Have You Seen...?

Sudip Bhattacharjee, Virginia Tech;
Duane Brandon, Auburn University;
Jennifer Mueller, Auburn University; and
Reed Smith, Indiana University Purdue University Indianapolis

"Audit Firm Appointments, Audit Firm Alumni, and Audit Committee Independence" by C. S. Lennox and C. W. Park. Contemporary Accounting Research (Volume 24, No. 1, 2007): 235–258

Previous research finds that alumni have ties with their former audit firms and are more inclined to provide economic benefits to former firms if they have stronger ties. If the alumnus is a senior corporate officer, the alumnus may benefit his former firm by recommending that the company appoint the firm as its auditor. However, the company's audit committee may be concerned that officer–auditor ties threaten audit quality. Therefore, an independent audit committee may not sanction the appointment of the officer's former firm. This study finds that companies appoint officers' former firms more often than they appoint alternative audit firms. However, companies are less likely to appoint officers' former firms if audit committees are more independent. This suggests that independent audit committees strengthen audit quality by deterring affiliations between audit firms and officers.

"A study of whistleblowing among trainee auditors" by N. Brennan, and J. Kellya. The British Accounting Review (Volume 29, No. 1, 2007): 61–87.

This paper investigates some of the factors that influence the propensity or willingness to blow the whistle among trainee auditors. Trainee auditors (of the Institute of Chartered Accountants in Ireland just about to sit their finals) reported their confidence in internal and external reporting structures in their firms. The trainees also provided their willingness to challenge an audit partner's inappropriate response to concerns raised during the audit. Finally, audit trainees responded concerning the influence of legal protection on their likelihood of whistleblowing. Results indicate that where firms have adequate formal structures for reporting wrongdoing, trainee auditors are more likely to report wrongdoing and have greater confidence that this will not adversely affect their careers. Training increases this confidence. Trainee auditors also express a willingness to challenge an audit partner's unsatisfactory response to wrongdoing. The study reports significant differences in attitudes depending on whether the reports of wrongdoing were internal or external. The willingness to report wrongdoing externally reduces for older (aged over 25) trainees.

"The impact of auditor-client relationships on the reversal of first-time audit qualifications" by M. J. Meyer, J. T. Rigsby, and J. Boone. Journal: Managerial Auditing Journal. (Volume 22, No. 1, 2007): 53–79

This study examines the linkage between auditor tenure and audit quality. Using attachment theory, auditor tenure can be viewed as but one measure of the attachment between auditors and clients. The authors use a number of measures of both interpersonal and interorganizational attachment between auditors and their clients. The authors track the event history of a sample of firms from the issuance of a first time audit qualification for going concern and non-going concern contingencies. They find that interpersonal and interorganizational attachment has a significant impact on those opinion decisions that require more auditor judgment (i.e. going concern).

"Auditor Conservatism and Audit Quality: Evidence from IPO Earnings Forecasts" by P. J. Lee, S. J. Taylor, and S. L. Taylor. International Journal of Auditing. (Volume 10, No. 3, 2006): 183–199.

The authors investigate the relation between a proxy for differential audit quality and both the (ex post) accuracy and conservatism of audited earnings forecasts provided in Australian initial public offering (IPO) prospectuses. For their period, most Australian IPO prospectuses include an earnings forecast (not ‘voluntary’), and the auditor must be satisfied prior to signing off on the prospectus. After controlling for other factors associated with forecast error, they find some evidence that forecasts audited by Big 6 auditors prove more accurate than those audited by a non-Big 6 auditor, although this result is not robust across alternative measures of forecast accuracy. In contrast, they find significantly less optimistic bias for forecasts associated with Big 6 auditors that is robust to alternative measures of forecast bias.

In this paper, the authors consider the ethical and economic context that existed and facilitated Andersen’s failure. The analysis is grounded in Akerlof’s (1970) theory of the Market for Lemons. Consistent with Akerlof’s model, they consider the appropriateness of the countervailing mechanisms that existed at the time of Andersen’s demise that appeared to have effectively failed in counteracting Andersen’s ethical shortcomings. They also assess the appropriateness of the remedies proposed by the Sarbanes–Oxley Act of 2002 (SOA) to ensure that similar ethical lapses will not occur in the future. They find that the SOA regulatory reforms should counteract some of the necessary conditions of the Lemons Model, and thereby mitigate the likelihood of audit failures. They contend that the effectiveness of the SOA critically depends upon the focus and attention of the Public Companies Accounting Oversight Board (PCAOB) towards assessing the ethical climates of public accounting firms.

"Do Auditor Provided Non-audit Services Improve Audit Effectiveness?," by J. R. Joe and S. D. Vandervelde, Contemporary Accounting Research, (Summer 2007): Forthcoming.

This study examined whether auditors are able to transfer knowledge from a nonaudit task to an audit task to determine whether performing both tasks potentially improves audit effectiveness. Results indicate that auditors who completed the nonaudit task transferred the knowledge about client risks and provided higher audit risk assessments than auditors who only reviewed the nonaudit workpapers. There was no evidence of knowledge transfer when the same nonaudit workpapers were attributed to a member of his or her firm or another audit firm, suggesting that the same personnel must work on both engagements to obtain a positive knowledge transfer from nonaudit services to audit services. However, results also indicate that auditors might exhibit less professional skepticism for clients when their firm performs nonaudit services.

This study examines the influences of alternative work arrangements, subordinate gender, and supervisor attitudes and beliefs regarding alternative work arrangements on performance evaluation judgments in public accounting. Experienced audit professionals evaluated a hypothetical subordinate’s performance in an experimental setting. Results indicate that subordinate gender and alternative work arrangements participation were significantly related to supervisors’ perceptions of the subordinate’s career success. The study also found that individual differences in supervisors’ attitudes and beliefs regarding alternative work arrangements were systematically related to their performance evaluation judgments, and indicate that cultural support for alternative work arrangements is not uniform among experienced Big Four professionals.

"Don't Believe Everything You Think: The 6 Basic Mistakes We Make in Thinking", by T. Kida, (Prometheus Books, 2006).

This book discusses how to recognize faulty thinking and develop the necessary skills to become a more effective problem solver. The author identifies six basic mistakes that lead decision-makers to unconsciously accept false ideas. The book illustrates these tendencies with numerous examples that demonstrate how easily we can be fooled into believing something that isn't true. The book offers an introduction to the psychology of judgment and decision-making along with the difference between scientific and pseudoscientific thinking. The decision errors discussed in this book are particularly relevant to the audit function, which relies heavily on judgment and decision-making.

"Auditors’ Memory Of Internal Control Information: The Effect of Documentation Preparation versus Review," by L. S. Kopp and J. L. Bierstaker, Advances in Accounting Behavioral Research, (Volume 29, 2006): 27–50.

The authors investigate the amount of auditor attention given to information during internal control documentation procedures, and the effect of this attention on internal control information acquisition and risk assessment. Results suggest that the audit seniors who completed an internal control questionnaire retained significantly more internal control information than audit seniors who reviewed an internal control questionnaire completed by another individual. This result held when separately examining the internal control strengths and weaknesses. In addition, audit seniors who completed an internal control questionnaire-assessed control risk at a level comparable to the control risk assessments of audit managers in the same firm.

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