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  • The Auditing Section
    Audit Partner Tenure and Audit Quality
    research summary posted May 7, 2012 by The Auditing Section, tagged 04.0 Independence and Ethics, 04.07 Audit Firm Rotation, 05.0 Audit Team Composition, 05.03 Partner Rotation, 15.0 International Matters, 15.03 Audit Partner Rotation in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Audit Partner Tenure and Audit Quality
    Practical Implications:

    The results of this study are limited to the debate concerning individual audit partner rotation and do not support the argument for, or negate the prior studies that examine, audit firm rotation.  Combining the results of this study with the prior studies suggests that audit firms develop, over time, client and industry-specific knowledge that increases their ability to provide quality audits, and if quality control procedures within the firm are adequate (such as might be expected at a Big 6 firm), then rotating audit partners periodically helps maintain the auditor’s independence and objectivity while minimizing the loss of client-specific knowledge and rtise.

    Citation:

    Carey, P. and R. Simnett 2006. Audit Partner Tenure and Audit Quality. The Accounting Review 81 (3): 653-676.

    Keywords:
    audit partner tenure; audit quality; qualifications; earnings management
    Purpose of the Study:

    For many years, regulators have expressed concern regarding auditors’ extended associations with particular audit clients (i.e., long auditor tenure) and its potential impact on auditors’ independence and objectivity.  In the U.S., the AICPA Practice Section mandated in the 1970’s that audit partners rotate off their client after a seven year period.  The Sarbanes-Oxley Act of 2002 decreased this period to five years for public company engagements.  Outside the U.S., countries following international accounting standards and the Code of Ethics implemented by the International Federation of Accountants, as well as the United Kingdom and Australia, adopted similar standards by the early 2000’s due to the perceived “familiarity threat” associated with long auditor tenure.  Two of the arguments for mandatory rotation are that long auditor tenure 1) results in personal relationships with the client that could impair, consciously or subconsciously, the auditor’s independence, and 2) weakens the auditor’s ability to critically evaluate the client’s assertions.  However, to date, there is little empirical evidence to support these
    arguments.

    Due to data limitations, previous studies examining auditor tenure tend to focus on tenure of the audit firm as a whole.  Contrary to regulators’ perceptions, those studies tend to find that audit quality actually deteriorates in the early years after a change in the client’s audit firm, which is attributed to the “learning curve” effect, and that higher audit quality is associated with longer audit firm tenure, which is consistent with the audit firm developing more knowledge and familiarity with the client and industry as time progresses.  Based on their actions, regulators appear convinced that the potential benefits associated with auditor rotation are greater than the potential risks.  Therefore, the purpose of this study is to further examine whether long auditor tenure contributes to decreased audit quality in a setting where individual audit partners can be identified for particular audit clients.

    Design/Method/ Approach:

    The authors rely on data for Australian-domiciled companies publicly traded on the Australian Stock Exchange in 1995.  The authors accumulate auditor tenure information through 1997.

    The authors proxy for audit quality using three different measures: 1) the auditor’s propensity to issue a going-concern opinion; 2) the client’s reporting of abnormal working capital accruals; and 3) the extent to which key earnings targets are just beaten or missed.  Using the results of prior studies and the arguments and policies provided by regulators, the authors examine the association between audit quality and three measures of auditor tenure: less than two years, three to seven years, and greater than seven years.

    Findings:
    • For going-concern opinions, the authors find that longer audit partner tenures do decrease the individual auditors’ propensity to issue such an opinion.  Sensitivity analyses for this test suggest that these results are driven by non-Big 6 audit firm partners.
    • The results of this study find no association between abnormal working capital accruals and longer audit partner tenure. 
      These findings are in contrast to a prior study that examines the Taiwanese market and does find some support for an increased association between abnormal accruals (i.e., lower earnings quality) and longer auditor tenures,
    • The results show limited evidence of fewer clients just missing earnings benchmarks (i.e., more clients beating earnings benchmarks) in cases where the audit partner has longer tenure at the client.
    Category:
    Independence & Ethics, Audit Team Composition, International Matters
    Sub-category:
    Audit Firm Rotation, Partner Rotation, Audit Partner Rotation, Audit Firm Rotation
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  • The Auditing Section
    An Examination of Auditor Planning Judgments in a Complex...
    research summary posted May 7, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.01 Use of Specialists e.g., financial instruments, actuaries, valuation, 07.0 Internal Control, 07.01 Scope of Testing in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    An Examination of Auditor Planning Judgments in a Complex Accounting Information System Environment
    Practical Implications:

    The results suggest that auditors’ AIS expertise can play a significant role in complex AIS settings and in their ability to compensate for CAS competence deficiencies.  The authors note that it may be prudent for firms to consider the combined capabilities of individuals when assigning auditors and CAS to engagements with complex AIS.

    Citation:

    Brazel, J. F. and C. P. Agoglia. 2007. An examination of auditor planning judgments in a complex accounting information system environment. Contemporary Accounting Research 24 (4): 1059-83.

    Keywords:
    Auditor judgment, risk, risk management, fraud risk
    Purpose of the Study:

    This study examines auditor judgments in a complex accounting information system (AIS) environment. Auditing standards recommend that a computer assurance specialist (CAS) be assigned to assist in the audit of computer-intensive environments. 
    CAS (also known as information systems audit specialists and IT auditors) provide auditors with control-testing evidence relating to their client’s AIS.  Auditors use this information when making control risk assessments and planning substantive audit procedures.  This study examines how the auditors’ own level of AIS expertise and the competence of the CAS affect the assessed control risk and scope of substantive testing.

    Design/Method/ Approach:

    Participants included practicing auditors from four international and two national public accounting firms. Participants were audit seniors with an average of 3.7 years of experience.  The experiment was conducted before 2007.  

    Participants were provided a case that included background information for a hypothetical client, relevant authoritative audit guidance, and prior year workpapers.  After reviewing this information, participants assessed and documented inherent risk. Participants then received information about the CAS competence (high or low) and CAS control tests.  Participants were then asked to evaluate the strength of CAS testing, assess control risk, and plan the substantive audit procedures. 

    Findings:
    • Auditors with high AIS expertise and those assigned low competence CAS tended to assess control risk as higher than their counterparts.
    • Auditors assigned low competence CAS assessed control risk as higher regardless of their own AIS expertise.    
    •  When the competence of the CAS is deficient, auditors with higher AIS expertise compared to auditors with lower AIS expertise are more likely to identify and react to potential AIS-specific risks.
    Category:
    Audit Team Composition, Internal Control
    Sub-category:
    Use of Specialists (e.g. financial instruments – actuaries - valuation), Scope of Testing
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  • The Auditing Section
    Mentoring and turnover intentions in public accounting...
    research summary posted May 4, 2012 by The Auditing Section, 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:
    Mentoring and turnover intentions in public accounting firms: A research note
    Practical Implications:

    The results of this study are important for audit firms to consider when designing their mentoring processes.  The evidence indicates that psychological mentoring programs can decrease employee turnover intentions, and that the career development mentoring can actually result in increased turnover intentions.  The latter is most likely a result of the mentee developing skills and experiences that can make the employee a more desirable candidate for employment opportunities outside of the firm.   However, the authors suggest that both types of mentoring (career development and psychological support) are important for the development of younger staff members.  They suggest that firms should be sensitive to the possible outcomes of each of these mentoring programs and that mentors be made aware of the potential effects before starting mentoring relationships.  This awareness could help mentors anticipate any of the potentially negative aspects of career development mentoring.

    Citation:

    Hall, M. and D. Smith. 2009. Mentoring and turnover intentions in public accounting firms: A research note. Accounting, Organizations and Society 34 (6): 695-704

    Keywords:
    Mentoring, turnover intentions, job satisfaction, psychological support, career development support, procedural justice, affective organizational commitment, psychological empowerment
    Purpose of the Study:

    During the recent years, public accounting firms have begun to foster and utilize mentoring relationships in which less experienced staff members (mentees) are paired with more experienced staff members (mentors).  One goal of these initiatives is to increase staff retention by focusing on two primary aspects of mentoring relationships: 

    • Career development support, which primarily focuses on helping the mentee to advance through the ranks of the firm by encouraging learning and facilitating membership on teams for important assignments
    • Psychological support, which primarily focuses on serving as a role model, providing friendship, and offering a venue to share personal experiences with the mentee.  

    Since previous research has only examined the implications of the existence of a mentoring program on turnover intentions, the authors conducted this study to determine if the different aspects of a mentoring program can have separate or distinct impacts on a person’s intent to leave the firm.  The authors also consider if the different types of mentoring have indirect effects on mentees’ intention to leave the firm.  An indirect effect occurs if the mentoring program impacts how accountants view their respective firms, and these perceptions then lead to turnover intentions.  Examples of these perceptions include the following: 

    • Psychological empowerment, which is the perception of individuals’ abilities, the intrinsic value of their work tasks, and the role that they can have over work productivity and workplace policies.
    • Procedural justice, which is the perception of how fairly individuals are treated by organizational policies and practices
    • Affective organizational commitment, which refers to individuals’ emotional attachment to the organization.
    Design/Method/ Approach:

    The research evidence is collected prior to 2009.  The authors use a group of accountants below partner level from seven Australian public accounting firms (one Big 4 firm and six middle-tier firms). Each participant completed a survey which was distributed by a representative of their accounting firm.  The surveys utilized to gather the data were based on surveys that were previously developed and utilized in conducting similar research conducted in other disciplines.

    Findings:
    • The authors find that career development support is associated with higher levels of psychological empowerment, which leads to higher levels of turnover intentions. 
    • The authors find that psychological support is associated with higher levels of both procedural justice and affective organizational commitment.  Each of these are then associated with lower levels of turnover intentions.
    • The authors find that while specific mentoring behaviors affect job satisfaction and turnover, the mere existence/absence of a mentor has no effect.  This emphasizes the importance of considering the nature of a mentoring relationship.
    Category:
    Audit Team Composition
    Sub-category:
    Staff Hiring - Turnover & Morale
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  • The Auditing Section
    Organizational justice and turnover in public accounting...
    research summary posted May 3, 2012 by The Auditing Section, 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:
    Organizational justice and turnover in public accounting firms: A research note
    Practical Implications:

    The results of this study are important for audit firms to consider when designing their employee evaluation processes which determine promotions and pay increases.  The evidence indicates that if employees perceive that the process is unfair and biased, they will be less committed to the accounting firm and that they will experience lower levels of job satisfaction.  The evidence also suggests that as employees experience lower levels of commitment to the accounting firm, they will be more likely to consider exploring employee opportunities outside of the accounting firm. Therefore, the authors suggest that accounting firms may be able to partially increase employee commitment to the firm by maintaining a fair process for determining promotions and pay increases, and this increase in commitment may result in decreased turnover.

    Citation:

    Parker, R. J. and J. M. Kohlmeyer III. 2005. Organizational justice and turnover in public accounting firms: a research note. Accounting, Organizations and Society 30 (4): 357-369

    Keywords:
    Perceived discrimination, job satisfaction, staff promotion and compensation, organizational justice, organizational commitment, turnover intentions
    Purpose of the Study:

    This study considers the relationship between “organizational justice” which is employees’ perceptions of how fairly they are being treated by their employer and “turnover intentions” which refers to employees’ intentions to leave their existing employer.     

    Even though previous research conducted within the management discipline has considered the effects of employee perceptions of organizational justice, very little research has been conducted on organizational justice in accounting settings.  Therefore, the authors developed a theoretical model that could explain how organizational justice and turnover intentions could impact a public accounting firm.  The theoretical model predicts that employees who perceive the firm’s process for determining promotions and raises to be biased will experience higher levels of “perceived discrimination” which, in turn, leads to lower levels of job satisfaction.  These individuals should also experience lower levels of “affective organizational commitment,” which can be described as the following: 

    • A strong belief in the goals or values of the organization
    • A willingness to exert effort for the organization
    • A strong desire to continue to be part of the organization 

    The authors also consider that lower levels of job satisfaction and organizational commitment will be associated with higher levels of turnover intentions. 

    Design/Method/ Approach:

    The research evidence is collected prior to 2005.  The authors use a group of accountants from offices of three Big 5 firms in one Canadian metropolitan area.  Participants completed a survey which was distributed by a representative from each of the firms.  The surveys utilized to gather the data were based on surveys that were previously developed and utilized in conducting similar research in other disciplines.

    Findings:
    • The authors find that increases in the level of perceived discrimination is associated with lower levels of job satisfaction and lower levels of organization commitment. 
    • The authors find that lower levels of organizational commitments are associated with greater employee turnover intentions.  However, changes in the level of job satisfaction are not associated with changes in employees’ intentions to leave the firm.

     

    Category:
    Audit Team Composition
    Sub-category:
    Staff Hiring - Turnover & Morale
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  • The Auditing Section
    Globalization and the Coordinating of Work in Multinational...
    research summary posted May 3, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 05.09 Group Decision-Making, 10.0 Engagement Management, 10.03 Interaction among Team Members in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Globalization and the Coordinating of Work in Multinational Audits
    Practical Implications:

    The results of this study are important for audit firms to consider when conducting multinational audits involving several different local offices. The results suggest that local offices of audit firms may modify inter-office instructions and firm audit methodologies to suit the needs of their local client, including adapting materiality levels. Additionally, results suggest that while some local offices see the worldwide audit team as their “client” other offices are focused on meeting the needs of their local client.

    Citation:

    Barrett, M., D.J. Cooper and K. Jamal. 2005. Globalization and the Coordinating of Work in Multinational Audits. Accounting, Organizations and Society 30 (1): 1-24.

    Keywords:
    International matters, audit team composition, globalization, international business enterprises, auditing, international relations, accounting, international affairs, and structuration theory (communication)
    Purpose of the Study:

    Many of the largest companies today are multinational, with operations in different countries. Because of this, auditors must be able to conduct their audits on a global scale, coordinating with auditors in other countries. This paper takes an in-depth look at how auditors coordinate across countries to perform an audit for a multinational company, and how effectively the auditors are able to communicate. The paper focuses on relationships between the local offices by looking at two key coordinating mechanisms: 

    • Inter-office instructions
    • The firm’s risk based audit methodology 

    The paper also looks at how the inter-office instructions are interpreted and how closely they are followed at different locations, also how any changes are communicated back to the coordinating office. The paper also discusses how different offices adapt the firm’s risk based audit methodology.

    Design/Method/ Approach:

    The authors observed the audit team conducting their audit from July 1996 to September 1997. The authors spent time in the offices of a Canadian audit firm, attended firm trainings, and spent time with the Canadian, U.S., and worldwide engagement teams at the client sites. Throughout this time period, the authors also conducted interviews with the auditors, as well as several senior financial officers and the chief internal auditor of the client.

    Findings:
    • The firm’s risk based audit methodology and inter-office instructions were designed globally, but adapted at the local level based on auditors’ experiences with the client, including changing materiality levels.
    • North American audit teams (Canada, U.S.) were able to suggest changes to the worldwide engagement team that affected the worldwide engagement team’s approach to business advisory services.
    • While the study was being conducted, the audit firm changed to a “review by interview” method, where managers and  patners reviewed the work of staff and seniors on the spot, by asking them direct questions rather than leaving review notes. Most of the staff interviewed seemed uncomfortable with this new review process.
    • The audit teams (particularly in the U.S. and Canada) focused on trying to identify consulting opportunities with the client w while conducting their audit. Staff interviewed seemed less confident in their ability to provide value-added consulting services to the client.
    • The local audit team in the U.S. viewed the worldwide audit team as their “client” and built their audit around satisfying their requests (via the inter-office instructions), while the local audit team in Canada viewed the local office of the company as their client, and adapted inter-office instructions to fit their local client.
    Category:
    Audit Team Composition, Engagement Management
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Group Decision-Making, Interaction among Team Members
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  • The Auditing Section
    Resolving Disputed Financial Reporting Issues: Effects of...
    research summary posted April 23, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 10.0 Engagement Management, 10.04 Interactions with Client Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Resolving Disputed Financial Reporting Issues: Effects of Auditor Negotiation Experience and Engagement Risk on Negotiation Process and Outcome
    Practical Implications:

    The critical implication from these findings is that, despite the expectation of conservatism required by GAAP, under certain circumstances some auditors may acquiesce more readily to client pressures than other auditors.  Specifically, when engagement risk is high, auditors with lower negotiation experience may tend to make more concessions in negotiations to the client than auditors with higher negotiation experience or auditors in a lower engagement risk setting.  

    Thus, though the paper does not discuss the following point specifically, the audit firms should be aware of this vulnerability of auditors with lower negotiation experience and should consider this in planning negotiations and assignments.  Potentially, audit firms may consider assigning managers and partners who are less experienced in negotiation to clients with lower engagement risk and/or lower litigation exposure for the audit firm.  Alternatively, when managers or partners with lower negotiation experience are placed on clients with high engagement risk, firms may consider assigning a manager or partner with more negotiation experience to accompany the manager or partner with less negotiation experience. 

    Citation:

    Brown, H. L., and K. M. Johnstone. Resolving Disputed Financial Reporting Issues: Effects of Auditor Negotiation Experience and Engagement Risk on Negotiation Process and Outcome. Auditing: A Journal of Practice and Theory 28(2):65-92.

    Keywords:
    auditor decision-making; experience; negotiation; risk.
    Purpose of the Study:

    Auditing necessitates negotiation between the auditor and the client to resolve disputed reporting issues.  Such negotiation can materially affect financial statements.  However, little is known regarding how contextual factors, such as auditor or client characteristics, affect client-auditor negotiations.  Understanding how such factors affect client-auditor negotiations is important because such an understanding provides insight into how training, personnel assignment, and other audit interventions may improve audit quality and reduce litigation exposure related to the issues involved in client-auditor negotiation.  Brown and Johnstone investigate how two factors, engagement risk and auditor negotiation experience resolving complex financial reporting issues, impact the process and outcome of client-auditor negotiation.

    Design/Method/ Approach:

    Brown and Johnstone collected their evidence via an experiment in which audit partners and managers who participate assume the auditor role in an experimental case setting.  The experimental case involves a complex revenue recognition issue, for which professional standards are imprecisely defined.  In the case, the auditors are required to decide how to allocate revenue between current and future periods for a multi-year contract.  The client’s preference is to recognize the majority of the revenue currently, though most of the earnings process is not complete.  Auditor participants then negotiate with the client via the internet.  Pre-determined client responses are generated by a computer program.  The experimental data was collected in the early 2000’s.

    Findings:

    Auditors with lower negotiation experience in the context of high engagement risk compared to (1) the auditors with lower negotiation experience in the context of low engagement risk and (2) the auditors with higher negotiation experience in both low and high engagement risk contexts, exhibit the following differences in judgments:

    • Significantly more concessions
    • Marginally less conservative negotiation outcomes
    • Marginally less confidence about whether their final outcomes are appropriate under GAAP
    Category:
    Audit Team Composition, Engagement Management
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Interactions with Client Management
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  • The Auditing Section
    An Examination of the Effects of Auditor Rank on...
    research summary posted April 23, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.05 Diversity of Skill Sets e.g., Tenure and Experience, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 11.0 Audit Quality and Quality Control, 11.05 Training and General Experience in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    An Examination of the Effects of Auditor Rank on Pre-Negotiation Judgments
    Practical Implications:

    This study provides evidence that there were significant differences in the pre-negotiation judgments of partners and managers. Since an outcome of an auditor-client negotiation of a contentious issue may have a significant impact on financial reporting quality, the findings of the study suggest that the using partners in the negotiation process is likely to lead to improved reporting quality. The results have implications for audit firms in allocating manager and partner time to handle negotiation.

    Citation:

    Trotman, K. T., A. M. Wright, and S.Wright. (2009). An Examination of the Effects of Auditor Rank on Pre-Negotiation Judgments. Auditing: A Journal of Practice & Theory 28(1): 191-203

    Purpose of the Study:

    Negotiations are pervasive in the auditing environment.  In general, audit firms have choices over what level of staff are involved in the process of negotiation. An important issue is that differences may exist between partner and manager negotiation judgments and strategies. This study focuses on the expectations and assessments that partners and managers take into the negotiation process, specifically the pre-negotiation stage. The authors use negotiation theory as well as other general psychology findings to investigate how rank (partner versus manager) affects the pre-negotiation judgments made by auditors.  The authors suggest and test the following assertions:

    • Partners take a tougher stand than managers in pre-negotiation judgments.
    •  Partners have greater confidence in their ability to negotiate and therefore receive a resolution that is closer to their initial position.
    • Partners’ rank, which reflects both additional experience and power (as compared to the manager), will lead them to believe they are in a better position to negotiate outcomes closer to their initial position.
    Design/Method/ Approach:

    The research evidence was collected prior to September 2007. The authors used responses collected from a computerized case about inventory write-downs, administered to partners and managers at three Big 4 firms in Australia and the U.S.

    Findings:
    • Compared to managers, partners appear to take a tougher stand in the negotiation: they expect a larger initial write-down and require a higher minimum write-down that they would accept.
    • Partners’ estimates of the maximum inventory write-down that a CFO would accept were significantly higher than managers’ estimates.
    • Partners believed they can negotiate a larger amount above the minimum adjustment than managers.
    • There were no differences in negotiation persuasion knowledge between partners and managers.
    Category:
    Audit Team Composition, Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Diversity of Skill Sets (e.g. Tenure & Experience), Prior Dispositions/Biases/Auditor state of mind, Training & General Experience
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  • The Auditing Section
    Engagement Quality Reviews: A Comparison of Audit Firm...
    research summary posted April 16, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.06 Qualifications of Engagement Quality Reviewers, 11.0 Audit Quality and Quality Control, 11.02 Engagement Quality Review – Processes and Effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Engagement Quality Reviews: A Comparison of Audit Firm Practices
    Practical Implications:

    Engagement quality review is one quality control mechanism used by public accounting firms to monitor the quality of audit engagements. In this study, the authors analyzed the concurring partner review process by reviewing six firms’ concurring partner review guidance. The authors argue that the analysis of this study provides a base for the PCAOB in setting its standard for engagement quality review.

    Citation:

    Epps, Kathryn K.and W.F. Messier, Jr. 2007. Engagement Quality Reviews: A Comparison of Audit Firm Practices. Auditing: A Journal of Practice & Theory 26 (2): 167-181.

    Keywords:
    Concurring partner review, engagement quality review.
    Purpose of the Study:

    Engagement quality (EQ) review, formerly called concurring partner review, is an important part of the audit review process. It is one quality control mechanism used by public accounting firms to monitor the quality of audit engagements. Concerns about the effectiveness of existing firm EQ review practices have led to increased partner sanctions by the SEC. In addition, SOX directs the PCAOB to develop an auditing standard on engagement quality review. Due to the structure of the current requirements, the authors note that there is the possibility for some variation for the concurring partner review and subsequent documentation across firms. In this study, the authors have two primary objectives: 

    • To determine the consistency of concurring partner (engagement quality) guidance included in the auditing manuals of the major public accounting firms. 
    • To conduct a task analysis of engagement quality reviews in order to develop research questions for future investigations.
    Design/Method/ Approach:

    The authors requested (in 1999) and subsequently collected firm guidance from the Big 4 and two of the next three largest U.S. firms specifically related to their engagement quality review process and documentation.  The data was provided by partners with “senior positions” at each firm as well as extensive experience with concurring reviews. Once the firm guidance was received (in roughly 2002), it was coded by attributes then returned to the firm for a review of the coding. Then each firm was asked to have an experienced concurring partner complete a short questionnaire that requested additional information or clarifying questions.

    Findings:
    • The results show a moderate level of consistency across the firms in regards to their policies surrounding engagement quality reviews. 
    • Differences identified among firms relate to:
      • The assignment of concurring partners to audit engagements.
      • The participation of the concurring partner in audit planning.
      • The content and extensiveness of practice aids available to concurring partners.
      • The involvement of concurring partners during the course of the audit engagement.
    • The authors find that the firms surveyed comply with the existing required regulation in all cases.  However, it was noted that some firms require practices above and beyond the current standards. 
    Category:
    Audit Team Composition, Audit Quality & Quality Control
    Sub-category:
    Qualifications of Engagement Quality Reviewers, Engagement Quality Review – Processes & Effectiveness
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  • The Auditing Section
    Does Industry Expertise Improve the Efficiency of Audit...
    research summary posted April 16, 2012 by The Auditing Section, tagged 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:
    Does Industry Expertise Improve the Efficiency of Audit Judgment?
    Practical Implications:

    The results of this study are important for potential clients to consider when selecting an auditor.  The results are also important for auditors considering tradeoffs between efficiency and effectiveness, and considering how to staff their current and future client engagements.  The evidence indicates that specialists are more effective auditors within their specialty and are more efficient in certain decision making processes.  Also, auditors are more effective when they spend more time and iterations reviewing audit information.

    Citation:

    Moroney, R. 2007. Does Industry Expertise Improve the Efficiency of Audit Judgment? Auditing: A Journal of Practice and Theory 26 (2): 69-94.

    Keywords:
    Behavioral decision theory, expertise paradigm, industry specialization
    Purpose of the Study:

    Industry specialization is used to differentiate audit firms, and prior research has demonstrated that industry specialists are more effective when working within their specialization.  Prior research also assumes that specialist auditors are more efficient within their specialty industry.  However, no prior studies have demonstrated that specialist auditors are more efficient than non-specialists when working within their specialty industry.  This paper addresses this concern by investigating whether audit judgment efficiency at each of three stages of the decision making process (pre-information search, information search, and decision processing) is influenced by auditor specialization.  The paper also links efficiency to effectiveness by investigating whether higher efficiency increases effectiveness within specialty. 

    The author motivates their expectations based on the literature that shows that expertise influences performance.  Specifically, specialist auditors are experts in their specialty industry and are expected to be more efficient when making decisions because of their prior knowledge and experience, which streamline the process of understanding the problem (pre-information search), acquiring knowledge (information search), and making decisions (decision processing) about a new case within their industry.  Finally, because of the learning opportunities afforded by repeatedly working with clients in the same industry, specialist auditors are expected to be more efficient and more effective when working within specialty.

    Design/Method/ Approach:

    The experimental data was collected prior to February 2006. The author used manufacturing and pension fund specialists from Big 4 firms to complete two simulated audit cases.  The cases involved reading the case materials, selecting and reviewing pertinent accounting and auditing standards (audit cues), and making an audit decision for a manufacturing client and a pension fund client.  The author then compared efficiency between the two specialist types. The author also examined the relation between efficiency and effectiveness

    Findings:
    • The author finds mixed evidence that industry specialists are more efficient in the pre-information search stage of decision making.
      • Specialists spend less time reading the case that is within their specialty.
      • Manufacturing specialists read the manufacturing case more often than the pension fund case, which is contrary to expectations. 
    • The author finds mixed evidence that industry specialists are more efficient in the information search stage of decision making.
      • Specialists spend less time reading the cues when working within their specialty.
      •  Only pension specialists selected fewer cues to review when working within their specialty.
    • The results do not support the hypothesis that specialists are more efficient in the decision processing stage of decision making.

    Contrary to the hypothesis that efficiency increases effectiveness, the author finds that auditors are more effective when they spend more time reading and reviewing case materials regardless of whether they are working within or outside their specialty.

    Category:
    Audit Team Composition
    Sub-category:
    Industry Expertise – Firm and Individual
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  • The Auditing Section
    Pattern identification and industry-specialist auditors
    research summary posted July 18, 2011 by The Auditing Section, tagged 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:
    Pattern identification and industry-specialist auditors
    Practical Implications:

    The results of this study have practical importance for the structure of audit teams.  The evidence suggests that auditors with industry-specific are more efficient in their development of problem expectations, allocation of time to procedures that are likely to discriminate the presence of a misstatement, and avoidance of procedures that do not discriminate the presence of a misstatement.  The results of this study are limited to instances of industry-specific accounting issues and not look at more generic auditing areas such as PP&E.  Additionally, this study does not look at the implications for instances in which a misstatement does not occur.

    Citation:

    Hammersley, J.S.  2006.  Pattern identification and industry-specialist auditors.  The Accounting Review 81 (2): 309-336.

    Keywords:
    auditor knowledge; industry specialization; pattern recognition; problem representations; auditor judgment
    Purpose of the Study:

    Financial statement misstatements can be complex and may be described by a pattern of cues that appear to be individually harmless.  The structure of an audit is such that misstatement cues may be gathered by different individuals of an audit team.  Each individual auditor may not have all the information needed to piece together the pattern and discover the misstatement. This study investigates task performance differences for auditors with industry-specific experience compared to auditors without industry-specific experience.  The following aspects of task performance are investigated:

    • The development of problem representations developed by auditors under no-, partial-, and full-cue conditions,
    • The auditors’ assessment of misstatement likelihood under no-, partial-, and full-cue conditions,
    • The mediation effect of the problem representation on the relationship between pattern completeness and misstatement likelihood,
    • Time allocated to audit procedures that discriminate whether a misstatement is present under no-, partial-, and full-cue conditions, AND
    • Time allocated to procedures unlikely to discriminate the presence of misstatement
    Design/Method/ Approach:

    Auditors from each of the Big 5 participated. Approximately two-thirds of the responses were pre-Enron and the remaining one-third were post-Enron.  Participants were identified as industry specialists in either banking or state and local governments.  Participants ranged in position from senior associate to partner.

    Each participant reviewed case materials for 2 cases – one banking and one state and local government – and assessed the likelihood of material misstatement, reported any potential misstatements about which they were concerned, listed audit procedures to be performed and estimated time needed to complete those procedures.  Participants were also asked to recall all important information from each case.

    Findings:

    (Note: Matched refers to auditors with industry-specific experience; mismatched refers to auditors without industry-specific experience)

    • Matched auditors have better developed problem representations when they receive full- or partial-cue patterns than when they have no-cue patterns
    • Mismatched auditors’ problem representations are at least as well developed when they receive full-cue patterns as when they receive partial- or no-cue patterns
    • Matched auditors receiving partial-cue patterns have better developed problem representations than mismatched auditors receiving partial-cue patterns
    • Matched participants will assess the likelihood of misstatement higher when they receive partial- or full-cue patterns compared to no-cue patterns
    • Matched auditors’ problem representation development mediates the relationship between likelihood assessments and pattern-condition (full, partial, and no).  This mediation relationship does not hold for mismatched auditors.
    • Matched auditors who receive full- and partial-cue patterns allocate more time to procedures that discriminate whether a misstatement is present compared to matched auditors who receive no-cue patterns.
    • Mismatched auditors who receive full-cue patterns allocate at least as much time to discriminatory procedures compared to mismatched auditors that receive partial- or no-cue patterns.
    • Mismatched auditors will allocate more time to procedures that likely will not discriminate whether a misstatement is present compared to matched auditors.
    Category:
    Audit Team Composition
    Sub-category:
    Industry Expertise – Firm and Individual
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