2023B03 - Fostering Audit Quality through Social Error Learning: Investigating Drivers and Consequences in Large and Mid-Sized Firms (Prof. dr. D. Breesch)

Why?

Delivering high-quality audits is essential to serve the public interest. Results from recent inspection reports (FRC, IFIAR, PCAOB), however, show that the overall rate of deficiencies in the audit work performed still remains high. Standards setters increasingly emphasize organizational aspects, such as the firm’s culture, tone-at-the-top, and root cause analyses, to support high-quality audits (IAASB, 2020a, 2020b; PCAOB, 2022a). This emphasis on culture as a facilitating condition for learning from errors is also mirrored by the Dutch professional body (NBA) that specifically encourages audit firms to develop a “learning organization with an ‘open’ culture where errors can be openly discussed” (NBA, 2019, p. 1) and in which it is “allowed to make mistakes; as these mistakes are opportunities for learning” (NBA, 2021, p. 4). The Dutch regulator concluded that learning from errors can still be developed further (AFM, 2020).

What?

This project will especially focus on quantifying the relationship between social learning from errors and audit quality, considering the role that a firm’s error management climate (EMC) plays in fostering learning behaviors in individual auditors, addressing three key gaps in extant research. First, despite suggestions from research as well as regulators that learning from errors may be a critical mechanism for long-term improvement of audit quality, no study to date has investigated the relationship between the auditor’s social learning (i.e., help-seeking) behavior and audit quality (i.e., detecting, analyzing and reporting potential material misstatements) (Smeets et al., 2022).

Second, this project will also investigate to what extent individual auditor characteristics (auditor’s personality traits) and firm size might drive this social learning from errors. To date, very little is known about how individual auditor characteristics and more specifically auditors’ personality traits might drive error learning. Literature in psychology and organizational behavior provides however ample evidence that personality is an important driver in explaining individuals’ professional behavior and performance (i.e., Naveh et al., 2015; Kerckhofs et al., 2023a, 2023b).

Finally, research on EMC and learning behavior in audit firms has mainly considered larger (Big 4) firms. There are, however, reasons to believe that the conditions for EMC and the learning environment are different in smaller audit firms compared to larger firms: “errors in the Mid-Market segment may be less consequential and/or visible, possibly leaving more opportunities for the emergence of a ‘learning organization’” (FAR Call 2023).