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Under-Researched Areas of Audit Quality: Inputs, Firms, and Institutions
Title
Under-Researched Areas of Audit Quality: Inputs, Firms, and Institutions.
Creator
Eutsler, Jared, Trompeter, Gregory, Roberts, Robin, Robb, Sean, Krishnamoorthy, Ganesh, University of Central Florida
Abstract / Description
Francis (2011) lists three under-researched units of analysis that affect audit quality: inputs, firms, and institutions. This dissertation analyzes how each of these units of analysis contributes to audit quality. Study 1 examines audit inputs, specifically, characteristics of the individual auditor that affect professional skepticism. Study 2 examines how firm staffing decisions affect audit quality. Study 3 examines how the Public Company Accounting Oversight Board ((")PCAOB(")), as a...
Show moreFrancis (2011) lists three under-researched units of analysis that affect audit quality: inputs, firms, and institutions. This dissertation analyzes how each of these units of analysis contributes to audit quality. Study 1 examines audit inputs, specifically, characteristics of the individual auditor that affect professional skepticism. Study 2 examines how firm staffing decisions affect audit quality. Study 3 examines how the Public Company Accounting Oversight Board ((")PCAOB(")), as a regulatory institution, promotes audit quality through their risk-based inspection program. The first study reports the results of two experiments that examine professional skepticism as a function of moral agency. Consistent with the theory of moral disengagement (through moral agency), the results suggest that common audit firm human resource practices used to promote audit quality (i.e. hiring creative individuals, and advertising public accounting's role as protecting the capital markets) may unintentionally decrease professional skepticism through increasing moral disengagement. Results of Experiment 1 demonstrate creative auditors are more skeptical. However, they are also more prone to engage in less skeptical behavior as they fabricate more creative moral justifications (a specific method of moral disengagement) when working under time pressure. Further, Experiment 2 suggests that moral disengagement is increased when firms frame their public interest responsibilities as protecting the 'capital markets.' The use of this label unintentionally dehumanizes the individuals that make up the public, and as a result, it decreases professional skepticism. Alternatively, altering the frame of the public interest responsibilities to protecting individuals (such as more familiar individual investors) increases humanization and increases professional skepticism. The second study examines how firms affect audit quality. Audit regulators view audit firm staffing as key input affecting audit quality and have suggested that it has value as a potential indicator of audit quality. Further, regulators (such as the IAASB) have called for audit firms to avoid cutting staff (including in periods of economic contraction), as reductions in staff could have a negative impact on audit quality. However, little empirical evidence exists to support how firm-level staffing maps into engagement-level audit quality. This study evaluates the extent to which firm-level staffing affects audit quality. Audit firm employment is obtained from the 1991-2014 rankings of the top 100 U.S. public accounting firms and analyzed across multiple measures of audit quality. In multivariate tests, firm staffing (such as number of partners) and firm leverage (as measured by total partners divided by total professional staff) are associated with audit quality. This analysis provides support for claims made by regulators, about the value of potential labor related audit quality indicators proposed by the PCAOB. Further, decreases in partners or staff (from year to year) are negatively associated with audit quality supporting regulatory claims that audit firm staff cuts have a detrimental impact on audit quality. The third study examines the relationship between the PCAOB, as an institution, and audit quality. The PCAOB uses a risk-based selection process to identify engagements for inspection and states that their inspection findings are an indicator of audit quality. However, critics argue that the risk-based selection program produces reports that are not representative of the overall audit quality for the firm. This study creates a selection model, investigates the extent to which inspection findings are representative of overall firm audit quality, and examines the extent to which the inspection process may improve audit quality. Inspection reports of annually inspected firms from 2004 to 2012 are analyzed in combination with the financials of their issuer clients. Results suggest that inspection report findings can be generalized to the audit quality of those deficient accounts for the issuer client base exhibiting the highest levels of selection risk. Specifically, when audit firms have increased levels of revenue related to inspection deficiencies, their high selection risk clients have higher average discretionary revenues for the year inspected. Further, the analysis suggests that the PCAOB risk-based inspection process is effective in improving audit quality of deficient accounts for clients exhibiting the highest levels of selection risk in the subsequent year. The results indicate a negative association between prior levels of revenue specific inspection deficiencies and future levels of discretionary revenues for high selection risk clients.
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Date Issued
2016
Identifier
CFE0006297, ucf:51590
Format
Document (PDF)
PURL
http://purl.flvc.org/ucf/fd/CFE0006297
THE PUBLIC POLICY IMPLICATIONS OF AUDIT REGULATION: THREE STUDIES RELATED TO THE PASSAGE OF THE SARBANES-OXLEY ACT OF 2002
Title
THE PUBLIC POLICY IMPLICATIONS OF AUDIT REGULATION: THREE STUDIES RELATED TO THE PASSAGE OF THE SARBANES-OXLEY ACT OF 2002.
Creator
Thornburg, Steven, Roberts, Robin, University of Central Florida
Abstract / Description
This dissertation documents and evaluates certain financial and non-financial strategies used by the public accounting profession to influence audit regulation during the policy formation period of the Sarbanes-Oxley Act of 2002 (SOX). The dissertation is comprised of three separate, but related studies. Each study uses prior research in accounting and related disciplines to investigate significant aspects the profession's strategies. The first study evaluates the rationality and...
Show moreThis dissertation documents and evaluates certain financial and non-financial strategies used by the public accounting profession to influence audit regulation during the policy formation period of the Sarbanes-Oxley Act of 2002 (SOX). The dissertation is comprised of three separate, but related studies. Each study uses prior research in accounting and related disciplines to investigate significant aspects the profession's strategies. The first study evaluates the rationality and effectiveness of political action committee (PAC) contributions paid by the accounting profession to members of Congress. The study finds that the accounting profession rationally allocated more PAC contributions to top congressional leaders and to members of committees having jurisdiction over SOX. The study also finds that the accounting profession allocated more PAC contributions to legislators with a history of pro-business roll call voting behavior and to candidates in close electoral races. This evidence suggests that the profession is motivated to contribute cash to legislators in order to gain access to lobby and to influence the ideological composition of the legislature. A voting model also finds a positive relationship in two instances between PAC contributions and roll call voting favorable to the economic interests of the profession in the House of Representatives. The second study evaluates the effect of these PAC contributions on Committee members' frequency and mode of speech during public hearings related to SOX. Using computerized computational linguistics, the study finds a significant positive association between PAC contributions and speech performance. The study also finds differential uses of modals and certain verbs between legislators depending upon party affiliation. The third paper explores the rhetoric of the accounting profession's public interest ideal and the profession's motivation to invoke public interest arguments in various contexts. I approach my analysis from three different perspectives. The first perspective analyzes the public interest language of the profession as well-intentioned rhetoric. The second approach eschews any well-intentioned motivations on behalf of the profession and casts public interest arguments as propaganda cloaking self-interested action. The third approach deconstructs the public interest ideal as myth, embodying a constellation of elements including cultural values, political doctrine and contingent interests.
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Date Issued
2005
Identifier
CFE0000540, ucf:46425
Format
Document (PDF)
PURL
http://purl.flvc.org/ucf/fd/CFE0000540