three groups: large global clients, mid-level clients, and small local clients.

    Findings:

    The results indicate that audit fees are higher in the year of partner rotation and the higher fees persist in the first year post rotation and, to a lesser extent, in the second year post rotation. Further, the results indicate the following:

    • Higher audit fees are associated with both mandatory and voluntary rotations in the year of rotation and with voluntary rotation in the first year post rotation.
    • Stratification of the sample shows that mandatory and voluntary rotations are associated with higher audit fees for the large global segment but only voluntary rotation is associated with higher audit fees for the small local segment. No association between audit fees and rotation was found for the mid-level market segment. 
    Category:
    Audit Team Composition, Standard Setting
    Sub-category:
    Audit Partner Rotation, Impact of SOX
  • Jennifer M Mueller-Phillips
    Biased Evidence Processing by Multidisciplinary Greenhouse...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Biased Evidence Processing by Multidisciplinary Greenhouse Gas Assurance Teams
    Practical Implications:

     This study has implications for public accounting firms engaging in GHG engagements. Team training that establishes an understanding of the knowledge and role of the team members from differing disciplines might help to alleviate over-reliance on peer-provided evidence. In the context of multidisciplinary assurance teams, establishing and adhering to audit firm quality control mechanisms relating to evidence collection, evaluation, and review are of particular importance. Accounting firms may also need to pay particular attention in fostering an assurance environment that encourages objective evidence processing.

    Citation:

     Kim, S., W. J. Green, and K. M. Johnstone. 2016. Biased Evidence Processing by Multidisciplinary Greenhouse Gas Assurance Teams. Auditing: A Journal of Practice and Theory 35 (3): 119-139.

    Keywords:
    greenhouse gas (GHG) assurance, multidisciplinary teams, internal experts, evidence weighting, and misstatement likelihood judgments.
    Purpose of the Study:

    Due to the increased attention being paid to the environment as well as how humans are impacting the environment, there exists growing demand for a range of corporate social responsibility information. In order to be most efficient, assurors conduct greenhouse gas (GHG) assurance engagements using multidisciplinary teams containing varying technical expertise, with some possessing financial audit-related expertise and others possessing science or combined science/financial-related expertise. The purpose of this study is to investigate how auditors respond to the discipline-specific expertise of other team members in undertaking GHG assurance. 

    Design/Method/ Approach:

    The authors test this by conducting an experiment in which traditional auditor participants respond to a simulated multidisciplinary team and examine whether the auditors bias their weighting of evidence based on if the senior assuror has a science background as opposed to a financial background. 

    Findings:
    • The authors find that the assuror participants bias their processing of audit evidence by conforming to the science senior’s explanation, despite the fact that, in this setting, no science-related expertise is needed to compile or evaluate the evidence and other available evidence items contradict the science senior’s explanation.
    • The authors find that the results also support the mitigating role of the reviewer’s expertise on the effect of the science senior’s explanation. Specifically, the participants who learned the explanation of a science senior place less weight on the science-related evidence items once they learn that the reviewer has financial assurance expertise.
    • The authors also find evidence that this biased weighting of evidence and the mitigating role of the reviewer’s expertise translate into the final assurance judgments.
    Sub-category:
    Auditor judgment in the workpaper review process
  • Jennifer M Mueller-Phillips
    The Influence of Mood on Subordinates’ Ability to Resist C...
    research summary posted August 30, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions, 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Influence of Mood on Subordinates’ Ability to Resist Coercive Pressure in Public Accounting
    Practical Implications:

     This study should give pause to investors, auditors and regulators about the potential willingness of subordinate auditors to acquiesce to a superior’s unethical request. As such, the accounting profession should make sure to have a better understanding of the nature of and solutions to the problem such as changes in firm/team culture, personnel placement, etc. Additionally, audit firms can better use this information to understand which employees may be most susceptible to such negative influence and preempt such events.

    Citation:

     Johnson, E. N., D. J. Lowe, and P. M. Reckers. 2016. The Influence of Mood on Subordinates’ Ability to Resist Coercive Pressure in Public Accounting. Contemporary Accounting Review 33 (1): 261-287.

    Keywords:
    Affect, Mood States, Unethical Acts, Obedience Pressure, Superior-Subordinate Relationships
    Purpose of the Study:

    This study examines the relationship between subordinate auditors’ various affective states (i.e. mood/emotion) and their effect on auditors’ willingness to comply with a superiors’ unethical directive in six common auditing scenarios.  The authors also employ more real-world event triggers and scenarios compared with previous research.  This study seeks to better refine and test the broad constructs of mood used in previous research.

    Design/Method/ Approach:

    Sample: 118 audit seniors from two large international public accounting firms

    Experiment: Create a broad distribution of arousal, fear and insignificance among participants by manipulating two aspects of the audit client CEO (high/low dominance and high/low prestige) and one aspect of the auditor (above/below average work-life history).

    Analyses: 2x2x2 between subjects ANOVA using median splits on each measured variable: fear, insignificance and arousal

    Findings:

    Regardless of affective state manipulations, the audit seniors express a high level of willingness to comply with a superiors’ unethical direction.  However, this willingness to comply is increased when auditors are made to feel more insignificant (i.e. weak/low power position relative to others) and fearful (i.e. elevated uncertainty and lower perceptions of control regarding future events and circumstances) but decreased when auditors are in an active, positive mood state (i.e. arousal).  Interestingly, these results obtain despite significant doubt by the firms’ senior management who reviewed the task that any of their subordinates would express willingness to engage in such behavior.  As such, auditors may be more willing to engage in or overlook unethical behavior than previously thought.  

    Category:
    Audit Quality & Quality Control, Audit Team Composition, Independence & Ethics
    Sub-category:
    Management/Staff Interaction, Moral Development and Individual Ethics Decisions, Staff Hiring - Turnover & Morale
  • Jennifer M Mueller-Phillips
    Audit Firms’ Client Acceptance Decisions: Does P...
    research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Audit Firms’ Client Acceptance Decisions: Does Partner-Level Industry Expertise Matter?
    Practical Implications:

     This paper contributes to the literature on auditor industry expertise in many ways. First, it extends previous studies on this topic to examine whether industry specialists demonstrate different risk preferences in client acceptance decisions. The finding that partner-level industry specialists are more likely to accept less risky clients may partly explain why industry specialists have better quality clients.

    Citation:

    Hsieh, Y., and Lin C. 2016. Audit Firms’ Client Acceptance Decisions: Does Partner-Level Industry Expertise Matter? Auditing: A Journal of Practice and Theory 35 (2): 97-120.

    Keywords:
    partner-level industry specialization, client acceptance decision, and Big N auditors
    Purpose of the Study:

    Recently, audit firms have paid more attention to client acceptance decisions due to increased litigation risk. As a result more and more studies have investigated what goes into making this important decision. However, most prior studies examine whether auditors evaluate client risk characteristics when making client portfolio management decisions and whether auditors change their portfolio management strategies in response to changed in response to changes in litigation liability. Few studies have examined the impact of auditor characteristics other than accounting firm size. Auditors with different attributes could have different risk considerations in making client portfolio management decisions. In fact, previous studies have suggested that auditors use industry experience as a risk management strategy to mitigate risk on client portfolio management decisions because industry specialists provide high-quality audits and thus decrease litigation risk and reflect a good client-auditor match. Audit firms make large investments in specialized industries, so specialist auditors have an incentive to shed risky clients to avoid litigation risk and protect their reputation; hence, whether audit firms use industry expertise as a risk management strategy to mitigate the effect of risk is an empirical issue. The authors of this paper hope to explore whether industry specialization affects the association between risk considerations and client acceptance decisions. 

    Design/Method/ Approach:

    The sample is restricted to Taiwanese listed companies audited by Big N audit firms from 1999 to 2010. The final sample contains 9,337 observations. A Client Acceptance Decision Model was created to examine the effect of auditor industry expertise on firms’ risk consideration when making client acceptance decisions. 

    Findings:
    • The authors find that auditors are less likely to accept clients with audit risk higher than that of existing clients.
    • The authors find that firm-level industry expertise has no significant effect on the association between risk consideration and client acceptance decisions.
    • The authors find that partner-level industry specialists alone are less likely to accept clients with higher financial risk or higher audit risk, which supports the hypothesis that partner-level industry specialization affects the association between risk factors and client acceptance decisions. No evidence is found that firm-level industry expertise alone affects risk considerations in client acceptance decisions. 
    Category:
    Audit Team Composition, Client Acceptance and Continuance
    Sub-category:
    Industry Expertise – Firm and Individual