bluuebunny/crossref_metadata_2025 huggingface dataset:
The Effects of Specialization in Audit Workpaper Review on Review Efficiency and Reviewers' Confidence
Authors: Bamber E. Michael , Ramsay Robert J.
Published: April 2008

Accounting firms are currently re-engineering their audit processes with the aim of delivering a quality audit more efficiently. One area of potential efficiency gains is the sequential and hierarchical workpaper review process. This study examines the potential for specialization to improve review efficiency and reviewer confidence. Auditing literature advises focusing each review level on specific kinds of errors (i.e., seniors on mechanical errors and managers on conceptual errors), rather than having seniors and managers perform successive all-encompassing reviews. We find that seniors but not managers performing specialized reviews were more confident in their reviews. However, both seniors and managers performing specialized reviews required on average more time than those performing all-encompassing reviews. Additional analysis suggests that specialized reviewers were also less calibrated. We attribute these results to specialization interfering with auditors' mental model of review. The results suggest specialization will not automatically improve review efficiency, and that accounting firms may need to carefully evaluate any proposed changes to their workpaper review process.
An Examination of Audit Report Lag for Banks: A Panel Data Approach
Authors: Henderson B. Charlene , Kaplan Steven E.
Published: April 2008

This study investigates the determinants of audit report lag (ARL) for a sample of banks. Researchers have been interested in the determinants of ARL, in part, because it impacts the timeliness of public disclosures. However, prior ARL research has relied exclusively on regression analysis of cross-sectional samples of companies from many industries. In addition to focusing exclusively on banks, panel data analysis is introduced and compared with cross-sectional analysis to demonstrate its power in dynamic settings and its potential to improve estimation.

Results reveal important differences between cross-sectional analysis and panel data analysis. First, bank size is negatively related to ARL in cross-section but positively related to ARL using panel data analysis. The cross-sectional size estimate is subject to omitted variables bias, and furthermore, cross-sectional analysis fails to capture variation in size over time in relation to ARL. Panel data analysis both accounts for omitted variables and captures the dynamics of the relationship between size and ARL. As well, the panel data model's explanatory power far exceeds that of the cross-sectional model. This is primarily due to the panel model's use of firm-specific intercepts that both capture the role of reporting tradition and eliminate heterogeneity bias. Thus, panel data analysis proves to be a powerful tool in the analysis of ARL.
An Investigation of Multidimensional Knowledge Structure and Computer Auditor Performance
Authors: Curtis Mary B. , Viator Ralph E.
Published: April 2008

This study assesses the internal control knowledge structure dimensions and antecedents, as well as the relationship between structure and performance, for a set of computer auditors. The study extends prior research in two ways. First, in an effort to investigate the impact of multiple knowledge structures on auditor performance, a multidimensional model is employed through the use of multidimensional scaling (MDS). An added benefit of this methodology is that it facilitates the evaluation of the extent of auditor knowledge structure. Second, a more complete understanding of the influence of experience and education on auditor performance is gained through investigating the role of knowledge structure as a mediator.

Results suggest that computer auditors employ both control objective and transaction flow structural dimensions simultaneously, as well as a third dimension not previously identified, which represents the degree of computerization of a particular procedure. Transaction flow was identified as the dominant structural dimension for most computer auditors.

Computer auditor knowledge structures were found to be associated with college education and prior computer information systems (CIS) work experience. The extent (weight) of auditors' control objective and transaction flow dimensions was related to their performance on an internal control review task. However, no significant interactions were found.
The Differentiation of Quality among Auditors: Evidence from the Not-for-Profit Sector
Authors: Krishnan Jagan , Schauer Paul C.
Published: April 2008

The association between auditor size and audit quality is examined for a sample of not-for-profit (NFP) entities. The audit quality measure is based on the entities' compliance with eight GAAP reporting requirements. The numbers on compliance supports policymakers' contention (prior to the recent issuance of three new statements) that reporting by NFPs was inconsistent. Of the eight reporting requirements examined, noncompliance is highest for those that pertain specifically to NFPs, for example, disclosures about pledges and donated materials. However, the extent of noncompliance decreases as one moves from the small non-Big 6 to the large non-Big 6 and from the large non-Big 6 to the then Big 6. This positive association between auditor size and audit quality is borne out in multivariate regression analyses, after controlling for other correlates of audit quality. Another measure of audit firm size, based on the number of professionals employed by the firm, further confirms this finding. In addition, the results indicate that there are other factors, i.e., client size, financial health, client wealth, and participation in a peer-review process, that impact audit quality.
Further Evidence on the Auditor's Going-Concern Report: The Influence of Management Plans
Authors: Behn Bruce K. , Kaplan Steven E. , Krumwiede Kip R.
Published: April 2008

The purpose of this paper is to report the results of a study examining whether auditors' going-concern reports are associated with management plans as directed in SAS No. 59. Proxies for management plan information are taken from management's discussion and analysis (MD&A), the 10-K, or the annual report. The paper extends work by Mutchler (1985) and Chen and Church (1992) by modeling and testing the association between the auditors' going-concern report and three types of management plan disclosures. After controlling for financial condition, size, default status, and the propensity to voluntarily disclose information, the results of the study indicate that auditors' going-concern reporting decisions are strongly linked to publicly available mitigating information relating to certain management plans. In particular, plans to issue equity and to borrow additional funds exerted the strongest association with the issuance of an unqualified opinion.
How Effective Is Joint Public and Private Monitoring? The Case of the AICPA Auditor Change Notification Letter
Authors: Ettredge Michael L. , Smith David B. , Stone Mary S.
Published: April 2008

The AICPA SEC Practice Section (SECPS) notification rule requires a member firm to notify its former client and the Chief Accountant of the SEC in writing within five business days of the date it determines the client-auditor relationship has ended. The rule is unique because it was developed and is enforced by a private organization (the AICPA) to assist a public organization (the SEC) in fulfilling its charge of ensuring full and timely disclosure. An SECPS educational effort to make members aware of their notification responsibilities recently ended. Our paper evaluates the effectiveness of the SECPS educational effort and the SECPS notification letter. It shows that registrant as well as auditor compliance and timeliness increased during the time the notification rule has been in effect, and that the improved registrant performance is likely due in part to improved auditor performance. One implication of our study is that a disclosure requirement auditors impose upon themselves can be effective in helping the SEC monitor client behavior.
An Examination of Auditors' Reporting Intentions When Another Auditor Is Offered Client Employment
Authors: Kaplan Steven E. , Whitecotton Stacey M.
Published: April 2008

An AICPA ethics ruling prohibits auditors from considering employment with a client during the audit engagement in order to minimize the concerns that financial statement users may have regarding the auditor's independence, in fact or appearance. The objective of this study is to examine auditors' reporting intentions when it is discovered that another auditor is considering employment with the client and has failed to comply with the ethics ruling. We test a model that predicts that auditors' reporting intentions will be influenced by their perceptions of the seriousness of the act, the personal costs of reporting, their responsibility for reporting, and their commitment to the accounting profession. The results indicate that auditors' reporting intentions are stronger when personal costs of reporting are perceived to be lower or personal responsibility for reporting is perceived to be higher. Implications of the findings for audit practice are discussed.
Twenty-First Century Assurance
Authors: Elliott Robert K.
Published: April 2008

Every aspect of the accounting profession is being pervasively affected by advances in information technology (IT). IT shifts power from producers (such as accountants and auditors) to consumers (such as investors, creditors, and other information users). Present and potential users of accounting and auditing services have increasing needs for relevant, reliable, and timely information, and IT provides the means to meet them. But responding to these needs will require changes in virtually every aspect of auditing—where it is applied and how it is produced and distributed, for example, as well as the profession's relations with assurance users. This article explores some of the principal changes in the audit paradigm that will be necessary in order to meet assurance-user needs in the future.
Aggressive Client Reporting: Factors Affecting Auditors' Generation of Financial Reporting Alternatives
Authors: Johnstone Karla M. , Bedard Jean C. , Biggs Stanley F.
Published: April 2008

This paper examines how features of the task environment interact with task knowledge to affect auditors' generation of financial reporting alternatives. We study this issue in a setting in which an audit client proposes an aggressive financial reporting alternative for a complex revenue-recognition issue. Companies' aggressiveness in financial reporting is an important contemporary topic (e.g., Levitt 1999, 2000). For auditors, aggressive financial reporting increases litigation exposure (e.g., Palmrose and Scholz 2001) and attracts regulatory attention (e.g., Public Oversight Board 2000; Securities and Exchange Commission 1999). By proposing less aggressive financial reporting alternatives, auditors increase the likelihood that clients will report less aggressively, thereby reducing auditors' risks of litigation and regulatory exposure. We study the effects of two common features of auditors' task environment (the level of engagement risk and the availability of previously generated alternatives) on financial reporting alternative generation, investigating whether these effects are contingent on auditors' task knowledge. Our results support interactive effects for both task environment features. Higher engagement risk enhances generation of alternatives only among higher knowledge auditors, while the presence of an inherited alternative inhibits generation of alternatives only among lower knowledge auditors.
Auditor Tenure and Audit Reporting Failures
Authors: Geiger Marshall A. , Raghunandan K.
Published: April 2008

Recently, the SEC has called for research regarding the relationship between audit tenure and audit failures. In this study, we address this issue by examining prior audit reports for a sample of companies entering into bankruptcy during the period 1996–1998. We use a multivariate analysis to test for the association between the type of audit opinion issued on the financial statements immediately prior to bankruptcy and the length of auditor tenure.

Our results indicate that there were significantly more audit reporting failures in the earlier years of the auditor/client relationship than when auditors had served these clients for longer tenures. The results do not support the arguments of those who propose mandatory auditor rotation and suggest that, contrary to the concerns expressed by the SEC, there is an inverse relationship between auditor tenure and audit reporting failures.
An Experimental Investigation of the Efficacy of Lawyers' Letters
Authors: Krogstad Jack L. , Taylor Mark H. , Stock Maribeth J.
Published: April 2008

This experimental study investigates the efficacy of lawyers' letters in providing auditors with corroborating evidence about litigation contingencies. Fifty second- and third-year law students indicate their willingness to provide auditors with estimates of the likelihoods of unfavorable outcomes and potential damages for two realistic litigation cases. The findings indicate that (1) the potential loss of attorney-client privilege and (2) likelihoods of unfavorable litigation outcomes that approach auditors' lower bound for accrual both may inhibit lawyers' responses to auditors. Overall, these findings raise doubts about the efficacy of this widely utilized auditing procedure and lead to concerns about whether litigation contingencies and corresponding losses may be underreported in financial statements.
A Multistage Approach to External Auditors' Evaluation of the Internal Audit Function
Authors: Krishnamoorthy Ganesh
Published: April 2008

External auditors are continually facing intense pressure to be more efficient in conducting audits without compromising quality and effectiveness. Optimal utilization of internal audit work can improve both the efficiency and the effectiveness of external audits and can enhance the value of internal auditors to the client organization.

The objective of this study is to understand how the three factors (objectivity, work performance, and competence of the internal auditors) identified by auditing standards and by prior research interact in determining the strength of the internal audit function. Most prior studies have attempted to understand external auditors' rank ordering of the importance of the three factors, without an explicit attempt to model the interactions among the factors. The results from these studies are mixed and inconclusive. Hence, prior studies have not produced a consensus about how external auditors seem to weight and combine these factors in order to make assessments relating to the strength of the internal audit function.

This study employs analytical methods based on Bayesian probability to model external auditors' evaluation of the internal audit function. Specifically, models based on multistage (cascaded) inference theory are developed and analyzed using numerical sensitivity analysis. The modeling contribution is significant in the sense that it is the only study that provides a theoretical model for the decision process. Results reveal that the importance of the three factors varies with the type of evidence (convergent or conflicting) observed and is contingent on the interrelationships among the three factors. A major conclusion of this study is that in the Bayesian context, it is futile to attempt a ranking of the factors since no single factor will dominate under all conditions. The study also provides avenues for future research and for improving the guidance provided by professional auditing standards that relate to the evaluation of internal audit work.
Big 5 Auditors' Professional and Organizational Identification: Consistency or Conflict?
Authors: Bamber E. Michael , Iyer Venkataraman M.
Published: April 2008

In response to a variety of challenges, accounting firms are reorganizing and reengineering their core audit services to capitalize on technology advances and to deliver more value-added services to their clients. Critics, however, have voiced concern that the changes underway undermine auditors' professionalism. Accordingly, this study examines auditors' sense of professional identity. Specifically, we provide (1) a comprehensive model of the relation between auditors' professional and organizational identities, including their potential conflict; and (2) the antecedents and consequences of auditors' professional and organizational identification, including how organizational-professional conflict relates to turnover. We find relatively high levels of professional identification and organizational identification, and a relatively low level of organizational-professional conflict among our study's 252 Big 5 auditors. Professional identification is positively related to organizational identification, but it is organizational identification and its antecedents that play the central role in the empirical model. Organizational identification decreases both organizational-professional conflict and turnover. The results have implications for both practitioners and researchers.
KRiskSM: A Computerized Decision Aid for Client Acceptance and Continuance Risk Assessments
Authors: Bell Timothy B. , Bedard Jean C. , Johnstone Karla M. , Smith Edward F.
Published: April 2008

This paper describes the development and implementation of KRisk, an innovative technology-enabled auditor decision aid for making client acceptance and continuance risk assessments. KRisk, developed and designed by KPMG LLP, is part of the firm's audit quality control and risk management processes. In this paper, we discuss the environmental and technological forces that affect auditor business risk management. We also describe important aspects of the development, functionality, and implementation of KRisk. We discuss possible impediments to realizing the full potential of decision aids that have been reported in prior auditing research, and describe how KRisk and related audit quality control procedures implemented at KPMG were designed to overcome such impediments. Also, we present some ideas for scholarly research dealing with auditor business risk management issues, and issues related to the design and use of decision aids in general.
Nonaudit Services and Shareholder Ratification of Auditors
Authors: Raghunandan K.
Published: April 2008

The SEC changed its rules recently and required companies to disclose information about audit and nonaudit fees, asserting that such data would be useful for shareholders in making their investment and voting decisions. An analysis of shareholder votes at 172 of the Fortune 1000 companies indicates that the proportion of shareholders voting against or abstaining from ratification of the external auditor is positively associated with the level of the nonaudit fee ratio. The results provide empirical support to the SEC's assertion that disclosure of fees paid to the auditor can influence shareholders' voting decisions. However, even in companies with very large nonaudit fee ratios (exceeding 4.0), the average shareholder ratification rate was about 97 percent. This suggests that a large majority of shareholders did not perceive auditor independence to be impaired, even in the presence of relatively high nonaudit fees.
Market Reactions to Disclosure of Reportable Events
Authors: Whisenant J. Scott , Sankaraguruswamy Srinivasan , Raghunandan K.
Published: April 2008

This study investigates the information content of FRR No. 31 reportable events (SEC 1988) communicated by auditors to clients in the two fiscal years and interim period preceding auditor changes. Reportable events identify weaknesses in internal control and problems related to the reliability of management representations and/or financial statement reliability. We examine 1,264 auditor changes (with available stock price data) over the period 1993 to 1996, including 118 companies with reportable events. Our findings suggest that reportable events disclosed in Form 8-K filings of auditor changes are considered by investors to have information content. We find a −2.75 percent (−5.53 percent) cumulative abnormal return over a three-day (seven-day) announcement period surrounding the disclosure of reportable events in Form 8-K filings. The conclusion that reportable events offer useful information to investors is robust to alternative specifications of expected returns and to controls for other disclosures (resignations and disagreements) made when auditor changes occur. Further tests also highlight differential information content among the types of reportable events. Specifically, stock prices act as if investors find reportable events about reliability issues more informative than reportable events about internal control weaknesses.
Review Partners' Reactions to Contact Partner Risk Judgments of Prospective Clients
Authors: Ayers Susan , Kaplan Steven E.
Published: April 2008

As a part of their risk management strategy, large audit firms have established a second partner review process during client screening. It is unclear, however, whether review partners are biased by the engagement risk assessment that is provided to them by a contact partner as a part of this process. Of particular interest are cases where the contact partner's engagement risk assessment is overly favorable when compared to the underlying evidence. We report the results of an experiment where approximately one-half of the review partners received an engagement risk assessment that was overly favorable when compared to the underlying evidence, while the other half of the review partners received an assessment that was more consistent with the client data provided. We examined the effect of this manipulated difference on review partner engagement risk assessments, acceptance judgments, fee judgments, and justification activity.

Results from a sample of 78 audit partners reveal that, on average, they were not influenced by differences in the contact partner's assessment when rendering their own engagement risk assessments. However, the acceptance and fee judgments of the partners who received overly favorable risk assessments were more conservative than those of the partners who received a more consistent assessment. In addition, justification activity was greater for the group who received overly favorable judgments. These results imply that a second partner review appears to aid auditing firms in avoiding overly risky clients during the acceptance process.
The Effect of the Private Securities Litigation Reform Act of 1995 on Accounting Discretion of Client Managers of Big 6 and Non-Big 6 Auditors
Authors: Lee Ho Young , Mande Vivek
Published: April 2008

This study examines how the Private Securities Litigation Reform Act of 1995 (PSLRA) affects auditors' incentives to curtail earnings management by client managers. The most significant reform of PSLRA was the elimination of joint and several liability under which auditors and other parties could be named to lawsuits because of ‘deep pockets’ rather than culpability. While the elimination of joint and several liability provides significant relief to auditors from litigation, opponents of PSLRA argue that it discourages meritorious lawsuits and lowers audit quality, reducing investor confidence in markets. The potential benefit would be greatest for Big 6 firms, who have the highest exposure (largest clients) and significant resources to pay damages. In this paper we argue that if PSLRA induces decreases in audit quality, then we should expect increases in the prevalence of accruals after this Act. To investigate this issue we examine the discretionary accruals of a sample of 2,600 companies three years before and after the act. Our results support this hypothesis. Specifically, we find that after PSLRA income-increasing discretionary accruals rise for auditees of Big 6 firms but not for auditees of non-Big 6 firms.
The Association between Audit Committee Characteristics and Audit Fees
Authors: Abbott Lawrence J. , Parker Susan , Peters Gary F. , Raghunandan K.
Published: April 2008

This study examines the association between audit committee characteristics and audit fees, using data gathered under the recent SEC fee disclosure rules. We hypothesize that audit fees will be positively associated with audit committee independence, financial expertise, and meeting frequency. We examine a sample of 492 nonregulated, Big 5-audited firms that filed proxy statements with the SEC in the period from February 5, 2001 to June 30, 2001. We find that audit committee independence (defined as an audit committee comprised entirely of outside, independent directors) and financial expertise (defined as an audit committee containing at least one member with financial expertise) are significantly, positively associated with audit fees. This is in contrast to the findings of Carcello et al. (2002a), who find that audit committee characteristics are not significant in the presence of board-related variables. Meeting frequency (defined as an audit committee that meets at least four times annually) was not associated with higher audit fees at conventional levels. This evidence is consistent with audit committees taking actions within their span of control to ensure a higher level of audit coverage.
An Examination of Different Performance Outcomes in an Analytical Procedures Task
Authors: Green Wendy J. , Trotman Ken T.
Published: April 2008

In order to improve auditor judgments, it is first necessary to understand and evaluate what successful auditors do differently than those who are less successful. This study uses a computerized research instrument to examine in a single experiment the hypothesis generation, information search, hypothesis evaluation, and final judgment stages of the analytical procedures process. The inclusion of a criterion variable and the ability to search for additional evidence allows the study to examine in which of the various stages of analytical procedures auditors make less-than-optimal judgments. Of the 82 participants, 24 selected the correct cause, 19 never generated the correct cause as a hypothesis, and 39 generated the correct cause as a hypothesis but ended up not selecting it. The incorrect participants were divided into two categories: those who incorrectly selected the inherited hypothesis and those who incorrectly selected another self-generated non-error as the cause. The former group showed deficiencies in both information search and hypothesis evaluation compared to the correct group. The second incorrect group had similar information search patterns to the correct participants but had inferior hypothesis evaluation. These findings therefore lend support to the suggestion by Asare and Wright (2003) that not only is hypothesis generation important, but also information search and hypothesis evaluation are important.
A Test of Changes in Auditors' Fraud-Related Planning Judgments since the Issuance of SAS No. 82
Authors: Glover Steven M. , Prawitt Douglas F. , Schultz Joseph J. , Zimbelman Mark F.
Published: April 2008

This study is a post-SAS No. 82 replication of Zimbelman (1997) (hereafter Z97), which examined the effect of a separate and explicit fraud-risk assessment as later required by SAS No. 82. Z97 found weak evidence that this requirement would impact auditors' planning judgments. However, because Z97 was conducted before SAS No. 82 was issued, that study was unable to capture the full effect of SAS No. 82 on the audit environment (e.g., related guidance and training, audit policy, and implementation experience). In this study, we compare pre- and post-SAS No. 82 planning judgments and find that post-SAS No. 82 judgments are more sensitive to fraud risk factors. Specifically, we find that post-SAS No. 82 participants are more aware of the need to modify audit plans and are more likely to increase the extent of their audit tests in response to increased fraud risk when compared with the pre-SAS No. 82 participants in Z97. However, we do not find evidence that auditors modify the nature of their planned tests in response to fraud risk either before or after SAS No. 82.
Audit Committee Composition and Shareholder Actions: Evidence from Voting on Auditor Ratification
Authors: Raghunandan K. , Rama Dasaratha V.
Published: April 2008

Recent actions related to audit committees by the Securities and Exchange Commission (SEC) reflect the Commission's belief that the composition of audit committees can influence the monitoring of auditor-client relationships, and thereby influence shareholder perceptions about auditor independence and overall audit performance. The SEC has also suggested that shareholder perceptions about the auditor will influence shareholder actions, including voting on ratifying the auditor selected by management. This paper examines the association between audit committee composition and shareholder actions, using auditor ratification data from 199 companies. The results indicate that, in companies with high nonaudit fee ratios, shareholders are less likely to vote against auditor ratification if the audit committee has solely independent directors. These results provide empirical support to the assertions of the SEC and others that audit committee composition can impact investors' perceptions and actions. However, the low percent of votes against auditor ratification indicates that the results must be interpreted with caution.
Audit Fees, Nonaudit Fees, and Auditor Reporting on Stressed Companies
Authors: Geiger Marshall A. , Rama Dasaratha V.
Published: April 2008

The SEC and legislators have expressed concerns that independence may be negatively impacted if auditors perform significant nonaudit services for their audit clients, and that providing lucrative nonaudit services to clients may make it more likely that auditors will “see things the client's way.” Such concerns are particularly salient in the context of issues that involve significant auditor judgment, as in the case of reporting decisions related to going-concern uncertainties for financially stressed clients.

In this study we examine the association between the magnitude of audit and nonaudit fees and auditor report modification decisions for financially stressed manufacturing companies. In our analysis we control for financial stress, company size, reporting lag, default status, audit committee effectiveness, and management plans. The results indicate a significant positive association between the magnitude of audit fees and the likelihood of receiving a going-concern modified audit opinion, but we find no significant association between nonaudit fees and audit opinions. Additional analyses also find no significant relationship between the ratio of nonaudit service fees to audit fees and reporting decisions, and indicate that our results are robust across alternative model, variable, and sample specifications. We also control for the potential endogeneity of audit opinions, audit fees, and nonaudit fees, and find the same positive association of audit fees with opinions, but no association between nonaudit fees and audit opinions. Overall, we find no evidence of a significant adverse effect of nonaudit fees on auditor reporting judgments for our sample of distressed companies.
Management Trade-Offs of Internal Control and External Auditor Expertise
Authors: Jensen Kevan L. , Payne Jeff L.
Published: April 2008

Managers of organizations establish control systems to reduce the agency costs inherent in those organizations. Control systems include both internal and external control mechanisms, some of which may be viewed as substitutes for each other. We develop a model of the demand for external auditor industry expertise and then examine whether managers substitute such expertise for certain closely related internal control mechanisms in their overall control systems. Using a sample of municipalities, we find evidence that managers who do not hire internal auditors or who hire accounting personnel with low levels of accounting expertise tend to hire external auditors with higher levels of industry expertise. We interpret this to be a conscious trade-off on the part of the managers, which appears to be linked to the costs of hiring the internal mechanisms in question.
An Empirical Analysis of Voluntarily Supplied Client-Auditor Realignment Reasons
Authors: Sankaraguruswamy Srinivasan , Whisenant J. Scott
Published: April 2008

In this paper we investigate whether voluntarily disclosed reasons for auditor-client realignments (as encouraged by the SEC) have information content for investors. After classifying realignment reasons into two types—verifiable and non-verifiable, with the latter representing disclosures about the auditor-client relationship not evident from alternative sources—we find that, as predicted by the “good news” precept of theoretical signaling models, non-verifiable realignment reasons are positively associated at the time of their announcement with abnormal returns. We also investigate whether voluntarily disclosed realignment reasons are associated with the relative size of the predecessor or successor auditor. We find that clients are more likely to cite service-related (non-verifiable) reasons when dismissing large predecessor auditors, and are more likely to cite fee-related (non-verifiable) reasons when choosing small successor auditors. These findings are consistent with auditors competing for the clients of large auditors by offering better or broader services, and with smaller auditors competing based upon price. All of our findings are robust to controlling for mandatory auditor change disclosures (auditor-client disagreements, reportable events, and goingconcern opinions), and operating, financing, and investing activities found in prior research to be associated with auditor changes.
Getting Inside the Black Box: A Field Study of Practices in “Effective” Audit Committees
Authors: Gendron Yves , Be´dard Jean , Gosselin Maurice
Published: April 2008

Although audit committees typically are considered a crucial corporate governance mechanism, knowledge is scant about the practices carried out in audit committee meetings. This paper provides insights into practices that audit committee members carry out in meetings, including the part of the meetings where members meet privately with auditors. The investigation was conducted via a field study in three Canadian public corporations—whose respective audit committees complied to a large extent with regulatory guidelines of the Toronto Stock Exchange and the voluntary recommendations of the Blue Ribbon Committee on audit committee effectiveness. Further, the three audit committees that we investigated are generally perceived as effective by the individuals who attend meetings. Our results highlight key matters that audit committee members emphasize during meetings, such as: accuracy of financial statements; appropriateness of the wording used in financial reports; effectiveness of internal controls; and the quality of the work performed by auditors. We also elicit the evaluation criteria that members use to assess written and verbal information submitted by managers and auditors. In addition, we found that a key aspect of the work carried out by audit committee members consists of asking challenging questions and assessing responses provided by managers and auditors.
An Empirical Investigation of IPO Underpricing and the Change to the LLP Organization of Audit Firms
Authors: Muzatko Steven R. , Johnstone Karla M. , Mayhew Brian W. , Rittenberg Larry E.
Published: April 2008

This paper examines the relationship between the 1994 change in audit firm legal structure from general partnerships to limited liability partnerships (LLPs) on underpricing in the initial public offering (IPO) market. The change in legal structure of audit firms reduces an audit firm's wealth at risk from litigation damages and reduces the incentives for intrafirm monitoring by partners within an audit firm. Prior research suggests that underpricing protects underwriters from litigation damages, and that the level of underpricing varies inversely with both the amount of implicit insurance provided by the audit firm and the quality of the audit services provided. We hypothesize the change in audit firm legal structure reduced the assets available from audit firms in IPO-related litigation and indirectly reduced audit quality by lowering intrafirm monitoring. As a result, underwriters have incentives as a joint and several defendant with the audit firms to increase IPO underpricing, particularly for high-litigation-risk IPOs, following audit firms' shifts to LLP status. Our findings are consistent with this hypothesis.
Audit Committee Characteristics and Restatements
Authors: Abbott Lawrence J. , Parker Susan , Peters Gary F.
Published: April 2008

This study addresses the impact of certain audit committee characteristics identified by the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (BRC) on the likelihood of financial restatement. We examine 88 restatements of annual results (without allegations of fraud) in the period 1991–1999, together with a matched pairs control group of firms of similar size, exchange listing, industry and auditor type.

We find that the independence and activity level (our proxy for audit committee diligence) of the audit committee exhibit a significant and negative association with the occurrence of restatement. We also document a significant negative association between an audit committee that includes at least one member with financial expertise and restatement. To test the robustness of the results we also consider a sample of 44 fraud and no-fraud firms and arrive at largely similar findings. Our results underscore the importance of the BRC's recommendations as a means of strengthening the monitoring and oversight role that the audit committee plays in the financial reporting process.
The Comparative Impact of an Audit Report Standard and an Audit Going-Concern Standard on Going-Concern Disclosure Rates
Authors: Citron David B. , Taffler Richard J.
Published: April 2008

There was a significant increase in going-concern opinions in the U.K. during the 1990s despite a strong economy. This paper tests the impact of a new audit report standard versus an enhanced audit procedures standard in explaining this change.

We find the increased going-concern modification rate among financially distressed firms is directly associated with the introduction of the less confrontational audit report standard: SAS No. 600. On the other hand, the going-concern procedure standard (SAS No. 130) had no impact on our results. We interpret this finding as highlighting the importance of audit report presentation for standard setters when seeking to enhance disclosure.
The Effect of Audit Committee Expertise, Independence, and Activity on Aggressive Earnings Management
Authors: Be´dard Jean , Chtourou Sonda Marrakchi , Courteau Lucie
Published: April 2008

This study investigates whether the expertise, independence, and activities of a firm's audit committee have an effect on the quality of its publicly released financial information. In particular, we examine the relationship between audit committee characteristics and the extent of corporate earnings management as measured by the level of income-increasing and income-decreasing abnormal accruals. Using two groups of U.S. firms, one with relatively high and one with relatively low levels of abnormal accruals in the year 1996, we find a significant association between earnings management and audit committee governance practices.

We find that aggressive earnings management is negatively associated with the financial and governance expertise of audit committee members, with indicators of independence, and with the presence of a clear mandate defining the responsibilities of the committee. The association is similar for both income-increasing and income-decreasing earnings management, suggesting that audit committee members are concerned with both types of earnings management and do not exhibit an asymmetric loss function similar to that of auditors.
An Examination of Internal Auditor Objectivity: In-House versus Outsourcing
Authors: Ahlawat Sunita S. , Lowe D. Jordan
Published: April 2008

The internal audit function is evolving from its traditional oversight function to one that includes a wider spectrum of activities that add value to their organizations. In addition, economic pressures have forced many companies to consider outsourcing as an alternative. These ongoing changes have caused some concern regarding the potential lack of objectivity and independence for internal auditors. This exploratory study examines whether outsourcing of the internal audit function is susceptible to client advocacy vis-a`-vis in-house auditing, which itself may be sensitive to an employer advocacy

Sixty-six practicing members of the Institute of Internal Auditors (IIA) completed a case study involving a corporate acquisition scenario. Of the 66 participants, 35 were from corporations (in-house), while the remaining 31 were from the Big 4 accounting firms (outsource). Advocacy was manipulated by asking participants to assume the role of internal auditor for either the buyer or the seller of a target division. Result s indicate that significant advocacy existed in the judgments of both in-house and outsource internal auditors. However, the extent of advocacy was less severe in the case of outsource auditors.
Auditor Industry Specialist Research Design
Authors: Neal Terry L. , Riley Richard R.
Published: April 2008

Auditor industry specialization has generated significant interest in the academic community. However, a review of prior research suggests a lack of consensus as to how auditor industry specialization should be measured. This paper analyzes data from the 1989–1997 time period and: (1) examines the underlying concepts of specialization that are embodied in the different measurement approaches to industry specialists and the reasons why these measures yield inconsistent results and conclusions, (2) presents a framework to assist researchers in selecting the most appropriate auditor industry specialization metric to apply, and (3) proposes an alternative metric for research designs in particular investigative settings. Our analyses, results, and discussion highlight the differences inherent in industry specialization metrics and offer an interpretation of why such differences exist and provide some guidance for auditor industry metric selection.
The Impact of Strategic-Positioning Information on Auditor Judgments about Business-Process Performance
Authors: Ballou Brian , Earley Christine E. , Rich Jay S.
Published: April 2008

Strategic-systems auditing (SSA) approaches require auditors to perform analyses of their clients at two levels (i.e., strategic and business-process levels) when conducting audits (e.g., Bell et al. 2002; Lemon et al. 2000). One advantage of using SSA approaches is that through these analyses, auditors gain a complex systems understanding of the client. This understanding enhances decision making in part by recognizing that small actions can have big effects that increase overall business risk (Jacobson 2001; Richmond 2000). This study examines how the two levels of analysis in SSA impact auditor judgments regarding small changes in a business process that can have big (risk-increasing) effects. Specifically, we predict that when strategic-positioning information (contained within the strategic-level analysis) indicates a client is typical of others in its industry, information at the business-process level regarding a small problem in a business process will be weighted less than when the strategic-positioning information indicates the client is atypical. Results support this contention. This behavior may have implications for the effectiveness of SSA approaches under certain conditions.
Client Retention and Engagement-Level Pricing
Authors: Hackenbrack Karl E. , Hogan Chris E.
Published: April 2008

This study contributes to the debate on the motives for auditor changes by examining the relationship between client retention and one of the many factors that potentially influence client retention, engagement-level pricing. We find for a sample of public and private audit engagements that the difference between realized realization rates (the ratio of the audit fee billed to the standard audit fee) and expected realization rates is positively associated with client retention over a five-year window. Our findings suggest pricing pressure is more than an isolated occurrence and the incumbent auditor's inability to recover unexpectedly high labor usage is associated with the severing of the auditor-auditee relationship.
The Introduction of Price Competition in a Municipal Audit Market
Authors: Jensen Kevan L. , Payne Jeff L.
Published: April 2008

We examine the effects of deregulation that introduced price competition in a municipal audit market. In 1993 Florida removed the competitive bidding restriction that prohibited disclosure of pricing information in the initial stages of auditor selection. This change led to significant shifts in the audit market from Big 6 firms toward established non-Big 6 firms in the municipal market and reduced audit fees. If quality increases with auditor office experience in a given industry, then our results also suggest that the primary effect of introducing price competition was to make quality audits more affordable.
A Review and Integration of Empirical Research on Materiality: Two Decades Later
Authors: Messier William F. , Martinov-Bennie Nonna , Eilifsen Aasmund
Published: April 2008

There has been a renewed interest in the concept of materiality motivated by concerns at the Securities and Exchange Commission, the Sarbanes-Oxley Act, and the Auditing Standards Board and International Auditing and Assurance Standards Board issuance of proposed standards on materiality. This paper: (1) reviews and integrates the empirical research on materiality since 1982, and (2) suggests some implications of this research for audit practice and research. The review indicates that while many issues related to materiality have been addressed by prior research, a number of new and important areas are in need of further examination.