Reporting Concerns about Earnings Quality: An Examination of Corporate Managers

Using an experiment with corporate financial managers (e.g., CFOs, controllers), we find that when red flags are present in the financial statements under their review, managers identify those red flags and, in turn, have greater concerns over earnings quality. In addition, when pressure to meet a financial target is high, managers are more concerned about earnings quality when red flags are present. We also document that when red flags are present, managers are more likely to report both internally to their CEO and, if their concerns are not resolved internally, externally to their auditor. Pressure to meet a financial target directly influenced the decision to report internally, but not externally. Additional analyses contemplate the countervailing personal costs associated with reporting or not reporting earnings quality concerns. We demonstrate the important role short-term costs play in external reporting decisions. Finally, we provide initial evidence that corporate managers with a longer tenure at their position (public accounting background) are less (more) likely to report externally

Do Rewards Encourage Professional Skepticism?

It is an open question whether auditors have credible incentives to exercise professional skepticism. We focus on costly skepticism: skepticism that is appropriate and generates incremental costs, but does not identify a misstatement. Costly skepticism is typically not rewarded by audit supervisors. We theorize and find that rewarding costly skepticism may backfire and decrease skepticism on subsequent audit tasks where evidential red flags are present. We reason that auditors interpret the reward as a non-credible, better-than-expected outcome, leading auditors to view subsequent tasks from a risk-averse gain frame. As a result, auditors self-interestedly seek to avoid the risks and effort of exercising additional skepticism. This effect decreases auditors’ sensitivity to red flags and auditors’ willingness to inform their manager about severe red flags, compromising audit quality. Encouragingly, auditors who have experienced a history of rewards for costly skepticism are more motivated to exercise skepticism. A survey finds that audit supervisors are likely to reward costly skepticism when their own supervisors encourage the behavior and promote consultation within the engagement team. Overall, our results suggest firms may benefit from a culture shift emphasizing credible rewards for costly skepticism, but that firms currently may not “get what they reward.

Coaching Today’s Auditors: When Do Workpaper Reviewers Professionally Develop Their Preparers?

Audit workpaper review is a quality control mechanism intended to detect preparer errors in the short-term and professionally develop preparers in the long-term. Currently, it is unclear as to what factors drive reviewers to professionally develop (or not develop) their preparers. Furthermore, whether error detection and professional development complement or compete during supervisory review is not known. As audit teams become more global, new contextual factors are introduced into the audit environment that may influence a supervisor’s review quality. In this study, we investigate how the preparer’s office location (local vs. international) and the likelihood of preparer recurrence affect the reviewer’s propensity to focus on the professional development of the preparer. We find that reviewers identify more with preparers from their local (vs. international) office and, as a result, focus more on professionally developing local preparers. We also observe that, regardless of office affiliation, reviewers are more apt to coach preparers who are likely (vs. unlikely) to recur the next year because they anticipate reaping future personal benefits from recurring preparers. Finally, we find that reviewers who focus more on developing preparers are also more likely to detect errors in preparer audit documentation

An examination of auditor planning judgments in a complex accounting information system environment

Paper presented at the 2007 International Symposium on Audit Research, Shanghai, China

An examination of auditor planning judgements in a complex accounting information system environment

Contemporary Accounting Research, 24(4): pp. 1059-83This study investigates the effects of computer assurance specialist (CAS) competence and auditor accounting information system (AIS) expertise on auditor planning judgements in a complex AIS environment. Recent professional standards state that auditors need to change their audit strategies in reaction to the all-encompassing changes in their clients’ AIS (American Institute of Certified Public Accountants [AICPA] 2001, 2002). Information technology (IT) applications, such as enterprise resource planning (ERP) systems, are significantly changing the ways in which companies operate their businesses (e.g., business process reengineering) and auditors perform their duties (Helms 1999; Public Oversight Board [POB] 2000). For example, the implementation and utilization of ERP systems at many major corporations can increase audit-related risks such as business interruption, data base security, process interdependency, and overall control risk (Hunton, Wright, and Wright 2004). As technological developments continue, auditors must expand their AIS knowledge and skills in order to perform effective and efficient audits (POB 2000; Kinney 2001; AICPA 2002). Prior research suggests that expertise in the AIS domain may make auditors more cognizant of AIS-specific risks and provide them with the sophisticated audit skills required in such settings (Lilly 1997; Hunton et al. 2004). To our knowledge, our study is the first to examine whether auditors’ AIS expertise levels affect their risk assessments and subsequent testing decisions in a complex AIS setting

The effect of risk of misstatement and workload pressure on the choice of workpaper review format

Paper presented at the 2007 International Symposium on Audit Research, Shanghai, China.The advent of electronic communication and electronic workpapers at audit firms has provided workpaper reviewers with options of how to interact with their audit team. Concurrently, other review formats have developed that rely more on in-person communication (e.g., review-by-interview). Prior research indicates that in-person discussion during review results in qualitatively different workpapers and judgments than when the reviewer interacts with the workpaper preparer electronically. As reviewers typically have discretion over how to conduct their reviews, the choice of review format can be viewed as a controllable audit input. Thus, the reviewer’s choice of review format could impact the quality of the audit review team’s work. Our study extends the audit review process literature by examining reviewers’ choice of the form of their reviews and by considering factors that influence that choice. Specifically, we examine the effect of misstatement risk and workload pressure on this choice. We find that misstatement risk and workload pressure affect reviewers’ review mode choices, with both those facing low risk and those under high pressure more likely to perform their reviews electronically. Further, risk and workload pressure interact to affect reviewers’ likelihood of choosing to review electronically. Results indicate that misstatement risk moderates the effect of workload pressure such that, when risk is high, the effect of workload pressure is reduced. Our findings provide insight to firms and regulators regarding the impact of misstatement risk and workload pressure on how audit workpaper reviewers conduct their reviews. These issues are particularly relevant in light of recent changes in the regulatory environment that both emphasize the auditor’s role in detecting fraud/misstatements and exacerbate traditional workload pressures during busy times of the year

The ChatGPT Artificial Intelligence Chatbot: How Well Does It Answer Accounting Assessment Questions?

ChatGPT, a language-learning model chatbot, has garnered considerable attention for its ability to respond to users’ questions. Using data from 14 countries and 186 institutions, we compare ChatGPT and student performance for 28,085 questions from accounting assessments and textbook test banks. As of January 2023, ChatGPT provides correct answers for 56.5 percent of questions and partially correct answers for an additional 9.4 percent of questions. When considering point values for questions, students significantly outperform ChatGPT with a 76.7 percent average on assessments compared to 47.5 percent for ChatGPT if no partial credit is awarded and 56.5 percent if partial credit is awarded. Still, ChatGPT performs better than the student average for 15.8 percent of assessments when we include partial credit. We provide evidence of how ChatGPT performs on different question types, accounting topics, class levels, open/closed assessments, and test bank questions. We also discuss implications for accounting education and research

The Effects of Computer Assurance Specialist Competence and Auditor Accounting Information System Expertise on Auditor Planning Judgments

While auditorsâ\u80\u99 interactions with complex accounting information systems (AIS)\ud and computer assurance specialists (CAS) play a critical role in determining audit quality\ud (POB 2000), little prior research has examined these topics. This study investigates the\ud effects of CAS competence and auditor AIS expertise on auditor planning judgments in a\ud complex AIS environment. The audit literature has typically examined auditorsâ\u80\u99\ud evaluations of evidence provided by sources with expertise structures similar to their\ud own. However, the natural variation in knowledge structures that occurs between CAS\ud and auditors likely results in a more complex relationship than those previously\ud examined.\ud Auditors were given a quasi-experimental case where the competence of the CAS\ud was manipulated as high and low between auditors and auditor AIS expertise was\ud measured. The case required auditors to evaluate evidence related to the audit of a\ud complex AIS client to which a CAS had been assigned, assess current year inherent and\ud control risks, and plan the nature, timing, and extent of substantive procedures for a\ud transaction cycle.\ud Results indicate that auditors possessing higher AIS expertise assessed both\ud inherent and controls risks at higher levels and designed corresponding substantive tests\ud that were greater in scope to mitigate those risks. For high AIS expertise auditors, both\ud the quality of their risk assessments and the effectiveness of their scope of tests exceeded\ud those of low AIS expertise auditors. Auditors were also sensitive to the reliability of CAS\ud as an evidence source and assessed control risk higher when provided with control testing\ud evidence from a CAS with low competence. When planning substantive procedures,\ud auditorsâ\u80\u99 AIS expertise levels moderated their reaction to CAS competence. Specifically,\ud under conditions of low CAS competence, auditors with higher AIS expertise expanded\ud the scope of their audit testing beyond the scope designed by auditors possessing lower\ud AIS expertise. No such AIS expertise effect occurred under conditions of high CAS\ud competence. These results suggest that auditor AIS expertise can play a significant role in\ud complex AIS environments and in their ability to compensate for potential CAS\ud competence deficiencies by increasing the scope of substantive tests.\u