Newsletter March 2021

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Latest publications:

• FAR Working Paper on "Network structure and auditor compensation: evidence from a bipartite network"
  
• FAR Practice Note on “Can audit committee support improve auditors’ application of professional skepticism?”
• Professional Paper - error or fraud (Dutch)

Also in this newsletter

• Online FAR Masterclass by Prof. dr. Christian Hofmann on "Internal control quality and audit quality" on 18 May 2021
• Online FAR International Conference "Auditing - The Human Factor (part 1)" on Monday 21 June 2021
• FARview podcast #14 with Sebastian Kuhn
• Recording online FAR Masterclass by Prof. dr. Ann Vanstraelen (5 March 2021) available
• Take-aways online FAR Masterclass Prof. dr. Ann Vanstraelen (5 March 2021)
• Maandblad voor Accountancy en Bedrijfseconomie (MAB; a Monthly Journal of Accountancy and Business Economics) published a summary of the round table on Audit Quality Indicators (AQI's) (Dutch)
• MAB practical note on "The measurement of audit quality in the Netherlands"
• Upcoming events – save the dates!

Latest publications

We have three publications available on our website

The first publication is a FAR Working Paper and is entitled "Network Structure and Auditor Compensation: Evidence from a Bipartite Network".

This working paper was written by the team of Reggy Hooghiemstra, Floor Rink, Dennis Veltrop and James Zhang.

The paper investigates the relationship between the extent of knowledge flow during audit practice (measured by the local network clustering coefficient) and auditor compensation. The team uses a unique bipartite (i.e., two mode) network composed of individual auditors assigned to different audit assignments of an accounting firm for a full year to determine the local network clustering coefficient and auditor compensation data from the personnel files of this accounting firm. Based on social network theory and determinants of pay in labor economics, the team found a positive relationship between local network clustering and auditor pay that was both statistically and economically significant.

Click here for the full paper.

The second publication is a FAR Practice Note and is entitled "Can Audit Committee Support Improve Auditors' Application of Professional Skepticism?"

This practice note was written by the team of Joe Brazel, Anna Gold, Justin Leiby and Tammie Schaeffer.

Despite the recognized importance of professional skepticism, the inability of auditors to consistently demonstrate a sufficient degree of professional skepticism remains a globally recognized problem. In this study, the research team seeks to better understand the role of audit committees, which oversee the audit process and can help improve auditors' application of skepticism. A survey of auditors found that audit committee support varies significantly across audit engagements, that audit committee support is multifaceted, and that support is often not conveyed to lower-level members of the audit team.

Based on the findings, the team experimentally investigated whether and how explicitly communicating audit committee support to the entire engagement team (by the partner or audit committee chair) affects auditors' skeptical judgments and actions.  It was found that an explicit expression of support of the audit committee by the audit partner can enhance auditors' skeptical judgments, whereas such an expression of support by the audit committee chair does not. The findings point to the crucial role audit partners can play in improving auditors' application of professional skepticism.

Click here to read the full paper.

The third and final publication is a Professional Paper and is entitled "Errors or Fraud", written by Luc Quadackers

A manager who commits fraud in the annual accounts will try to hide his deception. If the auditor discovers the corresponding discrepancy, what does the manager say to avoid being labelled a fraudster? The most likely scenario is that the manager will present the discrepancy as an error made unknowingly. And it is not unlikely that the accountant will then agree to this statement, with all its consequences. But how does a manager get the accountant to do this? The answer is so obvious that it has long been underestimated: the manager prefers not to take action.

Click here to read more.

Online FAR Masterclass by Prof. dr. Christian Hofmann on "Internal control quality and audit quality", on 18 May 2021

On Tuesday, 18 May 2021, from 3:30 - 5:00 pm CET, FAR will organize an online Masterclass on "Internal control quality and audit quality".

Registration is still open via Eventbrite, via this link and closes on 17 May 2021, 11:00 pm CET.

What is this Masterclass about? 

The study of Christian Hofmann and his team is aimed at investigating two interrelated themes: (1) Understanding the relevance of internal control quality for audit quality, and (2) identifying an information channel that (may) allow auditors to more accurately and efficiently assess internal control quality.

Please note that this Masterclass will be in English.

Register now

Online FAR International Conference "Auditing - The Human Factor" (part 1) on Monday 21 June 2021

On Monday 21 June 2021 from 12.30 till 5.30 pm CET, we will be hosting another interesting online version of our International Conference. The exact program for the day is still being worked on, but we can already reveal that there will be presentations by:

• Professor Ann Vanstraelen (Maastricht University) & Dr. Ulrike Thürheimer (UNSW, Sidney) on The auditor’s evaluation of misstatements – exploration, drivers, and consequences

• Professor Reggy Hooghiemstra (University of Groningen) on Why some auditors thrive while others struggle – The effects of multiple team membership on audit quality

• Professor Eddy Cardinaels (KU Leuven) & Professor Kristof Stouthuysen (Vlerick Business School) on How auditors' internal and external interactive relationships impact their judgment and decision-making

• Professor Shane Dikolli (Darden School of Business, University of Virginia) over "CEO behavioral integrity, auditor responses, and firm outcomes" 

You can now register for the online Conference.

FARview podcast #14 with Sebastian Kuhn

The 14th episode of our FARview series is now online. In this podcast we talk to Sebastian Kuhn (PhD student at Ludwig-Maximilians-Universität München), about the relationship between internal control quality and audit quality and how financial analysts can contribute to audit quality.

Kuhn explains the two ‘work packages’ that are part of the FAR research project "Internal control quality and audit quality". The first package is ‘understanding the relevance of internal control quality for audit quality’. The second package is about ‘identifying financial analysts as an information channel that may allow auditors to assess internal control quality more accurately and efficiently’. You can listen to the podcast on our YouTube channel or on SoundCloud.

More information on the research project can be found on our website.

Recording of the online FAR Masterclass by Prof. dr. Ann Vanstraelen available

On Friday, March 5, 2021, Ann Vanstraelen (Professor of Accounting and Assurance Services at Maastricht University) presented an online FAR Masterclass on "The drivers and impact of audit committee involvement on audit quality."

The edited version of this Masterclass is now available; you can watch it here.

More information about her project can be found here.

Take-aways from the online FAR Masterclass with Prof. Dr. Ann Vanstraelen

The research of Vanstraelen’s team goes beyond the regulated, functional characteristics of the audit committee (like number of members, member age, independence of the committee members etc.).
The study gathers both survey data from partners and their client’s audit committees as well as archival data concerning the engagements from the audit firms.The preliminary results are promising. Based on the survey responses, analyses show that both audit partners and audit committee members associate the relative power of the audit committee (as opposed to management) and social cohesion within the audit committee to higher audit committee involvement.

Read the take-aways here.

Maandblad voor Accountancy en Bedrijfseconomie (MAB; a Monthly Journal of Accountancy and Business Economics) published a summary of the round table on Audit Quality Indicators (AQI's) (Dutch)

As previously indicated in our newsletter, a roundtable meeting was held on January 25 on the search for suitable audit quality indicators, or AQIs. No fewer than four project groups of the 'Quartermasters' for the Future of Accountancy are currently working on the development of AQIs.

The four focus areas of the AQI project groups are:
1. File quality/output;
2. Quality control system;
3. Culture, governance and compensation; and
4. Legal embedding and disclosure.

But does audit quality actually allow itself to be captured in AQIs? What place can they occupy in the assessment of quality? Are audit quality and AQIs the same for different stakeholders? And above all: how do AQIs fit into the bigger story of auditor and audit firm, for example in the transparency reports? All these questions were addressed during the roundtable discussion organized by the Monthly Journal of Accountancy and Business Economics (MAB) and the Foundation for Auditing Research.

You can read the full summary here.

MAB practical note on "The measurement of audit quality in the Netherlands"

In a special issue of MAB on Audit Quality Indicators, our colleague Tjibbe Bosman also contributed with a practice note on "The measurement of audit quality in the Netherlands: a practical note".

Several committees, institutions and practitioners are currently working on defining appropriate and reliable audit quality indicators (AQIs). The experiences of the Foundation for Auditing Research (FAR) in collecting data on audit quality may be useful in the search for appropriate and reliable AQIs.
In this paper, Tjibbe Bosman discusses different types of audit (quality) measures and their availability in the Netherlands. Furthermore, he discusses the (potential) informational value, limitations, and recommendations for a wide range of audit quality measures and sources.

You can read the practical note here.

Upcoming events – save the dates!

Online FAR Masterclass – Prof. Dr. Christian Hofmann
On Tuesday 18 May 2021 FAR will host an online Masterclass on "Internal control quality and audit quality" by Prof.dr. Christian Hofmann.
This Masterclass is open for registration. You can read more earlier in this newsletter.

FAR International Conference 2021
Since the circumstances surrounding the COVID-19 pandemic have not improved enough, we have decided to organize another online FAR conference, as we did last year, on Monday, June 21. Last year proved to be a successful event, so we are very much looking forward to this year's edition. Registration is now open, see also earlier in this newsletter.

Do you have suggestions on how to improve our newsletter or news you would like to share with us? Please let us know by sending an email to info@foundationforauditingresearch.org