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Mock, Theodore J.

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University of Mississippi eGrove Proceedings of the University of Kansas Symposium on Auditing Problems Deloitte Collection 1-1-1992 Discussant's response to "Self-evaluative privilege" Theodore J. Mock Follow this and additional works at: https://egrove.olemiss.edu/dl_proceedings  Part of the Accounting Commons, and the Taxation Commons Recommended Citation Auditing Symposium XI: Proceedings of the 1992 Deloitte & Touche/University of Kansas Symposium on Auditing Problems, pp. 106-112; This Article is brought to you for free and open access by the Deloitte Collection at eGrove. It has been accepted for inclusion in Proceedings of the University of Kansas Symposium on Auditing Problems by an authorized administrator of eGrove. For more information, please contact egrove@olemiss.edu. Discussant's Response To "Self-Evaluative  Privilege" Theodore J. Mock* University of  Southern California Introduction and Significance  of  Issue As a somewhat frequent  participant in the Kansas Symposium on Audit Problems, I today find  myself  in somewhat of  an unusual situation—that of  dis-cussant rather than presenter or observer. But in any role, I always welcome the opportunity to participate in the grandfather  symposium of  systematic, academ-ic-based audit research. I congratulate Raj Srivastava, his colleagues, and Deloitte & Touche for  once again organizing an interesting set of  research and position papers. As a discussant for  an issues paper based in practice, I feel  obligated to give a qualification  similar to what one often  hears from  practitioners as they discuss academic papers. Before  I began to prepare my comments, I really knew very little about self-evaluative  privilege  or the other issues raised in Tom Powell's paper. However, the fact  that I was generally unfamiliar  with the issues raised, at least from  a research perspective, implies that we may have a research area which is academically novel. In addition, the fact  that a prominent practitioner is raising the issue implies that the issues are practically relevant. What else could a researcher ask for?  Perhaps, not much more. However, an academic dis-cussant is bound to feel  a bit uncomfortable  reacting to a paper that includes lit-tle literature, theory, methodology or statistical analysis! So, what to do? Tom Powell's paper is a lucid statement of  a set of  issues dealing with access to audit work-products which he develops from  an internal auditor's perspective. This is clearly an issue to both internal and external audi-tors and Tom is to be commended for  bringing it to the attention of  the academ-ic community. In my comments, I attempt to achieve two primary objectives. First, I attempt to react positively to Tom's challenge in his closing paragraph of  identi-fying  some promising research opportunities in the arena. Second, I provide some guidance as to what kinds of  additions to practitioner's papers (e.g. inte-gration of  academic literature and development of  more detailed models or the-ories) would help promote audit research. Such additions to papers of  this nature would help to bridge the Practitioner-Academic  Research Gap. Specifically,  the following  three topics are discussed. First, is the topic of what aspects of  auditor workpaper access are researchable  from  a scientific * Helpful  suggestions from  Ganesh Krishnamoorthy are gratefully  acknowledged. 106 standpoint. In other words, what types of  knowledge can academia contribute to these problems? Second, is an overview of  some of  the existing literature, both academic and practitioner based, which may be relevant. Lastly, based on this review, I then identify  some research opportunities and two specific  research ideas, one experimental and one analytical, which may be pursued. Hopefully some of  these ideas will ring a bell with both academics and Tom Powell and will lead to some research funds  and studies in this area. Nature of  the Issues: Problem Solving, Engineering, Research or Politics? When reading a position paper of  this nature, one is first  struck by the sheer complexity of  the issues related to access to audit workpapers. Tom does an excellent job of  identifying  some of  these complexities, although not in a formal or rigorous manner which would assist one interested in research. What would be helpful  is a more systematic identification  of  the variables, relationships and agents or players which Tom sees as being relevant. The researcher is forced  to do this for  him or herself  and is subject to serious risks of  omission of  relevant variables or relations. 1 The second thing that struck me in the paper was Tom's call for  academic research and the question of  the scientific  nature of  the issues he was raising. A distinction which is often  made in science, for  example by Kerlinger [1979], is that many issues which are raised by practitioners are not researchable issues. Kerlinger identifies  three types of  issues and problems that practitioners face: engineering, value and research problems. "We consider problems that are real-ly not problems in the scientific  sense. They can be called value or engineering problems."2 Engineering problems deal with "how to" issues and value issues concern "what is best or what is preferred"  types of  problems. In contrast, Kerlinger views scientific  research problems as questions that ask about relations  among variables or phenomenon. Whereas some of  the issues Tom raises are research questions, many are not. An example of  an engineering type problem is present-ed on the first  page where he asks: "How can we protect our workpapers and reports from  access by parties other than those for  whom they were prepared?" It doesn't take scientific  (i.e. academic) research to "engineer" feasible  solu-tions to this problem—one solution is simply to shred any potentially relevant evidence. An example of  a value question is presented later in the paper where Tom notes that some internal audit activities are being placed under legal department direction to come under the umbrella of  "attorney-client" privilege. "Is this in the best interest of  the profession?"  Such questions do not fall  within the direct purview of  science although research can provide some knowledge which might be helpful  such as attitudinal surveys of  the tradeoffs  which might be involved. In all deference  to Tom, it should be noted that many of  the questions, issues, problems, and assertions raised could be scientifically  addressed. For instance, on page 102 he asserts that "Unlimited access to internal auditing work-prod-ucts by outside parties would have a chilling effect  both on the scope of  activi-1 Figure 1 is a sketch of  such a model for  one aspect of  these issues. 2 Kerlinger, [1979, p. 29]. 107 Figure 1: A Multistage Structure for the Evaluation of Internal Audit Function Academic Education Professional Cer t i f i ca t ion Qual i ty and Quant i t y of Work papers Scope of Internal audit Freedom from conf l i c t ing dut ies Level to which IA repor ts Self-Evaluat ive Pr iv i lege (SEP) Exper imental t reatments: SEP / No SEP ties reviewed and the frankness  with which results could be communicated". A testable cause-effect  relation between access to work-product and chilling effects  is explicit in such an assertion. On page 100 he raises another research issue concerning "the degree to which the work of  internal auditors might be used to supplement or reduce some of  their [external auditors] work." In fact, this second question is one that already has some research results to consider.3 This leads to the third aspect of  Tom's paper that is readily apparent to any academic. The paper is devoid of  any explicit reference  to the academic litera-ture and little reference  to the professional  literature. From an academic/audit standpoint, one could say that the paper lacks appropriate research documenta-tion. What part of  the literature was systematically considered? What ideas, problems and assertions have support or explicit research results in the extant literature? These are questions whose answers would help academics interested in doing research of  this nature. Related Research and Literature Although I did not do a comprehensive review of  the research literature, I did consult a number of  sources to obtain a judgment sample of  what is available. My search looked at academic and professional  literature and also survey docu-ments, such as the "Research Opportunities in Auditing" monographs (see foonote  3) and a review of  research presented at the USC Audit Judgment Symposium.4 Although I found  little research which directly addresses issues related to access to internal audit work-products, there is a substantial body of 3 Peat, Marwick, Mitchell & Co.[1976]; and Abdel-kahlik and Solomon [1988]. 4 Mock, Watkins, Pincus and Caster [1992]. 108 Internal Audit Strength Competence Work Ob jec t i v i t y research, some of  which is listed in my references,  which may provide some useful  information  and guidance. For example, several studies have explicitly investigated aspects of  the exter-nal auditor's assessment of  and reliance on internal audit work. Figure 1 sum-marizes the main variables and their relations as they are discussed in the litera-ture. The main variable in the figure  is the quality or strength of  the internal audit function  within an organization. This variable is affected  by or related to in Kerlinger's terms three primary variables: competence, work quality and objectivity. These three variables are in turn affected  by a number of  factors such as work paper quality. Such models or theories are imperative in academic work as they summarize the knowledge that is thought to exist on a subject and are open to critique and challenge. The existing literature has focused  on the external auditor's assessment of the relative importance of  the internal audit qualities of  competence, work per-formance  and objectivity in their reliance decision.5 Such qualities may effect external audit efficiency  and may, in turn, be affected  by increasing access by outsiders to internal audit work. One possibility for  such an effect  would be that the access constrains or has a "chilling effect"  on audit work performance. An Experiment to Assess the Chilling Effect of  Increased Access At the bottom of  Figure 1, an experimental treatment is shown which indi-cates the kind of  experiment that could be conducted in this area. Such an experiment would develop a task where auditors were asked to make judgments concerning the internal audit strength in a case where the internal auditors were working with or without the "self-evaluative  privilege" discussed in Tom's paper. The "theory" suggested in Tom's paper is that for  the treatment where access to internal audit workpapers is a threat and where there is no self-evalua-tive privilege, there would be a chilling effect  on the workpapers. Other similar treatments, such as varying the likelihood of  increased access to workpapers, come to mind when reviewing these issues. Whether such an experimental study would be valuable from  a practicing or academic standpoint is an issue which symposia such as this one help address. In looking at Figure 1, which represents only a small part of  the issues raised in Tom's paper, one readily sees the complexity of  the problems being addressed. For example, published research shows that the external auditor's rankings and weightings of  these factors  vary over studies and probably over audit situations. Second, there are many other variables and players that proba-bly should be considered if  one attempted to expand a model like Figure 1 into a comprehensive model or theory. Other Researchable Questions and Research Opportunities In my review of  Tom's paper and of  the published literature, I did attempt to respond to his challenge to act in a proactive manner to these issues. This involved the compilation of  a list of  research questions that could benefit  from additional academic research: 5 See, for  example. Brown [1983]; Margheim [1986]; Messier and Schneider [1988]; and Harrell, Taylor and Chewning [1989]. 109 If  the internal auditors' workpapers become regularly accessed by true adversaries the auditors may have more difficulty  locating problem areas for  early detection and correction. [Powell, 1992, p. 103]. How do the auditor's need to document and take responsibility for  judg-ments and actions affect  his/her evaluation of  conflicting  evidence? [Abdel-kahlik and Solomon, 1988, p. 130]. When interests of  owners, managers, regulators and other interested par-ties diverge, what effects  will occur on internal auditor priorities and deci-sions? [Powell, 1992, p. 102]. What is the effect  of  aggressive enforcement  of  compliance with laws and regulations on security and privacy of  client (firm)  information?  [PMM, 1976, p. 137, (paraphrased)]. What mechanisms should be considered to serve the demand for  dissemi-nation of  attest reports related to social utilities? [Abdel-kahlik and Solomon, 1988, p. 151]. Does litigation influence  audit effectiveness?  If  so, how and to what extent? [Abdel-kahlik and Solomon, 1988, p. 180]. What are the effects  of  litigation on the nature and pricing of  audit ser-vices? [Abdel-kahlik and Solomon, 1988, p. 180]. Research Methods The above research questions and others that are evident in the literature imply the possible use of  a variety of  empirical research approaches and meth-ods including controlled experiments, experimental markets studies, field  stud-Figure 2: I n f o r m a t i o n a l  I m p a c t of I n t e r n a l Aud i t Workpapers Auditor's lack of  objectivity 110 ies and attitudinal surveys. It also might be fruitful  to utilize some of  the more formal,  hierarchical models of  auditor judgment to analytically assess the possi-ble impacts of  increased access to auditor work-products on the discovery of material errors or significant  control weaknesses. An example of  the analytical approach is suggested by Krishnamoorthy's work [1992]. In this approach, cascaded inference  theory is used to derive ana-lytically the effect  of  changes in the quality of  audit workpapers on the likeli-hood of  error detection, the primary issue identified  in Tom's paper. Figure 2 depicts the sensitivity of  the underlying likelihood ratios to differences  in audi-tor objectivity which influences  the "source reliability" of  the evidence. These differences  then change the informational  impact (likelihood ratios) of  the audit evidence. These differences  are particularly large on the left  side of  Figure 2, i.e., where the auditor lacks objectivity, for  example, when the internal auditor is "less than frank"  in communicating the results of  audit tests (Powell, 1992, p. 102). Concluding Comments In my remarks I have attempted to focus  on two general issues. First is the issue as to what scientific  research may be able to contribute to practical prob-lems such as increasing access to internal audit work-products. Tom's paper raises a number of  important problems which need to be addressed and academ-ic research can be helpful  for  some of  these problems. Examples of  research questions were identified  from  both Tom's paper and from  the literature in gen-eral. In addition, illustrations were developed of  both an experimental and an analytical methodology which could be used to address two of  these research questions. Second, I have suggested that practitioners could facilitate  this process in a number of  ways. For example, explicit incorporation of  extant research in their position papers would provide information  as to what previous results were use-ful  and to what extent models, theories and methods were found  to be incom-plete or inaccurate. If  extant research is found  to be lacking in some respect, the next step would be to identify  variables, relations and complexities that need to be considered in formal  research. Both of  these activities would help bridge the academic-practitioner research gap which exists. References Abdel-Khalik, A.R and I. Solomon, Research Opportunities  in Auditing:  The  Second  Decade, American Accounting Association Auditing Section. Sarasota, FL (1988). Abdel-Khalik, A.R., D. Snowball and J. H. Wragge, "The Effects  of  Certain Internal Audit Variables on the Planning of  External Audit Programs," The  Accounting Review (1983), pp. 215-227. American Institute of  Certified  Public Accountants (AICPA), Statement  on Auditing  Standards  No. 9: The  Effect  of  an Internal  Audit  Function  on the Scope of  the Independent  Auditor's Examination,  New York (1975). American Institute of  Certified  Public Accountants (AICPA), Statement  on Auditing  Standards  No. 65, The  Auditor's  Consideration  of  the Internal  Audit  Function  in an Audit  of  Financial Statements,  New York (1991). Australian Accounting Research Foundation, "Using the Work of  an Internal Auditor," Statement of  Auditing  Practice AUP2,  Melbourne (1983). Barrett, M.J. and V.Z. Brink, "Evaluating Internal/External Audit Services and Relationships," Institute  of  Internal  Auditors,  Research Report 24 (1980). Brown, P.R., "Independent Auditor Judgment in the Evaluation of  Internal Audit Functions," Journal  of  Accounting Research (Fall 1983), pp. 444-455. 111 Harrell, A., E. Chewning and M. Taylor, "Organizational-Professional  Conflict  and the Job Satisfaction  and Turnover Intentions of  Internal Auditors," Auditing:  A Journal  of  Practice and Theory,  Vol. 5 (Spring 1986), pp. 111-121. Harrell, A., M. Taylor and E. Chewning, "An Examination of  Management's Ability to Bias the Professional  Objectivity of  Internal Auditors," Accounting, Organizations  and  Society,  Vol. 14 (1989), pp. 259-269. Institute of  Internal Auditors, Standards  of  the Profession  of  Internal  Auditing,  Altamonte Springs, FL: The Institute of  Internal Auditors (1981). Institute of  Internal Auditors, "Report of  the Subcommittee on Access to Internal Auditing Work Products," IIA Professional  Issues Committee, (1991-1992). Kerlinger, F. N., Foundations  of  Behavioral Research, Holt, Rinehart & Winston, New York, N.Y. (1979). Krishnamoorthy, G., "External Auditor's Evaluation of  the Internal Audit Function: A Cascaded Inference  Approach," Dissertation Proposal, University of  Southern California  (1992). Margheim, L.L., "Further Evidence on External Auditors' Reliance on Internal Auditors," Journal of  Accounting Research, Vol. 24, No.1 (1986), pp. 194-205. Messier, W.F.,Jr. and A. Schneider, "A Hierarchical Approach to the External Auditor's Evaluation of  the Internal Auditing Function," Contemporary  Accounting Research, Vol. 4 (Spring 1988), pp. 337-353. Mock, T. J., P.R. Watkins, K. Pincus, and P. Caster, "Audit Judgment Symposium: 1983-1992, Review and Assessment," Auditing:  A Journal  of  Practice and  Theory  (forthcoming,  1993). Moizer, P., S. Turley, and D. Walker, "Reliance on other Auditors: A UK Study," Accounting and Business Research (Autumn 1986), pp. 343-353. Peat, Marwick, Mitchell & Co., Research Opportunities  in Auditing  (1976). Plumlee, D.R., "The Standard of  Objectivity for  Internal Auditors: Memory and Bias Effects," Journal  of  Accounting Research, Vol. 23 (Autumn 1985), pp. 683-699. Powell, Thomas E., "Self-Evaluative  Privilege," Proceedings  of  the 1992 Deloitte  & Touche/University  of  Kansas  Symposium on Auditing  Problems  (May 1992), pp. 99-105. Schneider, A., "Modeling External Auditors' Evaluations of  Internal Auditing," Journal  of Accounting Research (1984), pp 657-678. Schneider, A., "The Reliance of  External Auditors on the Internal Audit Function," Journal  of Accounting Research (1985). 112 

Discussant\u27s response to  Self-evaluative privilege

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Discussant\u27s response to Self-evaluative privilege

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