The Auditors Report

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Larry Abbott, University of Wisconsin - Milwaukee
Tamara Lambert, University of Massachusetts Amherst
Yinqi Zhang, American University

“Ethical Dilemmas in Auditing: Dishonesty or Unintentional Bias?”
By A. Guiral, W. Rodgers, E. Ruiz, and J. Gonzalo. Journal of Business Ethics 2010 (Volume 91, Supplement 1): 151-166.

This paper applies Moral Seduction Theory to evaluate the extent that compromised audits result from unintentional biases rather than dishonesty. The authors argue that regulatory approaches to promoting audit quality are limited in addressing true sources of auditor’s biases. Using a sample of eighty experienced auditors from international accounting firms, the authors use Moral Seduction theory to test auditors’ unintentional reluctance to issue qualified audit opinions that could precipitate client bankruptcy. The authors assert that more regulatory effort should be made in monitoring these types of conflicts of interest to reduce unintentional bias.

“Corporate Fraud and the Audit Expectations Gap: A Study Among Business Managers.”
By H. Hassink, L. Bollen, R. Meuwissen and M. de Vries. Journal of International Accounting, Auditing and Taxation 2009 (Volume 18, Issue 1): 85-100.

This paper examines the audit expectations gap concerning the role of the auditor in corporate fraud cases. The study assesses the significance of a reasonableness gap, a deficient performance gap and a deficient standards gap in the context of corporate fraud. The subjects were three groups of business managers, with a control group of bankers – all of which were located in the Netherlands. Subjects were given a questionnaire containing several statements about the definition and scope of fraud and auditors’ responsibilities concerning fraud and were asked to indicate their level of agreement with these statements. Results indicate a substantial expectations gap in the context of fraud, both with respect to the auditor’s performance, as well as the auditor’s formal obligations as laid down in the existing standards. Relative to bankers, business managers were less inclined to judge auditors’ performance of existing duties as inadequate.

“The Effects of Task Complexity and Skill on Over/Under-Estimation of Internal Control.”
By M. Mascha and C. Miller. Managerial Auditing Journal 2009 (Volume 25, Issue 8): 734 – 755.

This paper aims to examine the effects of skill level and the two task complexity dimensions – clarity and quantity of information – on subjects' internal control risk assessments. It uses a 2×4 mixed factors laboratory experiment. This design allows the effects of task complexity and skill between and within subjects to be examined. The mixed factors design includes two levels (high and low) for each dimension of task complexity (clarity and quantity) on a between-subjects basis, with four separate cases on a within-subjects basis. Skill level is measured as the subject's task-related knowledge. In general, subjects assess control risk too high, consistent with the conservatism principle. Skill level mediates this finding: high-skill subjects make more accurate risk assessments; low-skill subjects consistently assess control risk too high. Over repetitions of complex tasks, high-skill subjects make more accurate assessments, while low-skill subjects initially overstate, then improve. For repetitive simple tasks, both skill levels get worse, increasingly overstating their assessments. These findings support current practice, indicating that experienced auditors make complex risk assessments, where repetitive performance of complex tasks improves risk assessments. However, repetitive simple tasks may result in assessing control risk too high, resulting in excessive testing.

“Evidence from the United States on the Effect of Auditor Involvement in Assessing Internal Control over Financial Reporting.”
By J. Bedard, R. Hoitash and U. Hoitash. International Journal of Auditing 2009 (Volume 13, Issue 2): 105-125.

Securities regulators around the world are considering the costs and benefits of alternative policies for providing information to financial markets on corporate internal control. In this spirit, the authors examine the association of relative auditor involvement and auditor characteristics with Section 302 internal control disclosures made by US ‘non-accelerated filers’ from 2003 to 2005. We find more material weaknesses disclosed in the fourth quarter, when there is relatively more auditor involvement, relative to the first three quarters. Clients of larger audit firms have higher disclosure rates (although they are probably less risky due to more stringent client acceptance standards), but this difference is due to fourth quarter disclosures. Audit firms with Section 404 experience also have greater material weakness disclosure, implying process improvement associated with knowledge sharing across engagements.

“Does Increased Audit Partner Tenure Reduce Audit Quality?”
by J. Turner, T. Mock and D. Manry. Journal of Accounting, Auditing and Finance (Volume 23, Issue 4): 553-572.

Using data obtained from actual audits by multiple U.S. offices of three large international audit firms, this study examines whether there is a relationship between evidence of reduced audit quality, measured by estimated discretionary accruals, and audit partner tenure with a specific client. The authors document that estimated discretionary accruals are significantly and negatively associated with the lead audit partner's tenure with a specific client. Thus, audit quality appears to increase with increased partner tenure. After controlling for client size and engagement risk, we find audit partner tenure significantly and negatively associated with estimated discretionary accruals only for small clients with partner tenure of greater than seven years, regardless of risk level. We also find that tenure is not significantly associated with estimated discretionary accruals for large clients. This suggests that as partner tenure increases, auditors of small client firms become less willing to accept more aggressive financial statement assertions by managers, and that partner tenure does not affect audit quality for large clients or for shorter-tenure smaller clients