Have You Seen...?
Pennie Bagley, Texas Tech University
Albert Nagy, John Carroll University
Gary Peters, University of Arkansas
“Audit Committee Incentive Compensation and Accounting Restatements”, by D. Archambeault, F.T. Dezoort, and D. Hermanson, Contemporary Accounting Research (Volume 25, Issue 4, 2008): 965-992.
This study investigates the association between audit committee incentive-based compensation and financial reporting failures reported as restatements. The authors evaluate whether short-term and long-term incentive compensation for audit committee members is associated with accounting restatements due to error or fraud. Using a matched sample logistic regression, the authors find a significant positive relation between short term option grants for audit committee members and restatement likelihood. The authors conclude that short-term options may reduce oversight quality by causing audit committee members to focus heavily on short-term performance.
“The Market Reaction to Arthur Andersen’s Role in the Enron Scandal: Loss of Reputation or Confounding Effects?”, by K. Nelson, R. Price, and B. Rountree, Journal of Accounting and Economics (Volume 46, Issues 2-3, 2008): 279-293.
The authors investigate whether the negative client stock returns following the revelation that Enron documents had been shredded are attributable to confounding effects as opposed to a loss of Andersen’s reputation. Consistent with prior research, this study finds that Andersen clients experienced a negative abnormal return in the event window surrounding the shredding announcement. However, the authors show that the results are strongly influenced by the Energy sector; a sector in which Andersen, and in particular their Houston office, was heavily involved. The authors conclude that the significant market decline for Andersen clients in the days following the shredding announcement is attributable to these confounding factors, and not a reflection of the auditor’s damaged reputation.
“Does Audit Quality Matter More for Firms with High Investment Opportunities?” by K-W Lai, Journal of Accounting and Public Policy (Volume 28, Issue 1, 2009): 33-50.
This paper examines the association of firms with high investment opportunities with high quality audits (proxied by Big 5 auditors) and whether that association results in a lower likelihood of earnings management. The results show that firms with high investment opportunities are more likely to have more discretionary accruals than firms with low investment opportunities. However, this relationship is weaker when those firms are audited by Big 5 auditors. The author concludes from these results that the likelihood of earnings manipulation is higher for firms with high investment opportunities but a high quality audit is able to curb the manipulation.
“Internal Auditors’ Evaluation of Fraud Factors in Planning an Audit: The Importance of Audit Committee Quality and Management Incentives”, by S. Asare, R. Davidson, and A. Gramling, International Journal of Auditing (Volume 12, Issue 3, 2008): 181-203.
This study examines internal auditors’ fraud risk decisions in response to variations in audit committee quality and management performance incentives. The authors conduct two experiments in which internal auditors are asked to assume the role of either planning an audit of the company at which they are employed (self-assessment) or planning an audit of a potential acquisition target company (due diligence). The results show that internal auditors in both roles were sensitive to variations in management performance incentives and altered their audit plans accordingly. In regards to audit committee quality, the internal auditors’ responses to variations in quality depended on their assigned role. The authors conclude that, for at least one fraud factor, internal auditors’ fraud assessments and related planning decisions may be contingent on their positional role.
“Client Characteristics and the Negotiation Tactics of Auditors: Implications for Financial Reporting,” by R. C. Hatfield, C. P. Agoglia, and M. H. Sanchez, Journal of Accounting Research (Volume 46, Issue 5, 2008): 1183-1207.
Using two experiments, this paper investigates whether auditors will employ a reciprocity-based strategy for the resolution of audit differences and how client negotiating style and retention risk impact the extent to which this strategy is used. A reciprocity-based strategy is one in which the auditor brings inconsequential items to management and subsequently waives these items in an attempt to encourage management cooperation in the posting of significant income-decreasing adjustments. Experiment 1 results reveal that auditors are more likely to utilize a reciprocity- based strategy when management has a competitive negotiation style and the retention risk is high. Experiment 2 results suggest that using a reciprocity-based strategy in this scenario will result in more conservative financial statements than when no specific strategy is employed.
“Can Audit Partners Predict Subordinates’ Ability to Detect Errors?” by W. F. Messier, Jr., V. Owhoso, and C. Rakovski, Journal of Accounting Research (Volume 46, Issue 5, 2008): 1241-1264.
Using an experiment, this paper investigates how well audit partners can predict the ability of managers and seniors to detect financial statement errors. Specifically, audit partners are asked to predict whether subordinates (seniors and managers) are able to detect specific types of errors. Partner predictions are then compared to actual performance of the subordinates. The results reveal several insights. First, partners are overconfident in their subordinates’, specifically, seniors’ ability to detect errors. Secondly, partners are more accurate predicting managers’ rather than seniors’ performance. Third, partners are more accurate in predicting ability to detect mechanical versus conceptual errors. And lastly, partners are not better at predicting subordinates ability to detect more frequent and more important errors than less frequent and less important errors.
“Does Increased Audit Partner Tenure Reduce Audit Quality?” by D. L. Manry, T. J. Mock, and J. L. Turner, Journal of Accounting, Auditing, & Finance (Volume 23, Issue 4, 2008): 553-572.
This paper uses archival data to investigate the relationship between audit partner tenure and audit quality, measured as discretionary accruals. The Sarbanes-Oxley Act mandates that the lead and reviewing audit partner of an engagement rotate off the engagement every 5 years, implying that as partner tenure increases, audit quality will decrease. The authors find results that indicate the opposite. They find that discretionary accruals are negatively associated with audit partner tenure; in short, that audit quality increases as partner tenure increases. Further analysis reveals this result is driven by small clients. As partner tenure increases, auditors of small clients become less willing to accept more aggressive financial statement treatment. Partner tenure does not affect audit quality for large clients or for shorter-tenure clients.
“The Construction of Auditability: MBA Rankings and Assurance in Practice,” by C. Free, S. E. Salterio, and T. Shearer, Accounting, Organizations and Society (Volume 34, 2009): 119-140.
The purpose of this study is to shed light on the processes by which audit scope, practices, and communications are established for assurance services auditors provide in new domains. The authors investigate these issues through a field study of KPMG’s “audit” of the Financial Times MBA rankings, a project intended to lend more legitimacy to the rankings. The authors note from their investigation that audit planning, procedures, and communicated written conclusions are completed in a much more negotiated and interactive process than one would expect.
“Establishing a Baseline for Assessing the Frequency of Auditors’ Comments Concerning Perceived Client Integrity,” by R. A. Bernardi, Managerial Auditing Journal (Volume 24, Issue 1, 2009): 4-21.
Using an experiment, this paper examines whether comments made by then Big-Six auditors regarding their post-audit perceptions about client integrity were influenced by their firm’s rating of the client’s integrity prior to the beginning of the audit. Results reveal that the auditors were insensitive to client integrity ratings established in the planning phase of the audit. The study, conducted pre-standards requiring a preliminary assessment of fraud risk, can be used as a baseline for evaluating the effectiveness of such standards.
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