Have You Seen…?Sudip Bhattacharjee, Virginia Tech "An Experimental Investigation of Approaches to Audit Decision Making: An Evaluation Using Systems-Mediated Mental Models," by A. K. Choy and R. R. King, Contemporary Accounting Research (Volume 22, 2005): 311-350. This paper develops a framework for a systems-based audit approach. In doing so, the paper combines mental model theory with general systems theory to produce a hypothesis called systems-mediated mental model hypothesis and tests it using experimental economics methods. The results suggest that subjects make systematic errors under the setting without an organizing framework provided by the systems information and the presence of an organizing framework resulted in fewer errors. Importantly, the organizing framework significantly enhanced decision making in the settings where the environment changed. "Changes in Internal Auditing During the Time of the Major US Accounting Scandals," by, J. V. Carcello, D. R. Hermanson, and K. Raghunandan, International Journal of Auditing, (Volume 9, 2005): 117-127. This paper examines changes in internal auditing during the period following the Enron and WorldCom frauds. The data suggest that internal audit budgets, staffing levels, meetings with the audit committee, and meeting length all increased markedly during this time. Further, the evidence suggests that there were larger budget increases among smaller companies and in companies with greater financial resources or with greater liquidity risk. "Who Cares about Auditor Reputation?," by J. Barton, Contemporary Accounting Research (Volume 22, 2005): 549-586. This paper examines the defections of Arthur Andersen's clients following the accounting scandals and criminal conviction Andersen experienced in 2002. The results show that clients defected sooner, mostly to another Big 5 auditor, if they were more visible in the capital markets as proxied by clients that attracted more analysts and press coverage, had larger institutional ownership and share turnover, and raised more cash in recent security issues. In sum, the study suggests that more visible firms are more concerned about engaging highly reputable auditors, consistent with such firms trying to build and preserve their reputations for credible financial reporting. "Auditors as Underwriters: An Alternative Framework," by S. Bhattacharjee, K. Moreno and J. A. Yardley, International Journal of Auditing (Volume 9, 2005): 1-19. This paper proposes an alternative institution for auditing by requiring public companies to purchase insurance to indemnify their financial statements against material misstatements. The insurance company would hire an auditor to assess the risk of material misstatements in the financial statements and the auditor, in the capacity of underwriter, would assess the risk to determine the amount of the insurance coverage and premium. The authors argue that the proposed model would allow the SEC and the stock markets to more effectively reduce investors' information risk and restore investors' confidence in financial reporting. "The Effect of Partner Preferences on the Development of Risk-Adjusted Program Plans," by J. L. Bierstaker and A. Wright, Advances in Accounting (Volume 21, 2005): 1-23. The paper uses an experiment to explore the impact of partner preference on auditors' planning decisions in response to risk. Partner preferences were manipulated as either "efficiency" focused or "balanced" which entailed consideration of both effectiveness and efficiency. Auditors performed program planning for the revenue cycle of a hypothetical client. The results show a significant interaction between auditors' risk assessments and partner preferences. When the partner expressed a preference for a balanced approach the auditors recorded higher risk assessments and a more tests and hours relative to when the partner expressed a preference for efficiency only. "The Impact of Management Image and Non-Audit Service Fees on Investors' Perceptions of Earnings Quality," by S. Solomona, P. M. J. Reckers and D. Jordan Lowe, Advances in Accounting (Volume 21, 2005): 199-216. This paper examined the extent to which the perceived credibility of a corporation's financial statements is a function of the public's perception of the corporation's leadership and/or the auditor's independence. The paper looked at the public image of the CEO as projected in the press, and the perception of auditor independence as projected by mandated public information about non-audit services. Results from an experiment using third-year law students suggest that even in an environment fully compliant with SOX reforms, public perceptions of the integrity of management and the independence of auditors influence individuals' confidence in the financial statements. "The Association between Corporate Boards, Audit Committees, and Management Earnings Forecasts: An Empirical Analysis," by I. Karamanou and N. Vafeas, Journal of Accounting Research (Volume 43, 2005): 453-486. This paper studies how corporate boards and audit committees are associated with voluntary financial disclosure practices as proxied by management earnings forecasts. The findings indicate that managers are more likely to make or update an earnings forecast in firms with more effective board and audit committee structures. However, the forecast is less likely to be precise, it is more accurate, and it elicits a more favorable market response. Together, the results provide evidence suggesting that effective corporate governance is associated with higher financial disclosure quality. "Does the Market Value Financial Expertise on Audit Committees of Boards of Directors?," by M. L. Defond, R. N. Hann, and X. Hu, Journal of Accounting Research (Volume 43, 2005): 153-193. This study examines whether the market reacts favorably to the appointment of audit committee members who have financial expertise. Specifically, market reactions to two types of experts are examined: accounting financial experts (as initially proposed by SOX) or non-accounting financial experts (as ultimately passed in SOX). The results show a positive reaction to the appointment of accounting financial experts but no reaction to nonaccounting financial experts. The findings are consistent with the notion that accounting-based financial skills improve an audit committee's ability to ensure high-quality financial reporting whereas broader financial skills do not. "Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia," by J. P. H. Fan and T. J. Wong, Journal of Accounting Research (Volume 43, 2005): 35-72. This study examines whether independent auditors are employed as monitors or bonding mechanisms, or both, to alleviate the agency problems found in emerging markets. Using a sample from eight East Asian economies, the study documents that firms with agency problems embedded in the ownership structures are more likely to employ Big 5 auditors. Furthermore, firms using Big 5 auditors were found to receive smaller share price discounts. Also, Big 5 auditors appear to take into consideration their clients' agency problems when making audit fee and audit report decisions. Taken together, these results suggest that Big 5 auditors have a corporate governance role in emerging markets. "Information Systems Risk and Audit Planning," by J. C. Bedard, L. Graham and C. Jackson, International Journal of Auditing (Volume 9, 2005): 147-163. This study examined client characteristics that external auditors believe are relevant to two areas of systems risk: system security and management information quality. The study describes the client characteristics identified by the auditors and relates those characteristics to systems risk assessments and testing plans. Results indicate that auditors predominantly identified risk-increasing characteristics but they also identified risk-decreasing characteristics. The results suggest that audit planning for EDP security is associated with risk factors relating to control activities but not to control environment. "Independence Threats, Litigation Risk, and the Auditor's Decision Process," by A. D. Blay, Contemporary Accounting Research (Volume 22, 2005) This study uses an experiment to examine the effect of independence threats and litigation risk on auditors' evaluation of information and their reporting decisions. The author tracked auditors' information gathering and evaluation for a going-concern reporting decision. The findings suggest that auditors who faced high independence threats engage in motivated reasoning and evaluate information as more indicative of a surviving client leading to an unmodified audit report. In contrast, auditors facing high litigation risk evaluated the information as more indicative of a failing client and were more likely to suggest a modified audit report. "A Within-Firm Analysis of Current and Expected Future Audit Lag Determinants," by B. K. Behn, D. L. Searcy and J. Woodroof, Journal of Information Systems (Volume 20, 2006) This paper reports the impediments that practicing auditors identify as keeping them from significantly reducing the time need to issue an audit report. The authors surveyed audit partners and found that insufficient personnel, both with the client and the audit firm, appear to have caused prior audit report lags. Additionally, the partners state that the mindsets of both clients and auditors must change before audit report lags will be significantly reduced. Finally, the partners suggest that auditors' skills must improve and a flexible scheduling process must be used to reduce audit lag. The implications for continuous auditing are discussed. |
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