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Have You Seen...? “An Analysis of Experience Effects on Audit Committee Members’ Oversight Judgments,” by F. T. Dezoort, Accounting Organizations and Society (Vol. 23, No. 1, 1998): 1–21. This research examines whether experience affects the judgments of audit committee members. Eighty-seven audit committee members completed an internal control oversight task. Their performance was compared with that of a control group composed of independent auditors. The results indicate the both task-specific experience as well as general domain experience were correlated highly with internal control assessments. Audit committee members with experience mirrored more closely the auditor control group in terms of task performance. The results also indicate that experienced committee members were more consistent, had more self-insight, and more consensus than did inexperienced committee members. Further, experienced participants’ responses contained more technical content than did inexperienced participants. “Causality as an Influence on Hindsight Bias: An Empirical Examination of Judges’ Evaluation of Professional Audit Judgment,” by M. M. Jennings, D. J. Lowe, P. M. J. Reckers, Journal of Accounting and Public Policy (Vol. 21): 143–167. This paper examines whether the causal nature of an outcome influences the degree or intensity of hindsight effects. An experiment is used to determine whether general jurisdiction judges’ hindsight assessments of the external auditor’s responsibility to anticipate the bankruptcy of a hypothetical auditor client are affected by the causality (or degree of foreseeability) between control and antecedent conditions and the outcome (bankruptcy). The results indicate that judges’ assessments of the extent to which the auditor should have anticipated the client’s bankruptcy were directly related to the degree of outcome foreseeability. The results also showed that as foreseeability increased, judges provided progressively lower evaluations of the auditor’s performance. “The Impact of Litigation Against an Audit Firm on the Market Value of Nonlitigating Clients,” by D.R. Franz, D. Crawford, and E.N. Johnson, Journal of Accounting, Auditing & Finance (Vol 13, No. 2, 1998): 117–134. This paper examines how litigation against an audit firm affects the market value of the firm’s other publicly traded clients. Consistent with the idea that the market interprets litigation against an audit firm as a signal of decreased audit quality (and that the market impounds value for audit quality into securities prices), the results indicate that the firm’s clients that are not involved in the litigation experience significant negative returns upon the announcement of the litigation against their audit firm. The authors subsequently restricted the analysis to companies in the same industry in which the alleged audit failure occurred, and found that the market response was significantly more negative when the audit firm was a specialist in that industry than when the audit firm was not a specialist. The authors also found that the market response became weaker in later periods in the multi-year sample, consistent with research suggesting that the frequency of nonmeritorious suits has increased over time. “The Value of Auditor Assurance: Evidence from Loan Pricing,” by D. W. Blackwell, T. R. Noland, and D. B. Winters, Journal of Accounting Research (Vol. 36 No. 1): 57–70. This study analyzes the economic value that auditors provide clients in associating themselves with the financial statements of small, private firms. Using multivariate regressions, the authors analyze the relationship between interest rates charged by banks to small private firms and the degree of association with financial statements furnished to the lender. Controlling for other firm and loan characteristics, the authors find that audited firms paid significantly lower interest rates than unaudited firms and that the benefit derived decreases in a nonlinear fashion as firm size increases. They estimate that for a subsample of audited and unaudited firms (matched according to size) that the interest rate charged to the audited firms was, on average, 25 basis points lower than the rate charged to unaudited firms in the sample, covering from 28 to 50 percent of the typical audit fees observed in the study. “The Association Between Auditor Quality and Auditor Size: An Analysis of Small CPA Firms,” by G. Colbert and D. Murray, Journal of Accounting, Auditing and Finance (Vol. 13, No. 2, 1998): 135–150. This study investigates the relationship between auditor size and auditor quality for small CPA firms, using a nationwide sample of peer review ratings from the AICPA’s Private Companies Practice Section. The study also examines whether peer review ratings for small CPA firms improve over time and whether the peer review ratings are systematically affected by the oversight organization (AICPA vs. state societies). The results indicate that for firms receiving on-site reviews (i.e., firms that perform audits, reviews, and compilations), auditor quality is positively associated with CPA firm size, the number of previous peer reviews, and oversight by state societies. For firms receiving off-site reviews (i.e., firms that perform only reviews and compilations), auditor quality is not associated with any of the explanatory variables. The findings suggest that for small CPA firms, firm size is a useful indicator of firm quality. In addition, it appears that firms learn from prior peer reviews such that they are able to make needed adjustments to improve the quality of their practices. Finally, state societies tend to award higher peer review ratings than the AICPA, suggesting that perhaps the reviews sponsored by state societies are not conducted with the same rigor and care as those sponsored by the AICPA. Several avenues for future research are discussed by the authors. |