01 Auditing (AUD)

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    Subsequent event reporting and audit quality among U.S. state and local governments
    ( 2021) Brumley, Bethany ; Czerney, Keith ; Thompson, Anne ; Zhu, Wei
    We examine subsequent event reporting and audit quality among state and local governments. We find that ten percent of governments report at least one matter in the subsequent event note that does not appear to meet the criteria for subsequent events under GASB No. 56 and that twenty-nine percent of governments omit presumptively material bond-related events from the subsequent event note. Using a sample of audit work-papers for 150 audit engagements, we find that governments have weak internal controls surrounding subsequent events and their auditors experience difficulty identifying and classifying the severity of these internal control deficiencies. Two-thirds of subsequent events detected through the auditor’s search procedures are judged to be immaterial and are not reported in the financial statements. These findings suggest that governments and their auditors experience difficulty implementing financial reporting and auditing standards surrounding subsequent events and support the need for further guidance from standard-setters.
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    Uninvolved: Effects of Misstatement-Independent Auditor Oversight
    ( 2021) Gomez, Pedro
    Researchers in prior studies assume the current auditor is responsible for misstated financials or attempt to perform filtering to assign responsibility. However, for a minimally filtered sample of restatements within Audit Analytics, 20 percent of the restatements annually correspond to cases where the auditor engaged at the time of a restatement announcement was not engaged during the misstatement period. I refer to these observations as uninvolved. Using a similar model from prior literature, I find that companies with involved audit firms are negatively associated with the abnormal return around the restatement announcement. Following the restatement announcement, companies with uninvolved audit firms have a lower likelihood of experiencing audit turnover, and uninvolved auditor departures are characterized by a positive abnormal market reaction around the departure date. These findings suggest that involvement is an informative dimension to the market and is associated with different audit outcomes.
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    How Does Accountability and Role Drive Valuation Specialists’ Determination of Fair Value?
    ( 2021) Barr-Pulliam, Dereck ; Joe, Jennifer ; Mason, Stephani ; Sanderson, Kerri-Ann
    We interview valuation specialists (specialists) employed by accounting firms (in North America, Europe, and the Asia-Pacific region) to understand how their felt accountability to internal (auditors) vs. external clients (managers) influence the estimation and financial reporting and audit quality of complex financial instruments reported in audited financial statements. Specialists are integral to determining the fair values reported in audited financial statements because managers and auditors lack the necessary skill to do so and seek specialists’ assistance to fulfill their financial reporting responsibilities. Thus, the same specialists, at different times, act as either preparers (helping managers estimate fair values) or evaluators, supporting auditors’ assessments of their client’s fair value estimates. Our interviews reveal that differences across the specialists’ roles activate different types of felt accountability to managers and auditors. These felt accountability differences can result in lower commitment to ensure the adequacy of the specialist’s scope of services when evaluating versus preparing fair estimates. Specialists also exploit the subjectivity in fair value estimates to support balances that meet management’s preferences and complete valuations that avoid material audit differences. Importantly, such specialists’ behaviors and the consequences of their actions impact the amount of the fair values reported in financial statements yet are unobservable. Thus, financial statement users do not have access to potential bias existing in the estimates.
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    Embracing a Paradoxical Environment to Promote Technological Advancements in the Auditing Profession: Prospective from Paradox Theory
    ( 2021) Walker, Kimberly ; Brown-Liburd, Helen
    Data analytics is fundamentally changing the way enterprises operate. Despite the acknowledged power of data analytics to significantly transform the auditing profession and the significant financial investments that organizations make in data analytic tools, internal audit departments and auditing firms are slow to incorporate data analytics fully. Through interviews with 27 internal and external auditors, we explain why the audit profession is slow to adopt. The auditing environment contains pressures for stability (i.e., pressure to change and transform the profession) and pressures to change (i.e., pressure for the profession to remain the same). Through our interviews, we find evidence that our participants’ responses to the environmental contradictions (stability vs change) are the primary reason the audit profession has been slow to incorporate data analytics. Consistent with paradox theory, we identify the underlying assumptions that our participants use when experiencing the stability/change contradiction during the audit process. We find that our participants’ assumptions toward the stability/change are consistent with Either/Or or moderation assumptions. For example, when participants use an Either/Or assumption to interpret the stabilize/change contradiction, the actors create unintended consequences by reinforcing traditional and outdated audit practices that do not promote technological advancement in the audit profession. When actors use a Moderation assumption to interpret the stabilize/change contradiction, we find evidence consistent with hindering technological change, suggesting that the actors perform redundant audit tasks that affect audit efficiencies and effectiveness.
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    Audit Regulation and Debt Financing: Evidence from PCAOB International Inspections
    ( 2021) Gordon, Elizabeth ; Hsu, Hsiao-Tang ; Huang, Huichi
    We examine how audit regulation affects a non-US listed firm’s debt financing by exploiting the staggered introduction of the Public Company Accounting Oversight Board’s (PCAOB) auditor regulatory oversight of foreign audit firms from 2005 to 2017. We find that clients of auditors who are subject to PCAOB international inspections increase their propensity to issue public debt (i.e., bonds) rather than private debt (i.e., bank loans) after controlling for other determinants of the choice of public versus private debt. We also find a differential impact of PCAOB inspection access on the cost of debt, with a more significant decrease in the cost of public debt than private debt for countries that allow PCAOB inspections. Cross-sectional tests reveal that the effects of PCAOB auditor regulatory oversight depend on the importance of a borrower’s home country bond market and the institutional mechanisms that mitigate the agency costs of debt. Additional analyses using a sample of PCAOB inspection reports show that ex ante threat to auditors dominates the ex post effect for clients of the inspected auditors, and PCAOB inspection access affects loan contracts by encouraging fewer and loosened covenants. Collectively, these results suggest a spillover of audit regulation to non-U.S. listed firms that affects the firm’s choice of debt instruments, cost of debt financing, and the private debt contract design.