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research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity.Practical Implications:The results of this study suggest a course of action for enhancing professional skepticism, so they are important for audit firms specializing in privately held clients, which is an institutional setting where auditors may find it more difficult to maintain their objectivity. The authors suggest that audit firms can use their internal messaging to help individual auditors decrease the harmful effects of client identification. Specifically, audit firms can encourage auditors to (1) take the perspective of financial statement users (e.g., shareholders), (2) view themselves and clients as members of a group assigned the goal of providing accurate financial statements to shareholders, and/or (3) identify more strongly with the audit firm or the audit profession. Furthermore, the authors suggest that audit firms increase client commitment by encouraging auditors to be more attentive and available to clients (e.g., catching up with clients periodically and spending more time at the client site) and encouraging clients to feel free to reach out to auditors.
Citation:Herda, D. N. and J. J. Lavelle. 2015. Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity. Accounting Horizons 29 (3): 577-601.
- research summary posted October 16, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 09.06 Adequacy of Disclosure in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Commentary on Auditing High-Uncertainty Fair Value Estimates.Practical Implications:
PCAOB Chairman James Doty recently announced plans to convene a task force on audits of fair value measurements, as well as plans to change the auditor’s report to provide more useful, relevant, and timely information to users of public company financial statements. The authors hope their commentary is helpful to standard-setters’ deliberations, and the authors believe it should be useful to auditing scholars, both as a supplemental reading in auditing courses and a source of ideas to help guide future research designs on auditor and user judgment and decision making for high uncertainty FVA estimates.
Citation:Bell, T. B., and J. B. Griffin. 2012. Commentary on Auditing High-Uncertainty Fair Value Estimates. Auditing: A Journal of Practice & Theory 31 (1): 147-155.
- research summary posted October 13, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.03 Non-Audit Services, 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Does Mandated Disclosure Induce a Structural Change in the Determinants of Nonaudit Service Purchases?Practical Implications:
The authors contribute to the literature in three ways. First, the results provide support for the agency-based demand for publicly available audit quality signals in a powerful test setting. They find SOX supply-side approach of banning certain NAS may have hurt some registrants if those banned NAS services previously served to increase overall audit quality. Second, the evidence provided herein suggests that registrants learned from the market’s negative price protection reaction and, in accordance with agency theory, recalibrated their subsequent year NAS purchases. Finally, the results provide archival, empirical support for the audit committee incentive arguments of Gaynor et al.
Citation:Abbott, L. J., S. Parker, and G. F. Peters. 2011. Does Mandated Disclosure Induce a Structural Change in the Determinants of Nonaudit Service Purchases? Auditing: A Journal of Practice & Theory 30 (2): 51-76.
- research summary posted September 9, 2015 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions, 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Audit Fees and Investor Perceptions of Audit Characteristics.Practical Implications:
These findings provide important insight into investors’ current perceptions of auditor independence, particularly in the absence of relative or comparative information, and suggests that it might be useful for regulators, when contemplating additional disclosure requirements, to allocate some attention to disclosures that have the potential to enhance investor perceptions of auditor independence. The findings of this study contribute to the forum of debate concerning the current state of audit-related disclosures and their value for investors.
Citation:Beck, A. K., R. M. Fuller, L. Muriel, and C. D. Reid. 2013. Audit Fees and Investor Perceptions of Audit Characteristics. Behavioral Research in Accounting 25 (2): 71-95.
- research summary posted July 20, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Patterns of Language Use in Accounting Narratives and Their Impact on Investment-Related Judgments and Decisions.Practical Implications:
This study makes several important contributions. This study extends and complements prior research by looking at an additional characteristic of narrative disclosures not accounted for in prior research: language categories. In examining language categories, the authors contribute to the voluntary disclosure literature by: (1) introducing the LCM as a framework for classifying and organizing the language in accounting narratives; (2) validating that the LCM is indeed descriptive of the language included in accounting narratives; and (3) demonstrating that how prior events are construed in a narrative (using different predicate forms) has a predictable effect on investor judgments and decisions. This study is the first to take a meta-semantic approach to the content of accounting narratives and to apply the LCM in an accounting context.
Citation:Riley, T. J., Semin, G. R., & Yen, A. C. 2014. Patterns of Language Use in Accounting Narratives and Their Impact on Investment-Related Judgments and Decisions. Behavioral Research In Accounting 26 (1): 59-84.
- research summary posted July 16, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure, 09.07 GAAP Departures, 14.0 Corporate Matters, 14.05 Earnings Targets and Management Behavior in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:The Disclosure of Non-GAAP Earnings Information in the Presence of Transitory Gains.Practical Implications:
The authors find that the informative disclosure of non-GAAP earnings information enables investors to better understand firms’ future operating performance relative to opaque disclosures. Further, the results suggest that the most pervasive motive behind the disclosure of non-GAAP earnings information is to inform, although an economically significant proportion of firms appear to be opportunistic in that they only disclose non-GAAP earnings information when it increases investors’ perceptions of core operating earnings. The study should be useful to investors, financial analysts, regulators, and researchers for assessing the non-GAAP disclosure motives of management and the effect of these motives on market participants.
Citation:Curtis, A. B., McVay, S. E., & Whipple, B. C. 2014. The Disclosure of Non-GAAP Earnings Information in the Presence of Transitory Gains. Accounting Review 89 (3): 933-958.
- research summary posted March 10, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure in Auditing Section Research Summary Database > Auditing Section Research Summaries Space publicTitle:Narrative Disclosure and Earnings Performance: Evidence from R&D DisclosuresPractical Implications:
This study claims that, “our understanding of firms' R&D disclosure decisions is limited, and therefore the study’s results provides new insights about these decisions by showing that firms adjust their narrative R&D disclosures in response to changes in current earnings performance.
Furthermore, this study’s findings, “increase our understanding of firms' narrative disclosure decisions, an important disclosure channel used to convey contextual information about a firm's activities beyond financial statement numbers.”
- Findings are “not necessarily generalizable to other disclosures,” however, “the unique characteristics of the R&D disclosure setting make it useful to examine narrative disclosure decisions.”
- Study provides, “original evidence that earnings performance can affect distinct types of narrative disclosures differently.”
“These findings suggest that narrative disclosures should not be generalized as a whole and emphasize for future research the importance of considering disclosure type in the formation of hypotheses and empirical tests.”
Citation:Kenneth J. Merkley (2014) Narrative Disclosure and Earnings Performance: Evidence from R&D Disclosures. The Accounting Review: March 2014, Vol. 89, No. 2, pp. 725-757