02 Auditing

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Now showing 1 - 5 of 16
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    Mitigating the Effect of Rationalizations on Ethical Accounting Decisions
    ( 2018-09-01) Lowe, D. Jordan ; Reckers, Philip ; Sauciuc, Ashley
    In order to carry out unethical acts, individuals engage in a rationalization process to “morally disengage” from the consequences of their actions. Rationalizations provide the mechanism through which individuals are able to “morally disengage.” The purpose of our research is to examine three experimenter-devised interventions to moderate the influence of rationalizations in the process of making ethics-related decisions. Our first two interventions attempt to mitigate one’s ability to rationalize by highlighting the false premises of readily available rationalizations; whereas, our third intervention attempts to bolster the importance of one’s own self-regulation by providing a cautionary explanation of how individuals are inappropriately motivated to rationalize bad behavior. We predict that these interventions should enhance one’s ethical intentions through a reduction in rationalization. Furthermore, we anticipate that the success of our proposed interventions may vary with the degree of auditor professional commitment to the accounting profession. To test our hypotheses, we conducted an experiment with 88 auditors from four public accounting firms. Our results indicate that for auditors with a low professional commitment, two of the rationalization interventions were effective in lowering auditors’ willingness to accede to his superior’s unethical request than participants in the control group, while the third was not. As expected, the rationalization interventions were not effective for auditors with a high professional commitment level as these individuals are found less likely to rationalize. Implications of our research and suggestions for future research are also discussed. Ratioanizaion
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    Coaching Today’s Auditors: When Do Workpaper Reviewers Professionally Develop Their Preparers?
    ( 2018-08-31) Schaefer, Tammie ; Brazel, Joseph ; Andiola, Lindsay ; Downey, Denise
    Audit workpaper review is a quality control mechanism intended to detect preparer errors in the short-term and professionally develop preparers in the long-term. Currently, it is unclear as to what factors drive reviewers to professionally develop (or not develop) their preparers. Furthermore, whether error detection and professional development complement or compete during supervisory review is not known. As audit teams become more global, new contextual factors are introduced into the audit environment that may influence a supervisor’s review quality. In this study, we investigate how the preparer’s office location (local vs. international) and the likelihood of preparer recurrence affect the reviewer’s propensity to focus on the professional development of the preparer. We find that reviewers identify more with preparers from their local (vs. international) office and, as a result, focus more on professionally developing local preparers. We also observe that, regardless of office affiliation, reviewers are more apt to coach preparers who are likely (vs. unlikely) to recur the next year because they anticipate reaping future personal benefits from recurring preparers. Finally, we find that reviewers who focus more on developing preparers are also more likely to detect errors in preparer audit documentation.
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    Regulation, Auditor Litigation and Settlements
    ( 2018-08-31) Moorthy, Lakshmana Krishna ; Sarath, Bharat
    This paper aims to understand the determinants of lawsuits against auditors in securities class action litigation and the settlement pattern by auditors when the suit is not dismissed. The issues we consider are: (i) when are auditors named as defendants (ii) when do auditors choose to settle and (iii) what proportion of the settlement do auditors pay in relation to the settlement by all the other parties; and (iv) differences in settlement strategies among the big-n firms. This paper also examines how the lawsuit and settlement patterns have changed following the enactment of major regulation such as the Private Securities Litigation Reform Act (PSLRA), Sarbanes Oxley Act (SOX). Following prior literature, we first establish that auditors are more likely both to be named and to settle in cases involving restatement of earnings, accusations of violation of GAAP or accounting improprieties. We then show that the likelihood of suit and settlement increase in a measure that we construct measuring the complexity of litigation. We then examine differences in settlement patterns across periods preceding and after the passage of PSLRA and SOX. We find that auditors are named less often in the post PSLRA period (relative to the pre-PSLRA period), settle with the same frequency in both periods but pay less proportional damages. The same set of comparisons show that auditors are just as likely to be sued post-SOX as pre-SOX, but settle with lower frequency and pay the same proportion of damages. Overall this study documents the beneficial role of both PSLRA and SOX on reducing the litigation burden on auditors. With regard to settlement strategies, we document the varying strategies employed by the Big-n firms that settle at different rates, vary in their aggressiveness and time to settle signaling the willingness to fight or cooperate in the settlement.
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    Workload Leverage and the Effect on Audit Quality
    ( 2018-08-31) Westfall, Tiffany ; Harris, Kathleen ; Williams, Devin
    Practitioners and regulators suggests audit quality is negatively associated with auditor workloads (PCAOB 2015). We examine the association between office-level workload leverage and an office’s audit quality from 2004-2015 for all accelerated filers. The increase in workloads during busy season can instigate cognitive fatigue (Cohen 1980) if not appropriately mitigated by adequately preparing audit professional’s expectations (Glass and Singer 1972). Our findings indicate that increased busy-season workloads are associated with lower audit quality for accelerated clients of Non-Big 4 audit firms, whereas Big 4 auditors with higher workload leverage provide lower audit quality for non-accelerated filers. These results provide support for cognitive fatigue for all audit firm sizes; however, different sized audit firms experience cognitive fatigue at different points during busy season. Our findings contribute to the literature examining workload leverage and auditor burnout by providing empirical evidence of office workload influencing the audit process differently for different office sizes.
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    Auditor Competition and Cost of Bank Loans
    ( 2018-08-31) Geng, Heng ; Zhang, Cheng ; Zhou, Frank
    This paper examines the effect of auditor competition on the cost of bank loans of client firms. Exploiting the demise of Arthur Andersen that differently reduces the local audit market competition of metropolitan statistical areas (MSAs), we find a decrease in clients' cost of bank loans in areas with a larger decrease in competition. The competition effect on cost of bank loans is more pronounced when external monitoring is lower and when auditors compete more fiercely with price. Our finding is explained by a model in which clients shop for audit opinions and a more competitive audit market forces auditors to compromise audit quality to maintain client relationship and market share.