An empirical investigation of the impact of audit and auditor characteristics on auditor performance

We use a unique and confidential database of 15,392 tax audits performed by the Croatian Tax Administration during the 2002–2006 period to examine the impact of task complexity, auditor experience, and auditor effort on audit performance. We provide external validation to prior experimental and analytical research showing that task complexity decreases while auditor experience and effort increase audit performance. We also extend this literature by examining the roles of task complexity and experience in moderating the impact of the effort on audit performance. We find that task complexity mitigates, while experience enhances the positive relationship between auditor effort and performance. However, we also find that auditor experience reinforces the positive effect of auditor effort on performance to a greater degree when complexity is high. Taken together, our findings provide new evidence on how audit and auditor characteristics impact audit performance, and new insight into how task complexity and auditor experience separately and jointly moderate the impact of auditor effort on performance.     

Experimental research in financial accounting

This paper uses recent experimental studies of financial accounting to illustrate our view of how such experiments can be conducted successfully. Rather than provide an exhaustive review of the literature, we focus on how particular examples illustrate successful use of experiments to determine how, when and (ultimately) why important features of financial accounting settings influence behavior. We first describe how changes in views of market efficiency, reliance on the experimentalist’s comparative advantage, new theories, and a focus on key institutional features have allowed researchers to overcome the criticisms of earlier financial accounting experiments. We then describe how specific streams of experimental financial accounting research have addressed questions about financial communication between managers, auditors, information intermediaries, and investors, and indicate how future research can extend those streams. We focus particularly on (1) how managers and auditors report information; (2) how users of financial information interpret those reports; (3) how individual decisions affect market behavior; and (4) how strategic interactions between information reporters and users can affect market outcomes. Our examples include and integrate experiments that fall into both the “behavioral” and “experimental economics” literatures in accounting. Finally, we discuss how experiments can be designed to be both effective and efficient.     

It’s all about audit quality: Perspectives on strategic-systems auditing

We discuss the antecedents of and rationale for what has become known as Strategic-Systems Auditing (SSA). We also describe the conceptual foundation and key elements of SSA. We observe that the auditor employing SSA conceives the audit as a process of evidence-driven, belief-based, risk assessment. We also illustrate facets of this process, including how the auditor, by acquiring a rich understanding of how and how well management is executing its business-model, develops rich (e.g., distributional) expectations of future financial-statement amounts and disclosures. These expectations form a benchmark against which the auditor later compares and investigates management’s asserted financial-statement amounts and disclosures. Finally, we pose and respond to some of the more common questions about elements of SSA and complete the paper by suggesting some educational innovations and high-value targets for research.One salient message is that SSA first emerged in the 1990s as an attempt to enhance audit quality in response to changes in the audit environment. Another salient message is that SSA continues to equilibrate, adapting to more recent environmental changes, especially society’s demand for greater protection from financial-statement fraud. Such adaptation requires ongoing, significant intellectual investments by audit practitioners and audit scholars/educators.     

The effect of client management bargaining power, moral reasoning development, and belief in a just world on auditor independence

In two studies, practising auditors' responses to hypothetical audit conflict scenarios were used to test hypotheses that moral reasoning development and belief in a just world influence resistance to client management power. Based on a mixed factorial ANOVA design, results confirmed that auditor independence is interactively determined. Three styles of auditor decision-making emerged: “autonomous”, “accommodating” and “pragmatic”. Autonomous auditors were responsive to personal beliefs, such that those with strong just world beliefs were more likely to resist client management power. Pragmatic auditors were responsive to client management power, irrespective of beliefs. Accommodating auditors responded both to personal beliefs and client management power; they comprised the least resistant group, especially when they believed in an unjust world.     

Auditor changes following big eight mergers with non-big eight audit firms

This paper examines the reaction of clients of “non-Big Eight” audit firms to mergers of their auditors with “Big Eight” firms. We postulate that a non-Big Eight audit firm's clients will retain a Big Eight acquirer following a merger if they benefit from the Big Eight firm's specialized services and/or reputation. Clients that do not have these economic incentives to retain the Big Eight firm are more likely to change to another non-Big Eight audit firm following the merger. Empirical tests of the characteristics of clients that remain with a Big Eight acquirer or change to another smaller auditor following an audit merger generally support our hypotheses.     

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.     

Why inexperienced investors do not learn: They do not know their past portfolio performance

Recently, researchers have gone a step further from just documenting biases of individual investors. More and more studies analyze how experience affects decisions and whether biases are eliminated by trading experience and learning. A necessary condition to learn is that investors actually know what happened in the past and that the views of the past are not biased. We contribute to the above mentioned literature by showing why learning and experience go hand in hand. Inexperienced investors are not able to give a reasonable self-assessment of their own past realized stock portfolio performance which impedes investors' learning ability. Based on the answers of 215 online broker investors to an Internet questionnaire, we analyze whether investors are able to correctly estimate their own realized stock portfolio performance. We show that investors are hardly able to give a correct estimate of their own past realized stock portfolio performance and that experienced investors are better able to do so. In general, we can conclude that we find evidence that investor experience lessens the simple mathematical error of estimating portfolio returns, but seems not to influence their “behavioral” mistakes pertaining to how good (in absolute sense or relative to other investors) they are.     

The making of green knowledge: the contribution from activism

The paper discusses some of the contributions of environmental activism to the development of knowledge. The paper contrasts some of the main forms of knowledge-making that have emerged among activists and raises a number of questions both about the political and cognitive implications of such “green knowledge”. The general argument is that, in the future, new types of interaction and new spaces for communication will need to be developed if green knowledge is not to be incorporated into the dominant culture or reduced to ineffective forms of protest.     

An “American Dream” theory of corporate executive Fraud

In this paper, we first describe a “Broken Trust” theory that was introduced by Albrecht el al. [Albrecht, W. S., Albrecht, C. C., & Albrecht, C. O. (2004). Fraud and corporate executives: Agency, Stewardship and Broken Trust. Journal of Forensic Accounting, 5, 109–130] to explain corporate executive Fraud. The Broken Trust theory is primarily based on an “Agency” theory from economic literature and a “Stewardship” theory from psychology literature. We next describe an “American Dream” theory from sociology literature to complement Albrecht el al.'s (2004) Broken Trust theory. Like the Broken Trust theory, the American Dream theory relates to a “Fraud Triangle” concept to explain corporate executive Fraud. Finally, we provide some anecdotal evidence from recent high profile corporate executive Fraud to explore the American Dream theory. We conclude our thoughts on corporate executive Fraud from a teaching perspective.     

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.     

The effects of system design alternatives on the acquisition of tax knowledge from a computerized tax decision aid

Accounting firms are intensifying their reliance on experiential learning, and experience increasingly involves the use of computerized decision aids [Messier, W. (1995) Research in and development of audit decision aids. In R. H. Ashton & A. H. Ashton, Judgment and decision making in accounting and auditing (pp. 207–230). New York: Cambridge University Press]. Accountants are expected to learn from automated decision aid use, because the aids are not always available when dealing with the aid's topical matter, and the knowledge inherent in the aid is needed for competency on broader issues. To facilitate knowledge acquisition and explain the logic of the underlying processes, computerized decision aids provide the rationale for their calculations in the form of online explanations. We study how the location of explanations in a computerized decision aid affects learning from its use. Specifically, this research extends the existing literature by using a framework for the study of learning from decision aid use and by using cognitive load theory to explain the failure of certain decision aid design alternatives to promote learning. We define learning as the acquisition of problem-type schemata, and an experiment is performed in which cognitive load is manipulated by the placement of explanations in a computerized tax decision aid to determine its effect on schema acquisition. Schemata are general knowledge structures used for basic comprehension, and cognitive load refers to the burden placed on working memory when acquiring schemata. We find that increased cognitive load produced by the location of explanations in a decision aid leads to reduced schema acquisition. Our results indicate that when explanations in a computerized decision aid are integrated into its problem solving steps, cognitive load is reduced and users acquire more knowledge from aid use. This appears to be an important design consideration for accounting firms buying or building computerized decision aids.     

Hypothesis revision strategies in conducting analytical procedures

A number of accounting tasks require an evaluation of competing hypotheses. For instance, a management accountant considers alternative reasons for a significant standard cost variance while an auditor must determine whether an unexpected fluctuation in a client's account balance was caused by an error, irregularity or a change in economic conditions. In spite of the prevalence of hypothesis evaluation in practice, little is known about the process. In this paper we provide evidence on two issues that could compromise effective and efficient hypothesis evaluation: (1) the revision of beliefs over competing hypotheses given diagnostic evidence; and (2) whether an eliminated hypothesis is subsequently resuscitated (i.e. reconsidered as plausible). To address these issues, 55 auditors were provided audit test results and were asked to evaluate five potential hypotheses that may have caused a material fluctuation in the gross margin ratio of a client. The findings indicate that, when presented with diagnostic evidence about a target hypothesis, auditors were prone to adjusting the likelihood of the target hypothesis but not revising the likelihoods of the competing hypotheses. This non-Bayesian revision strategy, which we label the “one-hypothesis syndrome”, appears to represent a trade-off reflecting competing forces of cognitive strain, efficiency and accountability. While our preliminary results indicate high performance (in identifying the actual cause), additional research in less controlled settings is needed to fully evaluate the effect of this trade-off on efficiency and effectiveness. Finally, contrary to anecdotal evidence from an SEC release, auditors were reluctant to eliminate hypotheses and those who did, did not regard their eliminations as permanent.     

Adopting commercial software in the accounting classroom: A focus on learning

Concerns about the current state of accounting education are well documented. A common anxiety is that students are not prepared to deal with the complex issues and unstructured problems that they will encounter throughout their professional lives. Recent studies conclude that an educational objective for accounting is to teach students how to learn. This paper discusses adopting commercial-use software as an approach to accomplish this objective. The paper also provides an example for an accounting information systems class. Because “learning to learn” involves teaching students learning strategies, accounting educators need to find new ways to help students acquire these strategies. This paper will be useful for instructors seeking ways to assist students in developing strategies for learning that will better prepare them for careers in a complex and dynamic environment.     

Company takeovers and the auditor choice decision

There is a growing literature on how companies select their auditors. This literature emphasizes both theoretical development and empirical testing. Anderson, Stokes, and Zimmer (1993) recently identified corporate takeovers as events that generate auditor selection decisions; the acquiring company (the acquirer) has to choose whether to retain the new subsidiary’s (the acquiree) incumbent auditor or switch to its own auditor. To date, this is the only reported study that examines auditor changes following corporate acquisitions. Anderson et al. (1993) speculated that if the business activities of the acquirer and the acquiree are different, then the acquiree’s incumbent auditor is more likely to be retained. They used takeover type (horizontal, vertical, conglomerate) as a proxy for differences in activities. Their empirical results, however, were contrary to these expectations.The purpose of this paper is to test the robustness of Anderson et al.’s findings in a different national setting (Britain instead of Australia). Further, it modifies Anderson et al.’s test procedures by introducing new variables that are also hypothesized to affect auditor choice in acquired companies. The results show that proxies for differences in activities between acquirers and acquirees, namely takeover type and industry, are associated with the retention of the acquiree’s incumbent auditor. The takeover type finding therefore differs from the findings of Anderson et al. (1993).Other factors associated with the decision to retain auditors include audit opinions, contested takeover bids, changes in top management, restructuring and integration of businesses, and relative audit fees. Some of these factors have also been identified in other, non-takeover contexts. Finally, audit switches to Big Eight firms are found to be more likely than switches away from the Big Eight.     

A writing intervention for the accounting classroom: dealing with the problem of faulty modifiers

Good communication skills continue to be viewed as critical for success in accounting. This paper demonstrates a writing-skills “intervention” that deals with faulty modifiers, a grammatical problem that can inhibit accounting students and professionals from achieving the clarity and conciseness widely regarded as essential in the accounting profession. The intervention consists of a handout distributed to students – fashioned to sensitize them to the pervasiveness of faulty modifiers and help them avoid the problem – and an in-class discussion of the handout. By design, this intervention is both inexpensive and unobtrusive. For the accounting instructor, we provide in the body of the paper a technical, but unpedantic and informal, analysis of faulty modifiers, including numerous examples of the problem, accompanied by alternative corrections. To date, few papers in the accounting education literature that deal with writing problems present direct assessment evidence. To assess the efficacy and perceived value of our learning intervention, we collected assessment data – both direct (i.e., a set of three diagnostic tests) and indirect (i.e., feedback from a student questionnaire) from two institutions at which our learning intervention was tested. These data suggest than an intervention of the sort described here can be valuable in remedying discrete weaknesses of student writing. In a larger sense, we believe our paper can be used as a model for the development of similar “interventions” that cover other grammatical problems, and that can serve either as stand-alone entities (similar to the method proposed by Reinstein and Houston (2004) [Using the Securities and Exchange Commission’s “plain English” guidelines to improve accounting students’ writing skills. Journal of Accounting Education, 22, 53–67]) or as complementary resources to more comprehensive and formal writing programs.     

Public and private sector auditors and accruals quality in English NHS hospital Trusts

To promote auditor independence and audit quality in English NHS Trusts the Audit Commission regulates auditor rotation, fees and the appointment of its own and private sector auditors. NHS sanctioned departures from GAAP, some of which allow the financial breakeven target to be achieved, have been criticised by the Audit Commission as detrimental to financial discipline. In this paper, we investigate the association between abnormal accruals and the achievement of financial breakeven in NHS hospital Trusts over the period 1998–2005. We also investigate the association between abnormal accruals, audit fees and the Trusts audited by public and private sector auditors. We find evidence that abnormal accruals are used to achieve financial breakeven and they differ across different types of auditor. We also identify a negative relationship between abnormal accruals and NHS Trust star ratings. These findings raise questions about the ‘quality’ of NHS audit where compliance with NHS-specific regulations overrides the wider GAAP-based requirement for financial statements to show a true and fair view and they warrant reconsideration of the nature of audit in NHS Trusts.     

A Critical Theory and Postmodernist approach to the teaching of accounting theory

This paper outlines my teaching philosophy for the Accounting Theory subject. A Critical Theory and Postmodernist approach is recommended, which makes full use of non-accounting “tangential” material [Boyce G. Critical accounting education: teaching and learning outside the circle. Critical Perspectives on Accounting 2004;15(4/5):565–86] and material from popular culture [Kell P. A teacher's tool kit: an introduction to social theory. In: Allen J, editor. Sociology of education: possibilities and practices. 3rd ed. Southbank, Melbourne: Social Science Press; 2004. p. 29–51 [chapter 2]; Nilan P. ‘Reality TV’? School students and popular culture. In: Allen J, editor. Sociology of education: possibilities and practices. 3rd ed. Southbank, Melbourne: Social Science Press; 2004. p. 306–21 [chapter 14]]. The paper discusses some classroom interactive activities, as well as interview results from interviews conducted with 11 international students and one Australian student at Charles Sturt University. The teaching approach proposed in this paper is to conduct classroom interactive activities which study theories and research results from a range of disciplines in order to illustrate key points that apply equally as much to accounting theories and the accounting research process, e.g. the Positive/Normative dichotomy. Classroom interactive activities are discussed in class using the “dialogical approach” to education recommended by Freire [Freire P. Pedagogy of the oppressed. London: Pelican; 1996], Kaidonis [Kaidonis MA. Teaching and learning critical accounting using media texts as reflexive devices: conditions for transformative action or reinforcing the status quo? Critical Perspectives on Accounting 2004;15(4/5):667–73], Boyce [Boyce G. Critical accounting education: teaching and learning outside the circle. Critical Perspectives on Accounting 2004;15(4/5):565–86], and Thomson [Thomson I, Bebbington J. It doesn’t matter what you teach? Critical Perspectives on Accounting 2004;15(4/5):609–28]. Once students gain experience in studying material from outside accounting, the interview results suggest that they are then better motivated [Wynder M. Creative management accountants: short case studies to promote creativity in the classroom. In: Paper presented at the Accounting and Finance Association of Australia and New Zealand annual conference; 2006] and better equipped to study and evaluate accounting theories.     

CRITICAL THEORY AND ACCOUNTING HISTORY: CHALLENGES AND OPPORTUNITIES

This paper briefly examines the contributions that postmodern (critical) research has made to the historical accounting literature and the opportunities that this new body of literature has created for traditional historical researchers. I suggest that the “new history” that has rendered the “familiar strange” has provided new understanding of our discipline that should be welcomed by all historians. The paper briefly examines two areas, the emergence of double entry bookkeeping and cost accounting, to demonstrate the new insights that critical historians have provided to what has been considered a settled agenda. I conclude by noting that the diversity critical research has added to the accounting history research should be celebrated, but caution that we not engage in the modernist strategy of trying to find a “certified path to knowledge.” Accounting history will be enhanced if our community adopts the values–tolerance, willingness to listen, and respect for alternative views–ithat have enabled researchers in other disciplines to flourish.     

The use of on-line summative assessment in an undergraduate financial accounting course

According to the Quality Assurance Agency [QAA (2006). Section 6: Assessment of students, Code of practice for the assurance of academic quality and standards in higher education. <http://www.qaa.ac.uk/>. Accessed 14.03.2007] “Assessment describes any processes that appraise an individual’s knowledge, understanding, abilities or skills” and is inextricably linked to a course or programme’s intended learning outcomes. Assessment also has a fundamental effect on students’ learning where it serves a variety of purposes including evaluation, feedback and motivation. Assessment also provides a performance indicator for both students and staff. Computer-aided assessment (CAA) offers an option for “sustainable assessment” and provides opportunities for creating innovative assessment practices that help engage students and increase their motivation for learning. This paper reports the findings of a qualitative study where a series of on-line summative assessments were introduced into a first-year financial accounting course. Feedback from students obtained from an evaluative survey and focus group interviews indicates that assessment played a significant role in the teaching/learning process. That is, students perceived a beneficial impact on learning, motivation, and engagement.