| Have You Seen...? Brad Reed, “Auditor Conservatism and Voluntary Disclosure: Evidence from the Year 2000 Systems Issue,” by P. M. Clarkson, C. Ferguson, and J. Hall, Accounting & Finance (Vol. 43, No. 1, 2003): 21–40. Based on prior research, the authors of this study posit that Big 6 auditors have increased incentives to act conservatively in order to protect their reputation capital and avoid litigation risk. To examine auditor conservatism, the authors choose to use the level of voluntary disclosure of Year 2000 remediation information in company annual reports. The authors argue that the Year 2000 Systems issue provides a unique and appropriate opportunity to examine the conservatism issue for several reasons. First, it allows an experimental design that uses data with very little “noise.” Second, Australian company annual reports for the 1998 reporting period are truly voluntary because, at that time, neither the accounting rule-making bodies nor the statutory regulators had mandated any form of specific Year 2000 remediation disclosure for annual reports. Consistent with expectations, the authors find that Big 6 audit clients disclose more Year 2000 remediation information than non-Big 6 audit clients. “Auditor Conservatism and Reported Earnings,” by R. Chung, M. Firth, and J. B. Kim, Accounting and Business Research (Vol. 33, No. 1, 2003): 19–32. This study examines the relationship between auditor size and conservatism in reported earnings. Conservatism is an underlying concept of financial accounting—the authors argue that auditors force conservatism on clients and that the amount of conservatism depends on the economic performance of the company and on the type of audit firm. In particular, they contend that Big 6 audit clients use more conservative accounting than non-Big 6 audit clients when the clients are performing poorly (as reflected in stock prices). The authors regress excess earnings-to-price ratios on excess stock returns and other variables, and provide evidence consistent with the hypothesis that Big 6 auditors influence their clients to adopt more conservative accounting than non-Big 6 auditors, but only when the clients’ financial performance is worse than expected. “The Endogenous Relationship between Audit-Report Type and Business Termination: Evidence on Private Firms in a Non-Litigious Environment,” by A. Gaeremynck and M. Willekens, Accounting and Business Research (Vol. 33, No. 1, 2003): 65–79. This study examines the relationship between audit-report type and subsequent business termination for private companies. Because of the impact that possible litigation has on the auditor’s decision regarding the type of audit report to issue, the authors of this study use a sample of Belgian firms where the audit environment is virtually nonlitigious. The results show that an endogenous relationship exists between bankruptcy and audit-report type, and between voluntary liquidation and audit-report type. A non-clean opinion is typically issued when firms face financial difficulties, with these difficulties becoming more severe after the receipt of a nonclean audit opinion. The authors find that the “self-fulfilling prophecy” hypothesis holds for bankruptcy, but not for voluntary liquidation, and also find some differences in the audit-report decisions between Big 6 and non-Big 6 auditors. “Going-Concern Opinions, Auditor Switching, and the Self-Fulfilling Prophecy Effect Examined in the Regulatory Context of Belgium,” by A. Vanstraelen, Journal of Accounting Auditing & Finance (Vol. 18, No. 2, 2003): 231–254. This study examines the supposed reluctance on the part of auditors to issue going-concern opinions because of the auditor’s desire to avoid losing clients or reputation. The author investigates the threat of loss resulting from auditor switching and client bankruptcy in the regulatory context of Belgium. Belgium requires companies to engage an audit firm for a three-year period. Consequently, the client’s threat of switching auditors is potentially more credible in the third year than in the first two years. The results of this paper support the hypothesis that going-concern opinions significantly increase the probability of bankruptcy. Thus, going-concern reports remain relevant even in a country where debt financing is dominant. Also, clients are four times more likely to switch auditors at the end of the mandatory term if clients receive a going-concern opinion in the final year of the term relative to the previous two years, strongly suggesting that mandatory terms influence the association between going-concern opinions and auditor switching. “Auditor Recall and Evaluation of Internal Control Information: Does Task-Specific Knowledge Mitigate Part-List Interference?” by J. L. Bierstaker, Managerial Auditing Journal (Vol. 36, No. 2, 2003): 90–99. The author conducts an experiment using a sample of 61 practicing auditors, to determine whether task-specific knowledge interacts with the format of documentation to affect auditors’ recall and internal control evaluation. The task was an examination of an incomplete flowchart of the sales and collections cycle following the review of a complete narrative on the cycle, enabling the author to test the effects of part-list inference that occurs when information retrieved from memory inhibits the subsequent recall of additional information. The findings indicate that auditors with higher levels of knowledge are less susceptible to the effects of part-list interference than auditors with lower levels of knowledge. “Audit Firm Size, Public Ownership, and Firms’ Discretionary Accruals Management,” by H. Vander Bauwhede, M. Willekens, and A. Gaeremynck, International Journal of Accounting (Vol. 38, 2003): 1–22. The authors test whether Belgian firms manage earnings using discretionary accrual and, if so, how the earnings management is affected by audit firm size (Big 6 or not) and ownership (private or public firm). Using a matched sample of private and public firms (financial statement data are publicly available for Belgian privately held firms), the authors find that both private and public companies engage in income smoothing, and manage earnings opportunistically to meet expectations. The posited monitoring effects of auditor size (i.e., Big 6 auditors restrain earnings management) and ownership (i.e., public ownership works as an incentive to manage earnings) are supported only when companies have earnings that are above target and there is an incentive to smooth earnings downward. The lack of constraint for below-target companies, which is contrary to reported findings in the U.S., is attributed to the Belgian institutional environment. Auditors may have no incentive to report conservatively because of the lack of auditor litigation in Belgium; the lack of an ownership effect in below-target contexts may be attributable to the lack of stock pressure found in the U.S. “Auditor Analytical Review Judgment: A Performance Evaluation,” by K. Z. Linn, I. A. M. Fraser, and D. J. Hatherly, British Accounting Review (Vol. 35, 2003): 19–34. This study uses two different auditing tasks (accounts receivable and payroll expense) within the analytical procedures area to study the effects of experience differences on auditor judgment performance. Using 39 U.K. auditors to complete 32 cases in a full 25 factorial design, the authors find moderate levels of consensus, consistency, and self-insight in the auditors’ judgments. Contrary to expectations, based on the highly structured training programs of large auditing firms, auditors from larger firms did not exhibit higher levels of consensus. As expected, the authors find experience effects; specifically, managers and juniors exhibited the highest and lowest levels of consensus, respectively, but not in all contexts. “Auditing and the Production of Legitimacy,” by M. K. Power, Accounting, Organizations and Society (Vol. 28, 2003): 379–394. This essay
discusses a small body of recent publications that represent an emerging effort
to question rationalized accounts of the audit judgment process and to explore
the practice of auditing in its social and organizational contexts. The author
breaks down the contributions of these papers, described as the
“production of legitimacy,” into four areas: the audit process and
formal structure; auditing as a business; working papers and image management;
and new audits. The papers discussed in the essay also highlight the socially
construed nature of professional inference and provide avenues for taking this
type of research forward. |