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.     

What factors influence auditors' use of computer-assisted audit techniques?

To meet the challenges of rapid advances in client technology, audit standards urge auditors to use computer-assisted audit tools and techniques (CAATs). However, recent research suggests that CAAT use is fairly low. This paper uses the Unified Theory of Acceptance and Use of Technology (UTAUT) to identify and then examines factors potentially influencing auditors' use or non-use of CAATs. Examining auditor use of CAATs is important because CAATs hold out the promise of improving audit efficiency and effectiveness. Data was obtained from 181 auditors from Big 4, national, regional, and local firms. Results indicate that outcome expectations, the extent of organizational pressures and technical infrastructure support influence the likelihood that auditors will use CAATs.     

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.     

The Use and Abuse of Graphs in Annual Reports: Theoretical Framework and Empirical Study

This study investigates the use and abuse of graphs in external financial reporting. From an analysis of the annual reports of 240 large UK companies for the year ended 1989 we document the nature and extent of graph usage. The average number of graphs per annual report is 5.9, with 65% of companies graphing at least one key financial variable. Drawing on modern theories of graphical perception we identify selectivity in the use of graphs, and non-compliance with the principles of graph construction, as potential distortions in the communication process. We find that companies with ‘good’ performance are significantly more likely to use financial graphs. Material measurement distortions occur in 30% of these graphs, with the underlying numerical data being exaggerated by an average of 10.7%. We conclude that auditors' and directors' responsibilities in this area should be made more explicit.     

The interplay between cost accounting knowledge and presentation formats in cost-based decision-making

Most studies on cost-based decision-making examine the profit impact of cost reports that rely on different methods to allocate costs. In practice, firms’ cost reports often employ the same cost allocation method with subtle variations in the way that the cost data are presented. This paper examines experimentally the profit impact of a cost report’s presentation format in relation to a decision maker’s level of cost accounting knowledge. Using a customer profitability report prepared using activity-based costing and presented in either a tabular or a graphical format, participants analyze a complex pricing and resource allocation task that affects firm profitability. The results suggest a strong relation between presentation format and cost accounting knowledge. Specifically, decision makers with a low level of cost accounting knowledge attain higher profits when they use a graphical format in comparison to a tabular format. More surprisingly, graphs (versus tables) have an adverse effect on profits for users with a high level of cost knowledge. This result has broad implications: in order to facilitate the decisions of a variety of users of accounting data (e.g. managers, external investors, etc.), firms may need to adapt the presentation format of their accounting data to the level of accounting sophistication of the users.     

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.     

THE IMPLICATIONS OF DISTRESS PREDICTION MODELS FOR CORPORATE LENDING

Three literatures on financial distress prediction are reviewed and evaluated in terms of their usefulness in credit analysis. These are (1) bankruptcy prediction models initiated by Altman, (2) behavioural studies of the ability of loan officers and others to make accurate predictions of bankruptcy and (3) attempts to simulate loan officers' judgements. It is concluded that techniques based on judgement simulation are likely to be the most effective decision aids.     

The influence of partners' known preferences on auditors' sceptical judgements: The moderating role of perceived social influence pressure

We examine the moderating effect of auditors' perceived social influence pressure on the influence of partners' known preferences on auditors' sceptical judgements in China. We invoke social influence theory to provide complementary insights into the driving forces behind auditors' judgements, over and above the pressure arising from accountability. We hypothesise that the influence of partners' known preferences on auditors' sceptical judgements is stronger for auditors who perceive higher social influence pressure than those who perceive lower pressure. Our results support the hypothesis and establish the value of understanding auditors' perceived social influence pressure in managing partners' communication with audit teams.     

Auditors' prior probability distributions for account balances

This paper reports the results of a study in which practicing auditors assessed prior probability distributions (PPDs) for account balances. Assessed PPDs are found to exhibit desirable characteristics, including a sensitivity to the relative strength of internal controls. The study establishes that it is possible for auditors to assess account balance PPDs and, thereby, paves the way for cost effectiveness comparisons of the Bayesian and classical approaches to audit inference.     

The turnover intentions of information systems auditors

The turnover rate of Information Systems auditors is an emerging problem for the profession. In his study of factors affecting resource allocations to Information Systems Audit departments, Lucy [Lucy, R.F. Factors affecting information systems audit resource allocation decisions. Thesis, The University of Texas, Arlington, 1998.] found that the average Information Systems (IS) auditor has four years of IS Audit experience. Dunmore [Dunmore D.B. Farewell to the information systems audit profession. Internal Auditor 1989; February:42–48.] argues that this high turnover of IS auditors will limit systems audit knowledge. Unlike prior research investigating turnover intentions of IS auditors, this study specifically includes factors that reflect the higher level needs of IS audit professionals. The need to satisfy personal and professional growth exerts a particularly strong influence on IS auditors' turnover intentions. Further, our study confirms that IS auditors' share similar characteristics to other IS professionals rather than with general accountants and auditors. Organizations wanting to retain their IS auditors should provide regular opportunities for their IS auditors to satisfy their personal growth needs.     

An empirical investigation of analytical procedures using mixture distributions

Analytical procedures are evaluations of account and transaction flow information made by a study of plausible relationships between both accounting and non‐accounting data. This study investigates the performance of Tweedie distributions (which have Gaussian distributions as members) in improving fit of zero‐inflated, non‐negative, kurtotic and multimodal analytical review data. The study found that account valuations are more informative than marginal data in analytical review, that mixture Poisson–Gamma distributions offer better fit than Gaussian distributions, even under assumptions of central limit theorem convergence, and that mixture Poisson–Gamma distributions provide better predictions of future account and transaction volumes and values. Model performance improvement with price versus returns data in this empirical study was substantial: from less than one‐quarter of variance, to almost two‐thirds. Tweedie generalized linear model risk assessments were found to be a magnitude smaller than traditional risk assessments, lending support to market inefficiency and increased risk from idiosyncratic factors. An example with several differing distributions shows that use of mixture distributions instead of point estimation can reduce sample size while retaining the power of the audit tests. The results of this study are increasingly important as accounting datasets are growing exponentially larger over time, requiring well‐defined roles for models, algorithms, data and narrative which can only be achieved with statistical protocols and algorithmic languages.     

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.     

Audit Firm Attributes and Auditor Litigation Risk

This study examines the association between auditors' litigation risk and audit firm attributes. Using professional liability insurance premiums as a proxy for auditors' litigation risk, we present evidence that the risk is lower in audit firms having: (1) separate non-audit and audit divisions; (2) a higher proportion of partners; and (3) a higher annual growth in number of CPAs employed. Additionally, we find that the risk is higher in audit firms having: (1) operating losses; and (2) high revenue growth. Our results are consistent with the idea that audit firms' financial condition and organizational structure affect their independence/ expertise, and, in turn, their litigation risk. Our results are broadly supportive of the PCAOB's (2015) and US Department of Treasury's (2008) views that investors, audit committees, management, and other regulators could benefit from having access to financial and organizational information about audit firms.     

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.     

PERFORMANCE AUDITING: THE JURISDICTION OF THE AUSTRALIAN AUDITOR-GENERAL - A NOTE OF CLARIFICATION

Much confusion has arisen in recent years concerning the audit mandate of the Australian Commonwealth Auditor-General. It is this author's contention that this mandate is, in practice, little different to that afforded to his Canadian and United Kingdom counterparts. That is, he has a mandate that permits him to examine the economy and efficiency of operations as well as the effectiveness of management of departments and other Commonwealth bodies.     

THE DETERMINANTS OF AUDIT FEES: SOME EMPIRICAL MODELS

This paper proposes a model of audit fee determination based upon size and other characteristics of the auditee and the auditor, and upon whether there has been a recent change of auditor (which might lead to a low-balling effect). A novel feature of the model is that auditee size is measured in two dimensions, sales and assets, and is allowed to have a quadratic relationship with audit fee. The model was estimated for a sample of large listed UK companies for the years 1981 to 1988. The results support the low-balling hypothesis and also provide insights into the distinctive role of the Big 8 firms in the audit market.     

Effects of Personal Characteristics on Materiality Decisions: A Multivariate Analysis

In an effort to contribute to improved audit efficiency and quality, an experiment was administered to 596 CPAs to study the potential effects on materiality judgments of auditors' personal characteristics. A multivariate analysis indicates that age and place of employment can affect materiality decisions, while years of external auditing experience, place of employment, frequency of materiality decisions, and gender may affect confidence in materiality decisions.     

QUALIFIED AUDIT REPORTS,FIELD DEPENDENCE COGNITIVE STYLE,AND THEIR EFFECTS ON DECISION MAKING

This paper reports the findings of an experiment designed to investigate the effects of an unqualified versus an “except for” qualified audit report on subjects' share price estimates and the moderating role of cognitive style in this relationship. Using ANOVA experimental design, 34 subjects were administered identical financial information on a hypothetical company except that 17 subjects received a qualified auditors' opinion and the other 17 received an unqualified auditors' opinion. In addition, the subjects in each group were classified as either field dependent or field independent on the basis of their scores in the Embedded Figures Test. Results showed that the “except for” audit qualification affected share price estimates and field dependence cognitive style interacted with qualified/unqualified audit opinion to also affect subjects' share price estimates.     

National and Office‐Specific Measures of Auditor Industry Expertise and Effects on Audit Quality

Our paper examines whether audit quality is higher for industry audit specialists at the national and city‐office levels using the framework developed in Ferguson et al. [2003] and Francis et al. [2005] . We find that auditors who are both national and city‐specific industry specialists have clients with the lowest abnormal accruals, suggesting that joint national and city‐specific industry specialists have the highest audit quality. In addition, we find some evidence that abnormal accruals of firms audited by city‐industry specialists alone (without also being national specific industry specialists) are lower than those audited by nonindustry specialists. Using alternative measures of audit quality, we find that when the auditor is both a national and a city‐specific industry specialist, its clients are less likely to meet or beat analysts' earnings forecasts by one penny per share and more likely to be issued a going‐concern audit opinion. Together these results provide consistent evidence that audit quality is higher when the auditor is both a national and city‐specific industry specialist, suggesting that auditors' national positive network synergies and the individual auditors' deep industry knowledge at the office level are jointly important factors in delivering higher audit quality.