You limited your search to:
- Auditors’ Information Search and Documentation: Does Knowledge of the Client Preference Or PCAOB Accountability Pressure Matter?
- Auditors regularly make judgments regarding whether a client’s chosen accounting policy is appropriate and in accordance with generally accepted accounting Principles (GAAP). However, to form this judgment, auditors must either possess adequate topic-specific knowledge or must gain such knowledge through information search. This search is subject to numerous biases, including a bias toward confirmation of a client’s preference. It is important to further our understanding of bias in auditors’ information search to identify its causes and effects. Furthering our understanding is necessary to provide a basis for recommending and evaluating a potential debiaser, such as accountability. the Public Company Accounting Oversight Board (PCAOB) annually inspects the audit files of selected engagements, which introduces a new form of accountability within the auditing profession. This new form of accountability has come at great cost, however, there is little empirical evidence regarding its effects on auditors’ processes. As such, it is important to understand whether the presence of accountability from the PCAOB is effective in modifying auditors’ search behaviors to diminish confirmation bias. Using an online experiment, I manipulate client preference (unknown vs. known) and PCAOB accountability pressure (low vs. high) and measure search type (information –focus or decision-focus), search depth (shallow or deep) and documentation quality. I investigate whether auditors’ information search behaviors differ based on knowledge of client’s preference and in the presence of accountability from an expected PCAOB inspection. I also investigate whether differences in auditors’ information search behaviors influence documentation quality, which is the outcome of greatest concern to the PCAOB. I hypothesize and find a client preference effect on information search type such that auditors with knowledge of the client preference consider guidance associated with the client’s preference longer than those without knowledge of the client’s preference. Contrary to expectations, PCAOB accountability pressure does not influence information search depth. with respect to documentation quality, I find that auditors engaged in a more information-focused search have higher documentation quality. Further, as expected, auditors who initially engage in a decision-focus and deep search have higher documentation quality than those auditors who initially engaged in a decision-focused but shallow search.
- The Changing Role and Responsibilities of Audit Committees in the United States
- The corporate form that developed in the early 20th century created enormous pressure for corporate governance mechanisms to curb the power of corporate managers. Berle and Means, legal pluralists, warned about concentrating economic power in the hands of a small but powerful class of professional managers. They claimed this "new form of absolutism" required governmental oversight and viewed boards of directors as part of management, rather than monitors for shareholders. The Securities and Exchange Commission (SEC) proposed that corporations establish a special board committee, made up of "nonofficer members" in response to the McKesson & Robbins scandal of the late 1930s. My dissertation examines the evolution of the U.S. corporate audit committee through three specific time periods: (1) 1920-1954; (2) 1955-1986; and (3) 1987 to the passage of the Sarbanes-Oxley Act of 2002. My purpose is to determine if evolution of the audit committee throughout these periods has been a reform continually couched in symbolism or whether the audit committee concept has evolved into real reform, allowing proper corporate governance and mitigation of unchecked corporate power. My analysis is a traditional empirical analysis, relying on both primary and secondary sources to develop a coherent ordering of facts. I use narrative in a narrow sense as my historical methodology, examining patterns that emerge and interpreting facts to develop a clear understanding of demands for and uses of audit committees. I use a holistic approach in studying the data, using narrative to show how these patterns ensue from the historical data.
- Effects of Auditor-provided Tax Services on Book-tax Differences and Investors’ Mispricing of Book-tax Differences
Access: Use of this item is restricted to the UNT Community.
In this study, I investigate the effect of auditor-provided tax services (ATS) on firms’ levels of book-tax differences and investors’ mispricing of book-tax differences. The joint provision of audit and tax services has been a controversial issue among regulators and academic researchers. Evidence on whether ATS improve or impair the overall accounting quality is inconclusive as a result of the specific testing circumstances involved in different studies. Book-tax differences capture managers’ earnings management and/or tax avoidance intended to maximize reported financial income and to minimize tax expense. Therefore, my first research question investigates whether ATS improve or impair audit quality by examining the relation between ATS and firms’ levels of book-tax differences. My results show that ATS are negatively related to book-tax differences, suggesting that ATS improve the overall audit quality and reduce aggressive financial and/or tax reporting. My second research question examines whether the improved earnings quality for firms acquiring ATS leads to reduced mispricing of book-tax differences among investors. Recent studies document that despite the rich information about firms’ future earnings contained in book-tax differences, investors process such information inefficiently, leading to systematic pricing errors among firms with large book-tax differences. My empirical evidence indicates that ATS mitigate such mispricing, with pricing errors being lower among firms acquiring ATS compared with firms without ATS. Collectively, these results support the notion that ATS improve audit quality through knowledge spillover. Moreover, the improved earnings quality among firms acquiring ATS in turn helps reduce investors’ mispricing of book-tax differences.
- The Effects of Goal Difficulty and Monitoring Frequency on Effort and Risk Taking Decisions
- Management control systems perform a vital role in facilitating the accomplishment of organizational objectives. To effectively align the objectives of employees with those of the organization, firms balance multiple control mechanisms to encourage organizationally desired behaviors and discourage undesired behaviors. The purpose of my dissertation was two-fold. First, I assessed how changes in monitoring frequency influenced employee behaviors and the overall function of the management control system. Second, I investigated the effects of stretch goals on behavior to determine whether stretch goals can lead to harmful behaviors and whether continuous monitoring can mitigate these behaviors. Results suggest that individuals exert more effort when assigned a stretch or difficult goal compared to an easy goal. My study also finds that stretch goals can be harmful because of their effect on risk taking, goal commitment, and job insecurity. Finally, results indicate that accountability mediates the monitoring frequency-risk taking relationship such that continuous monitoring increases accountability and accountability decreases risk taking. However, the ability of monitoring frequency to decrease risk taking may depend on numerous factors. Results from this study allow practitioners to understand the potential benefits and drawbacks of implementing continuous monitoring systems and the combined effects of using these systems in conjunction with compensation systems. Consequently, this study highlights necessary considerations for practitioners during the implementation continuous monitoring systems. The study also informs practitioners of the potentially harmful effects of stretch goals, the conditions under which they occur, and the possible ways to mitigate these effects.
- An Experimental Examination of the Effects of Fraud Specialist and Audit Mindsets on Fraud Risk Assessments and on the Development of Fraud-Related Problem Representations
- Fraud risk assessment is an important audit process that has a direct impact on the effectiveness of auditors' fraud detection in an audit. However, prior literature has shown that auditors are generally poor at assessing fraud risk. The Public Company Accounting Oversight Board (PCAOB) suggests that auditors may improve their fraud risk assessment performance by adopting a fraud specialist mindset. A fraud specialist mindset is a special way of thinking about accounting records. While auditors think about the company's recorded transactions in terms of the availability of supporting documentations and the authenticity of the audit trail, fraud specialists think instead of accounting records in terms of the authenticity of the events and activities that are behind the reported transactions. Currently there is no study that has examined the effects of the fraud specialist mindset on auditors' fraud risk assessment performance. In addition, although recent studies have found that fraud specialists are more sensitive than auditors in discerning fraud risk factors in situation where a high level of fraud risk is present, it remains unclear whether the same can be said for situation where the risk of fraud is low. Thus, the purpose of my dissertation is to examine the effects of fraud specialist and audit mindsets on fraud risk assessment performance. In addition, I examined such effects on fraud risk assessment performance in both high and low fraud risk conditions. The contributions of my dissertation include being the first to experimentally examine how different mindsets impact fraud-related judgment. The results of my study have the potential to help address the PCAOB's desire to improve auditors' fraud risk assessment performance though the adoption of the fraud specialist mindset. In addition, my study contributes to the literature by exploring fraud-related problem representation as a possible mediator of mindset on fraud risk assessment performance. I executed my dissertation by conducting an experiment in which mindset (fraud specialist or audit) was induced prior to the completion of an audit case (high or low in fraud risk). A total of 85 senior-level accounting students enrolled in two separate auditing classes participated in my study. The results from my experimental provide empirical support that it is possible to improve auditors' fraud risk assessment through adapting the fraud specialist mindset. My study also provides preliminary evidence that individuals with the fraud specialist mindset developed different problem representations than those with the audit mindset.
- An Experimental Examination Of The Effects Of Goal Framing And Time Pressure On Auditors’ Professional Skepticism
- Professional skepticism is a critical component of audit practice and current auditing standards direct auditors to remain skeptical throughout the duration of each audit engagement. Despite the importance and prevalence of an emphasis on professional skepticism throughout auditing standards, evidence indicates that auditors often fail to exercise an appropriate degree of professional skepticism. Prior accounting research suggests that auditors’ professionally skeptical behavior is affected by individual personality traits as well as situational (state) influences, whereby both factors contribute to auditor professional skepticism. Yet, prior research has primarily focused on trait skepticism; and little research to date has investigated the concept of state skepticism. The purpose if this research study is to experimentally investigate the impact of time pressure and trait skepticism on state skepticism, and to test a potential debiasing procedure on the impact of time pressure on state skepticism. In addition, this study examines the influence of both skepticism types on skeptical behavior.This research offers several contributions to accounting literature and practice. First, I contribute to the existing debate regarding the influences of professional skepticism by providing evidence that professional skepticism may be categorized as a temporary state, induced by situational aspects, in addition to being classified as an enduring trait. Second, I identify certain situational conditions which create differences in the level of state professional skepticism exhibited within an auditing context. Lastly, my findings may also be important to audit firms as they consider tools within their training arsenal equipped to promote an appropriate level of professional skepticism among employees. If auditor skepticism can be influenced by the frames they are provided, then audit firms may create an environment that promotes consistency in auditors’ application of professional skepticism, simply by engaging in goal framing.
- The Impact of Social Learning and Social Norms on Auditor Choice
- The purpose of this dissertation is to explore the influences of industry dynamic factors (e.g., peer selections) on a client’s subsequent decision to select the type of auditor (e.g., Big N versus non-Big N), following auditor turnover. More specifically, drawing on social norms and social learning theories, I develop testable implications and investigate whether and how industry dynamics have an incremental power in explaining auditor choice beyond traditional firm-specific variables documented in prior research. Using a large sample from years 1988 – 2012, I find that clients are more likely to imitate their industry peers’ prior selections to select the type of their succeeding auditors, consistent with the implications of social learning theory. I also find that clients in industries with stronger industry norms, as measured by a greater proportion of clients audited by Big N auditors in an industry, are more likely to select Big N auditors as their succeeding auditors, consistent with the implications of social norms theory. To my best knowledge, this is the first study to explore the impact of social dynamics measured at the industry level on auditor selection and provide large-sample evidence on the relations between industry dynamics and auditor selection at the firm level. Findings of this study provide insights into the dynamic process of auditor selection in which companies do not make auditor-selection decisions in isolation of one another as often posited in existing literature, contribute to the research on the determinants of auditor choice by incorporating industry dynamics into an agent-principal model, and provide a more comprehensive view of the phenomenon of auditor selection.
- A Re-examination of the Dilution of Auditor Misstatement Risk Assessments: An Experimental Study of the Impact of Client Information Type, Workload, and PCAOB Guidance on Dilution
- Many external parties such as investors, creditors, and regulatory agencies, use a company’s financial statements in their decision-making. In doing so, they rely on audit opinions on whether financial statements are fairly stated. However, evidence suggests that there are factors in the audit environment that influence auditor judgments. For example, nondiagnostic client information dilutes auditor judgments when compared to judgments based on diagnostic information alone, especially for less experienced auditors (Hackenbrack 1992; Hoffman and Patton 1997; Glover 1994; Shelton 1999). High time pressure conditions mitigate this effect by refocusing auditor attention toward relevant client information, therefore reducing the impact of nondiagnostic information (Glover 1994, 1997). This research study examines other common audit environment factors to determine if they too influence audit judgment results. An online questionnaire of 149 auditors, CPAs and other accounting professionals indicate that the inclusion of nondiagnostic client information results in a significant change in auditor judgments. The direction of this change follows a theorized pattern; risk assessments that were initially high are reduced, while those that were initially low are increased. Significance was not consistently found for a workload and PCAOB effect on auditor judgment. However, a comparison of the absolute value of dilution effect means across conditions reveals some trending for the proposed unwanted effect of high workload, and the beneficial effect of PCAOB guidance. These results have important implications for auditing research and practice. It extends previous archival research on workload effects and uses a unique questionnaire design to reexamine workload pressures in a behavioral setting. The results of hypothesis testing on workload pressure and PCAOB guidance, although lacking consistent statistical significance; exhibit trends that agree with proposed theoretical relationships. Tests on the effects of nondiagnostic information show strong statistical support for previous studies in the area of psychology and audit. This study’s greatest contribution suggests that audit pressures do not produce equivalent effects on auditor judgment; time pressure improves audit judgment, while workload pressure does not (Glover 1994, 1997). These results can be explained by examining the relationship between stress and audit judgment performance (Choo 1995, Yerkes and Dodson 1908). Different types and different degrees of audit pressures may correspond to different levels of audit pressure. Low to moderate levels of audit pressure, such as the level of time pressure used in Glover’s (1994, 1997) study improve audit performance. Higher audit pressures, such as high workload during an auditor’s busy season, may lower audit performance.
- Regulation and Political Costs in the Oil and Gas Industry: An Investigation of Discretion in Reporting Earnings and Oil and Gas Reserves Estimates
- This study investigates the use of discretion by oil and gas companies in reporting financial performance and oil and gas reserve estimates during times of high political scrutiny resulting from increases in energy prices. Hypotheses tested in prior literature state that companies facing the risk of increasing taxes or new regulations reduce reported earnings to reduce this risk. This study uses a measure of high profitability (rank order of return on assets relative to industry peers) to identify oil and gas companies more likely to manage earnings during the period from 2002 to 2008. Two measures of discretionary accruals (total and current discretionary accruals), and a measure of discretionary depreciation, depletion, and amortization (DDA) were used as indicators of discretion exercised in reporting earnings. Data on oil and gas reserve disclosures was also hand-collected from Forms 10-K to investigate whether managers use reserve estimate revisions to reduce reported earnings through increasing the annual depletion expense. Results suggest that both oil and gas refining and producing firms use negative discretionary accruals to reduce reported earnings. Results also indicate that profitability is an important determinant of the use of negative discretionary accruals by these companies regardless of the time period examined. There is also evidence that oil and gas producing firms opportunistically revise their oil and gas reserve estimates to increase depreciation, depletion, and amortization expense during periods of high oil prices.
- Stable Book-Tax Differences, Prior Earnings and Earnings Persistence
- This study resolves divergent prior findings relating book-tax differences to future earnings, determines whether prior literature has missed relationships between different types of book-tax differences and pre-tax and/or after-tax income, and investigates prior earnings as a factor contributing to the observed relationships. As past research has found that some firms have large book-tax differences over several years, this study separates these firms with large stable book-tax differences from others with large book-tax differences (non-stable) when investigating the link between large book-tax differences and future earnings. Finally, this study investigates whether the relationship between book-tax differences and future earnings reflects information about prior earnings and finds that prior earnings growth explains much of the lower persistence found for firms with large book-tax differences.
- A Study of Firm Location to Examine Disclosures and Governance Using a Dual Approach: Quantitative Analysis Based upon the Sarbanes-Oxley Act of 2002 and Qualitative Analysis of the Annual Report’s Management Discussion and Analysis
- The purpose of this dissertation is to investigate the effect of U.S. firms’ geographic location, whether urban or rural, on their corporate disclosure and governance practices. An “urban” firm is one that is headquartered in a large metropolitan area; whereas, a “rural” firm is one that is headquartered some distance from any metropolitan area. Specifically, the study examines whether there are different stock market reactions to urban and rural firms around key event dates relative to the enactment of the Sarbanes-Oxley Act (SOX) on July 30, 2002. Also, the readability and linguistic style in the Management Discussion and Analysis (MD&A) section of public company’s annual reports (Form 10-K) to the Securities and Exchange Commission (SEC) are investigated to determine whether urban and rural firms communicate information differently to investors.
- Tax Compliance in a Social Setting: the Influence of Norms, Perceptions of Fairness, and Trust in Government on Taxpayer Compliance
- Many taxing authorities, including those in the United States (U.S.), rely on voluntary tax compliance and continually search for ways to increase tax revenues. Most of these methods are costly and labor intensive, such as audits and penalties for noncompliance. Prior tax compliance research has heavily investigated the influence that economic factors, such as tax rates and penalties, have on individual compliance intentions. However, economic models fail to fully predict individual tax compliance. Psychology literature suggests that social factors may also play an important role in individual tax compliance decisions. The purpose of this study is to examine the influence that social and psychological factors have on individuals' tax compliance intentions. Specifically, a model of taxpayer compliance is hypothesized that suggests that norms, perceived fairness of the tax system, and trust in government have a significant influence on compliance intentions. Results of a survey of 217 U.S. taxpayers found support for the influence of social factors on tax compliance. This research concludes that social norms have an indirect influence on compliance intentions through internalization as personal norms. Specifically, as the strength of social norms in favor of tax compliance increase, personal norms of tax compliance also increase, and this leads to a subsequent increase in compliance intentions. This dissertation also finds that trust in government and the perceived fairness of the tax system have a significant influence on compliance intentions. Supplemental analyses indicate that trust in government fully mediates the relationship between perceived fairness of the tax system and compliance intentions. This research offers several contributions to accounting literature and provides valuable insight for taxing authorities. First, this study examines taxpayer compliance from a psychological, rather than an economics driven, perspective. The suggested model of taxpayer compliance posits that social norms have a significant influence on compliance intentions. This information may help taxing authorities develop less costly and more effective strategies for increasing taxpayer compliance. This study also examines the influence that perceived fairness of the tax system has on compliance intentions. This is a widely debated topic in the media and social settings and may have a particularly strong influence on compliance intentions during these times of political and social arguments regarding tax equity. Finally, trust in government around the world has seen a continual decline. The results indicate that decreased trust in government and decreased perceived fairness of the tax system lead to decreased intention to comply with tax laws. Such information may help governments understand actions they can take to improve tax compliance.
- What Did the Client Say? Auditor Memory of a Client Inquiry: a Study of Encoding Style and Note Taking
- Client inquiry is a fundamental procedure for gathering audit evidence. Since inquiries are not audio- or video-recorded in practice, auditor memory is vital to the accuracy of evidence gathered in this manner. Due to the potential for error during memory encoding and retrieval, the effect of memory on judgment, and the cognitive complexity of conducting a face-to-face inquiry, examining factors affecting auditor memory of client inquiries is important. In this dissertation, I examine two factors likely to affect auditor memory of a client inquiry. First, encoding style is a low-level cognitive function representing how much stimuli an individual perceives before applying prior knowledge (schemata) to assist with encoding to long-term memory, affecting information noticed and remembered. Differences in auditors’ encoding style may explain variance in memory accuracy of evidence gathered from a client inquiry. Second, audit professionals often make hand-written or typed notes during client inquiries, and subsequently review the notes, which may affect memory. To address these issues, I first gather interview evidence from six professional auditors to determine how practicing auditors plan, prepare for, conduct, and document evidence from client inquiries. I then develop and execute a video-based experiment with 33 senior auditor participants, 23 masters-level accounting students, and 47 undergraduate-level accounting students to investigate whether encoding style and note taking affect auditor memory accuracy of, and audit judgments resulting from, a client inquiry. I find multiple significant results. First, I find that encoding style affects memory accuracy such that auditors quickly utilizing prior knowledge during an inquiry results in greater memory accuracy than auditors slowly utilizing prior knowledge. This finding suggests that quickly utilizing prior knowledge helps auditors to manage the cognitive complexity of a client inquiry. Second, I find that participants who take notes during an inquiry, and subsequently review his or her notes taken, have lesser memory accuracy than participants who do not take notes. This finding suggests note taking distracts participants during an inquiry, hindering memory accuracy. Third, I find that memory accuracy affects audit judgments such that memory accuracy is positively related to judging the client’s explanation as reasonable, and negatively related to judging the probability of material misstatement and likelihood to increase substantive testing. Finally, I find that encoding style has a significant indirect effect on audit judgment through memory accuracy. This study makes several contributions to audit practice and academic literature. First, this study contributes a discussion of how auditors conduct client inquiries based on interviews with very-experienced auditors from multiple accounting firms, representing various firm sizes. No prior research provides qualitative evidence of how auditors conduct inquiries. Second, this study contributes to the audit literature by finding that encoding style and note taking affect auditor memory accuracy of a client inquiry. Although the findings do not support hypotheses suggested by theory, the findings suggest further research in the topic is warranted. Third, this study contributes to the psychology literature by finding that encoding style affects memory in an information-robust, professional context, extending the generalizability of the encoding style construct beyond the abstract tasks with which it has been previously examined.