How Do Client-Provided Benchmarking Data Impact Auditors’ Evaluations of Level 3 Fair Value Discount Rate Assumptions?

This article summarizes the published study “The Impact of Benchmark Set Composition on Auditors’ Level 3 Fair Value Judgments” (Bhattacharjee, Moreno and Wright 2019), which examines how auditors’ judgments of the reasonableness of a client’s discount rate for a Level 3 investment are impacted by client-provided benchmarks. In two experiments, the authors find that audit seniors’ and managers’ judgments of a client-preferred discount rate for an investment are inappropriately influenced by the set of peer companies provided by the client as justification. Managers are less susceptible than seniors, likely due to highly developed knowledge structures. Results suggest that providing structured audit guidance to the seniors for conducting analyses somewhat reduces but does not eliminate this effect. The study’s findings have implications for other auditing contexts using benchmarking such as goodwill impairment, inventory obsolescence, and valuation estimates and for audit firms when auditing complex estimates and determining staffing of audit engagements.

How Many Simultaneous Audit Committee Memberships Are Too Many?

Recent research by Sharma, Sharma, Tanyi, and Cheng (2020) provides new insight into directors serving on multiple public company audit committees. Specifically, they investigate how an individual audit committee director serving on multiple audit committees is related to companies’ cost of equity capital. Their evidence suggests that serving on multiple audit committees is viewed positively by investors up to a certain point, but beyond that point investors become concerned. This turning point, on average, is 3.5 audit committees for retired directors and 1.5 audit committees for directors in full-time employment. These results have implications for numerous stakeholders including investors, proxy advisors, boards, nominating committees, stock exchanges, and policymakers. They also have implications for future research.

The Structure of State Auditor Functions in the Fight Against Corruption

In this study, we examine the structure of the state auditor or equivalent function to determine the relationship with federal corruption convictions. Specifically, we explore whether differences in the responsibilities for (1) financial statement audits of state or local governments (i.e., state audit function vs. private-sector auditor) and (2) fraud investigations through whistleblower programs within states are associated with federal corruption prosecutions within the state. We find that states’ efforts in the fight against corruption appear to be more effective where state audit functions are responsible for both financial statement audits and fraud investigations. We interpret our results as support for deterrence benefits achievable through state auditor functions’ active involvement in financial statement audits and fraud investigations.

PRACTITIONER SUMMARY Implications of Employee Satisfaction and Work-Life Balance in Accounting Firms

This article summarizes and reflects on the implications of the published study “Employee Satisfaction and Work-Life Balance in Accounting Firms and Audit Quality” (Khavis and Krishnan 2021), which examines the link between employee satisfaction, work-life balance, and audit quality within accounting firms. The study uses employee-level reviews from Glassdoor.com to examine how accounting firms are perceived by their employees, and tests whether accounting firms’ workplace characteristics explain employee satisfaction and audit quality. We briefly summarize the findings of this study and highlight relevant practical implications related to audit quality, employee recruitment, and employee retention, which may interest practitioners, regulators, and academics.

Determining the Inherent Risks of Cryptocurrency: A Survey Analysis

Cryptocurrencies pose several risks that impact the inherent risk assessments of auditors. The SEC has issued warnings about the risks (Clayton 2017), and the PCAOB lists virtual assets as a key focus area in future inspections (Vincent and Wilkins 2020). This study examines how accounting professionals perceive the inherent risks associated with cryptocurrency based on their likelihood of occurrence and expected impact on financial statements. We find the risk of determining cryptocurrency value is perceived as having the highest likelihood of occurrence, and unauthorized private key access has the highest impact. Combining the evaluations of likelihood and impact, we rank the risk of ineffective exchange-level controls as having the highest inherent risk. We also find that inherent risk judgments are negatively correlated with cryptocurrency experience. Professionals with prior cryptocurrency experience, or who work for a company planning to process cryptocurrency transactions, rate inherent risk lower than those with less experience.

Greater Than the Sum of Its Parts: Collaborating for Diversity

The Center for Accounting Education at Howard University partnered with public accounting firms, professional accounting associations, state CPA societies, and accounting academics to formulate recommendations to improve the advancement and retention of Black accounting professionals. Black accountants make up 9 percent of all U.S. accountants and auditors, but in public accounting firms they account for only 4 percent of professional staff and a mere 1 percent of partners (U.S. BLS 2019; AICPA 2019). An important indicator of the collaboration’s success is that public accounting firm leaders sought out its findings and are implementing its recommendations. This paper presents the formation, operation, and outcomes of the collaboration. It also describes the value each group gained from collaborating and provides recommendations for managing collaborations. Our descriptions are offered as a model for others to translate the results of academic research into industry action.

Auditing While Black: Revealing Microaggressions Faced by Black Professionals in Public Accounting

Despite efforts of the AICPA and public accounting firms, Black professionals remain underrepresented in public accounting. To better understand the experiences of Black accountants, we interviewed current and former auditors and collected their personal stories of inequality and microaggressions. We also collected the interviewees’ suggestions about how to improve the retention of Black professionals. We hope these stories and suggestions help advance the diversity, equity, and inclusion (DEI) initiatives of public accounting firms. They can also be used by academics to stimulate discussions about DEI issues and motivate research.

Comments on Discussion Paper: Fraud and Going Concern in an Audit of Financial Statements: Exploring the Differences Between Public Perceptions About the Role of the Auditor and the Auditor’s Responsibilities in a Financial Statement Audit

We commend the International Auditing and Assurance Standards Board (the Board) on its efforts to determine “whether the auditing standards related to fraud and going concern need to be updated to reflect the rapidly evolving external reporting landscape.” We especially commend the Board on the timeliness of the call for input into these issues in that there is sufficient time to conduct research to further inform questions raised in the Discussion Paper and the questions that will inevitably arise as deliberations continue and progress is made on the project. We note below insights from the extant research literature as they relate to the questions posed in the Discussion Paper, but there remain many unanswered questions. We believe that many members of the Auditing Section of the American Accounting Association stand ready to work with the Board and other stakeholders to inform deliberations in this area.