We investigate whether the format of internal control weakness (ICW) disclosures required by the Sarbanes-Oxley Act of 2002 influences perceptions of nonprofessional investors. Using a 2 × 2 between-participants experiment, we examine two facets of ICW disclosure formats: ICW presentation salience (high versus low) and ICW disaggregation type (disaggregated versus aggregated). We hypothesize and find evidence of an interactive effect between presentation salience and disaggregation type, such that investors perceive ICWs as less negative when they are saliently disclosed and this effect is enhanced when the material weakness is disaggregated into its individual control deficiencies. We also find evidence of moderated mediation such that high salience of ICW disclosures has a positive indirect effect on investing judgments through management trust, but only when the ICW is disaggregated into its individual control deficiencies.
{"title":"Does the Format of Internal Control Disclosures Matter? An Experimental Investigation of Nonprofessional Investor Behavior","authors":"Amanuel F. Tadesse, Uday S. Murthy","doi":"10.2308/AJPT-17-171","DOIUrl":"https://doi.org/10.2308/AJPT-17-171","url":null,"abstract":"\u0000 We investigate whether the format of internal control weakness (ICW) disclosures required by the Sarbanes-Oxley Act of 2002 influences perceptions of nonprofessional investors. Using a 2 × 2 between-participants experiment, we examine two facets of ICW disclosure formats: ICW presentation salience (high versus low) and ICW disaggregation type (disaggregated versus aggregated). We hypothesize and find evidence of an interactive effect between presentation salience and disaggregation type, such that investors perceive ICWs as less negative when they are saliently disclosed and this effect is enhanced when the material weakness is disaggregated into its individual control deficiencies. We also find evidence of moderated mediation such that high salience of ICW disclosures has a positive indirect effect on investing judgments through management trust, but only when the ICW is disaggregated into its individual control deficiencies.","PeriodicalId":48142,"journal":{"name":"Auditing-A Journal of Practice & Theory","volume":"81 1","pages":""},"PeriodicalIF":2.8,"publicationDate":"2020-09-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79361557","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Despite concerns that profit-sharing plans might have a detrimental effect on audit quality, there is little empirical evidence on this issue. We examine the effects of the type of profit-sharing plan, level of client importance, and auditor reinforcement sensitivity (joint sensitivity to rewards and punishments) on auditor reporting decisions. By relying on agency theory and reinforcement sensitivity theory, we posit that the joint effects of profit-sharing and client importance on auditors' decisions are contingent on reinforcement sensitivity. In an experiment with 450 audit partners and managers, we manipulate type of profit-sharing plan and client importance, and measure extroversion and neuroticism. We find the highest audit quality when profit-sharing is based on firm performance, client importance is low, and reinforcement sensitivity is high. Thus, instead of just modifying the type of profit-sharing plans, it is the mix of economic incentives and personality traits that affect audit quality.
{"title":"The Effects of Profit-Sharing Plans, Client Importance, and Reinforcement Sensitivity on Audit Quality","authors":"Herman Van Brenk, Barbara Majoor, A. Wright","doi":"10.2308/ajpt-18-118","DOIUrl":"https://doi.org/10.2308/ajpt-18-118","url":null,"abstract":"\u0000 Despite concerns that profit-sharing plans might have a detrimental effect on audit quality, there is little empirical evidence on this issue. We examine the effects of the type of profit-sharing plan, level of client importance, and auditor reinforcement sensitivity (joint sensitivity to rewards and punishments) on auditor reporting decisions. By relying on agency theory and reinforcement sensitivity theory, we posit that the joint effects of profit-sharing and client importance on auditors' decisions are contingent on reinforcement sensitivity. In an experiment with 450 audit partners and managers, we manipulate type of profit-sharing plan and client importance, and measure extroversion and neuroticism. We find the highest audit quality when profit-sharing is based on firm performance, client importance is low, and reinforcement sensitivity is high. Thus, instead of just modifying the type of profit-sharing plans, it is the mix of economic incentives and personality traits that affect audit quality.","PeriodicalId":48142,"journal":{"name":"Auditing-A Journal of Practice & Theory","volume":"31 1","pages":""},"PeriodicalIF":2.8,"publicationDate":"2020-09-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84128904","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines whether inaccurate going-concern opinions negatively affect the audit office's reputation. Assuming that clients perceive the incidence of going-concern opinion errors as a syst...
{"title":"Consequences of Going-Concern Opinion Inaccuracy at the Audit Office Level","authors":"Qiao Xu, Rachana Kalelkar","doi":"10.2308/ajpt-18-050","DOIUrl":"https://doi.org/10.2308/ajpt-18-050","url":null,"abstract":"This paper examines whether inaccurate going-concern opinions negatively affect the audit office's reputation. Assuming that clients perceive the incidence of going-concern opinion errors as a syst...","PeriodicalId":48142,"journal":{"name":"Auditing-A Journal of Practice & Theory","volume":"70 1","pages":"185-208"},"PeriodicalIF":2.8,"publicationDate":"2020-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83275238","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this study, we examine the roles of audit firms and individual auditors in improving financial statement comparability. We conduct the study in the Chinese setting, in which the identities of si...
{"title":"How a Shared Auditor Affects Firm-Pair Comparability: Implications of Both Firm and Individual Audit Styles","authors":"Li-li Jiu, B. Liu, Yuanyuan Liu","doi":"10.2308/ajpt-17-008","DOIUrl":"https://doi.org/10.2308/ajpt-17-008","url":null,"abstract":"In this study, we examine the roles of audit firms and individual auditors in improving financial statement comparability. We conduct the study in the Chinese setting, in which the identities of si...","PeriodicalId":48142,"journal":{"name":"Auditing-A Journal of Practice & Theory","volume":"31 1","pages":"133-160"},"PeriodicalIF":2.8,"publicationDate":"2020-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73910839","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A. Albrecht, M. Glendening, Kyonghee Kim, Raynolde Pereira
Following the 2007-2009 financial crisis, regulators and investor groups alleged that auditors were reluctant to issue going concern opinions (GCOs) to distressed banks during the crisis, raising q...
{"title":"Auditor Going Concern Opinions and Bank Systemic Risk: Evidence from the 2007–2009 Financial Crisis","authors":"A. Albrecht, M. Glendening, Kyonghee Kim, Raynolde Pereira","doi":"10.2308/ajpt-17-126","DOIUrl":"https://doi.org/10.2308/ajpt-17-126","url":null,"abstract":"Following the 2007-2009 financial crisis, regulators and investor groups alleged that auditors were reluctant to issue going concern opinions (GCOs) to distressed banks during the crisis, raising q...","PeriodicalId":48142,"journal":{"name":"Auditing-A Journal of Practice & Theory","volume":"37 1","pages":"1-28"},"PeriodicalIF":2.8,"publicationDate":"2020-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76027160","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
H. Kuang, Huimin Li, Matthew G. Sherwood, Robert L. Whited
This study uses a sample of mandatory partner rotation events hand-collected from SEC filings to investigate the relation between mandatory audit partner rotation and audit quality in the United St...
{"title":"Mandatory Audit Partner Rotations and Audit Quality in the United States","authors":"H. Kuang, Huimin Li, Matthew G. Sherwood, Robert L. Whited","doi":"10.2308/ajpt-18-152","DOIUrl":"https://doi.org/10.2308/ajpt-18-152","url":null,"abstract":"This study uses a sample of mandatory partner rotation events hand-collected from SEC filings to investigate the relation between mandatory audit partner rotation and audit quality in the United St...","PeriodicalId":48142,"journal":{"name":"Auditing-A Journal of Practice & Theory","volume":"332 1","pages":"161-184"},"PeriodicalIF":2.8,"publicationDate":"2020-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76583775","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
S. Bhattacharjee, Kimberly K. Moreno, Jonathan S. Pyzoha
We examine the influence of an audit committee (AC) that encourages auditors (partners and managers) and clients (CFOs and controllers) to consider an accounting dispute from the other party's pers...
{"title":"The Influence of Perspective Taking Encouraged by the Audit Committee on Auditor and Client Judgments during Accounting Disputes","authors":"S. Bhattacharjee, Kimberly K. Moreno, Jonathan S. Pyzoha","doi":"10.2308/ajpt-18-094","DOIUrl":"https://doi.org/10.2308/ajpt-18-094","url":null,"abstract":"We examine the influence of an audit committee (AC) that encourages auditors (partners and managers) and clients (CFOs and controllers) to consider an accounting dispute from the other party's pers...","PeriodicalId":48142,"journal":{"name":"Auditing-A Journal of Practice & Theory","volume":"24 1","pages":"29-53"},"PeriodicalIF":2.8,"publicationDate":"2020-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81109136","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Drawing on prior research and source credibility theory, this study examines nonprofessional investors' acquisition and evaluation of component auditor use as disclosed in Form AP, and whether and how this evaluation influences their investment decisions. I find that very few investors voluntarily access component auditor information. When asked to review the Form AP, investors perceive the audit team as more trustworthy when a component auditor is not used, leading them to perceive the audited financial statements as more reliable. However, the perceived competence of the audit team and investment behavior are not affected by component auditor use. Regulators express concerns regarding component auditor use, but results suggest that while investors share some concerns about the audit, their concerns are not significant enough to influence investment behavior, which complements archival research. Results also suggest that component auditor use could have an unintended consequence for the lead auditor's responsibility for the audit. JEL Classifications: M42; M4.
{"title":"How Does Disclosure of Component Auditor Use Affect Nonprofessional Investors' Perceptions and Behavior?","authors":"C. Hux","doi":"10.2308/ajpt-18-116","DOIUrl":"https://doi.org/10.2308/ajpt-18-116","url":null,"abstract":"\u0000 Drawing on prior research and source credibility theory, this study examines nonprofessional investors' acquisition and evaluation of component auditor use as disclosed in Form AP, and whether and how this evaluation influences their investment decisions. I find that very few investors voluntarily access component auditor information. When asked to review the Form AP, investors perceive the audit team as more trustworthy when a component auditor is not used, leading them to perceive the audited financial statements as more reliable. However, the perceived competence of the audit team and investment behavior are not affected by component auditor use. Regulators express concerns regarding component auditor use, but results suggest that while investors share some concerns about the audit, their concerns are not significant enough to influence investment behavior, which complements archival research. Results also suggest that component auditor use could have an unintended consequence for the lead auditor's responsibility for the audit.\u0000 JEL Classifications: M42; M4.","PeriodicalId":48142,"journal":{"name":"Auditing-A Journal of Practice & Theory","volume":"1 1","pages":""},"PeriodicalIF":2.8,"publicationDate":"2020-07-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76841414","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In response to cybersecurity risk and demand for information about organizations' cybersecurity risk management programs, the American Institute of Certified Public Accountants (AICPA) recently released a cybersecurity risk management examination service. We examine the effect of joint or separate provisioning of this service on investors' perceptions and decisions, and whether these effects differ when a subsequent cybersecurity incident occurs. We find that the negative signal of a subsequent cybersecurity incident reverses investors' positive perceptions of auditor competence and increases investors' sensitivity to potential independence impairments when the cybersecurity is jointly provisioned, leading to lower perceptions of audit quality. We also find that investors are less willing to invest when the examination is jointly provisioned compared to separately provisioned. Our results provide important insights to the literature and to purchasers and regulators by examining an emerging non-audit service and how a signal of non-audit service quality can affect perceptions of audit quality.
{"title":"The Impact of Cybersecurity Risk Management Examinations and Cybersecurity Incidents on Investor Perceptions and Decisions","authors":"Rebecca R. Perols, Uday S. Murthy","doi":"10.2308/ajpt-18-010","DOIUrl":"https://doi.org/10.2308/ajpt-18-010","url":null,"abstract":"\u0000 In response to cybersecurity risk and demand for information about organizations' cybersecurity risk management programs, the American Institute of Certified Public Accountants (AICPA) recently released a cybersecurity risk management examination service. We examine the effect of joint or separate provisioning of this service on investors' perceptions and decisions, and whether these effects differ when a subsequent cybersecurity incident occurs. We find that the negative signal of a subsequent cybersecurity incident reverses investors' positive perceptions of auditor competence and increases investors' sensitivity to potential independence impairments when the cybersecurity is jointly provisioned, leading to lower perceptions of audit quality. We also find that investors are less willing to invest when the examination is jointly provisioned compared to separately provisioned. Our results provide important insights to the literature and to purchasers and regulators by examining an emerging non-audit service and how a signal of non-audit service quality can affect perceptions of audit quality.","PeriodicalId":48142,"journal":{"name":"Auditing-A Journal of Practice & Theory","volume":"23 1","pages":""},"PeriodicalIF":2.8,"publicationDate":"2020-07-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79443134","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the relationship between audit pricing and managerial tone as a proxy of source credibility. Prior research shows that source credibility influences auditors' perceptions of client risk. Textually analyzing annual letters to shareholders, we find that characteristics of managerial tone that reflect impaired source credibility are associated with higher audit fees. Additional tests, including a change analysis and controls for other managerial characteristics, future client performance, and aggressive accounting choices, corroborate and build on our inferences that managerial tone proxies for source credibility. Our study extends literature that uses corporate disclosures to measure managerial characteristics by showing that auditors price source credibility reflected in managerial tone. These findings are important because they empirically confirm that source credibility affects auditors' assessments of engagement risk and that analysis of tone can inform researchers, auditors, and investors who seek to enhance effectiveness and objectivity in assessing source credibility based on managerial tone. JEL Classifications: G21; G34; M41. Data Availability: The data in this study are available from public sources indicated in the paper.
{"title":"Characteristics of Managerial Tone Priced by Auditors: Evidence Based on Annual Letters to Shareholders of Large U.S. Firms","authors":"Adam J. Greiner, L. Patelli, Matteo Pedrini","doi":"10.2308/ajpt-52594","DOIUrl":"https://doi.org/10.2308/ajpt-52594","url":null,"abstract":"\u0000 We examine the relationship between audit pricing and managerial tone as a proxy of source credibility. Prior research shows that source credibility influences auditors' perceptions of client risk. Textually analyzing annual letters to shareholders, we find that characteristics of managerial tone that reflect impaired source credibility are associated with higher audit fees. Additional tests, including a change analysis and controls for other managerial characteristics, future client performance, and aggressive accounting choices, corroborate and build on our inferences that managerial tone proxies for source credibility. Our study extends literature that uses corporate disclosures to measure managerial characteristics by showing that auditors price source credibility reflected in managerial tone. These findings are important because they empirically confirm that source credibility affects auditors' assessments of engagement risk and that analysis of tone can inform researchers, auditors, and investors who seek to enhance effectiveness and objectivity in assessing source credibility based on managerial tone.\u0000 JEL Classifications: G21; G34; M41.\u0000 Data Availability: The data in this study are available from public sources indicated in the paper.","PeriodicalId":48142,"journal":{"name":"Auditing-A Journal of Practice & Theory","volume":"1 1","pages":""},"PeriodicalIF":2.8,"publicationDate":"2020-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77300184","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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