Library

Private equity (PE) is rapidly transforming the SME audit market. But what are the consequences of the arrival of PE for partner appointments, career opportunities, talent development, and firm growth?

In this masterclass, members of the research team will present the initial findings of a unique FAR study on the impact of PE on the Dutch accountancy profession. Drawing on recent and extensive Dutch data, the masterclass offers an exclusive insight into these changes.

The session will also address prior research on PE and, of course, will discuss potential practical implications of the findings.

The masterclass will be highly interactive and will encourage discussion.

Book your seat now (limited availability)!

In his paper on regulation, Jere Francis explains why audits are regulated. Audits are regulated because the major parties (auditors and their clients) settle for lower levels of assurance. Society requires higher levels of assurance since they (e.g., future shareholders, banks, employees, customers) benefit
from higher levels of assurance. Legislation and regulation purportedly motivate auditors to set higher levels of assurance (and thus audit quality). However, since auditors are required to produce on average a
higher level of quality audit than the market requires, and arguably incur higher costs than the client is willing to pay, the question is who foots the bill for the higher cost: the auditor, the client, future shareholders, banks, society as a whole? Read Jere’s insightful paper. It is important to understand
why under the current system there will always be tension between what the firms believe is an appropriate level of assurance versus what auditors are expected to deliver.

What leaders can do to help team members feel safe enough to create a climate of voice in a dual-leader:
The manager plays a key role in the team: voice-modeling behavior from the manager has a stronger association than the partner’s behavior. Need for leadership training to help managers demonstrate, through their own “voice” leadership behaviors, that there is an environment of psychological safety
that enables voice for the audit team. Managers’ influence is accentuated when they are more
involved and avoid mixed messaging (by not engaging in counterproductive RAQ acts).
Partner’s voice role modeling may help in absence of the manager, but otherwise has a stifling effect (less actual team voice). More manager involvement cannot compensate for this.

the means to enhance audit quality. This study uses the Competing Values Framework (CVF) to explore the culture of large audit firms, and their attempts to change their cultures. We find that these firms predominantly emphasize a culture characterized by collaboration and control, which is consistent with an inward focus. We also find that audit firms struggle to implement a consistent understanding of culture across their offices and function levels, and there is a gap in how partners perceive culture compared to that of non-partner staff. This “culture gap” has negative consequences on auditors, as larger culture gaps are associated with lower psychological safety and poorer person-organization fit. Embedding mechanisms
can lower the culture gap, but having adequate resources is far more important of an embedding mechanism than “tone at the top.” The findings underscore the importance of actively communicating and reinforcing stated cultural values, and provide audit firms with a practical tool to diagnose problems
in achieving culture change.

As audit firms increasingly rely on mobile phones for work-related tasks, understanding how different communication devices impact auditor behavior is essential for maintaining professional skepticism and audit quality. Using a setting where an audit supervisor writes a message in response to advice sought by a subordinate auditor, we examine how the audit supervisor’s use of different communication devices (mobile phone versus PC) affects the extent to which their informal advice to the subordinate contains  skepticism-enhancing language. We predict that audit supervisor’s advice will be less skepticism-enhancing or the subordinate when communicated by a message sent through a mobile phone compared to a PC. However, this effect is expected to be stronger for advisors with lower compared to higher psychological distance to the task workflow. We conduct a 2×2 between-participants experiment and use Linguistic Inquiry and Word Count (LIWC) textual analysis to measure skepticism in participants’ responses to advice sought by a subordinate. We find that a message conveyed through a mobile phones compared to a PC contains less skepticism-enhancing advice, but only when psychological distance is low. Our study underscores the behavioral implications of device choice and psychological distance, offering important insights for audit firms and practitioners as they navigate the increasing use of digital communication tools in fostering audit quality.

The purpose of this literature review is to provide an overview of the academic literature on the relationship between audit committees (ACs) and audit quality (AQ). The starting point for our review is the most recent comprehensive overview of literature on corporate governance research in accounting and auditing by Carcello et al. (2011a). We start from their findings and conclusions, and add our review of studies on the relationship between ACs and AQ for the most current period, starting with 2011. In doing so, we draw from the IAASB (2014) conceptual framework on AQ that presents the key input, process and output factors that contribute to AQ.

Auditing complex estimates frequently requires input from specialists. However, auditors struggle to assess specialists’ capability and work quality, in part because auditors by definition lack the expertise to precisely evaluate a specialist’s skills and work processes (PCAOB 2015a; 2015b). Specialists can improve the audit of estimates, but any potential improvement first requires appropriate assessments of the adequacy of specialist’s work. Specifically, scholarly literature provides evidence that complex estimates provide client management with leeway to report in a manner consistent with its incentives, and that specialists are often hesitant to challenge these estimates. Thus, overestimating the specialist’s skills or work quality may lead the auditor conclude that an estimate is reasonable based on insufficient evidence, increasing audit risk and reducing financial reporting quality.
This study examines whether a specialist’s high status leads to higher auditor evaluations of specialist
work quality and greater reliance on this work as persuasive evidence. By status, we refer to prestige
indicated by the respect of peers, elite university or company affiliations, and/or membership in exclusive
social circles. U.S. and international auditing standards direct auditors to assess specialists based on
information such as the specialist’s experience with an audit issue, but also on “softer” factors such as
the specialist’s credentials, reputation, and standing among peers (IAASB 2009; PCAOB 2016). The
IAASB (2013) has recently expressed concern about auditor “over-reliance on the qualifications of the
expert with no further consideration as to their appropriateness.”

Het auditcomité is een belangrijk onderdeel van de huidige corporate governance. Ondanks de steeds strenger wordende regelgeving op het gebied van onafhankelijkheid en expertise, is het nog steeds onduidelijk waarom sommige auditcomités onderpresteren en hoe dit de effectiviteit van de externe accountantscontrole beïnvloedt. Wij stellen dat, naast het hebben van de juiste vaardigheden, de betrokkenheid van het auditcomité bij het auditproces cruciaal is voor de effectiviteit van de audit.
Communicatie, vertrouwen, ondersteuning, macht en leiderschap zijn belangrijke kenmerken die van invloed kunnen zijn op de manier waarop het auditcomité omgaat met meningsverschillen tussen het management en de accountant, en in hoeverre het auditcomité beide partijen kritisch zal uitdagen. Deze ‘zachte’ dimensies zijn nog onvoldoende onderzocht. Er is meer inzicht nodig voor de praktijk, academici en toezichthouders over hoe de betrokkenheid van het auditcomité kan worden gestimuleerd en hoe de betrokkenheid het auditproces beïnvloedt. Wij willen aantonen dat een actief en betrokken auditcomité in staat is om synergie te creëren met de externe accountant, waarbij beide partijen op elkaar vertrouwen en elkaar steunen. Die synergie kan het auditproces en de auditkwaliteit naar een hoger niveau tillen.

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.

A FAR sponsored study by Olof Bik, Jan Bouwens, Robert Knechel and Yuxia Zou has been accepted for publication in The Accounting Review.

This study examines how audit firms changed their policies on audit partner performance measurement, career development, and compensation during a period of heightened public scrutiny of audit quality (2007–2017). It argues that implementing policy changes requires a delicate transition in organizational design and internal processes of firms and that the changes may not automatically translate into day-to-day practices.

Access to proprietary performance management policies and individual partner performance and compensation data from the eight largest Dutch audit firms enables an in-depth analysis of the evolution of audit partner performance management.

The findings indicate that most policy changes have tangible consequences. In particular, audit quality becomes more influential in career development decisions, while profit sharing is increasingly linked to quality and long-term performance.

Overall, the evidence suggests that audit firms respond effectively to public scrutiny by increasingly aligning partner incentives with societal expectations regarding audit quality.