Auditors and base rates revisited

In their 1981 study “Are Auditors' Judgments Sufficiently Regressive?” [Journal of Accounting Research (Autumn 1981) pp. 323–349] Joyce & Biddle found that auditors underweighted base rates relative to a normative standard (Bayes' theorem), but appeared to be more sensitive to base rates than other subject groups. This study extends their results by addressing three questions raised by their findings: (1) Do auditors generally possess greater ability to recognize and utilize base rates than other decision makers? (2) Did the auditing context of the Joyce & Biddle experimental problems influence the results? and (3) Is it the framing of the experimental problems that influenced the apparent integration of base rates?Using students and auditors as subjects, the following five experiments replicate selected Joyce & Biddle experimental problems. The results suggest that it is the framing of the Joyce & Biddle experimental problem that drive their results rather than attributes of auditors or auditing context.     

AUDITOR LIABILITY: THE OTHER SIDE OF THE DEBATE

The auditing industry claims to be an unfair victim of lawsuits and has deployed its considerable economic and political muscle in a campaign to secure further liability concessions. Amongst other things, it seeks to replace “joint and several liability” of partnerships with “full proportional liability”, a “cap” on auditor liability and a statutory right to negotiate liability limits with company directors. This paper challenges the evidence and the arguments advanced by the UK auditing industry. It argues that there is little convincing argument to support that industry's claims. On the contrary, ordinary stakeholders are relatively powerless to take action against negligent auditors. It is noted that most of the major lawsuits are by one accountancy firm against another. The UK auditing industry already enjoys considerable privileges, such as incorporation and “contributory negligence”, a form of modified proportional liability. Despite these privileges, the industry has shunned public accountability. It is holding the UK public to ransom by threats of locating its operations in offshore islands. Scholars are urged to develop alternative public policy options and analysis.     

Privatizing the statutory auditing services in Greece

This paper examines the historical process of privatizing the Greek auditing profession in the context of contemporaneous political and economic developments that date from the inception of the profession in 1955. The paper focuses on the successive attempts to implement the EEC's Eighth Company Law Directive that led to the abolition of the Body of Sworn-in Accountants - the state-sponsored institute and at the same time a practising firm. Furthermore, the changing expectations about the auditor's role as reflected in the privatization discussions over time are explored.     

PERCEPTIONS OF EXTERNAL AUDITORS’ INDEPENDENCE: SOME CROSS-CULTURAL EVIDENCE

The objective of our paper is to contribute to the accounting education literature by demonstrating that there are significant differences among final year undergraduate accounting students in the United Kingdom, Australia, India, and Malaysia with respect to an important concept in auditing, namely, perceptions of external auditors’ independence. To attain this objective, we make an original contribution to accounting cross-cultural studies by operationalizing culture in terms ofindependent and interdependent construals of selfhood. These fundamental core cultural differences are important because they play a major role in regulating psychological processes including perceptions. Additionally, to gain insight into the evolving complexities associated with understanding culture in a global economy, the concept of acculturation is invoked in hypothesis formulation. We find support for the hypothesis that students from countries with greater political, economic and socio–cultural interactions (UK and Australia) are likely to have greater similarities (i.e., lesser variations) in their perceptions of external auditors’ independence, compared to students from countries that have less acculturation (other pairs of countries). The results have implications for improving learning and teaching of auditing in the four countries. Specifically, accounting educators may like to ensure that the meaning intended in the various national and international auditing pronouncements with respect to external auditors’ independence is effectively communicated to students within specific national cultural contexts. Our findings may also be useful to various international bodies whose objectives are to harmonize auditor education. The results also suggest that there is a need to critically question the assumptions made by professional accounting firms operating cross-nationally that it is possible to attain a single global set of audit procedures and codes of professional conduct.     

Intersections of law and accountancy: Unlimited auditor liability in the United Kingdom

In recent years, considerable pressure has grown within the British auditing industry for limitation of liability arising from negligent mis-statements in audit reports. Under British company law, auditors are forbidden from contracting with companies for their liability to be restricted. This legal provision was introduced in the Companies Act 1929 as a byproduct of legislation relating to directors' liability. The paper explores the background to this legal provision, observing that auditor liability cannot be viewed as a self-contained matter of interest only to a limited community. Attitudes to auditor liability have been shaped against a background of changes in the law of negligence, some, but by no means all, arising from cases involving auditors. Moreover, changing concepts of the position of the auditor within corporate governance structures have at different times encouraged and discouraged the assimilation of the legal treatments of auditors and directors. These concepts themselves reflect differing notions of what actually constitutes the “company”: a collectivity of shareholders or a separate entity controlled by directors. These notions emerged against a background of corporate failure and the need to allocate losses among various parties with different degrees of culpability for failure. However, legal developments do not account by themselves for changing attitudes within the auditing industry towards unlimited liability; acceptance of full responsibility for one's statements, adopted as a badge of professional status, has more recently been seen as inhibiting the commercial development of British auditing.     

INTERNATIONAL ACCOUNTING FIRMS VERSUS INDIGENOUS AUDITORS: INTRA-PROFESSIONAL CONFLICT IN THE GREEK AUDITING PROFESSION, 1990-1993

Jurisdictional claims over statutory audits in Greece have prompted a sustained and bitter intraprofessional conflict spanning the last 30 years. This paper examines a major episode during the climax of the struggle in the early 1990s. The main rival camps were a group of indigenous auditors—who had the legal monopoly of practice—and local branches of international accounting firms—who were excluded from the market for statutory audits. The latter fought for reform. The conflict took place against the backdrop of advancing neoliberal discourses within government stimulated by a desire for greater political and economic integration within the European Union and world-wide. The struggle ended victoriously for the international accounting firms, culminating in the “liberalisation” of the Greek auditing profession in 1992. The paper analyses the state-profession axis to expose the allegiances of conflicting professional groups to major political parties, as they strove to win vital political support to attack or defend contested territories. Of particular interest is the complex political manoeuvring employed by the government in order to grant international accountants easy access to the market for statutory audits. A secondary objective is to offer insights into the factors and conditions that precipitated and enabled a radical reform of the institution of Greek auditing. For example, the quest for the “liberalisation” was eagerly supported by the Confederation of Greek Industries. In addition, representative organisations of the international accountancy profession showed unreserved allegiance to international accounting firms and became actively involved in the conflict. Overall, the analysis shows that the structure of the auditing profession in Greece is the outcome of a dynamic interplay of economic, social, and political forces at both the national and the international level. Within these various interests, state agencies and professional groups play a prominent role.     

Knowing efficiency: the enactment of efficiency in efficiency auditing

This paper reports an ethnographic study of the activities of auditors in the field as they work to fulfil an efficiency auditing mandate; it analyses how auditors report on efficiency in practice. Miller and Rose's work on governmentality (Miller & Rose (1990). Governing economic Life. Economy and Society, 1–31; Rose & Miller (1992). Political power beyond the state: problematics of government. British Journal of Sociology, 173–205) is developed as it applies to the technologies that Miller and Rose identify as providing the means to realise programmes such as efficiency auditing. The study explores the operationalisation of efficiency auditing through analysis of three audits as they were conducted in the field. It is argued that in the absence of detailed rules or standards practitioners themselves developed an agreed upon knowledge and sensibility that allowed them to make efficiency auditing tractable. The paper explicates these normative guides and discusses the consequences of an apparently socially constructed form of efficiency in guiding auditing practice.     

The impact of prior working papers on auditor evidential planning judgments

There has been significant concern in auditing about the effects of relying on prior working papers in planning audit procedures (“anchoring”). This study employed an experiment with varying information sets: prior working papers, current year information and “scenario” (summarized prior year information). Practicing auditors were asked to design a substantive audit program for a case where changes in the client's environment dictated additional procedures. A consensus program from three partners was used as a bench-mark. Experimental groups were about equally adaptive to the changing environment. However, auditors provided with prior working papers demonstrated lower efficiency. The scenario group exhibited both high relative effectiveness and efficiency, while current information subjects displayed the lowest overall level of performance.     

From common sense to expertise: Reflections on the prehistory of audit sampling

This essay argues that sampling emerges as a claimed “technique” in auditing in both the U.K. and U.S.A. much later than is commonly imagined. While practical auditing texts provide evidence that auditors were selective in testing prior to 1900, this is not explicitly articulated as sampling at least until the 1930s. Accordingly, statistically based sampling develops to rationalise practices that had been in place for some years and to invest auditing with a new scientific authority. The essay further suggests that the history of development in auditing technique may be decoupled from changes in audit objectives. Overall, the argument represents a preliminary stage in a wider programme for understanding auditing in its social and organisational context.     

State audit budgets and market assessments of credit risk

While financial statement auditing dominates the market for corporate auditing, internal controls and operational auditing appear to be emphasized in governmental markets. The size of the governmental audit budget (beyond the minimum level prescribed by generally accepted auditing standards) is ultimately a cost/benefit decision, with lower borrowing costs being one of several potential benefits. In testing for empirical regularities between auditing quantity and investor decisions, we found the size of the audit budget to be indeed associated with borrowing costs, but the direction of the relationship was anomalous. The anomalous positive sign for the audit budget variable could be due to self-selection bias. Self-selection bias is a confounding effect that has come up repeatedly to muddy the interpretation of empirical findings in prior (corporate) market based research on discretionary accounting variables. The supply of (discretionary) internal and operational audits may be driven by operational considerations (e.g., internal control weaknesses), which cannot be directly observed by outsiders. The bond markets may be interpreting the size of the audit budget as a signal about underlying economic characteristics that make the state a more risky investment. Alternatively, larger state audit budgets may signal less use of private sector auditors and be interpreted as less useful to investors (though, possibly more useful to governmental concerns focusing on compliance issues). Despite the inclusion of CPAs' audit fees in state budgets, the signal “inferred” for the state's municipalities may have a carryover effect onto state issues.     

Getting comfortable with the numbers: Auditing and the micro-production of macro-order

Field observations of two audit engagements are used to interpret auditing as a ritual which transforms the financial statements of corporate management from an inherently untrustworthy state into a form that the auditors and the public can be comfortable with. The analysis draws on Collins' theory of interaction ritual chains (American Journal of Sociology, 1981, pp. 984–1014) to create an interpretative theory of auditing which offers insights into both the micro-level interactions within the audit team and the macro-level role of auditing in the economic order.     

THE RESPONSE OF STATUTORY FINANCIAL AUDITORS IN THE UK TO ENVIRONMENTAL ISSUES: A DESCRIPTIVE AND EXPLORATORY CASE STUDY

This paper explores the reaction of UK financial auditors to the growth of society's environmental awareness and attendant legislative pressures. The developing regulatory framework of auditing is briefly reviewed from an environmental perspective but the main contribution of the paper is to report the results of a series of interviews with a range of audit practitioners. The aim of the interviews was to explore: how, if at all, the conduct of the audit is changing (or, in the opinion of those interviewed, should change) in the light of environmental concerns: whether more training and guidance from professional bodies is sought; and views on regulation. Interviewees' experiences and their views of the impact of increasing environmental awareness and regulation on the statutory audit are reported and discussed. In addition, their views concerning a possible widening of their attestation role to encompass environmental reports are explored.     

Problem-centred research and knowledge-based theory in the professional accounting setting

The paper discussess the emerging need for theory development and much more extensive task and context analysis with respect to cognition in the professional accounting setting (“accounting” being taken to include the various accounting, auditing, tax and related subjects about which accounting professionals exercise judgment). The paper examines how such theory development and task and context analysis can improve the research and its contribution to understanding the professional settings that are the province of accounting research. Our analysis reflects our proposal that accounting judgment research contribute more strongly to the general body of accounting research, and deal better with practitioners' problems. From our analysis, we conclude that the lack of theory development is associated with several problems in the research, including an over-emphasis on transference of simplified models from psychology, inappropriate use of normative criteria for evaluating performance, and an over-emphasis on accountants and auditors rather than accounting and auditing. We offer a large number of constructive comments about task analysis, theory development and other steps to guide future accounting judgment research.     

Auditors’ decision-making under going-concern uncertainties in low litigation-risk environments: Evidence from Hong Kong

This study examines the audit opinions issued by auditors in a low litigation-risk environment at a time of high economic uncertainty – that of Hong Kong in the period immediately after the Asian financial crisis of 1997. Empirical research using United States data has shown that, contrary to professional guidance which restricts the issue of “disclaimer of opinion” only to situations where existing uncertainties prevent the auditor from forming an opinion, auditors tend to use the “disclaimer” report (in the going concern context) to signal more extreme client firm’s distress. In the high litigation-risk environment of the US, researchers have attributed this tendency to the idea that “disclaimer of opinion” reports are used by auditors to provide some protection against potential legal liability. The results of this study provide evidence that, even in the low litigation-risk environment of Hong Kong, auditors still use “disclaimer” reports to signal more extreme client firm financial distress. Thus, the maintenance of a high litigation-risk environment does not appear to be a necessary pre-requisite for high quality audits.     

Productivity Analysis of UK Auditing Firms

This study analyses the productivity change in the United Kingdom (UK) of auditing firms over the period 2005–2012, using a Malmquist index with a technological bias. Productivity is the rate at which goods or services are produced relative to the input. A common measure of productivity is the ratio of output per unit of labour used in the production. Productivity change is the change in the total output relative to the change in the total input and it is composed of technical efficiency change (managerial practices and scale effects) and technological change (innovation and investment in new technologies). Until 2005, the auditing profession in the UK employed a regime of self‐regulation; after a brief hiatus, the country adopted the new European Statutory Audit Directive in April 2008, changing the regulatory framework. This study analyses the productivity change among UK auditing companies both before and after the regulation change. Our results indicate that the productivity change among UK auditing companies is mixed and not dictated by regulation. Furthermore, the traditional growth accounting method, which assumes Hicks‐neutral technological change, is not appropriate for an analysis of the productivity change in auditing firms.     

Government auditing in China: Problems and reform

This paper evaluates the current government auditing system in China and the proposal to move it from the control of the executive body (the State Council) to the control of the legislature (the National People's Congress). Interviews with government auditors, government and people's congress officials, and leading academics identify the problems caused by lack of audit independence. Although audit independence can be increased by moving the control of government auditing to the legislature, many of our interviewees considered such a move as infeasible in the current political climate. To smooth the reform toward a legislature-led audit system, we propose a “Dual-Track System” in which the different audit responsibilities currently undertaken by the government auditing system are separated. The responsibility for auditing the use and control of fiscal budgets by the central and regional governments would be under the control of the legislature as this area of government auditing has a clear need for audit independence. Other audit functions including economic responsibility auditing, special purpose funds auditing, financial service auditing and state-owned enterprise auditing would remain under the control of the government. This dual track approach would, we argue, be a politically acceptable compromise as it would strengthen audit independence where it is most needed but also enable the government to maintain strong economic control.     

The role of auditing in the fight against corruption

The purpose of this paper is to analyze how various types of auditing may contribute to fight corruption. While previous literature has primarily addressed auditing's ability to prevent corruption, this paper systematically explores auditing's potential to detect corruption. It argues that financial auditing has excluded corruption from the definition of fraud and instead classified it as ‘non-compliance with laws and regulations’. The main arguments for this exclusion is that corruption leaves no material errors in financial statements and no evidence for the auditor to follow. The paper refutes this, arguing that commercial and political corruption creates misstatements in the financial statements of the corruption giver's organization as well as the corruption receiver's organization. Thus, if auditing is to gain a more prominent role in the fight against corruption, auditing standards must include corruption in the definition of fraud, private and public sector auditors need to cooperate and exchange information, auditing techniques to detect corruption should be employed, and the auditing profession must embrace effective preventive measures such as anti-corruption certifications.     

内部经济责任审计探析

《党政主要领导干部和国有企业领导人员经济责任审计规定》明确地指出内部审计机构对本部门和单位的内部管理领导干部经济责任进行审计。如何更好地开展内部经济责任审计是内部审计机构和内部审计人员面临的一项重要课题,笔者结合审计工作实际,通过对内部经济责任审计面临的难点问题的分析,进而提出了消解内部经济责任审计操作疑惑的对策。     

Public Attention and Auditor Behavior: The Case of Hurun Rich List in China

Adverse client publicity can entail regulatory scrutiny over audited financial statements and impose political costs on auditors. We use the changes in client publicity caused by their controlling owners’ presence on the Hurun Rich List (the rich listing) in China to test the hypothesis that auditor conservatism increases with client publicity. Our evidence indicates auditors issue more adverse audit opinions to clients and charge higher fees following the rich listing events. Moreover, we observe that auditors strategically respond to clients with different attributes—for clients whose owners accumulated wealth in a more questionable manner, auditors choose more stringent audit reporting to better defend themselves from regulatory scrutiny; for clients without such attributes, auditors primarily rely on increasing audit fees to cope with any post-listing increase in audit risks. Our analyses also suggest the impacts of rich listings tend to be concentrated among large audit firms with stronger reputation concerns or among engagement auditors with more conservative reporting styles. By showing how auditors manage political risks associated with heightened public scrutiny, we contribute to both the auditing and political cost literature.     

Efficiency audit: An assembly of rationalities and programmes

This paper focuses on the insertion of accounting and auditing knowledge into wider areas of practice, and examines the processes of auditing change through studying the development of “efficiency auditing” using events in one jurisdiction, the Province of Alberta, Canada, as an exemplar. These developments are interpreted through use of Miller and Rose's (1990; Rose & Miller, 1992) theoretical concerns with governmentality, and especially the links between generally stated political rationalities and more specific programmes for action. In studying the association of ideas of efficiency with auditing, and the developing belief that efficiency could be investigated or procured through audit scrutiny, it is argued that these events can be understood in terms of an intersection between wider discourse (concerning, for example, best management practice, appropriate auditing roles, etc.) and local circumstance. The specific interpretations that result are understood as providing one set of conditions by which auditing (and accounting are linked to the social (Burchell et al., 1985). Further research (Radcliffe, 1995) attends to the logistics of how one might audit for efficiency, using fieldwork to trace the technologies which provide practitioners with particular mechanisms for action (Miller & Rose, 1990). © 1998 Elsevier Science Ltd. All rights reserved.