The purpose of this study is to examine some of the potential impacts of more frequent financial reporting and concurrent assurance, as assessed by members of the assurer, preparer, and investor communities. Two hundred and fifteen participants (84 auditors, 30 controllers, 80 investors, as surrogated by MBA students, and 21 sell-side analysts) took part in an experiment where they received a case situation involving a company that was planning to voluntarily change from quarterly to monthly (daily) external financial statement reporting, without (with) assurance. After reading the case materials, the participants assessed the likely effects of such changes on the decision usefulness of financial statements, quality of earnings, financial reporting behavior, stock market price volatility, analysts' consensus forecasts, and cost of capital. The results indicate that monthly reporting without assurance would significantly enhance the decision usefulness of financial statements, improve the quality of earnings, and reduce managements' aggressiveness with respect to discretionary accounting accruals, estimates, and principles; further, the findings suggest stock price volatility would be lower, analyst consensus of future earnings estimates would increase, and cost of capital would decrease. Assessments of daily reporting were consistent with monthly reporting, yet significantly stronger. The inclusion of concurrent auditor assurance resulted in directionally consistent yet significantly pronounced results in both monthly and daily reporting conditions on all measures. Additionally, participants agreed that providing monthly reports would be technically and economically feasible at this time, while daily reporting would not be feasible.

The first objective of the current study is to examine the extent to which financial auditors recognize heightened risks associated with an enterprise resource planning (ERP) system, as compared to a non-ERP (legacy) system, in the presence of a control weakness over access privileges. The second objective is to assess the propensity of financial auditors to consult with information technology (IT) audit specialists within their firm when assessing ERP and non-ERP system risks during the planning stage of an audit. One hundred sixty-five auditors participated in an experiment in which we manipulated system type (ERP versus non-ERP) and measured auditor type (IT audit specialists versus financial auditors). Both auditor types indicate significantly higher business interruption, process interdependency, and overall control risks with the ERP, as compared to the non-ERP, system. Additionally, while IT audit specialists assess significantly higher network, database, and application security risks with the ERP system, financial audits do not recognize higher security risks in these areas. Perceived risk differentials from the non-ERP to the ERP system across all risk categories are significantly greater for IT audit specialists than financial auditors. Finally, financial auditors do not indicate a greater need to consult with IT audit specialists when auditing an ERP versus a non-ERP system and they are equally highly confident in the ability of financial audit teams to assess risks in both computing environments. Overall, evidence from this study suggests that financial auditors may be overconfident in their ability to assess ERP system risks.

ABSTRACT: This study examines the effectiveness of disclosure in the auditor's report of the auditor's judgment process as a means to mitigate unfavorable attribution to the auditor after the occurrence of an adverse event, i.e., the tendency to ascribe the cause to a factor(s) that can be readily associated with the event (“second guessing”). Modification of the audit report in this manner is consistent with recent calls to make the audit report more responsive to user expectations and with the recommendations of the Advisory Committee on Improving Financial Reporting for the establishment of a professional judgment framework. We provide 72 nonprofessional investors with a case where there are both positive and negative indicators about the going-concern status of a client. The auditor issues a standard audit report, and nine months later the client files for bankruptcy. Participants are randomly assigned to two groups: judgment process information or no judgment process information. The results indicate that judgment process information significantly mitigates auditor attribution after the bankruptcy for four of five auditor performance measures. In all, the findings suggest disclosure of the auditor's judgment process is a promising tool to mitigate auditor attribution.

SUMMARY We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several U.S. financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX). During this period, auditors and their clients faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB), and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments, including the effect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find that 24.2 percent of proposed adjustments were subsequently waived. The results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. Data Availability: Due to a confidentiality agreement with the participating audit firm the data are proprietary.

SUMMARY: Auditors often encounter contentious accounting and reporting issues that require resolution with the client. The purpose of the current study is to examine the impact of auditor rank on pre‐negotiation judgments. To address these issues, 25 managers and 18 partners examine a rich experimental case in which they are asked to consider their position and that of the client on a difficult inventory write‐down situation. The results indicate that partners take a harder stand than managers in calling for a higher initial proposed write‐down, minimum write‐down, and expected write‐down. Also, partners' estimates of the maximum write‐down the client is willing to accept are greater than managers' estimates. Finally, partners indicated a smaller difference between their initial write‐down and the estimated amount that would be recorded, as well as a larger difference between the estimated amount that would be recorded and the minimum acceptable write‐down, than did managers. Contrary to expectations, the...

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We present evidence on the resolution of proposed audit adjustments during a unique period of time immediately following several US financial scandals and surrounding the passage of the Sarbanes-Oxley Act (SOX). During this period auditors and clients both faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, annual inspections and a new external regulator (i.e., the PCAOB). In comparison with prior studies we also consider a broader range of factors potentially impacting the resolution of proposed adjustments including the affect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find a dramatic reduction in the proportion of waived audit adjustments when compared to prior studies, suggesting calls for greater auditor and client responsibilities increased conservatism. Results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although there is no pattern of favoring such clients. We also find that adjustments are more likely to be waived for clients with stronger internal controls, especially larger clients, and for repeat adjustments. Overall, the results suggest that there is increased conservatism in the resolution of proposed adjustments.

Technological advances have facilitated the ability of management to report finer sets of information in narrower time intervals (Kogan et al. 1999). Real-time reports are crucial for managerial decision making at all levels in a firm. The economic and technological feasibility of more frequent reporting has received increasing attention from the accounting profession and regulatory authorities. We attempt to shed light on the feasibility and receptiveness at the company level of more frequent financial reporting via a field study and a survey. Three publicly traded firms participated in our field study. The findings of our field study helped guide us in the development of our survey instrument. We used the survey instrument to examine our research questions. Our study expands the literature by (1) examining in-company accounting professionals' receptiveness toward availability of income statement or balance sheet accounts to external users on a more frequent basis than quarterly, (2) exploring factors (i.e., perceived usefulness, benefits/costs, economic reality, competitive disadvantage, and liability exposure) that affect in-company accounting professionals' receptiveness toward more frequent reporting, and (3) obtaining insights from in-company IT professionals on the technological feasibility of more frequent reporting (and comparing this finding with insights obtained from in-company accounting professionals).

Negotiations are a pervasive feature of the audit process (e.g., the resolution of proposed audit adjustments and disclosures). The results of such negotiations are of great importance to the capital markets, the client, and the auditor. The purpose of this study is to examine the effectiveness of three promising, pragmatic intervention methods for enhancing auditor negotiation performance: a role-playing intervention-assuming the client's position in a mock negotiation; a passive intervention-explicitly considering the client's interests and options; and a practice intervention-engaging in a mock negotiation prior to the client negotiation. We posit that the role-playing intervention will improve negotiation results, because this approach requires direct experience in considering and arguing the client's position and more cognitive effort in obtaining an understanding of the counterpart's position, a critical factor identified in the negotiation literature for successful performance.Forty-five audit managers and partners were provided a realistic case based on an actual scenario involving the potential writedown of inventory due to obsolescence. Participants were randomly assigned to one of three groups (role-playing, passive, or practice) and asked to negotiate the issue with a confederate playing the role of the CFO. Auditor conservatism and a large actual subsequent writedown suggest that a significant adjustment is warranted. The results indicate that the role-playing intervention method led to an enhanced negotiation outcome (greater writedown) compared to the passive and practice groups. Process improvements on a number of dimensions were also found, particularly for the role-playing group compared to the practice group.

The movement to more continuous reporting (CR) and continuous assurance (CA) of financial statements appears to be a matter of when and how such changes will take place, rather than if they will occur. Research evidence suggests that computing infrastructures and software applications have advanced to the point where it is now technically and economically feasible to begin preparing and disseminating financial statements on at least a monthly basis (Hunton, Wright, and Wright 2003), and someday it is likely that full or partial financial and nonfinancial disclosures will be processed and presented in real time. Additionally, information consumers are demanding, and the Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), and International Accounting Standards Board (IASB) are contemplating reporting and assurance changes of this nature. Thus, whether “continuous” is defined in terms of monthly, daily, hourly, or real-time reporting, rapidly converging market factors indicate that in the foreseeable future firms will publish and auditors will assure financial information on a more frequent basis than the current quarterly interval. The major challenge going forward for behavioral researchers in accounting is to investigate how changes of this nature might affect the decision-making processes and consequential outcomes of various constituent groups, such as investors, preparers, and assurers. The combinations of affected parties, contexts, and tasks that could be examined are too numerous to explore in a single article. Accordingly, to keep the following discussion focused and manageable, the scope of this paper is aimed at understanding the potential impact of CR and CA on individual investors. Perhaps by identifying a number of the psychological issues and reviewing some of the studies in this area, accounting behavioral researchers will be motivated to investigate many of the issues and opportunities related to this new and exciting line of research.

Enterprise Resource Planning (ERP) systems inherently present unique risks due to tightly linked interdependencies of business processes, relational databases, and process reengineering. Knowledge of such risks is important in planning and conducting assurance engagements of the reliability of these complex computer systems. Yet, there is little empirical evidence on this issue. To examine this topic, a semi-structured interview study was conducted with 30 experienced information systems auditors (from 3 of the Big 5 firms) who specialize in assessing risks for ERP systems. This approach allowed us to obtain detailed information about participants' views and client experiences. The results indicate that the implementation process of ERP systems has an important impact on system reliability. Further, interviewees identified a number of common implementation problems (e.g., improperly trained personnel and inadequate process reengineering efforts) that result in heightened risks. Interviewees also reported that ongoing risks differ across applications and across vendor packages. Finally, in providing assurance on ERP systems participants overwhelmingly indicate a focus on testing the process rather than system output.

The ability to recognize when there is a variety of solutions to a particular situation has been shown to be important to success in the accounting profession (Baril et al. 1998). Recently, a measure of ability has been developed in psychology that focuses on “practical” problemsolving ability (PPSA) (Devolder 1993). From a theoretical standpoint, relatively little is known about the association between ability and performance in accounting tasks. Thus, the purpose of this study is to investigate if PPSA predicts performance on two important auditing tasks, internal-control-evaluation and analytical procedures. Participants in this study (66 auditors and 78 accounting students) assessed vignettes of real-world financial problems and provided solutions to these problems. Participants also solved an analytical procedures and internal-control-evaluation task. The results suggest that PPSA was useful in predicting the performance of both accounting students and experienced auditors on both analytical procedures and internal-control evaluation. This is the first accounting study to examine PPSA. Practically, results suggest it may be important to attract students with high PPSA into the accounting profession.

Externally mediated outcomes are frequently used to encourage managers to enhance their performance. The literature argues that performance-contingent rewards, and especially financial ones, have a motivating effect on performance. One presumption is that differences in pay levels are differentially extrinsically valent. Whether extrinsically valent performance outcomes are met may depend on the extent to which there is slack in subordinates' budgets, the inherent degree of task programmability budgets represent, and the degree of budget emphasis in evaluation. A multi-method approach was used to evaluate this proposition based on a survey, conducted in Australia, and an experiment, undertaken in the U.S. Potential confounding effects were controlled for in the experiment and performance was objectively measured to add explanatory power. The results of the survey suggest that the influence of slack and task programmability on the relation between extrinsic valence and performance hold only in conditions of high budget emphasis. The experimental findings indicate that slack and extrinsic valence interact to affect performance when task programmability is low, but not when it is high. Moreover, the results show that extrinsic valence enhances performance in low task programmability settings when slack is low but not when it is high.

A significant concern in behavioral research in accounting has been the effect of experience on judgment and decision-making. As widely recognized, there are, however, several dimensions to experience, including general domain experience and task-specific experience. One important dimension that has received limited attention is industry experience. For instance, in an audit context, greater industry experience is expected to lead to greater effectiveness and efficiency as auditors develop a knowledge-base of the unique risks and audit approaches for a particular industry. The purpose of this study is to investigate the impact of industry experience on the generation of hypotheses of likely errors in conducting analytical procedures. Other audit planning tasks are also examined (e.g., risk assessment and extent of testing). Seventy-two auditors, 34 with significant retailing experience and 38 without such experience (both groups ranging in rank from senior to partner), completed a comprehensive, realistic case for a retailing client. Four material errors, three relating to a retailing environment, were present in the case. The findings indicate that industry experience significantly enhanced hypotheses generation in identifying errors but did not result in expected risk assessments or revisions to planned extent. Proportionately greater audit hours were, however, assigned to more experienced audit staff for misstated accounts.

The value of audit services is determined by an auditor's ability to both (1) discover misstatements in the client's accounting system and (2) report those misstatements (DeAngelo [1981a, 1981b]). Audit adjustments reflect the auditor's discovery of a potential breach in the client's accounting system. The decision to waive an audit adjustment is important, since it can potentially lead to misleading financial statements. Waiving an adjustments) may also result in litigation and loss of auditor reputation. Despite its importance, we have very little empirical evidence on the decision to waive an adjustment. The purpose of this study is to initiate an understanding of the importance placed by auditors on a number of factors noted in the literature in determining whether a proposed audit adjustment is waived. The study reported here utilizes archival data gathered from actual audit engagements to examine variables that may explain the decision to waive an audit adjustment. The findings reveal that in addition to materiality, a number of factors appear to be considered, including directional impact on income, the nature of the adjustment (objective versus subjective), and size of the client. Finally, a number of adjustments exceeding materiality were waived, highlighting the need for future research to more fully understand factors affecting this important decision and to ensure that business decisions (e.g., client pressures) do not overly influence the auditor.

Abstract Investigates the impact of industry experience on hypothesis generation in the audit-planning phase. Relevant literature and research hypothesis; Method of the research; Analysis and results of the study.

Abstract Planning judgments concerning the nature, extent and timing of evidence are critical to an audit's effectiveness and efficiency. The auditing literature suggests that knowledge of the strength of a client's internal controls in various cycles is an important consideration in such judgments, since the controls' strength is expected to affect the likelihood and nature of financial statement errors. This study examines the occurrence, financial impact and cause of detected misstatements as related to the assessed strength of internal controls. Data on detected errors were gathered from a random, cross-sectional sample of 186 audit agreements. Auditors reported detailed information on 368 audit adjustments, representing 731 misstatements to individual accounts. The results indicated that as assessed internal controls weakened, the frequency of adjustments increased and adjustments were more likely to have an effect on income. However, error magnitude did not differ across control strength settings. Errors were more likely to reflect understatement of assets and liabilities when controls deteriorated, while when controls were strong, assets and liabilities were more frequently overstated. Finally, the causes of adjustments reflect a greater frequency of 'routine' errors as controls deteriorate, although cut-off errors were relatively common across all control settings. These results suggest that different audit strategies are appropriate in response to variations in controls.

Addition of the nonionic surfactant C10E4 (n-C10H21(OCH2CH2)3OCH2CH2OH) to aqueous cetyltrimethylammonium bromide ((CTA)Br) inhibits the micellar-mediated reaction of Br- with methyl naphthalene-2-sulfonate (MeONs) under conditions in which MeONs is essentially fully micellar-bound. Fractional micellar ionization, alpha, of (CTA)Br is increased by C10E4, and the loss of Br- from the micellar surface is a major cause of the inhibition. First-order rate constants at the micellar surface are proportional to the mole ratio of bound Br- to total micellized surfactant, and second-order rate constants in the micellar pseudophase are very similar to those at the surface of a (CTA)Br micelle. These second-order rate constants are almost unaffected by incorporation of C10E4 or a moderately hydrophobic alcohol in the micellar pseudophase, probably because reaction occurs preferentially adjacent to cationic head groups at the micellar surface.

Micellar enhancement of chemical reactivity has been used to probe counterion binding to mixed cationic/nonionic micelles composed of CTABr and C10E4 by examining micellar rate effects on the reaction of bromide ion with methyl napthalene-2-sulfonate. The CTABr/C10E4 mixed micellar system was also characterized by using conductivity measurements. Results show the addition of the nonionic surfactant C10E4 leads to a marked decrease in the overall rate of demethylation of methyl napthalene-2-sulfonate by bromide ion, and that a simple pseudophase model can account for this effect.