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FAR Practice Note - The Effect of Audit Culture on Audit Quality Prof. dr. Jasmijn Bol Prof. dr. Isabella Grabner Dr. Katlijn Haesebrouck Prof. Mark E. Peecher PhD Details
 

In this research note, we discuss why designing a management control system that directs effort towards audit quality is so tricky. We discuss the different ways that audit firms motivate effort and highlight “culture controls” where, through selection and socialization, audit firms create a workforce of auditors that value and, therefore, work hard to ensure audit quality. We also discuss the importance of directing auditors’ efforts towards audit quality and distinguish three critical elements. Auditors must: (1) understand the importance of audit quality, (2) possess the right tools and capabilities, and (3) prefer those tasks that lead to audit quality. We share some preliminary results of our research that examines how successful five Dutch audit firms are at this non-trivial task. This provides firms with the knowledge to critically examine and improve their own current management control system. Our study is relevant for Dutch audit firms as well as for auditors all over the world.

 

Authors

Prof. dr. Jasmijn Bol

Professor Jasmijn Bol teaches Accounting and Controls for Operational Risk, a master’s-level class about risk and control systems at Tulane University, Freeman School of Business, USA. Her classes go beyond lectures and textbooks, incorporating interactive pedagogy and lessons drawn from her own research.

Born and raised in the Netherlands, Professor Bol has studied at universities in The Netherlands, Spain and in the U.S., and she consistently presents her research to communities across the globe. Professor Bol’s research focuses on subjectivity in compensation contracting, and she has authored and co-authored several articles that have appeared in prestigious scholarly journals. She has also earned awards for her teaching and research.

Prof. dr. Isabella Grabner

Isabella Grabner is a Professer of Management Control and Strategy Implementation at WU (Vienna University of Economics and Business).

She holds a Master’s degree in International Business from the University of Vienna and a PhD in Business Administration from WU Vienna (Title of dissertation "Creativity and Control: Conflicting Objectives?"). Before joining WU Vienna, she was a tenured faculty member at the Department of Accounting and Information Management at Maastricht University School of Business and Economics. She has also worked as visiting researcher at Emory University Goizueta Business School and the University of Technology Sydney.

Dr. Katlijn Haesebrouck

Assistant Professor Accounting & Information Management, School of Business and Economics, Maastricht University

Prof. Mark E. Peecher PhD

Mark E. Peecher, CPA, is a professor of accountancy and a Deloitte Teaching Fellow at the University of Illinois, specializing in behavioral auditing and accounting research. He holds a bachelor’s, master’s, and Ph.D. degrees in accountancy from Illinois. Prior to returning to his alma mater, he was a faculty member at the University of Washington. An active member in the AAA’s Audit Section, Mark currently serves as the Audit Section’s past president.

Professor Peecher’s business-press writings about auditing have appeared in The Wall Street Journal, and his scholarly writings have appeared in AccountingOrganizations & SocietyAuditing: A Journal of Practice & TheoryContemporary Accounting ResearchInternational Journal of AuditingJournal of Accounting ResearchOrganizational Behavior and Human Decision Processes, and The Accounting Review. He has presented his research at numerous conferences, consortia, and universities, and he has served on the editorial boards at Auditing: A Journal of Practice & TheoryThe Accounting Review, and Issues in Accounting Education. Mark enjoys teaching both undergraduate courses and doctoral seminars related to auditing. He particularly likes helping to mentor doctoral students, three of whom have won outstanding doctoral dissertation awards.


FAR Literature review - The Effect of Audit Culture on Audit Quality Dr. Katlijn Haesebrouck Prof. Mark E. Peecher PhD Prof. dr. Jasmijn Bol Prof. dr. Isabella Grabner Details
 

In 2014, the professional body for accountants in the Netherlands (NBA) indicated that audit quality did not live up to the public’s expectations. One of the main corrective measures suggested by the NBA was an improvement in audit culture (NBA, 2014). Although audit culture can be an important determinant of audit quality, the extant academic literature has not payed much attention to audit culture. This paper provides an overview of the literature on audit quality and audit culture as a determinant of audit quality.

Authors

Dr. Katlijn Haesebrouck

Assistant Professor Accounting & Information Management, School of Business and Economics, Maastricht University

Prof. Mark E. Peecher PhD

Mark E. Peecher, CPA, is a professor of accountancy and a Deloitte Teaching Fellow at the University of Illinois, specializing in behavioral auditing and accounting research. He holds a bachelor’s, master’s, and Ph.D. degrees in accountancy from Illinois. Prior to returning to his alma mater, he was a faculty member at the University of Washington. An active member in the AAA’s Audit Section, Mark currently serves as the Audit Section’s past president.

Professor Peecher’s business-press writings about auditing have appeared in The Wall Street Journal, and his scholarly writings have appeared in AccountingOrganizations & SocietyAuditing: A Journal of Practice & TheoryContemporary Accounting ResearchInternational Journal of AuditingJournal of Accounting ResearchOrganizational Behavior and Human Decision Processes, and The Accounting Review. He has presented his research at numerous conferences, consortia, and universities, and he has served on the editorial boards at Auditing: A Journal of Practice & TheoryThe Accounting Review, and Issues in Accounting Education. Mark enjoys teaching both undergraduate courses and doctoral seminars related to auditing. He particularly likes helping to mentor doctoral students, three of whom have won outstanding doctoral dissertation awards.


Prof. dr. Jasmijn Bol

Professor Jasmijn Bol teaches Accounting and Controls for Operational Risk, a master’s-level class about risk and control systems at Tulane University, Freeman School of Business, USA. Her classes go beyond lectures and textbooks, incorporating interactive pedagogy and lessons drawn from her own research.

Born and raised in the Netherlands, Professor Bol has studied at universities in The Netherlands, Spain and in the U.S., and she consistently presents her research to communities across the globe. Professor Bol’s research focuses on subjectivity in compensation contracting, and she has authored and co-authored several articles that have appeared in prestigious scholarly journals. She has also earned awards for her teaching and research.

Prof. dr. Isabella Grabner

Isabella Grabner is a Professer of Management Control and Strategy Implementation at WU (Vienna University of Economics and Business).

She holds a Master’s degree in International Business from the University of Vienna and a PhD in Business Administration from WU Vienna (Title of dissertation "Creativity and Control: Conflicting Objectives?"). Before joining WU Vienna, she was a tenured faculty member at the Department of Accounting and Information Management at Maastricht University School of Business and Economics. She has also worked as visiting researcher at Emory University Goizueta Business School and the University of Technology Sydney.

Crossing the Divide - Behavioral Research in Auditing Prof. dr. Olof Bik Details
 

Inaugural address of prof. dr. Olof Bik RA
Abridged version given in acceptance of the Professorship of Behavioral Research in Auditing at Nyenrode Business Universiteit on Tuesday September 17th, 2019.  

 

Authors

Prof. dr. Olof Bik

Olof Bik is professor Behavioral Research in Auditing at Nyenrode Business University. He is also a member of the daily board of the Foundation for Auditing Research (FAR). Bik worked in accounting practice for 18 years, since 2002 always in combination with a university appointment. He obtained his PhD at the University of Groningen with a dissertation on the effects of culture on accountant behavior.

Auditor Reporting for Going-Concern Uncertainty: Research Findings and implications for practitioners Prof. Marshall Geiger PhD Prof. dr. Anna Gold Prof. dr. Philip Wallage Details
 

The auditor’s decision regarding a going concern opinion (GCO) is among their most important judgments, as GCOs impact the client company, markets, financial statement users, and auditors themselves. Such a sensitive and complex judgement call requires expertise and experience. In the academic literature, GCO decisions are often seen as related to audit quality, and they are among the few observable outcomes of the audit that vary across engagements. In the last decades, academic researchers have spent considerable effort examining GCO decisions. We believe that audit practitioners can benefit from improved awareness of the insights that research has generated. In our complete report (Geiger, Gold, and Wallage, 2019), we review and synthesize 149 academic studies authored since 2013, the end of the previous synthesis by Carson et al (2013). In this practitioner note, we make a selection of what we deem the most interesting insights from our review, and discuss their implications for practice. We then report on our focus group engagement with audit practitioners where we obtained their perceptions regarding some the academic findings, the issues faced in making GCO decisions, as well as areas where additional research would be helpful.

Authors

Prof. Marshall Geiger PhD

CSX Chair in Management and Accounting Professor of Accounting University of Richmond

Prof. dr. Anna Gold

Anna Gold obtained her Ph.D. from the University of Amsterdam in 2004, worked as an assistant professor at Rotterdam School of Management, Erasmus University for six years and is currently professor at the Vrije Universiteit Amsterdam where she teaches Auditing at the BSc and MSc level, as well as PhD courses in Auditing and Experimental Methods. Anna’s research interests are in the judgment and decision-making area, primarily applied to the field of Auditing. Her research has focused on the impact of regulatory changes, on judgments and decisions of auditors and financial statement users. Her recent work focuses on how auditors and audit firms handle errors and whether varying the error management climate affects auditors’ error reporting willingness and audit firm learning. Anna’s work and her publications have appeared in a number of prestigious journals such as The Accounting Review, Accounting Horizons, Journal of Business Ethics, and International Journal of Auditing.

Prof. dr. Philip Wallage

Professor of Auditing at VU University Amsterdam and University of Amsterdam

A Synthesis of Research on Auditor Reporting on Going-Concern Uncertainty: An Update and Extension Prof. Marshall Geiger PhD Prof. dr. Anna Gold Prof. dr. Philip Wallage Details
 

Reporting on going-concern-related uncertainties remains one of the most challenging issues faced by external auditors. Even though professional standards do not hold external auditors responsible for predicting future events, such as the subsequent viability of audit clients, if an auditor refrains from issuing a going concern modified audit opinion (hereafter GCO) and the client company subsequently fails (referred to in the academic literature as a “type II” reporting error), the costs to the auditor in terms of increased litigation costs and loss of reputation are often substantial (Carcello and Palmrose 1994). At the same time, companies usually do not welcome a GCO from their auditor. For example, if an auditor renders a GCO to a financially distressed client, there is often concern that the GCO itself may precipitate, or at least accelerate, the financial distress of the already troubled company resulting in a self-fulfilling prophecy. Further, if an auditor renders a GCO to a client that subsequently survives (referred to in the academic literature as a “type I” reporting error), these clients are significantly more likely to switch to another auditor for their next audit (Geiger, Raghunandan and Rama 1998). It is not surprising, then, that audit practitioners, regulators and standard-setters around the world continue to grapple with this complex issue. As requested by the Foundation for Audit Research (FAR), the primary purpose of this research synthesis is to review and discuss the recent academic literature pertinent to the auditor’s decision to issue, or not issue, a GCO. Our review begins with research available after the going-concern research synthesis provided in Carson, Fargher, Geiger, Lennox, Raghunandan and Willekens (2013). We attempt to minimize the gap and the overlap in the research discussed in Carson et al. (2013) and our work. Further, in an attempt to be as comprehensive as possible, we do not limit our coverage to only published research, but also include well-developed working papers in the public domain, particularly if we determine they add significant contribution to the literature.

Authors

Prof. Marshall Geiger PhD

CSX Chair in Management and Accounting Professor of Accounting University of Richmond

Prof. dr. Anna Gold

Anna Gold obtained her Ph.D. from the University of Amsterdam in 2004, worked as an assistant professor at Rotterdam School of Management, Erasmus University for six years and is currently professor at the Vrije Universiteit Amsterdam where she teaches Auditing at the BSc and MSc level, as well as PhD courses in Auditing and Experimental Methods. Anna’s research interests are in the judgment and decision-making area, primarily applied to the field of Auditing. Her research has focused on the impact of regulatory changes, on judgments and decisions of auditors and financial statement users. Her recent work focuses on how auditors and audit firms handle errors and whether varying the error management climate affects auditors’ error reporting willingness and audit firm learning. Anna’s work and her publications have appeared in a number of prestigious journals such as The Accounting Review, Accounting Horizons, Journal of Business Ethics, and International Journal of Auditing.

Prof. dr. Philip Wallage

Professor of Auditing at VU University Amsterdam and University of Amsterdam

Practice Note: How is auditor commercialism related to audit quality? Prof. William Ciconte PhD Dr. Justin Leiby Prof. dr. Marleen Willekens Details
 

It is taken for granted that a fundamental conflict exists between auditors’ professional responsibilities and their commercial interests. While there is no direct evidence to support this widely held belief, it nonetheless fuels extensive, costly regulatory and standard-setting activities. We propose to examine whether auditors’ commercial and professional motivations actually conflict. Moreover, we argue that quality control mechanisms in audit firms—e.g., performance evaluation and technical consultation procedures—create conditions in which the two sets of motivations are likely mutually reinforcing.

Authors

Prof. William Ciconte PhD

Assistant Professor of Accountancy University of Illinois

Dr. Justin Leiby

Associate Professor of Accountancy and Professor Ken Perry Faculty Fellow University of Illinois

Prof. dr. Marleen Willekens

Full Professor of Accounting and Auditing at KU Leuven

Literature review: How is auditor commercialism related to audit quality and efficiency? Prof. William Ciconte PhD Dr. Justin Leiby Prof. dr. Marleen Willekens Details
 

Authors

Prof. William Ciconte PhD

Assistant Professor of Accountancy University of Illinois

Dr. Justin Leiby

Associate Professor of Accountancy and Professor Ken Perry Faculty Fellow University of Illinois

Prof. dr. Marleen Willekens

Full Professor of Accounting and Auditing at KU Leuven

Ten considerations for conducting Root Cause Analysis in auditing Prof. dr. Olof Bik Details
 

Root cause analysis is an established process in a number of industries and is a developing area in the audit profession. This practice note speaks to the question of what constitutes root cause analysis specific to the auditing profession (as varying root cause analysis methods may potentially be more or less effective within the auditing context). For audit firms (large and small) wanting to apply root cause analyses as part of their quality assurance systems, the following ten considerations are discussed that are relevant for effectively and efficiently producing root cause findings and recommendations concerning the improvement of audit quality:

  • Root cause analysis, when done properly, can be a powerful tool for collective team-based learning, designed to avoid blame and strengthen continuous improvement.
  • Root cause analysis is about understanding human behavior and judgement and decision making: things that go wrong, often happen in the same way as things that go right.
  • There is not one single root cause to “fix” in the complex organizational context of auditing: incidents may happen that are reasonably beyond management control.
  • Root cause analysis findings and recommendations are not always interventions: it is up to management to weigh recommendations and decide on their “organizational fit”
  • Root cause analyses should be rigorous enough to allow for “evidence-based-change” only: formulating effective actions is more difficult than finding problems.
  • Strong recommendations rely less on a change in human behavior, but are practical, sensible, achievable, and actually measurable as far as what can be implemented.
  • Root cause analysis is a collaborative and dialogic process requiring time, human behavior expertise, and communication skills across professional and social boundaries.
  • Interviewing audit staff that depend on personal performance and professional accountability in their career development is a specifically daunting task.
  • Next to audit deficiencies as ‘triggering events”, good quality analyses and analyzing ‘near misses’ result in richer and stronger root cause analyses.
  • Next to engagement level root cause analysis, more holistic thematic and audit firm level analyses most likely deliver deeper insight and better results.

Authors

Prof. dr. Olof Bik

Olof Bik is professor Behavioral Research in Auditing at Nyenrode Business University. He is also a member of the daily board of the Foundation for Auditing Research (FAR). Bik worked in accounting practice for 18 years, since 2002 always in combination with a university appointment. He obtained his PhD at the University of Groningen with a dissertation on the effects of culture on accountant behavior.

Practice note: Is the internal value of the external audit greater for owner-managed businesses than for public interest entities? Dr. Mahmoud Gad Dr. Robin Litjens RA Prof. dr. Jeroen Suijs Details
 

The research study by Gad, Litjens en Suijs relates to the question of the Foundation for Auditing Research whether there exists a need for ‘different audits for different purposes’. Does the external audit of a public interest entity require a different approach than the external audit of an owner-managed business? In order to answer this question, it is appropriate to analyze the differences in value of the external audit for a public interest entity versus an owner-managed business.

Authors

Dr. Mahmoud Gad

Lecturer, Lancaster University 

Dr. Robin Litjens RA

Assistant Professor of Accounting at Tilburg University

Prof. dr. Jeroen Suijs

Professor of Financial Accounting at Erasmus University Rotterdam

Practice note: Is voor DGA-ondernemingen de interne waarde van de externe controle groter dan voor organisaties van openbaar belang? (Dutch) Prof. dr. Jeroen Suijs Dr. Mahmoud Gad Dr. Robin Litjens RA Details
 

Het onderzoek van Gad, Litjens en Suijs sluit aan op de vraag vanuit de Foundation for Auditing Research of er behoefte bestaat aan ‘different audits for different purposes’. Moet en kan de audit voor een organisatie van openbaar belang (OOB) anders worden aangepakt dan bijvoorbeeld voor een onderneming die door een DGA wordt geleid?

Authors

Prof. dr. Jeroen Suijs

Professor of Financial Accounting at Erasmus University Rotterdam

Dr. Mahmoud Gad

Lecturer, Lancaster University 

Dr. Robin Litjens RA

Assistant Professor of Accounting at Tilburg University

FAR Literature review: do private firm audits serve a different purpose? Dr. Mahmoud Gad Dr. Robin Litjens RA Prof. dr. Jeroen Suijs Details
 

The Dutch market for mandatory audit services is heterogenous and includes publicly listed and private firms. While private firms dominate the market, existing audit research focusses primarily on listed firms where audit demand originates from external stakeholders such as shareholders assisting them in the monitoring of management. This is surprising as private firms represent a significant portion of the economy in most countries.

Private firms generally face different incentives in terms of accounting and auditing demand. For example, private firms that are not run by owner-manager may have agency conflicts that drives the demand for audit. However, in private owner-managed firms external audit demand can arise from other, more internal, factors that are difficult to observe and less well understood, such as compensation for lacking internal controls. Legislators across the world seem to acknowledge this variation and mandate audits to a varying degree, for instance dependent on private firm size. Yet, institutional heterogeneity is large, varying from mandating audits for very few (e.g., United States) to all (e.g., Sweden) private firms.

Furthering our understanding of internal value factors of private firm external audits and their effect on audit pricing, audit effort and audit quality is therefore relevant. It can assist regulators in determining the scope (which private firms) and features of a private firm audit (e.g. independence regulation, exclusion of certain non-audit services). Understanding internal value factors can assist auditors and audit firms in how to price and ‘produce’ private firm audits and the effects of these decisions on audit quality.

Authors

Dr. Mahmoud Gad

Lecturer, Lancaster University 

Dr. Robin Litjens RA

Assistant Professor of Accounting at Tilburg University

Prof. dr. Jeroen Suijs

Professor of Financial Accounting at Erasmus University Rotterdam

FAR Practice note: "What do we already know about…”: The Effects of Expert Status on the Audit of Complex Estimates Prof. dr. Anna Gold Prof. dr. Kathryn Kadous Dr. Justin Leiby Details
 

Authors

Prof. dr. Anna Gold

Anna Gold obtained her Ph.D. from the University of Amsterdam in 2004, worked as an assistant professor at Rotterdam School of Management, Erasmus University for six years and is currently professor at the Vrije Universiteit Amsterdam where she teaches Auditing at the BSc and MSc level, as well as PhD courses in Auditing and Experimental Methods. Anna’s research interests are in the judgment and decision-making area, primarily applied to the field of Auditing. Her research has focused on the impact of regulatory changes, on judgments and decisions of auditors and financial statement users. Her recent work focuses on how auditors and audit firms handle errors and whether varying the error management climate affects auditors’ error reporting willingness and audit firm learning. Anna’s work and her publications have appeared in a number of prestigious journals such as The Accounting Review, Accounting Horizons, Journal of Business Ethics, and International Journal of Auditing.

Prof. dr. Kathryn Kadous

Kathryn Kadous is the Schaefer Chaired Professor of Accounting and the Director and Associate Dean of the Ph.D. Program at Emory University's Goizueta Business School. She earned a PhD from the University of Illinois. Prior to that, she worked as an auditor and controller. Professor Kadous' research considers judgment and decision-making issues in auditing and accounting. Her current research is focused primarily on using psychology theory to improve auditor decision making and on identifying the antecedents of auditor skepticism. Professor Kadous' research has been published in The Accounting Review, Contemporary Accounting Research, Journal of Accounting Research, Organizational Behavior and Human Decision Processes, The Journal of Behavioral Finance, and Auditing: A Journal of Practice and Theory. 

Professor Kadous has served two terms as an editor for The Accounting Review and two terms as an editor for Auditing: A Journal of Practice & Theory. She serves on several editorial boards and has served on various research and publications related committees and tasks forces for the American Accounting Association (AAA) and the Auditing and Accounting, Behavior, and Organizations Sections of the AAA. She is currently Vice-President (Academic) of the Auditing Section of the American Accounting Association.

Dr. Justin Leiby

Associate Professor of Accountancy and Professor Ken Perry Faculty Fellow University of Illinois