Have You Seen...?Sudip Bhattacharjee, Virginia Tech
"Fraud Risk Assessments and Auditors' Professional Skepticism," by E. A. Payne and R. J. Ramsay, Managerial Auditing Journal (Volume 20, 2005): 321-330. This study conducts an experiment with auditor participants to examine if planning stage fraud risk assessments and audit experience influence professional skepticism during fieldwork. Professional skepticism is measured as the auditor's assessment of client truthfulness. The results indicate that auditors predisposed to low (moderate/high) fraud risk assessments are less (more) skeptical than the control group, and staff auditors are more skeptical than auditor seniors. The implications of these results are that audit firms need ongoing training on professional skepticism and the requirements of SAS No. 99. "Auditor Identification of Fraud Risk Factors and their Impact on Audit Programs," by T. J. Mock and J. L. Turner, International Journal of Auditing (Volume 9, Issue 1, 2005): 59-83. This study uses archival data from 202 audit clients obtained from three large audit firms to investigate the effect of auditors' fraud risk assessments on audit programs following the issuance of SAS No. 82. The findings of the study suggest that fraud risk factors vary by client, industry and fraud risk category. In addition, auditors modified the nature, timing, and/or extent of audit procedures, as well as the experience of audit team members, for 20 percent of the year one audits and 31 percent of the year two audits examined. The decision to modify the audit program was correlated with the identification and documentation of fraud risk factors identified by SAS No. 82. The authors conclude that their results differ somewhat from prior research into overall audit program planning and provide evidence that subsequent to the issuance of SAS No. 82, audits are being fraud risk adjusted. "A Theoretical Framework of the Relationship between Public Accounting Firms and Their Auditors," by E. D. Almer, J. L. Higgs, and K. L. Hooks, Behavioral Research in Accounting (Volume 17, 2005): 1-22. The authors develop a model of the employment relationship between auditors and public accounting firms using agency theory and the sociology of professions literature. The purpose of the framework is to identify what auditing professionals contribute and receive based on their work, as well as the pressures and incentives they face. The model integrates prior research on auditors and their firms in the context of their employment relationship, specifies a variety of variables in the employment contract model, and suggests a number of possibilities for future research. "The Value of Internal Control Audits," by D. R. Hermanson, Internal Auditing (Volume 20, Issue 1, 2005): 35-38. The author describes the benefits of internal control audits required by Section 404 of the Sarbanes-Oxley Act to external auditors, audit committees, and internal auditors. Specifically, the author suggests that internal control audits may aid organizations with the detection and prevention of fraudulent financial reporting and improve corporate governance by providing the audit committee and board of directors with more complete information about the company's ability to manage risks. "The Influence of Nonaudit Service Revenues and Client Pressure on External Auditors' Decisions to Rely on Internal Audit," by W. L. Felix Jr., A. A. Gramling, and M. J. Maletta, Contemporary Accounting Research (Volume 22, Issue 1, 2005): 31-53. This paper investigated how external auditor provision of significant nonaudit services and client pressure to use the work of internal audit influence external auditors' use of internal auditors' work. The paper addressed this issue by focusing on the importance of various explanatory variables (e.g., nonaudit service revenues, client pressure, internal audit quality, and coordination) to the external auditor's decision to rely on the work of internal audit. The study used data from surveys completed by internal and external auditors from 74 separate audit engagements. The findings suggest that when significant nonaudit services are not provided to a client, internal audit quality and the level of internal-external auditor coordination positively affect auditors' internal audit reliance decisions. However, when the auditor provides significant nonaudit services to the client, internal audit quality and the extent of internal - external auditor coordination do not significantly affect auditors' reliance decisions. Furthermore, when significant nonaudit services are provided, client pressure significantly increases the degree of internal audit reliance. The authors conclude that external auditors appear to be more affected by client pressure and less concerned about internal audit quality and coordination when making internal audit reliance decisions related to clients for which significant nonaudit services are also provided. "The Corporate Governance Mosaic and Financial Reporting Quality," by J. Cohen, G. Krishnamoorthy, and A. Wright, Journal of Accounting Literature (Volume 23, 2004): 87-152. This paper reviews research on corporate governance and its impact on financial reporting quality. The review has three objectives: 1) to suggest a corporate governance "mosaic" (i.e., the interactions among the actors and institutions that affect corporate governance) that encompasses a broader view of governance than has been considered in prior accounting research; 2) to provide an overview of the principal findings of prior research; and 3) to identify important gaps in the research that represent promising avenues for future study. "The Role of the Internal Audit Function In Corporate Governance: A Synthesis Of The Extant Internal Auditing Literature And Directions For Future Research," by A. A. Gramling, M. J. Maletta, A. Schneider, and B. K Church Journal of Accounting Literature (Volume 23, 2004): 194-244. This paper synthesizes literature on internal auditing to guide future thinking and research on the new and expanding roles that the internal audit function can play in helping ensure quality corporate governance. To organize the review, the authors adopted the perspective that corporate governance is comprised of four cornerstones: the external auditor, the audit committee, management, and the internal audit function [Institute of Internal Auditors (IIA), 2003a]. They then focus on the internal audit function "cornerstone" and how the internal audit function can contribute to corporate governance through its relationships with the other three corporate governance parties. More specifically, they adopt a perspective that the internal audit function serves as a resource to each of the other three parties responsible for corporate governance. "Reexamination of Behavior in Experimental Audit Markets: The Effects of Moral Reasoning and Economic Incentives on Auditor Reporting and Fees," by J. W. Schatzberg, G. R. Sevcik, B. P. Shapiro, L. Thorne, and R. S. Olusegun Wallace, Contemporary Accounting Research (Volume 22, Issue 1, 2005): 229-264. This study conducts an experimental market to investigate how moral reasoning influences auditor reporting under different levels of economic incentives. In each multi-period market, auditor participants could either (1) misreport low observed outcomes as high and thereby reap economic advantages at the expense of third-party investors, or (2) truthfully report low observed outcomes as low and thereby forgo the economic advantages of misreporting. The results suggest that misreporting and premium fees are more likely with higher than with lower moral reasoning participants and the moral reasoning effect diminishes as economic penalties increase in the market. These findings provide valuable insights for specifying the determinants of auditor misreporting, the observable behaviors that signal its existence, and the institutions that can prevent its occurrence in the market. "In Denial? Stock Market Underreaction to Going-Concern Audit Report Disclosures," by R. Taffler, J. Lu and A. Kausar, Journal of Accounting & Economics (Volume 38, 2004): 263-296. The authors examined stock price performance of London Stock Exchange listed companies over a one-year period subsequent to receiving a going-concern opinion. The authors find that their sample underperformed by 24% to 31% depending upon the benchmark used for comparison. These results suggest that the market fails to fully impound negative information of a GC opinion in an efficient manner. However, the authors report that due to high transactions costs they were unable to demonstrate a profitable investment arbitrage strategy. "The Auditor-to-Client Revolving Door and Earnings Management," by M. Geiger, D. North and B. O'Connell, Journal of Accounting, Auditing & Finance (Winter, Volume 20, 2005): 1-26. Sarbanes-Oxley places restrictions on companies' ability to hire senior financial executives from their external auditors. The authors of this paper examined changes in accruals for a sample of companies where financial executives (e.g. CFO, controller etc.) were hired by a public company directly from their external auditing firm. The authors find no evidence of a change in the propensity to use accruals to manage earnings immediately before or after the hiring of former auditors as compared to three control groups. The data show no evidence of increased use of accruals over the 11-year period studied. "Audit Quality and Executive Officers' Affiliations with CPA Firms," by C. Lennox, Journal of Accounting & Economics (Volume 39, 2005): 201-231. The author estimates an audit opinion model to identify companies with a high likelihood of receiving a non-clean audit opinion. The data suggest that companies that have executives with previous affiliation with the external audit firm are less likely to receive modified audit opinions than are companies whose executives have no prior affiliation with the external audit firm. The results were strongest when the affiliation was due to an executive convincing her employer to switch to her prior audit firm as opposed to an affiliation that arose from a direct hiring of the executive from the current audit firm. "Auditor Size, Market Segmentation and Litigation Patterns: A Theoretical Analysis," by S. Bar-Yosef and B. Sarath, Review of Accounting Studies (Volume 10, Issue 1, 2005): 59-92. The authors provide a theoretical rationale for the observed audit industry structure where well-capitalized auditors hold an extremely large market share while focusing on the economics of trading in an adverse selection market where audit quality is unobservable. They show that concentration of market share can arise even if well-capitalized auditors have no relative advantage with regard to supplying high-quality audits, and that the strategy of attracting a narrow base of high-margin clients is typically unsustainable in rational expectations equilibrium. Other results suggest that better-capitalized auditors get a dominant market share, produce more accurate reports and are more pro?table. In addition, the imposition of high minimum standards increases the market power of wealthy auditors, even though smaller auditors can potentially provide the same level of audit quality at lower fees. "Management Ownership and Audit Firm Size," by C. Lennox, Contemporary Accounting Research (Volume 22, Issue 1): 205-227. The finance literature identifies two agency problems between managers and outside shareholders. First, there is a divergence-of-interests problem as management ownership falls. Second, there is an offsetting entrenchment problem when management ownership increases within intermediate regions of ownership. Agency problems are mitigated through contracting, but contracts are often based on accounting numbers prepared by management. Because accounting numbers must be reliable for contracts to be enforced, agency theory predicts a demand for higher-quality auditors when agency problems are more severe. However, extant studies find no significant or robust relation between management ownership and audit firm size. First, the monitoring value of auditing may be higher in unlisted companies because they are less vulnerable to takeover and they are required to disclose much less non-accounting information to shareholders. Second, unlisted companies have greater variation in management ownership, which permits more powerful tests of the demand for auditing as ownership varies between zero and 100 percent. |
|