Have You Seen...?
Sudip Bhattacharjee, Virginia Tech
Duane Brandon, Auburn University
Brian Mayhew, University of Wisconsin
Jennifer Mueller, Auburn University
and Reed Smith, Indiana University Purdue University Indianapolis
"Audit Quality: A Synthesis of Theory and Empirical Evidence," by A. L. Watkins, W. Hillison, and Susan E. Morecroft, Journal of Accounting Literature (Volume 23, 2004): 153-194.
This paper reviews and evaluates the theory and empirical research on audit quality. Such a consideration is warranted and necessary to take stock of the large body of audit quality literature and assess the current understanding of the concept. Gaps in the knowledge and understanding can then be identified and suggestions can be provided as to how to fill those gaps. The authors develop a theoretical framework that treats audit quality as a construct with multiple, interrelated dimensions and which constitutes a well-defined space for locating existing research and future hypothesis formation. The authors focus primarily on empirical papers that explicitly investigate audit quality as it relates to financial reporting. Therefore, the review does not include audit quality research relating to compliance or operational auditing.
"A Comparison of Auditor and Client Initial Negotiation Positions and Tactics," by C. W. Bame-Aldred and T. Kida, Accounting, Organizations and Society, In Press.
This study examines the initial negotiation positions and tactics of auditors and clients in a revenue recognition conflict. Using professional auditors and experienced financial managers (clients), the study investigates the degree of flexibility in auditor and client initial negotiation positions, whether auditors and clients accurately perceive the other party's positions, and the types of negotiation tactics that may be used by both parties. The results indicate differences in ways auditors and clients approach conflict resolution. Clients were more flexible, determined the auditor's goals and limits more accurately, and were more likely to use negotiation tactics such as bid high/concede later and trade-off one reporting issue for another.
"Management Reporting Incentives and Classification Credibility: The Effects of Reporting Discretion and Reputation," by F. Hodge, P. E. Hopkins, and J. Pratt, Accounting, Organizations and Society (Volume 31, 2006): 623-634.
The study looks at how the level of discretion in the reporting environment and management's reporting reputation influence the extent to which management's reporting incentives are important in determining the perceived credibility of management's classification choices. Using graduate business students, the results show that the extent to which users consider the consistency between the classification and management's reporting incentives depends on the level of discretion in the reporting environment and management's reporting reputation. Users rely less (more) on the consistency between management's reporting incentives and the classification in a mandated (discretionary) reporting environment and when managers have a good (poor) reporting reputation.
"Perceptions of the True and Fair View Concept: An Empirical Investigation," by N Kirk, Abacus (Volume 42, 2006): 205-235.
This article reports the results of a survey designed to explore New Zealand financial directors', auditors' and shareholders' perceptions of terms associated with financial reporting quality. The results show that a clear majority of all three groups share similar perceptions of the concept 'true and fair view'; but perceive 'true and fair view' to be quite different from 'fairly presents' and 'fair presentation'. The findings also support a literal rather than a technical interpretation of 'true and fair view'; that respondents do not perceive 'true and fair view' as compliance with GAAP.
"Managing Perceptions of Technical Competence: How Well Do Auditors Know How Others View Them?," by H. Tan and K. Jamal, Contemporary Accounting Research (Volume. 23, 2006): 761-787.
This article investigates factors that influence auditors’ accuracy in knowing how subordinates, peers, and superiors view their technical competence. Using natural teams of auditors who work together in audit assignments, the study shows that accuracy in knowing what others think of one's technical proficiency (metaperception) is generally high, particularly when the predictor auditors are partners and managers; however, metaperception accuracy is asymmetric and varies depending on the predictor auditor, the target auditor being predicted, and task complexity.
"Prominent Audit Clients and the Relation between Discretionary Accruals and Non-Audit Service Fees," by C. Callaway Dee, A. Lulseged and T. S. Nowlin. Advances in Accounting (Volume 22, 2006): 123-148.
This study uses a matched-pair design and finds that for S&P 500 firms, higher proportions of non-audit fees are associated with higher income-increasing accruals; however, the result is not robust to alternative fee measures. For a group of matching small firms, higher fees paid to auditors are associated with higher levels of income-decreasing discretionary accruals (i.e., lead to more negative discretionary accruals). The authors conclude that the relation between discretionary accruals and fees paid to auditors differs for prominent and less-prominent audit clients, and auditors appear to be more conservative with their less-prominent audit clients from whom they receive large fees.
"Audit Programs and Audit Risk: A Study of Japanese Practice," by H. Fukukawa, T. J. Mock and A. Wright. International Journal of Auditing (Volume 10, Issue 1, 2006): 41-66.
This study examines whether audit planning is 'risk adjusted' using archival data from 235 clients from a well-established audit firm in Japan. The authors address all four aspects of audit planning (nature, extent, timing and staffing) and examine a wide variety of client risks to reflect the current holistic audit approaches of global auditing firms. The results indicate that, although audit planning is based on the level of and change in assessments of many audit risk variables, the associations are rather modest. They also find that client risks that comprise business risk and fraud risk affect audit planning to some extent. In addition, they report exploratory results suggesting a substitution effect between audit planning judgments in response to higher client risks such as increasing the extent of validity tests while decreasing the extent of confirmations.
"The Differential Effects of Auditors' Non-Audit and Audit Fees on Accrual Quality," by B. Srinidhi, and F. A. Gul. Contemporary Accounting Research (Forthcoming). Available at SSRN: http://ssrn.com/abstract=920776
This paper examines linkages between the audit and non-audit fees and accrual quality. The authors posit that in settings where audit quality is compromised by a loss of auditor independence, managers use accruals more opportunistically and thereby drive down the accrual quality. Conversely, higher audit effort and quality translate to a better accrual quality. The dependent variables are the relative magnitude of non-audit fees to audit fees, the absolute magnitudes of audit, non-audit and total fees. Results show that accrual quality has a significant negative association with the magnitude of non-audit fees but a significant positive association with audit fees. This latter result is consistent with the proposition that higher audit fee reflects higher audit effort and better judgments about the propriety of accruals, but is not consistent with the proposition that audit fee is associated with economic bonding.
"An Economic Analysis of Audit and Nonaudit Services: The Trade-off Between Competition Crossovers and Knowledge Spillovers," by Martin Wu. Contemporary Accounting Research (Volume 23, 2006) 527-554.
The author examines an economic model of duopoly in which the firms in the duopoly both engage in a portfolio of services. The different services have the characteristic that there is improved efficiency when they are both performed for the same client (knowledge spillover). They also provide a source for competition that works against this efficiency. Wu finds that (1) the tensions created by duopolistic competition in the audit and NAS market and knowledge spillover can induce auditor specialization. Further, he finds that (2) some of the increase in audit fees that we have observed since the enactment of the Sarbanes-Oxley Act of 2002 may be due to the relaxing of the market tension from firms providing both types of services.
"The Importance of Account Relations when Responding to Interim Audit Testing Results," by Scott Vandervelde. Contemporary Accounting Research (Volume 23, 2006) 789-822.
Vandervelde reports the results of an experiment in which practicing auditors performed a web-based experiment in which they plan an audit budget for five clients in one period, then after receiving feedback about the results of the stage-one audit, they plan a second stage audit budget. The purpose of the experiment was to see to what extent auditors look in related accounts for problems once a potential problem has been indicated. The author finds that, in fact, auditors do consider related accounts and that audit profitability is not a significant factor in the auditor's reaction to problems identified in early stages of the audit.
"Effects of Multiple Clients on the Reliability of Audit Reports," by Anne Beyer and Sri Sridhar. Journal of Accounting Research. (Volume 44, 2006) 29 – 51.
Beyer and Sridhar consider a model with auditors that each have a portfolio of clients. There are two reasons that an auditor can report a bad firm as a good firm. Either there can be a statistical imperfection in the audit or the auditor can intentionally bias the report to please the client. The authors find that if an auditor gives a qualified report to one client, then this signals his ability and willingness to issue these types of reports and thus makes the clean reports that much more credible. They also show, though, that additional clients reduce audit quality for the existing clients because their capacity is constrained.
"Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock-Compensation and Lease Information," by Robert Libby, Mark Nelson, and James Hunton. Journal of Accounting Research. (Volume 44, 2006) 533-560.
The authors conduct an experiment to determine whether auditors are more strict with reported numbers on the financial statements than they are with values that are merely disclosed in the footnotes. They examine stock compensation and leases which allow footnote disclosure as an alternative to recognition. In both the stock-compensation and lease settings, audit partners require greater correction of misstatements in recognized amounts than in the equivalent disclosed amounts.
"Does Opinion Shopping Impair Auditor Independence and Audit Quality," by Tong Lu. Journal of Accounting Research. (Volume 44, 2006). 561 – 583.
This study investigates the ability of companies to influence their auditors by threatening to switch auditors. Lu also considers how the stock market reacts to an auditor switch. The results indicate that neither the predecessor auditor’s nor the successor auditor’s independence is compromised by dismissal threats and opinion shopping. This is due to the fact that the successor auditor is motivated to provide a higher quality audit than is the predecessor auditor.
|
