Newsletter November 2020

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Latest publication:

FAR Practice Note about "Internal control quality and audit quality: the role of financial analysts" by Prof. dr. C. Hofmann is now available

Also in this newsletter:  

• Online FAR Masterclass on 4 December 2020 by Professor Mark Peecher on “Assessing and Addressing Fraud Risk Based on Earnings Calls"
  
• FAR Young Professionals - Young Academics Brown Bag Seminar on 13 November 2020
• The Foundation for Auditing Research, today and tomorrow
• Upcoming events – save the date! 

FAR Practice Note about "Internal control quality and audit quality: the role of financial analysts" by Prof. dr. C. Hofmann is now available
In this practice note you can read about the study of Prof. dr. Christian Hofmann and his team in which they study the role of internal control quality during the audit process and propose a new source which auditors can use to gain information on control risk.
Their study aims at understanding the relevance of internal control quality for audit quality and identifying an information channel which may help auditors to assess internal control quality more accurately and efficiently. 

You can read the full practice note via this link.

Online FAR Masterclass on 4 December 2020 by Professor Mark Peecher on “Assessing and Addressing Fraud Risk Based on Earnings Calls”
On Friday 4 December 2020, from 3:30 – 5:00 pm CET, FAR will organize an online Masterclass with Mark Peecher, who is a Professor at Illinois Gies College of Business.

Registration is via this link and closes on 3 December 2020 11:00 pm CET.

What is this Masterclass about?
Listening to earnings calls has the potential to improve auditors’ exercise of professional skepticism, as these calls can reveal signs of aggressive financial reporting or even fraud. Prior research shows that experienced audit partners in the United States can detect signs of deception in earnings calls at rates well above chance, but only if instructed to watch for signs of dissonance in management as opposed to watch for signs of fraud. Thus, while experienced auditors appear to have an ability to detect signs of deception, they appear to subconsciously suppress this ability due to the aversive nature of fraud and disincentives for suspecting fraudulent financial reporting. A limitation of prior research is that the auditors were listening to earnings calls of non-clients, and it
could be that auditors psychologically are more reluctant to see and respond to fraud indicators at their clients.

The project team addresses this limitation and advances the literature by conducting a field experiment in which 184 auditors listen to their own clients’ earnings calls in the midst of audit engagements. They examine how auditors alter their assessment of the risk of material misstatement, including fraud risk, their plans for addressing these assessed misstatement risks, and the correlation between these two. Rather than focusing only on experienced audit partners, the team uses auditors with a wide range of audit experience. Further, they also use a control group of auditors listening to the same earnings calls for non-clients.  

Preliminary results indicate that what auditors think they learn from earnings calls differs markedly based whether or not they are instructed to focus on fraud indicators, focus on indicators of dissonance in managers, or both. They find that prompting auditors to focus on fraud actually reduces auditor concern about fraud risk unless accompanied also by a dissonance prompt. Prompting a focus on management dissonance, by contrast, results in an increase in auditors’ assessed risk of material misstatement and strengthens the correlation among assessing and addressing risk.

Please note that this Masterclass will be in English.

FAR Young Professionals - Young Academics Brown Bag Seminar
FAR currently co-finances 17 PhD positions to facilitate rigorous academic research with practical relevance in the auditing field by talented young academics. Several of these PhD candidates recently started with their research projects. On 13 November 2020, 22 young professionals and young academics met in an online brown bag seminar to give input on the research ideas of several PhD candidates.

In short presentations five junior researchers pitched their early stage research idea to practitioners and peers. They received a wide range of input and questions from the participants, to help them improve their research and its relevance to practice. Furthermore, all participants were asked to discuss topics they find important for FAR’s (future) research agenda. Several topics were discussed that are of interest for the young professionals and the future developments for the auditing profession.

The Foundation for Auditing Research, today and tomorrow

Towards the end of 2015, the Foundation for Auditing Research (FAR) started with a major ambition: to examine the work of auditors using internal data from the ten largest accountancy firms in the Netherlands. As of October 2020, we entered our second five-year term.

The idea of FAR was, and is, to advance scientific and practical knowledge in the field of auditing. In recent years more than 25 research groups have started at FAR, with a wide variety of projects. The researchers are affiliated with the world's best universities, including Harvard, University of Illinois, LMU Munich and Maastricht University. Through the projects, we answer questions ranging from the culture within the firms to analyses of factors influencing the effective execution of the audit; from the success in attracting the best people to the question of how well firms handle fraud detection; from quality management systems to the influence of commerce on quality; from processes leading to a going concern opinion to the role that international collaborative auditors play in the quality of the auditor's work.

You can read the full article here.

Upcoming events – save the dates!

Online FAR Masterclass – Professor Mark Peecher
On Friday 4 December 2020 FAR will host an online Masterclass by Mark Peecher on “Improving audit quality by enhancing auditor’s detection of markers of management deception”.

Registration is now open! You can read more in the second news item of this newsletter.

We are currently working on organizing Masterclasses in February and March/April, but in the meantime we want to inform you that we already have one scheduled in May: 

FAR Masterclass – Prof. Dr. Christian Hofmann
On Friday 28 May 2021 FAR will host a Masterclass with Christian Hofmann

FAR International Conference 2021
We hope to see you all live next year at the FAR Conference on 21 and 22 June 2021 in Breukelen, the Netherlands. Please save the date in your calendar!”¯ 

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