| Have You Seen...? James Lloyd Bierstaker, “Why Good Accountants Do Bad Audits,” by M. H. Bazerman, G. Lowenstein, and D. A. Moore, Harvard Business Review (November 2002): 97–102. In one of a
series of papers addressing auditor independence, the authors suggest that
accountants and auditors are vulnerable to unconscious bias from three sources.
First, there is ambiguity in accounting standards. Second, auditors have
incentives to want to please clients (i.e., attachment). Third, auditors assess
client accounting judgments that have already been made (approval). In
addition, three aspects of human nature (familiarity, discounting, and
escalation) may amplify these biases. “Will You Detect Fraud If You Think You Can?” by C. A. Strand, T. S. Nowlin, and B. Wier, Internal Auditing (Vol. 18, No. 4, July/August 2003): 34–38. The authors conducted an experiment with 283 internal auditors and 249 accounting majors to examine the relationship between self-efficacy and detection of fraud. The results suggest that internal auditors who thought they could detect fraud did a better job identifying misappropriation of assets than those who did not, but there was no significant correlation between self-efficacy and fraud detection for students. Fraud training and exposure to articles about fraud increased the self-efficacy of both groups, but experience was not related to self-efficacy. “How Are Earnings Managed?” by M. W. Nelson, J. A. Elliott, and R. L. Tarpley, Accounting Horizons (Supplement 2003): 17–35. The authors use a survey to gather data on 515 earnings-management attempts from 253 partners and managers. Many attempts involved revenue recognition, reserves and accruals, and fixed asset impairment and amortization. While consistent with the findings of prior research, this study focuses on attempted earnings management and provides detailed descriptions of specific instances of earnings management. “Do Nonaudit Services Compromise Auditor Independence? Further Evidence,” by H. Ashbaugh, R. LaFond, and B. W. Mayhew, The Accounting Review (July 2003): 611–639. Based on a sample of 3,170 firms, the authors find no evidence to support the claim that firms purchasing nonaudit services manage earnings to a greater extent than other firms. These results stand in contrast to Frankel et al. (2002), who suggest that auditor independence is compromised when clients pay high nonaudit fees relative to total fees. The authors suggest that the explanation for these conflicting results is that they control for firm performance whereas Frankel et al. (2002) do not. “Evidence on the Joint Determination of Audit and Non-Audit Fees,” by S. Whisenant, S. Sankaraguruswamy, and K. Raghunandan, Journal of Accounting Research (Vol. 41, No. 4, 2003): 721–744. A number of prior studies find a significant association between audit and non-audit fees using single-equation audit fee models, suggesting that knowledge spillovers occur from one service to the other. In this study, the authors present and test a system of fees that utilizes the simultaneous determination of audit and non-audit fees. Using fee data from preliminary and definitive proxy statements filed between January and August 2001, the authors first confirm the association between audit and non-audit services using a single-equation fee model. However, their results differ when they use simultaneous-equation estimations of audit fees. They find that audit fees do not directly influence non-audit fees; instead, audit and non-audit fees are related indirectly through parameters that determine each fee. “Whistle-Blowing to Internal Auditors,” by W. J. Read and D. V. Rama, Managerial Auditing Journal (Vol. 18, No. 4, 2003): 354–362. Using survey responses from 129 chief internal auditors, the authors examine the receipt of whistle-blowing complaints by internal auditors. The results indicate that within the two years prior to completing the survey, 71 percent of respondents received whistle-blowing complaints; of those, 65 percent were found true upon investigation. The study also finds a positive association between the receipt of whistle-blowing complaints and both the role of internal auditing in verifying compliance with the company’s code of conduct and the organizational status of the chief internal auditor. “Auditor Conservatism, Asymmetric Monitoring and Earnings Management,” by J. Kim, R. Chung, and M. Firth, Contemporary Accounting Research (Vol. 20, No. 2, 2003): 323–360. Prior research provided evidence that Big 6 auditors were more effective than non-Big 6 auditors at constraining management’s opportunistic reporting behavior. The authors revisit this issue and examine whether the convergence or divergence of management’s reporting incentives and auditors’ litigation avoidance incentives impact auditors’ effectiveness. The authors argue that Big 6 auditors have incentives to be more conservative than non-Big 6 auditors in determining reported earnings because of greater potential litigation costs. Therefore, Big 6 auditors may not be as motivated as non-Big 6 auditors to deter or constrain management’s income-decreasing accrual choices. The authors provide evidence that Big 6 auditors are less (more) effective than non Big-6 auditors at constraining earnings management where management has an incentive to use income-decreasing (increasing) accruals. “Audit Committee Support for Auditors: The Effects of Materiality Justification and Accounting Precision,” by F. T. DeZoort, D. R. Hermanson, and R. W. Houston, Journal of Accounting and Public Policy (Vol. 22, 2003): 175–199. The authors examine how accounting and auditing issue characteristics affect audit committee members’ (ACMs) judgments in an auditor-management disagreement. Using data collected from 55 ACMs of small to mid-sized public companies, the authors conducted a 2×2 between-subjects design that included explanatory variables for materiality justification (i.e., the auditors provide either a quantitative-only explanation of materiality or both a quantitative and qualitative explanation of materiality) and accounting precision (i.e., precise or imprecise accounting issue in dispute). The model’s primary dependent variable is ACM support for either management or the auditor, coded on a continuous scale. The findings indicate that ACMs provide greater support for the auditor when the auditor’s materiality justification included both a quantitative and qualitative explanation of materiality and when the accounting issue was subject to precise measurement. The authors also find that more experienced ACMs and those who are CPAs were more supportive of the auditor. “Do Expert Informational Intermediaries Add Value? Evidence from Auditors in Microcap IPOs,” by J. Weber and M. Willenborg, Journal of Accounting Research (Vol. 41, No. 4, 2003): 681–720. The authors examine the informativeness of audit reports contained in prospectuses of firms engaged in small, non-venture-backed IPOs. This segment of the IPO market provides a unique setting in that these IPOs have the poorest long-run performance and the audit firm may be the only financial expert associated with the IPO (e.g., there are no prestigious underwriters or venture capitalists involved in the offering). The results indicate that the pre-IPO opinions of larger (Big 6) auditors are more predictive of future negative delistings. However, the opinions of the national-tiered firms are comparatively predictive, but only after the authors accommodate the selectivity-based differences in clients that hire national audit firms. The findings also suggest that the presence of a pre-IPO going-concern opinion is more strongly associated with first-year stock returns for firms with larger auditors, and that larger auditors are more likely to give such opinions to distressed clients. “Independence in Appearance and in Fact: An Experimental Investigation,” by N. Dopuch, R. King, and R. Schwartz, Contemporary Accounting Research (Vol. 20, No. 1, 2003): 79–114. The authors use 2×3 experimental markets design to investigate the effect of the SEC’s mandated disclosures concerning the amount of non-audit fees paid to the company’s auditors. The authors manipulated independence in fact (biased reports vs. non-biased reports) and independence in appearance (no information provided to investors; investors informed that auditor provides non-audit services and that the auditor has a high likelihood of issuing biased reports; or, investors informed that auditor does not provide non-audit services and that the auditor has a high likelihood of issuing unbiased reports). The study found that disclosures of non-audit services reduced the efficiency of the markets in cases where independence in fact and appearance were incongruent. “Audit Committee Independence and Disclosure: Choice for Financially Distressed Firms,” by J. Carcello and T. Neal, Corporate Governance: An International Review (Vol. 11, No. 4, 2003): 289–299. The authors examine whether a relationship exists between the percentage of independent (non-affiliated) audit committee members and distressed firms’ disclosure choices. The authors argue that independent members will be more likely to insist that management address financial distress issues in a footnote as well as to encourage more conservative wording in the disclosure than will client-affiliated audit committee members. Using a dichotomous measure of disclosure choice, the authors demonstrate a positive relationship between the percentage of affiliated audit committee members and the optimism of management’s disclosure choice. “Attitudes toward Dysfunctional Audit Behavior: The Effects of Locus of Control, Organizational Commitment, and Position,” by D. Donnelly, J. Quirin, and D. O’Bryan, The Journal of Applied Business Research (Vol. 19, No. 1, 2003): 95–108. The authors develop and test a theoretical model of antecedents to dysfunctional audit behavior. Testing of the model is based on the survey responses of 113 auditors from accounting firms of various sizes. The survey instrument measured auditors’ attitudes towards three forms of dysfunctional behavior: premature sign-off, underreporting time, and altering audit procedures. The researchers found that auditors with the strongest internal (external) locus of control were less (more) likely to accept dysfunctional audit behavior and had significantly higher (lower) levels of organizational commitment. Organizational commitment was found to have a negative relationship with acceptance of dysfunctional audit behaviors. Additionally, the results demonstrate that the higher an auditor’s position within the firm, the less likely they are to accept dysfunctional audit behavior. “Audit Committee Effectiveness: A Synthesis of the Empirical Audit Committee Literature,” by F. T. DeZoort, D. R. Hermanson, D. S. Archambeault, and S. A. Reed, Journal of Accounting Literature (Vol. 21, 2002): 38–75. Given well-publicized concerns about corporate governance and the quality of financial reporting, this article provides a timely overview of the existing literature on audit committee (AC) effectiveness. The literature reviewed in the article is organized around four determinants of AC effectiveness: composition (including expertise, integrity, and objectivity of AC members), authority (AC responsibilities and influences), resources (e.g., access to management and auditors, adequate number of AC members) and diligence (AC incentives, motivation, and perseverance). The article concludes by encouraging researchers to explore whether the current structure of ACs can meet the ever-increasing expectations of various stakeholders. |