Auditor Perceptions of Audit Workloads, Audit Quality, and the Auditing Profession
In this study, we use a survey instrument to obtain perspectives from almost 800 auditors about present-day audit workloads and the relationship between audit workloads and audit quality. Our findings indicate that auditors are working, on average, five hours per week above the threshold at which they believe audit quality begins to deteriorate and often 20 hours above this threshold at the peak of busy season. Survey respondents perceive deadlines and staffing shortages as two of the primary reasons for high workloads and further believe that high workloads result in decreased audit quality via compromised audit procedures (including taking shortcuts), impaired audit judgment (including reduced professional skepticism), and difficulty retaining staff with appropriate knowledge and skills. We also find that auditors’ job satisfaction and their views on the audit profession are impacted negatively by audit workloads, particularly when the workloads are perceived as being heavy enough to impair audit quality. Overall, our findings provide support for the PCAOB’s concern regarding excessive workloads and suggest that the primary drivers of workloads (i.e., deadlines and staffing problems) might be the actual “root cause” of workload-related audit deficiencies.
Julie S. Persellin, Jaime J. Schmidt, Scott Vandervelde, and Michael S. Wilkins. 2016. Auditor Perceptions of Audit Workloads, Audit Quality, and the Auditing Profession. Working Paper, available for download at SSRN here.
Internal Control Opinion Shopping and Audit Market Competition
This study examines the extent to which audit clients successfully engage in internal control opinion shopping activities and whether audit market competition appears to facilitate those activities. Regulators have long been concerned about the impact of both audit market competition and opinion shopping on audit quality. We adopt the framework developed in Lennox (2000) to construct a proxy to measure the tendency that clients engage in internal control opinion shopping activities. Our empirical results suggest that clients are successful in shopping for clean internal control opinions. In addition, we find evidence that internal control opinion shopping occurs primarily in competitive audit markets. Finally, our results indicate that among auditor dismissal clients, opinion shopping is more likely to occur when dismissals are made relatively late during a reporting period and when audit market competition is high. Our findings have implications for the current policy debate regarding audit quality and audit market competition.
Nathan J. Newton, Julie S. Persellin, Dechun Wang, and Michael S. Wilkins. 2016. Internal Control Opinion Shopping and Audit Market Competition. The Accounting Review, Vol. 91 (2), pp. 603-623.
Can the UN Global Compact Fill the Gap in International Corporate Law?
Gaps in international law have resulted in transnational corporations bearing little or no direct responsibilities for their actions in host countries (De Brabandere, 2010; Slawotsky, 2012). The void in international regulation of corporate behavior cedes the area to the host country itself or to non-governmental organizations (“NGOs”). The intent of this paper is not to provide an examination of international law as it pertains to transnational business entities (Ratner, 2001; Bantekas, 2004; Mushkat, 2010; Alvarez, 2011, Stewart, 2013), or even to examine the role of the NGO in providing oversight (Adeyeye, 2010, Backer, 2010), as both have been examined extensively. Rather, this paper takes a multi-disciplinary approach to examine the unique characteristics of one of the most prominent NGOs, the UN Global Compact (UNGC), to provide insight into ways in which organizational identity theory and salience might enable it to develop its strengths and overcome its weaknesses in providing the oversight and accountability that international law cannot currently provide.
Katherine Lopez, Julie S. Persellin, and Linda Specht. 2014. Can the UN Global Compact Fill the Gap in International Corporate Law? Southern Journal of Business and Ethics, Vol. 6, pp. 130-140.
Arachnophobia: A Case on Impairment and Accounting Ethics
This case requires students to apply accounting and ethical decision-making within the context of a potential land impairment decision. Students are required to research the relevant professional literature and provide appropriate FASB Codification references and International Financial Reporting Standards cites as they investigate the significant uncertainties that frequently are associated with valuation and impairment analyses. Students also are required to evaluate the ethical implications of the decisions that could be made regarding the necessity of impairment. The case provides an opportunity for students to extend their research and financial accounting abilities, to consider the consequences associated with a set of potentially reasonable accounting alternatives, and to ;begin to appreciate how the significant uncertainties that are present in many accounting and auditing situations require consistent technical and ethical decision-making. The case could be used in Intermediate Accounting I as well as in undergraduate and graduate Auditing or Ethics classes. It has already been used by over 300 undergraduate and graduate students at Trinity University and two large public universities.
Julie S. Persellin, Michael K. Shaub, and Michael S. Wilkins. 2014. Arachnophobia: A Case on Impairment and Accounting Ethics: Issues in Accounting Education Vol. 29 (4), pp. 577-586.
The Influence of SOX on Going Concern Reporting
Corporate accounting failures and regulatory proceedings that led to the enactment of the Sarbanes–Oxley Act of 2002 increased the scrutiny of auditors. We investigate whether these events resulted in a change in auditor behavior with respect to going concern reporting. Generally speaking, we find that smaller auditors became more conservative while Big 4 auditors became more accurate. Specifically, smaller auditors issued more going concern opinions to both failing and non-failing clients post-2001, reducing their Type II misclassifications at the expense of increased Type I misclassifications. However, Big 4 auditors decreased their Type I misclassifications with no corresponding increase in Type II misclassifications. Thus, our findings suggest that increased auditor scrutiny resulted in performance improvements in the area of going concern reporting primarily for larger auditors. For smaller auditors, improved going concern accuracy for subsequently bankrupt clients came at the cost of more going concern opinions being issued to subsequently non-failing clients.
Linda Myers, Jaime Schmidt, and Michael S. Wilkins. 2014. An Investigation of Recent Changes in Going Concern Reporting Decisions Among Big N and Non-Big N Auditors. Review of Quantitative Finance and Accounting, Vol. 43 (1), pp 155-172.
Satyam Fraud: A Case Study of India's Enron
This case provides students a unique opportunity to examine and reflect on the challenges of auditing in today's global environment. Students examine a real-world billion dollar plus embezzlement and fraud at Satyam Corporation, an international company based in India and previously trading on the New York Stock Exchange. The case focuses on auditors' responsibilities related to obtaining and evaluating audit evidence, particularly as it relates to confirming cash and receivables. It also explores the quality control responsibilities related to audit procedures performed by foreign affiliates of a large international audit firm. The case illustrates the role of culture in performing an audit in accordance with auditing standards issued by the U.S. Public Company Accounting Oversight Board. Additionally, case details provide opportunities for class discussions and foster students' critical thinking skills on other auditing topics such as audit risk and planning, related party transactions, tone-at-the-top, and internal control deficiencies. By using a foreign issuer to explore these issues, the case highlights both the technical and international challenges of performing auditing procedures.
Veena L. Brown, Brian E. Daugherty, and Julie S. Persellin. 2014. Satyam Fraud: A Case Study of India's Enron. Issues in Accounting Education, Vol. 29 (3), pp. 419-442.
A Comparative Ethical Analysis of Proposed Tax Reforms
Notions of the "fairness" of tax laws are usually based upon wherewithal to pay, with a tax judged as "fair" if the taxpayer is able to pay it. This paper takes an alternate approach, examining the ethical implications of a "True Flat Tax", a "Modified Flat Tax", and a proposed "Fair Tax" from the perspectives of two ethical frameworks: utilitarianism (i.e., the fairness of the outcome of the tax) and deontology (i.e., the fairness of the intent of the tax). While the results of the deontology analysis indicate that all three models have ethical worth based on their intention to simplify compliance and create a fair system; and the results of the utilitarian analysis indicate all three models have desirable consequences that include reduction of complexity, compliance costs, and collection costs, the analysis must also consider the utilitarian philosophy that seeks the greatest amount of good for the greatest number of people. Only the Modified Flat Tax proposal has the potential to affect all taxpayers equally after consideration of proportionate sacrifice and marginal utility.
Katherine Lopez and Linda Specht. 2013. The Taxman Cometh - Will He Be Fair? A Comparative Ethical Analysis of Proposed Tax Reforms. Southern Journal of Business and Ethics, Vol. 5.
How Does Audit Market Competition Influence Restatements?
We examine the relationship between auditor competition and the likelihood of financial restatements that occur as a result of failures in the application of generally accepted accounting principles (GAAP). Policy makers and audit market participants have expressed concern that the current level of auditor competition is low, resulting in a negative impact on audit quality. However, we find that restatements are more likely to occur in metropolitan statistical areas (MSAs) that have higher auditor competition. The association between audit market competition and restatements is statistically and economically significant. Our finding of a positive relationship between the likelihood of restatement and audit market competition is relevant to the ongoing debate regarding audit quality and the concentration of audit markets.
Nathan J. Newton, Dechun Wang, and Michael S. Wilkins. 2013. Does a Lack of Choice Lead to Lower Quality? Evidence from Auditor Competition and Client Restatements. AUDITING: A Journal of Practice & Theory, Vol. 32 (3), pp. 31-67.
The Influence of PCAOB Inspections on Audit Committee Members’ Judgments
This paper experimentally examines whether the likelihood of a Public Company Accounting Oversight Board (PCAOB) audit engagement inspection can moderate the negative incentives created by short-term stock option compensation on audit committee members' decisions. Prior research suggests that short-term option compensation may weaken audit committee member objectivity and oversight quality (Archambeault et al. 2008; Magilke et al. 2009; Keune and Johnstone 2010); however, holding individuals accountable for their actions has been shown to result in less self-serving decisions (Rus et al. 2012). Ninety-two Executive M.B.A.s, serving the role of audit committee members, evaluate a hypothetical audit case that involves a dispute between management and the external auditors, with likelihood of PCAOB inspection and type of compensation manipulated between participants. Results confirm prior research on option compensation, finding that participants show less support for recording a proposed income-reducing audit adjustment when compensated primarily with short-term options rather than cash. In addition, a significant interaction reveals that PCAOB inspection likelihood moderates the effect of compensation form, such that option compensation only causes audit committee members to not recommend recording the proposed adjustment when PCAOB inspection likelihood is low. These results allow stakeholders to gain valuable insights into ways in which loyalties that have been potentially misaligned may be realigned by regulatory requirements aimed at improving the corporate governance process.
Julie Persellin. 2013. The Influence of PCAOB Inspections on Audit Committee Members’ Judgments. Behavioral Research in Accounting, Vol. 25 (2), pp. 97-114.
Auditor Quality, Audit Committee Expertise, and the Timely Reporting of Restatements
This study investigates whether auditor quality and audit committee expertise are associated with improved financial reporting timeliness as measured by the duration of a financial statement restatement's “dark period.” The restatement dark period represents the length of time between a company's discovery that it will need to restate financial data and the subsequent disclosure of the restatement's effect on earnings. For a sample of dark restatements disclosed between 2004 and 2009, we find that companies that engage Big 4 auditors have shorter dark periods than companies that do not engage Big 4 auditors. We also find that companies with more financial experts on the audit committee have shorter dark periods, but only when such financial expertise relates specifically to accounting. Finally, companies with audit committee chairs that have accounting financial expertise provide the most timely disclosures, as the dark periods for these firms are reduced by approximately 38 percent. Our results suggest that both auditor and audit committee expertise are associated with the timely disclosure of restatement details.
Jaime Schmidt and Michael S. Wilkins. 2013. Bringing Darkness to Light: The Influence of Auditor Quality and Audit Committee Expertise on the Timeliness of Financial Statement Restatement Disclosures. AUDITING: A Journal of Practice & Theory, Vol. 32 (1), pp. 221-244.