Karla M. Johnstone

• Ph.D. Accounting
• Professor at University of Wisconsin–Madison

Conducting a fraud brainstorming session during planning assists with risk-based tailoring of the audit. An effective session should include a team environment in which all members are willing to share information to appropriately calibrate the collective assessment of fraud risk. We report the results of a study (Gissel and Johnstone 2017) in whic...

We investigate the effects of psychological safety and auditor knowledge on subordinates' willingness to share privately known, fraud-relevant information during brainstorming. We test a model illustrating how partner leadership affects subordinates' perceptions of psychological safety (P-S), which then affect brainstorming differentially depending...

We investigate how auditors respond to the discipline-specific expertise of team members in undertaking greenhouse gas (GHG) assurance. Assurors conduct these engagements using multidisciplinary teams containing varying technical expertise, with some possessing financial audit-related expertise (‘‘traditional auditors’’) and others possessing scien...

We investigate the role of audit committee economic incentives in judgments involving the resolution of detected misstatements. The results reveal a positive association between audit committee short-term stock option compensation and the likelihood that managers are allowed to waive income-decreasing misstatements that, if corrected, would have ca...

This study examines the relationship of CEO overconfidence with accrual-based earnings management, real activities-based earnings management, and targeting to meet or just beat analyst forecasts. Following, we measure “overconfidence” based on the CEO's tendency to hold in-the-money stock options, as rational expected utility maximizers should exer...

We investigate the effect of auditors’ supply chain expertise at the city-level on supplier companies’ audit quality and audit pricing. We find that auditors’ supply chain expertise at the city-level is associated with higher audit quality and lower audit fees for supplier companies, compared to companies employing auditors with no supply chain exp...

SYNOPSIS This study develops and tests a conceptual model articulating factors associated with internal audit function size in the post-SOX era. These factors include audit committee characteristics, internal audit characteristics and mission, internal audit activities performed by others (including outsourced providers and other divisions within t...

This paper describes how audit seniors modify a standard audit program in response to heightened fraud risk when cues allow formation of specific hypotheses about the nature of the fraud. We conduct an experiment in which we manipulate provision of information about an internal control material weakness. We find that when fraud risk is heightened b...

Boards of directors and compensation committees predominantly use financial measures reflecting executive managerial duties as inputs to executive compensation decisions. Yet, despite the fact that Holmstrom (1979) suggests that any readily available performance measure should be considered in executive compensation decisions, there is little resea...

This study investigates how manager and auditor incentives, along with audit committee characteristics, are associated with materiality judgments about detected misstatements. Using data on detected misstatements that occurred between 2003 and 2006, we find auditors' incentives to protect their reputations weaken the effect of managerial incentives...

This paper describes how audit seniors modify a standard audit program in response to heightened fraud risk when cues allow formation of specific hypotheses about the nature of the fraud. We conduct an experiment in which we manipulate provision of information about an internal control material weakness. We find that when fraud risk is heightened b...

This paper investigates the association between audit engagement partner tenure and audit planning and pricing. Prior archival research from countries requiring partner signature on the audit opinion provides mixed results on the implications of partner tenure for audit quality. While variation in audit quality based on partner tenure implies some...

Motivated by calls for increased compliance, size-based regulation, and continued exemption of small firms from internal control reporting requirements, we assess the incremental effects of firm size, corporate governance quality, and bad news on disclosure compliance. We examine compliance with the disclosure requirements of an SEC-mandated filing...

The revelation of material negative events about a firm, including issues such as fraud, restatements, or internal control material weaknesses (ICMWs), may destabilize the firm’s corporate governance equilibrium as it works to remediate the event or effects thereof. Prior research investigates the association between the revelation of fraud and res...

This paper addresses the current status of the recommendation by the Advisory Committee on the Auditing Profession (ACAP) that auditing firms provide periodic reporting on audit quality indicators. We first consider several reasons why public reporting of audit quality indicators in the U.S. is highly controversial. We then report some information...

The auditing environment continues to change in dramatic ways, and new professionals must be prepared for a high standard of responsibility. Prepare your students for these changes by using the new decision-making framework in Rittenberg/Johnstone/Gramling's AUDITING: A BUSINESS RISK APPROACH, 7th EDITION. With the help of new author Audrey Gramlin...

Using an experimental task that involves a dyadic negotiation between a computer-simulated client and 60 experienced audit managers and partners, this paper examines the effects of engagement risk and auditor experience resolving complex financial reporting issues on the process and outcome of client-auditor negotiation. The results show that the l...

The purpose of this paper is to provide a descriptive analysis of companies' previously uncorrected financial statement misstatements using disclosures recently mandated by Staff Accounting Bulletin No. 108 (SAB 108). We analyze 355 companies that disclose and correct 792 misstatements in their financial statements filed from November 15, 2006 to F...

We study auditors' client risk management in the first year of the Sarbanes-Act Oxley (SOX) 404 implementation, and find that a pecking order exists among auditors' strategies to manage control risk resulting from internal control weaknesses. We first examine the relation between internal control weaknesses and audit fees, modified opinions, and au...

We investigate whether information about deficiencies in controls over financial reporting made available under the Sarbanes-Oxley Act facilitates auditors' fraud detection. Using an actual fraud case, we experimentally examine auditors' planning judgments and decisions under three levels of information about material weaknesses: (1) no information...

Using longitudinal data from an international accounting firm, this paper investigates how budgeted and reported audit hours change in response to prior budget variances, fee pressure, and budget pressure imposed by audit firm management. This investigation is motivated by concern regarding the association between these factors and quality-reducing...

We examine how CFO annual salary and bonus compensation relates to internal control material weakness (MW) disclosures, and consider the roles of CFO expertise and reputation, along with board of director strength, in moderating this relationship. While an extensive body of research considers CEO compensation, little is known about factors influenc...

This paper describes how auditors conduct brainstorming sessions to comply with the requirements of SAS No. 99. We gather evidence by interviewing twenty-two auditors at all personnel levels across seven audit firms (including all of the Big 4 firms) and by observing actual brainstorming sessions. The results reveal how auditors prepare for brainst...

Previous research in non-audit contexts suggests that managers design budgets based on prior performance relative to budget targets, and that this "ratcheting" response can be asymmetrical (i.e., greater increase in target following good performance than the decrease in target following correspondingly bad performance). This implies a dynamic view...

This paper presents a framework that explains how certain incentives affecting independence risk interact with situational factors to affect actual or perceived audit quality. The combined effects of direct incentives, indirect incentives, and judgment-based decisions involving difficult accounting issues, materiality, and audit conduct are articul...

This paper investigates auditors' assessments of earnings manipulation risk and corporate governance risk, and their planning and pricing decisions in the presence of these identified risks. To conduct this investigation, we use engagement partners' assessments of their existing clients made during the participating public accounting firm's client...

This paper reports the outcome assessement of an accounting department's writing-skill improvement initiative. The paper compares the writing skills of accounting students who participated in the writing initiative with the writing skills of other business students who did not participate. Results from both outcome assessment methodologies indicate...

In this paper, we examine firms' use of the Internet to enhance the relevance of their financial reporting. We define a firm as practicing Internet Financial Reporting (IFR) when it provides in its web site either (1) a comprehensive set of financial statements (including footnotes and the auditors' report), (2) a link to its annual report elsewher...

This paper examines whether risk-management strategies (specifically, the use of specialist personnel and higher billing rates) moderate the effect of risk on client acceptance decisions, thereby assisting auditors in bringing prospective client relationships to acceptable risk/return levels. We propose a conceptual model of the client acceptance d...

Along with many other business entities, auditing firms have implemented a variety of electronic work systems to assist professionals in collecting and analyzing data, with the objective of improving operational efficiency and effectiveness. While prior research in other contexts finds that knowledge workers may reduce the impact of electronic work...

While many audit firms have adopted electronic systems for workpaper preparation and review in hopes of improving both efficiency and effectiveness, prior research shows that the expected gains may be difficult to achieve. In order to investigate possible sources of difficulty in full use of these systems in audit practice, this paper identifies in...

This article finds that clients with greater risk of fraud are less likely to engage prospective auditors in competitive bidding, consistent with the theory that these companies seek to limit access to information that might reveal their high-risk status. In contrast, we find no support for the expectation that companies with higher agency costs wi...

We examine client acceptance and client continuance decisions of a large audit firm to provide empirical evidence on the extent and nature of risk avoidance that the firm uses to purposefully manage its client portfolio. Our results support several key new inferences regarding audit firm portfolio management decisions. First, the results show that...

This paper examines the relationship between the 1994 change in audit firm legal structure from general partnerships to limited liability partnerships (LLPs) on underpricing in the initial public offering (IPO) market. The change in legal structure of audit firms reduces an audit firm's wealth at risk from litigation damages and reduces the incenti...

This paper investigates how clients' choices regarding whether or not to engage in competitive bidding affect a bidding firm's decisions about planned engagement effort and pricing. Specifically, we investigate whether competitive bidding is associated with higher planned engagement effort and lower fees relative to noncompetitive bidding, and whet...

This article investigates the effect of training on user acceptance of an electronic audit–workpaper system. Electronic work systems are implemented by organizations to reduce storage costs, facilitate communication, and improve efficiency and effectiveness. However, these goals may not be achieved because users who resist the system may try to dup...

The authors examined the effects of both general and task-specific writing experiences on college students' writing-skill development. On the basis of theories of expertise development and a cognitive process theory of writing-skill development, the authors predicted that repeated practice would be associated with superior writing skills and that a...

This paper describes the development and implementation of KRiskSM, an innovative technology-enabled auditor decision aid for making client acceptance and continuance risk assessments. KRiskSM, developed and designed by KPMG LLP, is part of the firm's audit quality control and risk management processes. In this paper, we discuss the environmental a...

This case requires you to consider the complexities of auditing in terms of a realistic client‐auditor interaction involving difficult accounting issues. The case is loosely based on an actual situation that occurred between an audit firm and its client. In the case you will assume the role of either the auditor or the client as you attempt to reso...

This paper examines how features of the task environment interact with task knowledge to affect auditors' generation of financial reporting alternatives. We study this issue in a setting in which an audit client proposes an aggressive financial reporting alternative for a complex revenue recognition issue. Companies' aggressiveness in financial rep...

This paper investigates the effects of competitive bidding on clients' and service providers' decisions. We examine the determinants of clients' decisions to choose private negotiations (i.e., only one bidder) versus competitive bidding (i.e., multiple bidders) and the effect of that choice on the bidding firm's engagement planning and bid pricing...

This study examines how client risk factors and the provision of additional services affect engagement planning and bid pricing for a set of initial engagement proposals that a single firm submitted to its prospective clients in 1997-1998. The paper finds little effect of risk on planned personnel hours, but shows that the firm responds to fraud an...

The purpose of this paper is to provide insight regarding past, present, and future research in behavioral auditing to Ph.D. students and other researchers seeking to identify productive opportunities for future research. Our analysis is informed by recent publication trends and interviews with twenty-one active researchers likely to shape behavior...

Presented in this manuscript is a series of three cases that require students to research, analyze, and write about emerging financial accounting issues or extensions of existing technical pronouncements. Specifically, the cases focus on accounts receivable valuation, environmental liabilities reporting, and the accounting for purchased in-process...

Little is known about how audit partners make the client-acceptance decision. In this paper, a model is developed and tested that characterizes the client-acceptance decision as a process of risk evaluation and risk adaptation. The model proposes that auditors will evaluate client-related risks (e.g., financial viability, and internal control) and...

This paper introduces and analyzes problem-based learning (PBL), a teaching method that is used in medical education and that has been intensively evaluated in the medical literature for its ability to incorporate realistic experiences in the classroom. A model of expertise development based on Boshuizen and Schmidt, 1992provides a cognitive framew...

This experimental study investigates how cognitive and contextual factors influence the process by which auditors develop alternative methods of accounting for complex transactions in which financial reporting guidance is ambiguous. The process of resolving these transactions is difficult for auditors when the client prefers an aggressive (i.e., in...

ABSTRACT This paper examines the effects of workpaper role (i.e., preparer or reviewer), task knowledge and technical knowledge,on auditors’ acceptance of a new computerized audit workpaper system introduced by an international public accounting firm. This research is important, as it represents an initial study of factors affecting the potential s...

Risk containment efforts are one of the most important activities of public accounting firms in today's litigious and highly competitive environment. Of these efforts, the first "line of defense" is the decision to accept a client. By effectively screening out risky potential clients, firms can guard against the risk of litigation. Despite its grow...

Acknowledgments: We gratefully acknowledge insights provided by personnel at the participating firm.