The impact of audit reforms on objectivity during the performance of non-audit services

2014 ◽  
Vol 29 (3) ◽  
pp. 222-236 ◽  
Author(s):  
Richard G. Brody ◽  
Christine M. Haynes ◽  
Craig G. White
Keyword(s):  
Audit Quality ◽  
Content Type ◽  
Auditor Liability ◽  
Internal Auditors ◽  
External Auditors ◽  
Regulatory Perspective ◽  
External Auditor ◽  
The Impact ◽  
Practical Implications ◽  
Non Audit Services

Purpose – This research aims to explore whether recent audit reforms have improved auditor objectivity when performing non-audit services. Design/methodology/approach – In two separate experiments, the authors tested whether external and internal auditors' inventory obsolescence judgments are influenced by their client's (or company's) role as the buyer or seller in an acquisition setting. Findings – External auditors assessed the likelihood of inventory obsolescence objectively, regardless of their consulting role in the acquisition setting. Internal auditors assessed the likelihood of inventory obsolescence as higher when consulting for the buyer than when consulting for the seller, consistent with the supposition that the buyer would prefer to write-down inventory and negotiate a lower purchase price, whereas the seller would prefer the inventory not be written down. Practical implications – From a regulatory perspective, external auditors may be relying too much on the work of internal auditors if internal auditors' lack of objectivity as consultants extends to their assurance role. Originality/value – This paper extends prior research in the area of internal and external auditor objectivity and is the first paper to include both subject groups in the same experiment. It also addresses the current policy issues that may have a significant effect on audit quality and auditor liability.

Communication of the external auditor with the audit committee

2018 ◽  
Vol 31 (3) ◽  
pp. 900-924 ◽  
Author(s):  
Tiphaine Compernolle
Keyword(s):  
Impression Management ◽  
Audit Committee ◽  
Design Methodology ◽  
Audit Committees ◽  
Content Type ◽  
Internal Auditors ◽  
External Auditors ◽  
External Auditor ◽  
Points Of View ◽  
Practical Implications

Purpose The purpose of this paper is to understand how external auditors communicate with audit committees (ACs). Design/methodology/approach A total of 53 interviews were conducted with participants in the ACs of 22 French companies listed in the CAC 40 index, including external and internal auditors, CFOs, AC chairpersons, and members. Findings In multiple accountability relationships, external auditors sit in the middle. They therefore use impression management (IM). While AC members expect them to be transparent, they are also expected to preserve managers’ “face” by sustaining impressions of consistency. The construction of impressions of consistency and transparency takes place mainly backstage, through time-consuming teamwork shared by auditors and CFOs. External auditors have power to make things transparent, but the use of such power is tricky, because it can damage relationships with CFOs. External auditors have a difficult “discrepant role” (Goffman, 1959) to play. Practical implications This study provides insights into what occurs behind the scenes with ACs, which can help regulators think deeper about relationships between external auditors and ACs. Originality/value This research makes contribution to governance, IM, and AC literature. It analyzes the AC process from external auditors’ – rather than AC members’ – points of view. Highlighting the AC process backstage, it shows that IM can be carried out collectively toward an internal rather than external audience and demonstrates that external auditors practice rather than limiting IM.

Internal and external auditor ethical decision‐making

2013 ◽  
Vol 28 (4) ◽  
pp. 300-322 ◽  
Author(s):  
Donald F. Arnold ◽  
Jack W. Dorminey ◽  
A.A. Neidermeyer ◽  
Presha E. Neidermeyer
Keyword(s):  
Decision Making ◽  
Ethical Decision ◽  
Ethical Decision Making ◽  
Exploratory Research ◽  
Social Consensus ◽  
Content Type ◽  
International Firms ◽  
Internal Auditors ◽  
External Auditors ◽  
External Auditor

PurposeThe aim of this exploratory research is to compare three sectors of the auditing profession – internal auditors, external auditors from larger international firms, and external auditors from smaller/regional firms – in regard to the influence of situational context on their ethically‐related decision‐making and judgment evaluations.Design/methodology/approachAgainst the backdrop of five vignettes applied with a survey, the paper examines the potential influence of social consensus and magnitude of consequence on the ethical decision path of these three auditor groups.FindingsThe paper finds that, in all cases, social consensus and magnitude of consequences exert influence on the ethical decision path. In the case of social consensus, however the paper finds that the ethical decision path is fully mediated for large firm auditors but is only partial mediated for the other two groups of auditors.Originality/valueThis research examines responses from both internal and external auditors. Comparison between such groups is unique because these groups have not been well researched in the past literature.

The Effects of Employer and Client Identification on Internal and External Auditors' Evaluations of Internal Control Deficiencies

2012 ◽  
Vol 31 (1) ◽  
pp. 39-56 ◽  
Author(s):  
Chad M. Stefaniak ◽  
Richard W. Houston ◽  
Robert M. Cornell
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Data Availability ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors ◽  
Audit Efficiency ◽  
Public Company ◽  
External Auditor ◽  
Internal Control Deficiencies

SUMMARY The Public Company Accounting Oversight Board's (PCAOB) Auditing Standard No. 5 (AS5) encourages external auditors to rely on internal auditors to increase the efficiency of lower-risk internal control evaluations (PCAOB 2007). We use post-SOX experimental data to compare the levels and effects of employer (client) identification on the control evaluations of internal (external) auditors. First, we find that internal auditors perceive a greater level of identification with the evaluated firm than do external auditors. We also find some evidence that, ceteris paribus, internal auditors are less lenient than external auditors when evaluating internal control deficiencies (i.e., tend to support management's preferred position to a lesser extent). Further, while we support Bamber and Iyer's (2007) results by finding that higher levels of external auditor client identification are associated with more lenient control evaluations, we demonstrate an opposite effect for internal auditors—higher levels of internal auditor employer identification are associated with less lenient control evaluations. Our results are important because we are the first to capture the relative levels of identification between internal and external auditors, as well as the first to compare directly internal and external auditor leniency, both of which are important in light of AS5. That is, we provide initial evidence that external auditors' increased reliance on internal auditors' work, while increasing audit efficiency, also could improve audit quality by resulting in less lenient internal control evaluations, due, at least in part, to the effects of employer and client identification. Data Availability: Contact the first author.

An Understanding of the Differences between Internal and External Auditors in Obtaining Information about Internal Control Weaknesses

2016 ◽  
Vol 28 (3) ◽  
pp. 83-99 ◽  
Author(s):  
Ian Burt
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Relevant Information ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors ◽  
Organizational Silence ◽  
Internal Control Weaknesses ◽  
External Auditor

ABSTRACT The Institute of Internal Auditors (IIA) argues that internal auditors often have a strong “employee” identity within their organization. While external auditors are concerned that this employee identity might negatively impact internal auditors' objectivity, the IIA argues this identity can actually be beneficial as employees may be more willing to share sensitive and audit-relevant information with the internal auditor than they would with the external auditor. Through an experiment relying on the social identity and organizational silence literatures, I test the prediction that non-audit employees will identify more highly with the internal than the external auditor and they will thus, be willing to share more information about internal control weaknesses with the internal than the external auditor. The results from a moderated mediation analysis support this prediction and also show the effect is stronger as the severity of the internal control weakness increases. Overall, this research informs external auditors and regulators about conditions under which the internal auditor may have an advantage over the external auditor in obtaining information that could help improve audit quality. It also informs managers about an important role played by their internal auditors that may result in increased quality of the internal control system while also potentially lowering audit fees.

Tax services, consequence severity, and jurors' assessment of auditor liability

2013 ◽  
Vol 29 (1) ◽  
pp. 50-75 ◽  
Author(s):  
John M. Thornton ◽  
Michael K. Shaub
Keyword(s):  
Audit Quality ◽  
Auditor Independence ◽  
Tax Planning ◽  
Court Case ◽  
Content Type ◽  
Auditor Liability ◽  
Audit Failure ◽  
The Impact ◽  
Independence In Appearance

Purpose – The purpose of this research is to determine whether the type of tax services provided by a public accounting firm to its audit client and the consequence severity of an audit failure impact jurors' assessment of audit quality and auditor liability. Design/methodology/approach – The authors administer a court case to 168 jurors manipulating three levels of tax services provided to an audit client (none, tax preparation, and aggressive tax planning services); two levels of consequence severity of the alleged audit failure, observing the impact on jurors' assessment of audit quality, auditor responsibility for audit failure; and damages awarded the plaintiff. Findings – Consistent with recent US regulations, jurors perceive the quality of the audit to be lower when auditors provide aggressive tax planning services, but not for tax preparation services. Damages are greater when auditors provide aggressive tax planning services across both levels of consequence severity. Research limitations/implications – The results indicate that the type of tax services provided may impact jurors' views of audit quality and damage assessments against auditors. The questionnaire uses previously validated measures, but the results may not be generalizable to jurors in all jurisdictions. Practical implications – Though empirical evidence is mixed at best about the impact of auditors providing non-audit services on auditor independence in fact, auditor independence in appearance, and thus audit quality, such impacts may affect the way jurors perceive the situation. Originality/value – The study directly tests the implications for auditor liability of new restrictions on tax services and more accurately measures the impact of consequence severity, using actual jurors.

Internal audit quality: perceptions of Tunisian internal auditors an explanatory research

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Aida Krichene ◽  
Emna Baklouti
Keyword(s):  
Audit Quality ◽  
Internal Audit ◽  
Access To Information ◽  
Quality Model ◽  
Internal Auditor ◽  
Content Type ◽  
Internal Auditors ◽  
External Auditor ◽  
The Relationship

Purpose The purpose of this study is to understand how internal auditors perceive the internal audit quality and to highlight the different profiles of internal auditors based on their perception of internal audit quality determinants. Design/methodology/approach The authors’ methodological approach is based on the submission of a self-administered questionnaire. The final sample consists of 104 internal auditors. The first stage of the study is in the lead of a certified public accountants (CPA), which highlights seven factors of the internal audit quality. The second step is a confirmatory factor analysis (CFA) that allowed the authors to validate the model proposed by the CPA. Finally, the authors carry out a typological analysis of the auditors according to their way of perceiving the factors extracted by the CPA. Findings The authors’ model, validated by the CFA, shows that the knowledge of the internal auditor, the independence of reporting, compliance with professional standards of internal audit, the relationship with the external auditor, the personal relationship of the internal auditor, the access to information and the field of intervention of the internal auditor have a positive association with the internal audit quality but with a different degree of significance. For example, the field of intervention of the internal auditor and the access to information explain better the internal audit quality. However, the knowledge of the internal auditor and the relationship with the external auditor are not significant to explain the internal audit quality. From the hierarchical cluster analysis, four groups of internal auditors emerged: the autonomous, the perfectionists, the rigorous ones and the objectives. Originality/value In offering these findings, the paper contributes to the existing internal audit literature by introducing evidence from an emerging country, namely, Tunisia, of the internal audit quality model. In addition, the authors proposed a new measure to the internal audit quality model which is the use of the work of the internal auditor by the external auditor. This study is also interesting to managers and professional internal audit organizations in recognizing the characteristics of the quality of the internal audit and advance reflections on the effectiveness of internal audit practices. The authors’ study proposes a typology of certified internal auditors through their perceptions of the quality of the internal audit while taking into account the specificities of the Tunisian audit market. This provides insights to managers and audit committees on the measures necessary to ensure the relevance of the internal audit work within their companies.

scholarly journals Do key audit matters (KAMs) matter? Auditors’ perceptions of KAMs and audit quality in Finland

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Antti Rautiainen ◽  
Jani Saastamoinen ◽  
Kati Pajunen
Keyword(s):  
Audit Quality ◽  
European Union Country ◽  
Added Value ◽  
Audit Process ◽  
Content Type ◽  
Electronic Survey ◽  
Work Effectiveness ◽  
The Impact ◽  
Audit Effectiveness ◽  
Practical Implications

Purpose Key audit matters (KAMs) in International Standard for Auditing, 701 seek to enhance the value of the auditor’s report by increasing the transparency of how the audit was performed. The purpose of this study is to investigate how professional auditors themselves perceive the impact of KAMs on audit quality and audit effectiveness. Design/methodology/approach Statistical analyses of an electronic survey of certified public auditors (CPAs) in Finland. Findings Regarding the perceptions of KAMs, the authors found two dominant views on auditing: quality and efficiency. In general, the respondents did not consider that KAMs improve audit quality. However, auditors focusing on efficiency considered that KAMs make the audit process more fluent. Further, the use of KAMs may facilitate audit effectiveness and cooperation between auditors and managers. The authors also found three factors related to the KAMs processes and auditing work: effectiveness, risks and workload. Practical implications Auditors may use KAMs to provide focus in their work. This facilitates balancing between the demands for added value while keeping the workload and audit risks at a tolerable level. Originality/value This study contributes to the emerging literature on KAMs as well as to the literature examining practitioner views of changes in auditing regulation. It is, as far as we know, the first study to report survey evidence on how CPAs themselves perceive KAMs and the effects of KAMs on audit work in an European Union country context.

Characteristics of the internal audit and external audit hours: evidence from S. Korea

2016 ◽  
Vol 31 (6/7) ◽  
pp. 629-654 ◽  
Author(s):  
Ho-Young Lee ◽  
Hyun-Young Park
Keyword(s):  
Internal Audit ◽  
Financial Statement ◽  
External Audit ◽  
Content Type ◽  
Internal Auditors ◽  
External Auditors ◽  
Audit Efficiency ◽  
Financial Statement Audit ◽  
Legal Expertise ◽  
Practical Implications

Purpose Using 5,055 sample firm-years in Korea between 2009 and 2013, this paper aims to examine the association between the characteristics of the internal audit and the number of external audit hours as a proxy for audit efficiency. Design/methodology/approach This study is motivated by the International Standard on Auditing No. 610: “Using the work of internal auditors”. This auditing standard guides external auditors in using the work of internal auditors to obtain audit evidence and consult internal auditors for direct assistance. The authors expect that external audit efficiency will increase when the work of competent internal auditors is used. Findings The authors find that the number of internal auditors relative to the number of employees is associated with the number of external audit hours. This result suggests that the greater the availability of internal auditors, the greater their contribution will be to the financial statement audit and the more efficient the audit. The authors find evidence that external auditors use the work of internal auditors with accounting and legal expertise to improve audit efficiency. They also find some evidence that the work of internal auditors with greater availability is more effective during initial external audit engagements. Originality/value This study adds to the extant literature on the contributions of internal auditors to external audits by using archival data and by measuring audit effort using a large database of audit hours. In addition, our findings have practical implications for firms and external auditors who are evaluating the role and value of using the work of internal auditors. The authors also believe that the findings will be of interest to regulators or auditing standards boards.

The impact of internal audit function characteristics on internal control quality

2018 ◽  
Vol 33 (5) ◽  
pp. 450-469 ◽  
Author(s):  
Ahmed Atef Oussii ◽  
Neila Boulila Taktak
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Audit ◽  
Audit Committees ◽  
Content Type ◽  
Internal Auditors ◽  
Control Quality ◽  
Internal Audit Function ◽  
The Impact

Purpose This paper aims to investigate the association between internal audit function (IAF) characteristics and internal control quality. Design/methodology/approach Using data gathered from 59 chief audit executives from Tunisian listed companies, this paper uses a regression model to examine research hypothesis related to the association between IAF characteristics and internal control quality. Findings The findings of the current study reveal that internal control quality is significantly and positively associated with IAF competence, internal audit quality control assurance level, follow-up process and audit committee’s involvement in reviewing the internal audit program and results. Practical implications The findings have significant implications for IAF wishing to enhance their effectiveness, by recognizing the impact of the IAF’s characteristics on internal control quality. The findings of this study also have significant implications for regulatory bodies who are concerned with the internal control quality, managers and audit committees who determine IAF investment, oversight IAF activities and assess internal auditors’ performance. Originality/value This study helps fill a gap in the extant literature where existing empirical evidence of how the IAF characteristics influences the quality of the financial reporting process in emerging markets is scant.

The impact of corporate social responsibility on firm financial performance: does audit quality matter?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Anissa Dakhli
Keyword(s):  
Corporate Social Responsibility ◽  
Financial Performance ◽  
Audit Quality ◽  
Corporate Financial Performance ◽  
Content Type ◽  
Independent Variables ◽  
Firm Financial Performance ◽  
Corporate Social ◽  
The Impact ◽  
Practical Implications

PurposeThe purpose of this paper is to investigate the relation between corporate social responsibility (CSR) and firm financial performance, and how audit quality moderates this relationship.Design/methodology/approachThis study uses panel dataset of 200 French firms listed during 2007–2018 period. The direct and moderating effects were tested by using multiple regression technique.FindingsThe authors find that CSR has a positive impact on firm financial performance proxy with return on assets (ROA), return on equity (ROE) and Tobin's Q (TQ), suggesting that investment in social activities helps firms to achieve better financial results. The authors also find that the improvement effect of CSR on corporate financial performance is more pronounced for firms audited by Big 4 auditors.Research limitations/implicationsOne limit of this study is the selection of independent variables. We are limited to one variable, namely CSR engagement. Further studies may consider other independent variables, such as the age of the company, the type of industry, the composition of the board of directors, etc., in order to provide an in-depth analysis of corporate financial performance drivers.Practical implicationsThe findings have practical implications that may be useful to managers in their management of the firm. They encourage all board members to seriously weigh investing in developing strategies that promote the social behavior components in order to improve overall corporate performance.Originality/valueThe research adds to the current literature on CSR by revealing the impact of external auditor quality on the CSR–financial performance relationship. In addition, it investigates not only the overall CSR ratings but also each of CSR dimensions, namely environmental, social and governance.

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