The impact of commitment and moral reasoning on auditors' responses to social influence pressure

This paper reports the results of an experiment examining whether social influence pressures within the accounting firm affect auditors' willingness to sign-off on financial statements that are materially misstated. We also evaluate the effects of organizational commitment, professional commitment, and moral development as three variables that may impact individual responses to social influence pressure. A sample of 171 auditors from one international firm participated in a between-subjects experiment with obedience pressure from superiors and conformity pressure from peers as the social influence pressure treatments. The results indicate that obedience pressure significantly increased auditors' willingness to sign-off on an account balance that was materially misstated, although conformity pressure did not. The findings also supported the predictions for organizational commitment. However, the predicted effects for professional commitment and moral development did not emerge.     

Perceived auditor independence and audit firm fees

Regulations requiring the disclosure of fees paid to an auditor for audit and non-audit services (NAS) respond to concerns that such payments are potentially detrimental to auditors' actual or perceived independence. Although empirical studies have failed to produce unequivocal evidence of detrimental effects on auditor independence, the actions of regulators, audit firms and companies are consistent with the belief that economic bonding generated by fees can impair perceived levels of auditor independence.

Using a sample of UK companies over a six year period to March 2006, we study perceived impairment of auditor independence by examining the relationship between levels of total relative fees (combined audit and NAS fees payable by a company to its auditor as a proportion of the audit firm's UK income) and market value. This paper's methodological innovation is its use of a valuation framework in this setting. A further contribution lies in dropping the assumption of linearity found in most prior empirical studies. We provide evidence that shareholders perceive a threat to auditor independence only at high total relative fee levels. At lower levels, total relative fees are positively related to company value. These results suggest that disclosure of NAS and audit fees are of relevance to investors, as is information about auditor income. Our results support the view that regulation by reference to the threshold at which total relative fees are perceived negatively is more consistent with investor preferences than prohibition of the supply of NAS by auditors to their audit clients.     

External auditors' willingness to rely on the work of internal auditors: The influence of work style and barriers to cooperation

The extent to which external auditors rely on the work of internal auditors is an important judgment. Recently, the Public Company Accounting Oversight Board has recommended that external auditors “rely (more) on the work of others” to reduce the greater-than-expected costs associated with compliance with Section 404 of the Sarbanes–Oxley Act. Reliance decisions, however, are complex decision tasks that require professional judgment and may be influenced by a number of factors, both external (environmental) and internal (cognitive and affective), including the auditors' working style and pervious experiences related to barriers to external/internal auditor cooperation (e.g., previously experienced low versus high internal auditor objectivity and/or competence). We experimentally examine these influences in our research reported herein. Consistent with expectations, external auditors' work styles significantly influenced the extent of planned audit testing, internal auditor reliance judgments, and interpretation of analytical procedures results. Auditors' perceptions about internal auditors' competence and objectivity, developed over years of interaction, also influenced these judgments, and interacted with work styles. Inconsistent with expectations, auditor rank (senior versus manager) did not influence judgments.     

Managing risk in a poor economy: The association between economic activity and auditor response to risk

We examine the association between economic climate and auditor risk acceptance as measured by the auditors' reaction to internal control weaknesses. We hypothesize and find that auditors address risk in a way that is conditioned on the economic environment. In particular, we find that during periods of weak economic activity, auditors tend to assess lower risk premiums and are less likely to resign in response to an adverse ICFR opinion. However, we find evidence that economic factors do not influence fees assessed by incoming auditors following a resignation in the presence of an ICFR weakness. Our results indicate that auditors modify their engagement risk strategies during challenging economic times and accept higher levels of risk to attract and retain clients. For the riskiest clients, however, economic factors do not appear to influence auditors' risk pricing.     

Do auditors’ early-life socioeconomic opportunities improve audit quality? Evidence from China

Prior research documents significant variation in audit outcomes based on individual auditors' demographic features, working experience, educational background, and social connections. This study examines whether individual auditors' early-life socioeconomic opportunities also affect audit practices. We expect that auditors from big cities have more access to socioeconomic opportunities and accumulate more human capital in early life, thus are more capable of providing high-quality audits after they start careers. Consistent with this hypothesis, we find that auditors from big cities make more audit adjustments to earnings compared with auditors from small towns. Additional tests suggest that this early-life effect on audit quality is moderated when auditors receive higher education or gain more auditing experience and is more pronounced in downward adjustments than in upward adjustments. We also find a fee premium for auditors from big cities. Overall, this paper provides evidence that auditors’ early-life socioeconomic opportunities have a far-reaching influence on audit quality.     

The effects of reward structure,media richness and gender on virtual teams

This study explores the dynamics of virtual teams. We hypothesize that the use of a mixed-incentive reward structure will increase team member satisfaction, affect group cohesion and decrease perceived social loafing in a virtual team environment. We also hypothesize that team member satisfaction and team cohesion will increase and perceived social loafing will decrease with the use of a richer technology medium in a virtual team environment. In addition, we hypothesize that in a virtual team environment, team member satisfaction, group cohesion and perceived social loafing will differ between males and females. Using eighty-nine MBA students at a large southeastern university as participant's for our study, we find that perceived social loafing decreases with the use of a mixed-incentive reward structure in a virtual team environment. We also find that perceived social loafing decreases with the use of a richer technology medium in a virtual team environment. Finally, we find that perceived social loafing differs between males and females and that females perceive more social loafing when there is not a mixed-incentive scheme. The results shed light on the role of gender in virtual teams.     

The Effects of Anticipation and Frequency of Errors on Auditors' Selection of Substantive Procedures

The process of audit planning continues throughout an audit engagement. Preliminary audit plans are developed in the early phases of an engagement, and are revised in light of information received in subsequent phases, such as the results of substantive tests. This study examines the effects of (1) auditors' anticipation of finding a particular error-type in substantive tests and (2) the frequency of occurrence of the error-type on auditors' revision of preliminary audit plans. An experiment was conducted with practising auditors as subjects. Three error-types were manipulated as part of eighteen sets of exceptions from accounts receivable confirmations that each auditor reviewed. We found that auditors who do not anticipate finding an error-type in substantive tests are more likely to increase the amount of planned audit work. No effect of frequency of an error-type within a sample was found.     

Effects of managerial overconfidence and ability on going-concern decisions and auditor turnover

I examine how the appearance of managerial overconfidence and managerial ability affect 1) auditors' decisions to issue a going concern opinion and 2) auditor dismissal rates after issuing a going concern opinion. Managerial attributes are likely to have an influence on auditors' decisions because auditors obtain and evaluate information about client management's remedy plans when there is substantial doubt about the entity's ability to continue as a going concern. While prior literature on managerial overconfidence classifies all managers who demonstrate overconfident behaviors in one group, I argue that the literature needs to take managerial ability into consideration when measuring overconfidence. I find that auditors are more likely to issue a going concern opinion to clients with seemingly overconfident managers only when the management who appears overconfident is also incompetent. I also find that auditors are more likely to be dismissed after issuance of a going concern opinion when the client company has seemingly overconfident management. Finally, I find that the association between managerial overconfidence and auditor dismissal subsequent to issuance of a going concern opinion is stronger when management is relatively more powerful than the company's audit committee.     

The effect of gender and firm identification on auditor pre-negotiation judgments

This paper extends current auditor negotiation research by considering the effects of two dimensions of auditors' identity that are posited to be relevant to auditors' negotiation: gender and audit firm identification. Women earn over half of college degrees in accounting, and hold more than half of accounting and auditing positions in the US, yet the balance of the gender of partners at audit firms is currently not equal (AICPA, 2017). However, as more women advance into partnership positions in firms, it is increasingly important to have an understanding of how gender affects the behaviors, processes and outcomes of negotiation, and thus the quality of financial statements. The auditor-client negotiation context has features, such as ambiguity and representation of others that can “trigger” the salience of auditors' gender and firm identity. Once salient, these two dimensions of auditors' identity shape auditors' motivational orientation towards negotiations, which, in turn, affects the auditors' negotiation behavior and negotiation outcomes.The study finds that male and female auditors approach the negotiation over audit adjustments differently. Although many negotiation studies find that males negotiate more aggressively than do females, auditor-client negotiation offers a unique setting that has been found to reverse this common trend. We hypothesize and find that female auditors recommend higher audit adjustments than males. However, the level of firm identification moderates female's recommended audit adjustments such that at higher levels of firm identification, the larger audit adjustments recommended by females decrease. This finding is consistent with the growing research on gender differences in auditing and the research on gender and risk tolerance, which find females to be more risk averse, but contrary to much of the negotiation research which shows males as more aggressive and achieving higher negotiated outcomes. In supplemental analysis, we find that our results hold in the senior manager subsample but not in the partner subsample. This result is consistent with theory on gender differences which suggests that the differences will disappear with increased occupational socialization (Smith & Rogers, 2000). Practical implications are discussed.     

媒体负面报道与审计收费：基于事务所组织形式变更的视角

事务所向特殊普通合伙制的转变,为研究审计师法律责任的增强对媒体治理作用的影响提供了现实样本.以公司层面的负面报道和审计收费数据进行研究发现,转制后,负面报道与审计费用和正向异常收费显著正相关,但在转制前均不显著;考虑事务所规模的差异后,发现对大型事务所,转制提高了负面报道与正向异常收费的相关性,但对小型事务所,审计收费和异常收费与负面报道的相关性在转制前后没有显著变化,表明审计师法律责任的强化是媒体发挥治理作用的重要路径.     

Signing auditors' cultural background and debt financing costs

This study explores the effect of signing auditors' cultural background on debt financing costs. Using a sample of Chinese listed firms from 2007 to 2019, we find a negative association between signing auditors of Confucian origin and the cost of debt, indicating that signing auditors who grow up in strong Confucian atmospheres increase perceptions of audit quality. Furthermore, empirical results show that signing auditors of Confucian origin enhance accounting information quality. Meanwhile, these signing auditors can obtain high audit fees, attract more clients, and are more likely to be selected by client firms when changing auditors. Additional tests document that signing auditors' gender, education level, and working experience attenuate the negative relationships between signing auditors' Confucian background and debt financing costs. The negative effect of signing auditors' cultural background on debt financing costs is more pronounced in non-state-owned firms and firms with less analyst coverage. This paper extends the literature about the influencing factors of financing costs and provides insights into the economic consequence of culture.     

The impacts of economic importance difference of a joint venture (JV) held by partners and partners' size difference on the extraction of rivalrous and non-rivalrous private benefits in a JV

We investigate the impacts of economic importance difference of a JV held by partners and partners' size difference on the extraction of rivalrous and non-rivalrous private benefits in a JV. Focusing on 824 JV events during the period 2001–2012 in the global markets we find that, where the economic importance difference of a JV held by partners is large, a partner with a more economically important JV extracts more rivalrous type and non-rivalrous type of private benefits. Under the situation where partners' size difference is large, a smaller partner extracts more non-rivalrous type of private benefits. Whether arbitrage trading between two partners' shares outperforms the trading strategy of buy-hold two partners' shares during the JV announcement period depends on whether there are large private benefits available or not.     

An Empirical Study of the Audit Expectation-Performance Gap

The critical, litigious environment which characterises auditing today can be traced to the audit expectation-performance gap. Defined as the gap between society's expectations of auditors and auditors perceived performance, it is seen to comprise ‘reasonableness’ and ‘performance’ components, the latter being subdivided into ‘deficient standards’ and ‘deficient performance’. Empirical research was conducted in New Zealand in 1989 to investigate the audit expectation-performance gap. The study enables the duties which constitute the reasonableness, deficient standards and deficient performance components of the gap to be identified. It also provides the means to estimate the relative contribution of the duties to their respective components, and of the components to the overall gap between society's expectations of auditors and auditors' perceived performance. The research provides new insights into the structure, composition and extent of the audit expectation-performance gap but, more importantly, it signals a rational, comprehensive approach towards narrowing the gap. If adopted, this should bring society's expectations of auditors and auditors' performance into closer accord and, as a consequence, reduce the criticism and litigation which auditors face today.     

The antecedents of the use of continuous auditing in the internal auditing context

The concept of continuous auditing originated over two decades ago. Yet despite its much touted benefits, its acceptance and use in practice has been slow. To gain insight into the state of affairs, we surveyed 210 internal auditors worldwide on the status of their use of continuous auditing. Using the Unified Theory of Acceptance and Use of Technology (UTAUT) we explore the antecedents of internal auditors' intentions to use continuous auditing technology. Employing the Partial Least Squares method, we find strong support for the model with an R² of 44.3%. Specifically, we find that internal auditors' perceptions of effort expectancy and social influence are significant predictors of their intentions to use continuous auditing. We also find that annual sales volume of the company and voluntariness of use significantly moderate the relationship between performance expectancy and social influence respectively. Additionally, we find regional differences in the significance of key UTAUT antecedents. Specifically, we find that the North American internal auditors are more likely to use continuous auditing due to soft social coercion pressures of Social Influence through peers and higher authorities. On the other hand, Middle Eastern auditors are more likely to use the technology if it is mandated by the higher authorities.     

The impact of perceived ethical intensity on audit-quality-threatening behaviours

Although there has been significant interest among researchers in audit-quality-threatening behaviours (QTBs), the decision process through which staff auditors engage in those behaviours has received relatively little attention. It seems likely that the ethical intensity of the behaviours perceived by auditors may play an important role in that process; to date, this has not been tested. This study examines the mediating role of perceived ethical intensity in the relationship between perceived ethical culture of the firm and the auditors' ethical evaluation of, and intention to engage in, three different forms of QTBs. A multi-item measure of ethical intensity is developed and the findings provide the first empirical evidence of a direct relationship between perceived ethical intensity and ethical decision-making regarding QTBs. Moreover, the findings show that perceived ethical intensity fully mediates the relationship between perceived ethical culture and ethical decision-making. Implications of the findings for accounting firms and for researchers are discussed and areas for future research on the mediating role of perceived ethical intensity are suggested in the paper.     

The influence of the institutional context on corporate illegality

This paper examines the relationship between the institutional environment and sustained corporate illegality. We find that cognitive assumptions generate expectations that can, under specific circumstances, induce organizations to amplify illegal actions and that serve to lessen regulatory scrutiny. We also find that, once initiated, illegal actions can become hidden because of institutionalized practices that enable their concealment and that weaken the prospect of detection. These processes and effects are particularly noticeable in networks of professional regulators who become mutually over-confident and over-influenced by each other to the extent that their independent critical assessments and judgements are compromised. Mechanisms of mimetic herding and social humiliation compromise independence of judgement. Networks of interacting professionals are thus vulnerable to a collectively induced lowering of regulatory vigilance.     

Changes in audit effort and changes in auditors’ disclosures of risks of material misstatement

This paper investigates whether auditors' year-to-year modification to risks of material misstatements (RMMs) in extended auditors' reports (EARs) are associated with changes in underlying audit effort, as proxied by changes in audit fees. We examine the dynamics of RMMs over time in terms of adding or dropping specific RMMs. Our main results show that, on average, audit fees increase more from the previous year's fees when more RMMs are added to the current year's EAR. This increase is partially offset by dropping RMMs that were disclosed in the previous year, but changes in audit fees are not significantly affected by dropping RMMs without adding new RMMs. Further analysis suggests the effect of added RMMs is attributable to “new” RMMs originating with the auditor and that added RMMs that were previously known, based on related disclosures in the prior year's audit committee report, do not significantly impact on changes in audit fees. Overall, our results suggest that changes in the choice of RMMs included in EARs reflect changes in underlying audit effort.     

A content analysis of auditors' reports on IT internal control weaknesses: The comparative advantages of an automated approach to control weakness identification

We employ an automated content analysis approach to provide a snapshot of the terminology auditors actually use to describe information technology weaknesses (ITWs). We develop and use a dictionary based on textual analysis of auditors' reports on internal control filed under Section 404 of the Sarbanes–Oxley Act from 2004 to 2009. Using the dictionary with content analysis software led to the identification of 14 categories of ITWs in order of decreasing frequency of occurrence: (1) access, (2) monitoring, (3) design issues, (4) change and development, (5) end-user computing, (6) segregation of incompatible functions, (7) policies, (8) documentation, (9) masterfiles, (10) backup, (11) staffing sufficiency and competency, (12) security (other than over access), (13) outsourcing and (14) operations. The use of automated content analysis methodology also helped us identify potential disconnects between terminology used in auditors' reports and that used in published frameworks and guidelines. We provide the dictionary and discuss the methodology used in creating and applying the dictionary to the analysis of the textual content of auditors' reports on internal control, including the advantages and limitations of automated ITW identification.     

Is the objectivity of internal audit compromised when the internal audit function is a management training ground?

We conduct an experiment with 74 internal auditors to examine the effects of using the internal audit function as a training ground for future senior managers. Specifically, we investigate internal auditors' willingness to resist current management's aggressive revenue recognition policies, assuming that internal auditors expect to move into senior management positions in the future. We also examine whether increasing the power of the board of directors can reduce threats to internal auditors' objectivity. This is the first study to empirically examine whether training grounds influence internal auditors objectivity. Results of our study indicate that internal auditors are less objective (i.e. they are more likely to side with management's aggressive revenue recognition policies) when they expect to move into senior management positions, relative to when internal auditing is not used as a training ground. We also find that empowering the audit committee further decreases the objectivity of internal auditors. These results suggest that board power can have unintended consequences on the behaviour of internal auditors and that board empowerment does not guarantee improved governance or improved oversight of financial reporting.     

The role of negative associations and trust in risk perception of new hydrogen systems

In this study the moderating role of trust and negative affective associations on the inverse relationship between risk and benefit judgements is investigated. A survey (N = 406) was held in the Netherlands on the public perception of new hydrogen systems, during the time that a demonstration project with hydrogen buses was being undertaken. The data of the survey show that for the group of respondents with a negative evaluation of trust in actors involved, an inverse relationship between risk and benefit judgements can be observed. Furthermore, for the group of respondents that had elicited negative affective spontaneous associations with hydrogen in general, the inverse relationship was also found. The inverse relationship between risk and benefit judgements was not observed in the group not making these spontaneous associations. The strongest negative correlation between risk and benefit judgements was found for those who had a negative evaluation of trust and had elicited negative affective spontaneous associations. In all cases the general affective evaluation of hydrogen systems was the mediating factor in this inverse relationship between risk and benefit judgements. These findings provide evidence for the moderating role of trust and negative affective associations on the observed inverse relationship between perceived benefit and perceived risk.