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Using Cultural Mindsets to Reduce Cross‐National Auditor Judgment Differences
Abstract
In a globalized audit environment, regulators and researchers have expressed concerns about inconsistent audit quality across nations, with a particular emphasis on Chinese audit quality. Prior research suggests Chinese audit quality may be lower than U.S. audit quality due to a weaker institutional environment (e.g., lower litigation and inspection risk) or cultural value differences (e.g., greater deference to authority). In this study, we propose that lower Chinese audit quality could also be due to Chinese auditors’ different cognitive processing styles (i.e., cultural mindsets). We find U.S. auditors are more likely to engage in an analytic mindset approach, focusing on a subset of disconfirming information, whereas Chinese auditors are more likely to take a holistic mindset approach, focusing on a balanced set of confirming and disconfirming information. As a result, Chinese auditors make less skeptical judgments compared to U.S. auditors. We then propose an intervention in which we explicitly instruct auditors to consider using both a holistic and an analytic mindset approach when evaluating evidence. We find this intervention minimizes differences between Chinese and U.S. auditors’ judgments by shifting Chinese auditors’ attention more towards disconfirming evidence, improving their professional skepticism, while not causing U.S. auditors to become less skeptical. Our study contributes to the auditing literature by identifying cultural mindset differences as a causal mechanism underlying lower professional skepticism levels among Chinese auditors compared to U.S. auditors, and providing standard setters and firms with a potential solution that can be adapted to improve Chinese auditors’ professional skepticism and reduce cross‐national auditor judgment differences.
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... We also extend the work of Saiewitz and Wang (2020), who explore the impact of cultural differences on auditor judgment quality by demonstrating that Chinese component auditors tend to use concrete mental processing when evaluating audit evidence in the global group audit setting. Saiewitz and Wang (2020) find that, compared to their US counterparts, Chinese auditors tend to adopt a more holistic approach, which leads to their having less skeptical judgments. ...
... We also extend the work of Saiewitz and Wang (2020), who explore the impact of cultural differences on auditor judgment quality by demonstrating that Chinese component auditors tend to use concrete mental processing when evaluating audit evidence in the global group audit setting. Saiewitz and Wang (2020) find that, compared to their US counterparts, Chinese auditors tend to adopt a more holistic approach, which leads to their having less skeptical judgments. While Saiewitz and Wang (2020) focus on the influence of cultural factors on auditors' skepticism in assessing disconfirming evidence, we focus on the component auditor setting, where component auditors must adapt to the practical constraints they face, such as following a list of risk points provided in detailed lead auditor instructions. ...
... Saiewitz and Wang (2020) find that, compared to their US counterparts, Chinese auditors tend to adopt a more holistic approach, which leads to their having less skeptical judgments. While Saiewitz and Wang (2020) focus on the influence of cultural factors on auditors' skepticism in assessing disconfirming evidence, we focus on the component auditor setting, where component auditors must adapt to the practical constraints they face, such as following a list of risk points provided in detailed lead auditor instructions. Our findings indicate that an emphasis on following instructions step-by-step may disincline component auditors from prioritizing the broader "why" purpose of group engagements. ...
Regulators have raised concerns about the quality of component auditors' work. Of particular concern is that component auditors often do not adequately perform procedures and gather enough quality evidence. This failure is likely caused by component auditors' different interpretations of lead auditor instructions and by their lack of responsibility. Our interview findings suggest that component auditors tend to interpret lead auditor instructions concretely because they often receive detailed instructions from lead auditors. We propose that a responsibility prompt reminding component auditors to be aware of their obligations to the group audit engagement can improve their evidence collection. In two experiments, we find that our proposed responsibility prompt can effectively improve component auditors' evidence collection decisions and that this finding holds across different cultural settings. Our third experiment provides evidence that a responsibility prompt improves component auditors' evidence collection when provided to auditors who receive instructions that prime low‐level (but not high‐level) construals. Overall, our findings suggest that prompting component auditors to internalize the responsibility of a group audit engagement is a viable way to improve the quality of group audits.
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... A mindset refers to "a set of judgmental criteria and cognitive processes and procedures that produce a disposition or readiness to respond in a certain manner" (Griffith et al. 2015a, p. 54). Mindsets can influence auditors' judgment quality and application of professional skepticism (e.g., Griffith et al. 2015a;Brewster and Bucaro 2020;Saiewitz and Wang 2020). Therefore, adopting inappropriate mindsets may diminish the benefits of ADA to audit practice. ...
... Therefore, adopting inappropriate mindsets may diminish the benefits of ADA to audit practice. Although there is limited research on mindset during ADA use (Cao et al. 2021), implications can be drawn from research in related auditing areas (e.g., Griffith et al. 2015a;Plumlee et al. 2015;Backof et al. 2018;Austin et al. 2020;Saiewitz and Wang 2020). ...
... Therefore, auditors employing a deliberative mindset, relative to an implemental mindset, are less likely to exhibit bias in their information evaluation, hence motivating their examination on contradictory information and identification of inconsistencies (Griffith et al. 2015a). Similar implications can be obtained from similar studies, such as Austin et al. (2020) and Saiewitz and Wang (2020). Overall, research implies that employing mindsets which improve auditors' examination on contradictory evidence is critical to improve their skeptical judgment and application of professional skepticism. ...
The aims of this paper are to inform audit practice and academia about the potential behavioral challenges to the application of auditors’ professional skepticism when using audit data analytics (ADA) and to discuss future research opportunities. This is accomplished by reviewing relevant audit research and discussing the potential challenges from five perspectives, including auditors’ attitudes toward ADA, data characteristics, anomalies identified by ADA, auditors’ mindsets, and social contexts and interactions involved in ADA practice. Although applying ADA brings many benefits to audit practice, they simultaneously raise many challenges to the application of appropriate levels of auditor professional skepticism. Being aware of and prepared for those potential behavioral challenges is critical to maximize the benefits of ADA to professional skepticism and ultimately audit quality.
... Research identifies the following considerations associated with audit quality that we believe the group audit partner should also be mindful of: the extent to which component auditors are involved in the group audit (Burke et al., 2020), cultural and language difficulties (Sunderland and Trompeter, 2017;Burke et al., 2020;Downey and Westermann, 2020;Saiewitz and Wang, 2020), component auditor concurrent commitments and priorities (Downey and Westermann, 2020) and socio-cultural norms (Downey and Westermann, 2020). ...
... A large body of research highlights that culture can, and often does, impact auditor judgments (for a review of this literature, see Nolder and Riley, 2014) and the exercise of professional scepticism is not immune to the influence of culture (e.g., Khan and Harding, 2020;Saiewitz and Wang, 2020). We concur with the explicit recognition of cultural influences in paragraph A9. ...
... Finally, concerning the impact of cultural differences on auditor scepticism, we note research finding that making auditors aware of the different cultural mindsets can reduce the effects of culture on the exercise of professional scepticism (Saiewitz and Wang, 2020), providing additional support for our recommendation that paragraph A51 be further expanded to reinforce the need to be mindful of cultural differences in tailoring the nature of direction, supervision and review. ...
The International Auditing and Assurance Standards Board (IAASB) issued for public comment Proposed International Standard on Auditing 600 (Revised) ‘Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors) (ED 600). The Australian Auditing and Assurance Standards Board (AUASB) and New Zealand Auditing and Assurance Standards Board (NZAuASB) also called for comments. The Auditing and Assurance Standards Committee of AFAANZ prepared a submission, based on the findings reported in extant research, responding to a number of the questions asked by the IAASB (and AUASB/NZAuASB). This commentary presents the formal submission made to the IAASB (and AUASB/NZAuASB).
... Even though this is a laboratory experimental study, culture is a factor that is inherent in individuals and influences the way they make decisions. For example, Saiewitz and Wang (2020) find that American auditors use a more analytical mindset than Chinese auditors and are not easy to intervene when examining audit evidence. A compelling reason for this is that the US has a strong institutional environment (e.g., high regulatory, inspection, and litigation risks) (Saiewitz & Wang, 2020) compared to Asian countries. ...
... For example, Saiewitz and Wang (2020) find that American auditors use a more analytical mindset than Chinese auditors and are not easy to intervene when examining audit evidence. A compelling reason for this is that the US has a strong institutional environment (e.g., high regulatory, inspection, and litigation risks) (Saiewitz & Wang, 2020) compared to Asian countries. In particular, Nasution and Östermark (2012) examined the relationship between culture and professional commitment to auditor judgment in Indonesia. ...
This study investigates the role of advantageous comparisons and professional commitment in earning management rationalization. Our study adopted a laboratory between-subject experimental design with 139 accounting students. The results show that advantageous comparisons and professional commitment affect the rationalization of earning management actions. Moreover, compared to participants with high levels of professional commitment, those with low levels of professional commitment view earning management as a more appropriate action when they are engaged in earning management and viewing the egregious example of that action. This finding is important because it explains how personal psychological factors affect the ethical cognitive processes of accountants. This study complements the lack of previous studies and argues that the propensity to compare acts of delinquency depends on an individual's commitment to their profession. We also emphasize the importance of investigating this issue outside of the US context. The results of this study may be helpful to managers, practitioners, academics, and accounting researchers with a better understanding of the potential impact of exposure to earning management practices and an individual’s professional commitment to earning management behaviour. Further, based on this study, all stakeholders may be better positioned to suggest possible remedies and mitigate these behaviours.
... This will enable them to identify control system vulnerabilities, evaluate evidence, and choose a sample for control testing (Oradi et al., 2020). Consequently, this judgment might be affected by a variety of circumstances, including the cultural backgrounds of auditors (Abuaddous et al., 2018;Biada-Hireche & Garmilis, 2016;Brasel et al., 2019;Chand et al., 2012;Ghani et al., 2021;Gierusz et al., 2022;Nolder & Riley, 2014;Saiewitz & Wang, 2020;Ying, 2022;Zheng et al., 2015). ...
This study analyzed the impact of national culture on auditing processes and auditors' judgments using an ex-tensive literature analysis. The main objective was to examine the important topics of literature about the influ-ence of cultural factors on auditors' risk assessment, fraud detection, and adherence to global auditing standards. The review sought to identify the obstacles presented by cultural diversity in the uniform use of global auditing methodologies. A narrative literature review method was employed to combine data from diverse studies to identi-fy noteworthy relationships and trends.
... Fang et al., 2017) [20]. Fifth, using the experimental method, Saiewitz and Wang (2020) argue that the cultural mindset affects audit behavior. Specifically, Chinese auditors make less skeptical judgments compared to US auditors since Chinese auditors are more likely to take a holistic mindset approach. ...
Purpose
This study aims to review and synthesize the burgeoning field of auditing research utilizing Chinese data. Over the past decades, there has been a remarkable rise in such research, driven by China’s abundant audit data, distinctive institutional features and enduring cultural influences. The purpose is to comprehensively review auditing studies featured in top-tier accounting journals, shedding light on the unique contributions made possible by Chinese data. By identifying key themes across domains, this paper aims to underscore the cultural and contextual disparities between China and Western countries, predominantly the USA, within the area of auditing.
Design/methodology/approach
This study presents a systematic review of China-themed auditing research, primarily published in seven leading global accounting journals. The researchers conducted a comprehensive search of the websites of these journals, identifying relevant articles using search terms such as “China auditing,” “Chinese Stock Market and Accounting Research (CSMAR),” “institutional environment,” and “internal control.” After the initial search, 54 relevant articles were selected and reviewed. The study covers all China-specific auditing research, categorizing key themes into six areas to explore how scholars use Chinese data to address important auditing questions.
Findings
The findings reveal a significant increase in auditing research utilizing Chinese data, prominently featured in top-tier academic journals. This study categorizes six central themes, highlighting the broad range of topics explored using Chinese audit data. More importantly, the research identifies substantial cultural and contextual differences between China and Western nations, particularly the USA, that influence the auditing profession and markets. Exploring these themes underscores the invaluable insights derived from Chinese data, shedding light on areas not previously addressed by studies relying solely on Western datasets.
Originality/value
The value of this study lies in its comprehensive examination of seminal auditing studies using Chinese data, making a distinctive contribution to the auditing literature. This paper highlights the inadequacies of Western datasets in addressing certain auditing questions and emphasizes the unique advantages offered by China’s extensive public audit data, institutional characteristics and cultural determinants. The identified gap in the literature underscores the unexplored opportunities for further research in the Chinese auditing context. This study, therefore, provides a roadmap for future scholars, encouraging the exploration of new avenues and fostering a deeper understanding of the cultural nuances influencing auditing practices in China.
... Research, however, suggests that the involvement of a component auditor be recognised as an additional criterion that may be indicative of complexity (and unique to a group setting) (Burke et al., 2020;Carson et al., 2021). Complexity in group audits may arise from coordination and communication challenges between group and component auditors (Downey & Bedard, 2019; Downey & Westermann, 2021) and cross-cultural differences and language barriers between group and component auditors (Downey et al., 2020;Saiewitz & Wang, 2020). ...
The International Auditing and Assurance Standards Board (IAASB) issued for public comment Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE). The Australian Auditing and Assurance Standards Board (AUASB) and New Zealand Auditing and Assurance Standards Board (NZAuASB) also called for comments. The Auditing and Assurance Standards Committee of the Accounting and Finance Association of Australia and New Zealand (AFAANZ) prepared a submission, based on the findings reported in extant research, informing a number of the questions asked by the IAASB (and AUASB/NZAuASB). This commentary presents the formal submission made to the IAASB.
... = 0.77, t = 2.55, p = 0.01, two-tailed, untabulated). This is consistent withSaiewitz and Wang (2019), who find that Chinese and U.S. audit seniors use different mindsets with Chinese auditors making less skeptical judgments.Downloaded from http://meridian.allenpress.com/accounting-horizons/article-pdf/doi/10.2308/HORIZONS-2020-118/3003893/horizons-2020-118.pdf by Soon-Yeow Phang on 14 January 2022 ...
SYNOPSIS
Motivated by regulator concerns that auditors do not always demonstrate sufficient professional skepticism (hereafter skepticism), we consider whether a brief mindfulness intervention can assist. Research has demonstrated that mindfulness interventions help people focus on tasks in a range of settings. We draw on this research to predict, and find, that when novice auditors undertake a mindfulness intervention, they demonstrate greater skepticism than other novice auditors. This exploratory study provides preliminary evidence of an accessible intervention that can encourage greater skepticism.
... Saiewitz and Wang 2019). Such cultural differences could amplify the backfiring effect of investor perspective taking we document in this study. ...
Audit regulators and commentators propose prompting auditors to more fully take an investor's perspective as a remedy to their concern that auditors underreact to material misstatements. By contrast, we predict that prompting auditors in this manner will backfire, making them less (more) heavily weight indicia that misstatements are (not) material. We further predict auditors will apply this asymmetric weighting instrumentally—to a greater degree as needed—to justify management-preferred conclusions. We test these predictions in two experiments in which in-charge audit seniors judge the likelihood that identified audit differences are material and choose required adjustment amounts. Between-participants, we manipulate whether or not auditors are prompted to take an investor's perspective and, within-participants, whether these audit differences would or would not violate a qualitative criterion—by breaking or not breaking a favorable profitability trend. Study 1 uses a context in which a relatively low degree of motivated perspective taking is needed, as the audit difference is just below tolerable misstatement. Investor-prompted auditors assess audit differences as less likely to be material than do unprompted auditors, but only when the qualitative criterion is not violated. Study 2 adds a between-participant manipulation of misstatement tolerability—that is, whether the audit difference is just below or well above tolerable misstatement. Consistent with an instrumental increase in motivated perspective taking, investor-prompted auditors assess audit differences that simultaneously are less tolerable and violate a qualitative criterion as significantly less likely to be material. Overall, our theory and experimental evidence suggest prompting auditors to take the investor perspective may have unintended consequences.
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Purpose
A significant challenge faced by large audit firms is providing consistent quality across their global networks. Past studies have noted that cultural differences in individual auditors can create variations in judgments and decision-making, resulting in inconsistent audit quality. Social forces with a pervasive impact on behavior are likely to be one of the more expedient means of minimizing the impact of cultural differences. We hypothesize that asking auditors to make a commitment to audit quality by signing a statement of values can mitigate the effect of cultural differences on their judgments. Developing such a basic mechanism for providing uniform audit judgment could significantly enhance global audit quality and improve the global audit reputation of accounting firms.
Design/methodology/approach
We test our hypothesis on a sample of practicing auditors from the US and India using a qualitative, survey-based methodology.
Findings
Consistent with prior research, we find Indian auditors (collectivist, high power-distance culture) are more inclined to acquiesce to a client’s preferred accounting treatment than US auditors (individualist, low power-distance culture). We also find that asking auditors to affirm their commitment to audit quality reduces client acquiescence for both groups of auditors, resulting in less cross-cultural inconsistency in auditor judgments.
Originality/value
Few studies have looked at mechanisms for enhancing and promoting global audit quality. Our paper develops a simple, basic mechanism for providing uniform audit quality across the globe.
The political differences between Chinese and Japanese imperial systems offer a foundation for this study of accounting traditions in East Asia. For much of pre-modern history, the Chinese empire had a highly centralised power structure in which accounting gradually became a political institution that supported the emperor's power of governance. In pre-modern Japan, however, political control was largely shared by the shogunate and local clans of feudal lords, diverting power away from a central monarch. In such an environment, Japanese accounting traditions were orientated towards the business interests of major merchants, rather than the political interests of a centralised state. These political variances also underpin the different journeys that both countries have taken in their transition to embrace Western-style accounting practices from the late nineteenth century. This comparative history reinforces that accounting is highly responsive towards broader socio-political structures, adapting to the specific needs of changing circumstances in particular contexts.
The latest technology-based audits have quickly overcome traditional barriers for auditors to access data, client resistance, and client readiness. However, the auditor’s capacity to gather adequate and pertinent audit evidence may be hampered by limitations on travel and access as well as a shortage of human resources as a result of health issues. This research aims to analyze and discuss how auditors view and consider audit evidence throughout the pandemic. This qualitative method involves the perceptions of Indonesian Public Accountants (CPA Indonesia), especially in the Indonesian context. The informants were chosen by their involvement in their work as the partners or senior auditors of an audit firm. This research finds that during the pandemic, by fulfilling legal statutory audits and rendering a clean audit opinion even in the absence of compelling audit evidence, auditors can preserve their credibility and stability. Second, in the event of extraordinary circumstances, regulators ought to create audit guidelines and standards. Third, in order to perform audit procedures digitally and remotely, audit firms need to make investments in information technology. The implication is that the crusader, the safe pair of hands, the accommodator, and the truster are four different types of audit engagement partners discovered as a secondary result of this research.
A society’s culture affects its behavior and values. This study explores the role of national culture in accounting research. It starts by updating the work of G. Hofstede, G. J. Hofstede, and Minkov (2020), including several new measures of culture discussed by Minkov (2018) and Minkov and Kaasa (2022). As previously found, national culture dimensions are tied to accounting values and systems differently (Gray 1988; Doupnik and Tsakoumis 2004). This paper begins with a review of what national culture is, how it relates to accounting values and systems in individual countries, and how it has affected questions of interest to accounting researchers in the last decade. We then provide research questions that need to be answered by accounting researchers.
Data Availability: The data used in this study are publicly available from the sources indicated in the text.
JEL Classifications: E16; F23; M00; M14; M40; M41; M42; M49.
Given heterogeneous findings on how diversity impacts performance, we investigate diversity in internal audit teams. Using responses from 302 chief audit executives, we analyze demographic and cognitive diversity’s effects on perceived internal audit performance. Our metrics go beyond gender diversity to include nationality and education. National diversity gains importance with the increasing internationalization of companies and the global focus of internal auditing. Our findings highlight that gender diversity is conducive to team performance, whereas a skewed gender composition may impede it. We find that national and educational diversity might enhance perceived performance. However, our results indicate that in certain configurations, such as gender-uniform groups, perceived performance may be higher, revealing a complex relation between our measures for diversity and perceived performance. Our findings reveal diversity may induce biases to exclude minority groups, such that teams do not integrate additional perspectives to improve decision-making and offset the expected benefits of diversity.
Data Availability: The data that support the findings of this study are available from the authors upon request.
We contribute to the literature on intentions to report wrongdoing by examining whether Chinese internal auditors make consistent judgments when an ethical dilemma is presented in English and when the same dilemma is presented in Chinese. We invoke cultural frame switching theory, and our findings, which are based on a randomized experiment using between-subjects and within-subject mixed design, support the hypothesis that Chinese internal auditors are more likely to report wrongdoing when the ethical dilemma is presented in English than when it is presented in Chinese. Our results, which demonstrate that internal auditors make inconsistent ethical judgments in English and Chinese, point to language-triggered cognitive bias resulting from cultural mindsets. We suggest practical interventions and language strategies to improve audit quality.
Based on implicit person theories, this paper investigates the relationship between the growth mindset of manage- ment accountants and changes in the design of costing systems, as well as the role that organisational culture plays in this relationship. Using survey data from 146 management accountants of manufacturing companies, we find that management accountants who have a growth mindset increase the complexity, inconclusiveness, and functionality of their firm's costing system, compared to those who have a fixed mindset. Additionally, our results show that innovation-oriented culture (a dimension of or- ganisational culture) strengthens the relationship between growth mindset and changes in the design of the costing system.
With advances in technology (e.g., secure cloud storage and video conferencing), audit firms have increasingly been using geographically distributed auditors to staff engagements to improve resource utilization. However, such benefits may come at a cost if geographically distributed teams underperform co-located teams. To explore factors that could influence the relative effectiveness of distributed and co-located teams, we conduct an experiment to examine how team member proximity (distributed versus co-located) and assignment length (temporary versus continuing) jointly affect auditor judgment when subordinate auditors are given client-favorable guidance from their supervisor. Relying on the impression management and persuasion literatures, we predict and find that distributed auditors are less influenced by their supervisor's directional preferences than co-located auditors when they are on temporary assignment. As such, despite concerns about the effectiveness of distributed teams, we identify a setting in which it can be beneficial to utilize distributed auditors over co-located auditors. However, we also predict and find that distributed auditors tend to react more like co-located auditors when on continuing assignment. Further, we find that while distributed auditors on continuing assignment are more influenced by their supervisor's directional guidance than distributed auditors on temporary assignment, the opposite is true of co-located auditors.
Purpose
This study aims to examine whether accountability and culture have an impact on auditors’ professional scepticism. It also examines whether culture moderates the effect of accountability on auditors’ professional scepticism.
Design/methodology/approach
Three of the Big 4 firms in Australia and Egypt participated in an audit judgement experiment, which required them to indicate their beliefs about the risk of fraud and error at the planning stage of a hypothetical audit and evaluate the truthfulness of explanations provided by the client management. The authors examined whether their professional scepticism was influenced by accountability.
Findings
The results indicate professional scepticism differs significantly between cultures in some situations. The fact that culture influences scepticism suggests that even when auditors use the same standards (such as ISA 240 and ISA 600), they are likely to be applied inconsistently, even within the same firm. The authors, therefore, recommend that international bodies issue additional guidance on cultural values and consider these cultural differences when designing or adopting auditing standards.
Originality/value
To the best of the authors’ knowledge, this is the first study that examines whether culture moderates the impact of accountability on auditors’ professional scepticism using Egyptian and Australian (Middle Eastern and Western) auditors. Prior literature suggests that individuals subject to accountability pressure increase their cognitive effort and vigilance to detect fraud and error. As the authors find evidence that culture moderates accountability pressure and as accountability affects scepticism, they add to the literature suggesting that culture can influence professional scepticism.
Prior research shows that ghost ticking, or documenting audit work not actually performed, is a persistent threat to audit quality. We examine whether requiring self-references in audit workpapers (i.e., “I” performed the test) can effectively curtail ghost ticking, compared to other workpaper language that can be used in practice. We also design and test an alternative to tick marks (symbol-based notation commonly used in workpapers to describe the results of audit procedures), in which auditors select the same description of the procedure performed, but from a prepopulated drop-down list. Consistent with our hypotheses, we find that using both self-references and descriptions (as opposed to tick marks) jointly reduces ghost ticking, compared to when only one (or neither) of these are used. Overall, we demonstrate how two simple and easily implementable changes to language and tick marks can significantly curtail ghost ticking and therefore reduce its threat to audit quality.
JEL Classifications: M40; M42.
Prior research documents that auditors fail to revise audit plans to effectively address identified fraud cues. While auditors may understand what evidence would address such cues, we propose that auditors fail to apply this understanding because they use implemental mindsets when making decisions for themselves (i.e., deciding). However, we also propose that auditors use deliberative mindsets when advising. To test our predictions, we assign auditors to a decider or an advisor role in a realistic case that contains seeded fraud cues and asks them to consider revising last year's plan. We also manipulate whether the case prompts auditors to revise the plan unconventionally. Results indicate decider‐condition auditors use implemental mindsets: Prompted deciders follow the unconventional plan without regard to underlying fraud risk and unprompted deciders stick with the same‐as‐last‐year plan. Advisor‐condition auditors use more deliberative mindsets: In the prompt and no prompt conditions, they identify plans that are strongly linked to their own fraud risk assessments and that better align with experts' recommended plan for effectively addressing the seeded fraud cues. Supplemental analyses suggest deciding and advising auditors both follow experts' plan when they believe in its potential effectiveness but, after controlling for the influence of perceived effectiveness, deciding auditors follow it to a greater extent simply because they believe the PCAOB wants it. By contrast, advising auditors do not exhibit signs of excessive PCAOB influence. Our findings provide evidence that seeking informal advice (or thinking like an advisor) helps auditors to effectively revise audit plans in response to identified fraud risk – it helps when a prompt is present or not, suggesting it complements rather than merely substitutes for interventions meant to improve auditors' judgment and decision‐making.
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Auditees can play an active role in influencing staff auditors' professional judgment and skepticism. Yet, although it constitutes one of the main threats to auditor independence, very little is known about the means and extent of auditees' power during the audit engagement. To address this knowledge gap, our study focuses on a specific category of auditees, namely, auditees who have worked as auditors in large accounting firms. We interviewed 36 of these auditees and triangulated our findings with 11 interviews conducted with auditors. At the theoretical level, we conceptualize auditees' influence over auditors as intentional and active through the notion of “social power” (Raven 2008). Overall, our analysis shows that the efficacy of auditees' power during the engagement materializes through the mobilization of two main power resources developed during their time at the firms: (i) expert knowledge of auditing techniques and (ii) social capital. On the one hand, relying on their cognitive authority, auditees' employ three different power strategies to constrain staff auditors' operational independence: stage‐setting, teaching, and questioning. On the other hand, auditees' social capital can support the use of two additional strategies: attracting and monitoring. Our triangulation analysis confirms our findings and suggests that auditors may be aware of the threats to independence that auditee expertise and social capital pose. By focusing on auditees' agentic capabilities—that is, individuals' capabilities to consciously exert influence over the course of events—we reinterpret the pressures exerted by clients on auditors as the product of strategic actions, and discuss substantive consequences for independence risk.
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Auditing fair value measurements and other complex estimates (hereafter, FVMs) has received significant attention from regulators, practitioners, and researchers. Using a survey, we gather data from audit partners with FVM expertise to gain further insights in areas that have not been fully explored in the previous literature. Specifically, we extend the literature by providing a deeper understanding of the following areas: auditors’ use of different substantive approaches to test higher-risk FVMs, auditors’ use of pricing services and valuation specialists, and how challenges differ when auditing financial versus nonfinancial FVMs. In doing so, our findings and analyses extend prior research and coalesce pieces of several prior studies on auditing FVMs to provide a more complete picture of current auditing practices and challenges encountered by auditors. Our study provides insights useful in reconciling seemingly inconsistent findings in previous studies and provides important implications for future research, regulation, and standard-setting.
This study examines whether China's weak institutional environment results in lower-quality audits by the Big 4 firms. We find that the Big 4 assign their less experienced partners to companies that are listed only in China compared with clients cross-listed in Hong Kong. The Big 4 are less likely to issue modified audit reports, and they charge lower audit fees for clients that are listed only in China. Finally, companies listed only in China have larger signed abnormal accruals than do companies crosslisted in Hong Kong. Overall, we conclude that the weak institutional environment in China results in the Big 4 firms providing lower-quality audits to companies that are listed only in China.
The results of a content analysis of 1141 articles published in the Journal of International Business Studies over a 24-year time period (1989–2012) reveal that a pervasive tendency exists in the international business (IB) literature towards emphasizing the adverse outcomes associated with cultural differences more than the positive effects. We argue that this imbalance is not an accurate reflection of the reality of cross-cultural contact in IB and that it has hindered our understanding of the processes and conditions that help organizations leverage the benefits of cultural differences in a wide range of contexts. We offer several explanations for the predominance of the negative over the positive in theory and research on culture in IB; and, using a Positive Organizational Scholarship lens couched in the context of March's (1991) exploration vs exploitation organizational learning framework, highlight a complementary perspective, namely the idea that cultural differences can be an asset, not just a liability in a range of IB contexts. We conclude by offering an integrative framework within which both positive and negative effects of cultural differences can be under-stood and provide a road map for future research on culture in IB. Journal of International Business Studies (2014) 0, 1–24. doi:10.1057/jibs.2014.68
Multiculturalism, the internal representation of multiple cultural meaning systems, has critical implications for global managers and multinational corporations (MNCs). Understanding multiculturalism is becoming increasingly important, given that the locations within which MNC activity resides, and the composition of the workforce even within a given location, are more diverse. Building on the connectionism perspective, we offer a novel cognitive conceptualization of multiculturalism that incorporates the individual’s multicultural cognitive content and structure. Based on that, we explain how specific sociocultural experiences interact with existing individual cognitions to form different patterns of multiculturalism. Specifically, we propose five stylized patterns – compartmentalization, integration, inclusion, convergence, and generalization – and explain how they are developed through specific sociocultural experiences. We discuss how different patterns of multiculturalism influence specific capabilities of multicultural MNC managers and their effectiveness in a variety of critical MNC tasks. We believe the cognitive connectionist perspective, which has not been brought before into international business discussions of culture and cultural capabilities, holds great promise for better understanding global managers’ capabilities and development.
Collaboration across national boundaries has become increasingly prevalent over the last decade, yet the management literature remains remarkably unhelpful in answering questions about what happens when people across nations and cultures work closely together. We review the management literature that reports empirical studies of global work and conclude that few of these studies, despite their explicit focus on globally distributed work, meaningfully examine the intercultural aspects of these collaborations. We assume an intercultural lens to understand what gets lost by not examining the global in global work and conclude that the very process by which workers who reside in different countries confront, explore, and resolve cultural differences begs for more clarity. Further, we conclude that a more contextual and dynamic view of culture is necessary to shed light on these processes. We use two examples—social networks and technology use—to illustrate how cultural differences might generate different patterns of behavior, and consider the effect of these potential incompatibilities on global work and workers as they collaborate across national boundaries.
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A theory of the types of values on which cultures can be compared is presented and validated with data from 49 nations from around the world. Seven types of values are identified, structured along three polar dimensions: Conservatism versus Intellectual and Affective Autonomy; Hierarchy versus Egalitarianism; and Mastery versus Harmony. Based on their cultural value priorities, nations are arrayed in a two-dimensional space, revealing meaningful groupings of culturally related nations. Analyses replicate with both teacher and student samples. Implications of national differences in cultural values for differences in meaning of work are explicated. To stimulate research on cultural values and work, hypotheses are developed regarding the cultural value emphases that are especially compatible or conflicting with work centrality, with different societal norms about work, and with the pursuit of four types of work values or goals.
When data are collected via anonymous Internet surveys, particularly under conditions of obligatory participation (such as with student samples), data quality can be a concern. However, little guidance exists in the published literature regarding techniques for detecting careless responses. Previously several potential approaches have been suggested for identifying careless respondents via indices computed from the data, yet almost no prior work has examined the relationships among these indicators or the types of data patterns identified by each. In 2 studies, we examined several methods for identifying careless responses, including (a) special items designed to detect careless response, (b) response consistency indices formed from responses to typical survey items, (c) multivariate outlier analysis, (d) response time, and (e) self-reported diligence. Results indicated that there are two distinct patterns of careless response (random and nonrandom) and that different indices are needed to identify these different response patterns. We also found that approximately 10%-12% of undergraduates completing a lengthy survey for course credit were identified as careless responders. In Study 2, we simulated data with known random response patterns to determine the efficacy of several indicators of careless response. We found that the nature of the data strongly influenced the efficacy of the indices to identify careless responses. Recommendations include using identified rather than anonymous responses, incorporating instructed response items before data collection, as well as computing consistency indices and multivariate outlier analysis to ensure high-quality data. (PsycINFO Database Record (c) 2012 APA, all rights reserved).
East Asian cognition has been held to be relatively holistic; that is, attention is paid to the field as a whole. Western cognition, in contrast, has been held to be object focused and control oriented. In this study East Asians (mostly Chinese) and Americans were compared on detection of covariation and field dependence. The results showed the following: (a) Chinese participants reported stronger association between events, were more responsive to differences in covariation, and were more confident about their covariation judgments; (b) these cultural differences disappeared when participants believed they had some control over the covariation judgment task; (c) American participants made fewer mistakes on the Rod-and-Frame Test, indicating that they were less field dependent; (d) American performance and confidence, but not that of Asians, increased when participants were given manual control of the test. Possible origins of the perceptual differences are discussed.
Auditors have difficulty evaluating the assumptions underlying management's estimates. One source of these problems is that auditors appear to dismiss evidence contradicting management's assumptions because their initial preference to support management's accounting biases their preliminary conclusions and, thus, their interpretation of evidence. We experimentally examine whether auditors with a balanced focus (i.e., a focus on documenting evidence that supports and contradicts their preliminary conclusion) are less likely to dismiss evidence that contradicts management's assumptions than auditors with a supporting focus (i.e., a focus on documenting evidence that supports their preliminary conclusion). We expect and find that, compared to auditors with a supporting focus, auditors with a balanced focus create documentation that is less dismissive of evidence contradicting management's estimate. Importantly, a balanced focus changes auditors' cognition and affects how auditors interpret contradicting evidence rather than merely increasing their documentation of this evidence. The effects of reduced dismissiveness persist to improve auditors' evaluations of a biased estimate and subsequent actions, improving audit quality in an important and difficult area.
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The Public Company Accounting Oversight Board is concerned about auditors' tendency to ignore relevant information that is inconsistent with management's assumptions underlying complex estimates. We find that priming auditors to consider how management arrived at a particular assumption helps curb aggressive reporting by encouraging auditors to engage in low‐level, concrete thinking regarding the direct evidence underlying the assumption. Low‐level, concrete thinking enhances auditors' sensitivity to relevant contradictory evidence. We also find that auditors reviewing graphical (versus textual) evidence are more skeptical of aggressive assumptions underlying a complex estimate. Evidence suggests that this is because graphs provide a better cognitive fit for tasks requiring comparisons and associations among data points. Our study is important to practitioners, regulators, and researchers as it sheds light on how a simple prime and the presentation format of audit evidence influence auditors' professional skepticism in this area. Additionally, it supports audit firms' initiatives to transform data to more visual formats by highlighting a context in which graphs improve auditors' judgments. Finally, we provide evidence as to how different primes affect auditors' evaluation of evidence, which can be useful in designing more effective audit plans.
The concept of professional skepticism is pervasive throughout auditing standards, and inspectors around the globe often identify a lack of skepticism as a root cause of audit deficiencies (IFIAR, 2015, 2016). Despite its importance, the professional skepticism construct remains ill-defined and measurements used in research do not map well into practice. The purpose of this paper is to develop a conceptualization of professional skepticism that will facilitate the conduct of research with meaningful implications for practice, providing a way forward for skepticism researchers. To that end, we propose a dual conceptualization of professional skepticism as both a mindset and an attitude, and we rely on mindset and attitude theory to develop measures of each component. Mindsets drive cognitive processing, and the mindset component captures the critical thinking that is an important element of professional skepticism and is required by standards. Including the mindset component reflects the idea that skepticism involves critical analysis of evidence, and not just doubt. Attitudes include affective and cognitive components to predict intentions and behavior, and attitudes recognize the influence of social factors on evaluative judgments. Including an attitude component thus expands the notion of evaluation to include auditors' feelings, as well as their beliefs, about risk, and it improves the predictive power of “skepticism” for auditors' evidence collection. We expect that our skeptical mindset and skeptical attitude theoretical approach will move the literature forward, especially in terms of framing standards, developing interventions to improve audit quality, and performing root cause analyses.
Inspectors frequently identify deficiencies on global group audits (GGAs) attributed to problems in coordination and communication among the multiple participating firms. As GGAs involve large multinational entities with extensive global reach, the costs of audit failure are high. Prior research and theory suggest that coordination and communication challenges are common when interdependent teams perform work in complex environments. Studying actual experiences of 147 group audit leaders, we find that clients’ size/regulatory status and global structure contribute to coordination/communication challenges, but language/cultural barriers are less important. We also investigate strategies that group auditors can use to mitigate challenges, finding that modularization (advance scripting of work) and ongoing communication (availability/use of communication channels) are not as effective as tacit coordination (leveraging common ground through knowledge/experience). The variation in knowledge of component teams reported by participants leads to the question of whether group auditors can influence the training and/or selection of component personnel.
Contrast analysis has become prevalent in experimental accounting research since Buckless and Ravenscroft (1990) introduced it to the accounting literature over 25 years ago. Since its initial introduction, the scope of contrast testing has expanded, yet guidance as to the most appropriate methods of specifying, conducting, interpreting, and exhibiting these tests has not. We survey the use of contrast analysis in the recent literature and propose a three-part testing approach that provides a more comprehensive picture of contrast results. Our approach considers three pieces of complementary evidence: the visual evaluation of fit, traditional significance testing, and quantitative evaluation of the contrast variance residual. Our measure of the contrast variance residual, q², is proposed for the first time in this work. After proposing our approach, we walk through six common contrast testing scenarios where current practices may fall short and our approach may guide researchers. We extend Buckless and Ravenscroft (1990) and contribute to the accounting research methods literature by documenting current contrast analysis practices that result in elevated Type I error and by proposing a potential solution to mitigate these concerns.
Internationally operating audit firms rely heavily on global firm policies and audit methodologies to ensure consistency of audits across the globe. However, cultural differences are likely to affect auditors’ compliance with such firm-wide systems of control. In this study we use proprietary data from a Big 4’s internal quality reviews, involving 1,152 audit engagements from 29 countries, to assess the impact of cross-national cultural differences on auditors’ compliance (or not) with the firm’s policy in a specific yet crucial and culturally susceptible area of the audit process: fraud risk assessment procedures. We find that collectivism and societal trust are negatively associated, while religiosity is positively associated with compliance with global firm policy. However, we do not find evidence that compliance and power distance are associated. Overall, our findings suggest that cross-national differences in auditors’ compliance with global audit firm methodology (or not) are associated with cross-national cultural differences. An implication of our findings is that a uniform local application of global audit methodologies may remain an illusion unless different, targeted approaches for different regions in the world are considered.
In this study, we investigate whether receiving an auditor inquiry via e-mail differentially affects client responses as compared to more traditional modes of inquiry, and whether those responses are affected by the auditor's professional tone. In an experiment, experienced business professionals respond to an auditor's information request regarding a potential accounting adjustment. We varied the communication mode of the request (e-mail, audio, or visual) and the professional tone of the communication (more versus less professional) and then measured the extent to which participants revealed information that either supported or did not support the client's accounting position. We find that if an auditor asks for information via e-mail, client responses are more biased towards information that supports the client's position as compared to audio or visual inquiries. In addition, we find that clients respond in a more biased manner when the inquiry is worded in a less professional tone as compared to a more professional tone. Further underscoring the implications of these findings for audit outcomes, our results suggest that if an auditor's request leads clients to provide a response that is biased towards client-supporting information, clients may be less likely to agree with an auditor's proposed income-decreasing adjustment.
This paper discusses problems faced in conducting global group audits. We present background discussion on group audits, including the relationships between the global group entity, the group engagement team, components and the component auditors. Discussion is framed around group audit problems that were highlighted in an IAASB-sponsored review of ISA 600 regarding group audits and the use of component auditors. We also consider additional problems related to internal controls in the global group audit setting. Throughout the paper we highlight specific issues, review related research and offer opportunities for future research. Our intent is to (a) highlight issues that practitioners face on a regular basis in the conduct of global group audits and (b) identify relevant research that could lead to a more substantive and meaningful dialogue between practice and the academic auditing community.
Our 2006 Journal of International Business Studies article, “A Quarter Century of Culture’s Consequences: A Review of the Empirical Research Incorporating Hofstede’s Cultural Values Framework,” provided a comprehensive review of 180 empirical journal articles and edited volume chapters published between 1980 and June 2002 that incorporated Hofstede’s cross-cultural values framework. We examined empirical research that positioned culture as either a main or moderating effect. The review attempted to make sense of the almost quarter century of research examining the impact of culture at the individual, group/organization, and country levels. In the present commentary, we provide: (a) a summary of the progress that has been made in the intervening decade, and most importantly, (b) a new set of recommendations for the next decade to guide those wishing to study the role of national culture in organizations.
The study of culture and decision making addresses variations in how and why people from different cultures sometimes tend to decide differently. This review is organized around what is intended to be a comprehensive analysis of the distinct fundamental questions that people must answer in the process of making virtually all real-life decisions. Our emphasis was on recent developments as well as identifying important yet neglected topics (e.g., how decision episodes get started—or not, and why some decisions are never implemented). Early as well as current efforts have focused mainly on East Asian and North American Caucasian cultures, with little treatment of other populations. In such studies, individualism and collectivism have been the dominant explanatory factors although related but distinct concepts such as “tightness” and “looseness” have been welcome additions to recent discussions. Throughout, the review emphasizes practical concerns, such as the challenges of intercultural learning and collaboration.
Identifying causal mechanisms has become a cornerstone of experimental social psychology, and editors in top social psychology journals champion the use of mediation methods, particularly innovative ones when possible (e.g. Halberstadt, 2010, Smith, 2012). Commonly, studies in experimental social psychology randomly assign participants to levels of the independent variable and measure the mediating and dependent variables, and the mediator is assumed to causally affect the dependent variable. However, participants are not randomly assigned to levels of the mediating variable(s), i.e., the relationship between the mediating and dependent variables is correlational. Although researchers likely know that correlational studies pose a risk of confounding, this problem seems forgotten when thinking about experimental designs randomly assigning participants to levels of the independent variable and measuring the mediator (i.e., "measurement-of-mediation" designs). Experimentally manipulating the mediator provides an approach to solving these problems, yet these methods contain their own set of challenges (e.g., Bullock, Green, & Ha, 2010). We describe types of experimental manipulations targeting the mediator (manipulations demonstrating a causal effect of the mediator on the dependent variable and manipulations targeting the strength of the causal effect of the mediator) and types of experimental designs (double randomization, concurrent double randomization, and parallel), provide published examples of the designs, and discuss the strengths and challenges of each design. Therefore, the goals of this paper include providing a practical guide to manipulation-of-mediator designs in light of their challenges and encouraging researchers to use more rigorous approaches to mediation because manipulation-of-mediator designs strengthen the ability to infer causality of the mediating variable on the dependent variable.
In this paper, we examine why Chinese reverse merger (RM) firms have lower financial reporting quality than U.S. IPO firms. We find that the financial reporting quality of U.S. RM firms is similar to that of matched U.S. IPO firms, but Chinese RM firms exhibit lower financial reporting quality than Chinese ADR firms. We also find that Chinese RM firms exhibit lower financial reporting quality than U.S. RM firms. These results indicate that the use of the RM process is associated with poor financial reporting quality only in firms from China, where legal enforcement and investor protection are weak. In addition, we find that compared with Chinese ADR firms, Chinese RM firms have weaker bonding incentives (as measured by CEO turnover-performance sensitivity) and poorer corporate governance. These factors, in turn, contribute to the lower financial reporting quality of Chinese RM firms. Overall, our results suggest that the less scrutinized RM process allows the Chinese firms with weak bonding incentives and poor governance to gain access to U.S. capital markets, resulting in poor financial reporting quality.
JEL Classifications: G15; G24; G34; G38.
International business (IB) research has predominantly relied on value constructs to account for the influence of societal culture, notably Hofstede's cultural dimensions. While parsimonious, the value approach's assumptions about the consensus of values within nations, and the generality and stability of cultural patterns of behavior are increasingly challenged. We review two promising alternatives-the constructivist approach centering on schemas and the intersubjectivist approach centering on norms-and the evidence that demonstrates their usefulness in accounting for international differences in the behavior of managers, employees, and consumers. We propose a situated dynamics framework, specifying the role of values, schemas, and norms in accounting for cultural differences, and delineating conditions under which each causal mechanism is operative. Values play a more important role in accounting for cultural differences in weak situations where fewer constraints are perceived; schemas play a more important role when situational cues increase their accessibility and relevance; and norms play a more important role when social evaluation is salient. Directions for future research based on this integrative framework and its implications for the measurement of culture and application in IB are discussed.
Understanding the influence of culture on business operations has been one of the most enduring components of international business (IB) and international management (IM) theorizing and empirical investigation. While several critiques and debates questioned the significant progress made in this domain, the special issue we introduce here is meant to demonstrate that further advancement on how we conceptualize and measure culture is not only needed, but also possible. We provide an overview of past and current approaches in the measurement of culture in IB/IM and the challenges associated with these approaches, and emphasize the important, yet insufficiently acknowledged, link between the theoretical conceptualization of culture and its measurement. We then introduce the four articles included in the special issue and highlight how they break away from the "addiction" to approaches that have been very useful in getting where we are today, but that might not always be useful in advancing knowledge beyond what we already know. Last but not the least, we offer our own perspective on promising directions in conceptually and methodologically rethinking the study of culture in IB and IM.
The public accounting profession may be significantly disadvantaged if hindsight bias is manifest through the U.S. civil liability system. Auditors must make decisions without knowledge of an eventual outcome, but auditor liability is determined from a perspective that includes outcome knowledge. Ex post, litigants tend to blame auditors for failing to foresee and anticipate subsequent financial problems of their audit clients. This study was conducted to test the effectiveness of two methods of mitigating hindsight bias in a legal liability context. An experiment was conducted with 157 state general jurisdiction judges serving as subjects. Results indicate that these judges' evaluations of auditors' performance were subject to hindsight bias. More importantly, we found that under one of the mitigation methods, evaluative judgments were significantly more favorable than were judgments in the unmitigated negative outcome treatment, and essentially the same as evaluative judgments in the no outcome control condition. The primary contribution of this study is that it is the first to provide evidence that judges' hindsight bias can be mitigated in an audit legal liability context. Implications for audit legal liability and future research are also discussed.
This research explores whether there are systematic cross-national differences in choice-inferred risk preferences between Americans and Chinese. Study 1 found (a) that the Chinese were significantly more risk seeking than the Americans, yet (b) that both nationals predicted exactly the opposite - that the Americans would be more risk seeking. Study 2 compared Americans and Chinese risk preferences in investment, medical and academic decisions, and found that Chinese were more risk seeking than Americans only in the investment domain and not in the other domains. These results are explained in terms of a cushion hypothesis, which suggests people in a collectivist society, such as China, are more likely to receive financial help if they are in need (i.e. they could be cushioned if they fell), and consequently, they are less risk averse than those in an individualistic society such as the USA.
Integrative social contracts theory has multilevel implications for similarities and differences in ethical attitudes between and among members of national groups. This theory identifies two conditions-type of norm and degree of community inclusion-that predict convergence rather than divergence in ethical attitudes. Our findings support our convergence hypotheses. Russian and American survey respondents expressed similar attitudes toward organizational practices violating ethical "hypernorms." American expatriates who were highly included in Russian communities expressed attitudes similar to those of Russian respondents when evaluating "local norm" practices. In both cases, Russians' and Americans' ethical attitudes converged despite differences in their national identities.
Motivated by the growing cultural diversity of new hires in audit firms, this paper reviews the literature on cross-cultural differences in auditors' judgment and decision making (JDM). The overarching aim of the review is to summarize the current state of knowledge and compare our understanding of cross-cultural auditors' JDM with the broader cross-cultural JDM research in psychology to stimulate applied research. We develop a framework that categorizes those auditor judgments and decisions most likely affected by cross-cultural differences. The categories include auditors' confidence, risk and probability judgments, risk decisions, conflict decisions, and ethical judgments. We contribute to the cross-cultural audit research in four ways. First, we provide a framework by which future research can be synthesized within auditing and compared with psychology. Second, we recommend specific research questions to respond to both the gaps in extant literature and the changing multicultural environment of audit firms. Third, we advocate for an alternative theoretical approach beyond the examination of cultural traits. Finally, we argue that bicultural auditors represent an unexplored boundary condition on prior findings that warrants more immediate attention from audit researchers.
We examine the influence of national culture on the judgments of Australian and Chinese tertiary accounting students when they are interpreting selected International Financial Reporting Standards (IFRSs) that contain uncertainty expressions. To extend prior cross-cultural research, we also examine whether cultural values of individuals can change because of acculturation and accounting education, and measure their potential impact on accounting judgment. The results provide strong support for the notion that Chinese accounting students are more conservative than Australian accounting students in assigning probabilities to in-context uncertainty expressions contained in IFRSs. A unique finding of this study is that the cultural values of individuals can change because of acculturation and accounting education, and this could potentially improve the comparability of financial reports by moderating differences in the interpretation of accounting standards caused by cultural differences between accountants.
Data Availability: The complete version of the research instrument is available from the second author.
The overall complexity and estimation uncertainty inherent in financial statements have increased in recent decades; however, the related reports and services have changed very little, including the format of the balance sheet and income statement, the content in the auditor's report, and the level and nature of assurance provided on estimates. We examine estimates reported by public companies and find that fair value and other estimates based on management's subjective models and inputs contain estimation uncertainty or imprecision that is many times greater than materiality. Importantly, changes in the estimates often impact net income; consequently, the extreme estimation uncertainty also resides in measures such as earnings per share. We do not question the value audits provide to the marketplace, the importance of fair value reporting, or the ability of auditors to deploy up-to-date valuation and auditing techniques. Rather, we suggest that the convergence of relatively recent events is placing an increasingly difficult, and perhaps in some cases unrealistic, burden on auditors. We consider whether the convergence of events in regulation and standard setting may have outstripped auditors' ability to provide the level and nature of assurance currently required on estimates with extreme estimation uncertainty by auditing standards and regulators. We discuss potential changes to financial reporting and auditing standards that may improve the information provided to users and also address the concerns we raise. Finally, we suggest avenues for future research that may be fruitful in addressing how changes to standards would influence the behavior of preparers, auditors, and users.
JEL Classifications: M4; M40; M41; M42.
Data Availability: All data are publicly available.
The term “audit style” is used to characterize the unique set of internal working rules of each Big 4 audit firm for the implementation of auditing standards and the enforcement of GAAP within their clienteles. Audit style implies that two companies audited by the same Big 4 auditor, subject to the same audit style, are more likely to have comparable earnings than two firms audited by two different Big 4 firms with different styles. By comparable we mean that two firms in the same industry and year will have a more similar accruals and earnings structure. For a sample of U.S. companies for the period 1987 to 2011, we find evidence consistent with audit style increasing the comparability of reported earnings within a Big 4 auditor's clientele.
Data Availability: All data are publicly available from the sources identified in the text.
Auditors experience significant problems auditing complex accounting estimates, and this increasingly puts financial reporting quality at risk. Based on analyses of the specific errors that auditors commit, we propose that auditors need to be able to think more broadly and incorporate information from a variety of sources in order to improve audit quality for these important accounts. We experimentally demonstrate that a deliberative mindset intervention improves auditors’ ability to identify unreasonable estimates by improving their ability to identify and incorporate into their analyses contradictory information from diverse parts of the audit and improving their ability to think critically about the evidence. We perform additional analyses to demonstrate that our intervention improves auditor performance by causing them to think differently rather than simply to work harder. We demonstrate that critical thinking can improve the identification of unreasonable estimates and, in doing so, we provide new directions for addressing audit quality issues.This article is protected by copyright. All rights reserved.
Auditors and regulators have invested heavily in improving audits of estimates in recent years, but problems in this area persist. We examine the causes of these problems and why they persist. To do so, we interview 24 very experienced auditors about how they audit complex accounting estimates such as fair values and impairments and what problems they experience in the process. We find that auditors overwhelmingly choose to audit the details of management's estimate rather than use other allowable approaches. The steps auditors describe and the language they use to describe those steps indicate that they follow a process of verifying individual elements of management's assertions on a piecemeal basis, resulting in overreliance on management's process, rather than engaging in a critical analysis of the overall estimate. The problems that auditors identify are consistent with this view, and include failures to notice inconsistencies among the estimate and other internal data or external conditions and overreliance on specialists to identify, evaluate, and challenge critical assumptions. We interpret these processes and problems using institutional theory and identify two root causes: standards' and firm policies' emphasis on verifying management's model, and audit firms' division of knowledge between auditors and specialists. Institutional theory proposes these conventions arise from firms extending use of procedures that are legitimate in one area (i.e., auditing accounts without significant uncertainty) to a new area (i.e., auditing complex estimates), even though they are likely less effective in the new area. These conventions are reinforced by regulators' method of inspection and by firms' reluctance to change methods without a prompt to change to a clearly better method. We argue that these institutionalized conventions thwart auditors' good-faith attempts to engage in skeptical analysis of estimates. Thus, audit quality problems are likely to persist.
This paper extends and builds on Ronen and Shenkar’s synthesized cultural clustering of countries based on similarity and dissimilarity in work-related attitudes. The new map uses an updated dataset, and expands coverage to world areas that were non-accessible at the time. Cluster boundaries are drawn empirically rather than intuitively, and the plot obtained is triple nested, indicating three levels of similarity across given country pairs. Also delineated are cluster adjacency and cluster cohesiveness, which vary from the highly cohesive Arab and Anglo clusters to the least cohesive Confucian and Far Eastern clusters. Exploring predictors of cluster formation, we draw on the ecocultural perspective and other inputs, and examine the combined role of language, religion, and geography in generating cluster formation. We find that these forces play a prominent yet complex role: for instance, the religion and language brought by the Spanish fail to create a singular, cohesive Latin American cluster akin to the Anglo cluster. The role of economic variables is similarly considered. Finally, comparing the current map with that of 1985, we find strong support for the divergence (vs convergence) argument. Implications for international business are delineated.
This paper synthesizes the extant geographically distributed work literature, focusing on how geographic distribution affects coordination and communication, knowledge sharing, work design, and social identity. Geographically distributed audit arrangements, such as group audits and offshoring, are becoming increasingly prevalent in audit practice. However, little empirically is known about how working across cities, countries, and continents affects auditors, the audit process, or audit quality. To this end, the synthesis seeks to stimulate research investigating the implications of geographically distributed work arrangements in auditing, by surveying the extant literature within the management and social psychology disciplines and developing eighteen research questions for future audit research to consider. The synthesis reveals that geographically distributed audit work is likely to be very different from work performed in more traditional arrangements and therefore cannot be treated by audit researchers, practitioners, or standard setters as replications of domestic processes abroad. As a result, the synthesis focuses on building a greater understanding of the changes in day-to-day auditing, the consequences of such changes, and interventions that may moderate the challenges encountered in geographically distributed audit arrangements.
This paper presents the results of an experiment that examined five hypotheses related to the information search and evidence evaluation that takes place as part of an auditor's sequential decision process. The results indicate the following. (1) When given a choice, auditors examined the most reliable type of evidence. (2) Auditors who stopped at intermediate stages in the sequential task had, on average, more extreme assessments of the outcome, although there were differential effects depending on whether the auditors based their decisions on positive or negative evidence. (3) Changes in the direction of the auditor's judgments were consistent with the signal in the audit evidence. (4) Negative evidence, in general, led to greater judgment revisions than positive evidence, and the most reliable negative evidence led to the greatest revisions. (5) Auditors searched for corroborating evidence, but their evaluation of that evidence did not impact the assessment of evidence received earlier in the sequential task.
This study examines cultural influences on professional judgments of Australian, Indian and Chinese Malaysian accountants in relation to auditor-client conflict resolution. The study draws on cultural characteristics of, and differences among, these societies to formulate hypotheses that Australian accountants are less likely to resolve audit conflicts by acceding to clients than Indian and Chinese Malaysian accountants, and are also less accepting of resolving audit conflicts in this way. Data are gathered through a survey questionnaire administered to samples of senior accountants from 'big-six' (at the time of data collection) firms in Australia, India and Malaysia. The questionnaire comprised an auditor-client conflict scenario, and used both single-item and multidimensional [specifically, the Multidimensional Ethics Measure of Reidenbach and Robin (1988, 1990)] measures of professional judgment. The results support the hypotheses about differences in Australian compared to Indian and Chinese Malaysian professional judgments. Additionally, the results support the Multidimensional Ethics Measure as having greater explanatory power than a single-item measure. The results have implications for the international harmonisation of accounting and auditing standards, and for audit procedures and codes of conduct in international accounting firms.
Recent accounting scandals have resulted in regulatory initiatives designed to strengthen audit committee oversight of corporate financial reporting and have led to a concern that U.S. GAAP has become too rules-based. We examine issues related to these initiatives using two experiments. CFOs in our experiments exhibit more agreement and are less likely to report aggressively under a less precise (more principles-based) standard than under a more precise (more rules-based) standard. Our results also indicate that CFOs applying a more precise standard are less likely to report aggressively in the presence of a strong audit committee than a weak audit committee. We find no effect of audit committee strength when the standard is less precise. Finally, we find support for a three-path mediating model examining mechanisms driving the effect of standard precision on aggressive reporting decisions. These results should be of interest to U.S. policy makers as they continue to contemplate a shift to more principles-based accounting standards (e.g., IFRS).
In this paper, we first develop a model in which national legal environments play a crucial role in determining auditor effort and audit fees. Our model predicts that: (1) audit fees increase monotonically with the strength or strictness of a country’s legal liability regime; (2) given a legal liability regime, Big 4 auditors charge higher audit fees than non-Big 4 auditors; and (3) the Big 4 fee premium decreases as a country’s legal regime shifts from a weak to a strong regime. We then test the model’s predictions using a large sample of audit clients from 15 countries with different legal regimes where audit fee data are publicly available. The results of our cross-country regressions strongly support the above three predictions, and are robust to a variety of sensitivity checks. Furthermore, we find that the effects of a legal regime on audit pricing and the Big 4 premium are more salient for the small client segment than for the large client segment. Overall, our regression results indicate that a country’s legal environment plays an important role in determining both audit fees and the fee spread between Big 4 and non-Big 4 auditors.
Ongoing corporate scandal and audit failure raise serious concerns about the ability of auditors to resist client pressure. Based on a sample of 93 auditors from China and the United Kingdom (U.K.), we analyze the effect of specificity of accounting standard, level of auditor tenure, provision of management advisory services (MAS) and degree of audit market competition on perceptions of auditors' ability to withstand client pressure in audit conflict situations. We draw on cultural differences to explain differences in auditors' perceptions in the respective countries. Our findings are consistent with national cultural characteristics identified in the research literature. We find that U.K. auditors perceive specificity of accounting standards, auditor tenure, MAS and competition as less likely to affect decisions as to whether or not to accept clients' preferred accounting treatments than do their Chinese counterparts. Additionally while Chinese auditors perceive MAS and competition to be significant factors, they perceive accounting standard specificity and auditor tenure to be insignificant. For U.K. auditors, these results are reversed. The results may be relevant to international audit firms operating cross-culturally and seeking to apply common audit procedures or codes of professional conduct in different national settings.
This study examines whether auditors from different countries come to different conclusions when they perform analytical procedures to assess the risk of misstatement in accounts. During a laboratory experiment, auditors who worked for the same firm in the United Kingdom, France, and the United States performed analytical procedures on identical case materials. Although auditors from all three countries came to similar conclusions about the overall risk of misstatement, they attributed risk differently across the individual financial statement accounts they evaluated.
This study uses three audit-specific ethical dilemmas to assess the level of ethical reasoning between Chinese accounting
students (as proxies for new entrants to the auditing profession) and experienced auditors. A sample of U.S. accounting students
is used as a base for comparison. Consistent with expectations based on particularly salient aspects of Chinese national culture,
we find the Chinese students’ levels of ethical reasoning to be significantly lower than those of their U.S. counterparts
in the two cases that invoked these cultural attributes. In contrast, the Chinese students’ level of ethical reasoning is
slightly higher than that of the U.S. students in the third, control case. We further find that the Chinese auditors’ levels
of ethical reasoning are even lower than those of the Chinese students in two cases, while not being significantly different
in the third. Together, these findings suggest that cross-national differences in auditors’ ethical reasoning depend on the
nature of the ethical dilemma and caution against wholesale inferences about ethical reasoning levels in China.
KeywordsChinese accounting students-Chinese auditors-national culture-ethical reasoning
This study extended research in auditing by examining audit decision making in an international context. Audit decisions made by Japanese and U.S. auditors were compared in areas expected to be affected by cultural differences. Hofstede's measures of national characreristics, specifically, rank consciousness and group orientation, were used to predict the effects of cultural differences. In an audit setting, these differences were expected to result in differences in the acceptance of senior management judgment. Results of hypothesis testing provided evidence of the existence of national differences. The differences, however, appeared to be due to environmental factors rather than the theorized effect of cultural differences.
The East Asian countries Hong Kong, Malaysia, Singapore and Thailand provide rare insight into the interaction between accounting standards and the incentives of managers and auditors. Their standards derive from common law sources (UK, US, and IAS) that are widely viewed as higher quality than code law standards. However, their preparers’ incentives imply low quality. We show their financial reporting quality is not higher than under code law, with quality operationalized as timely recognition of economic income (particularly losses). It is misleading to classify countries by standards, ignoring incentives, as is common in international accounting texts, transparency indexes, and IAS advocacy.
This study examines the relationship between different levels of ethical reasoning and ethical behavior of Hong Kong auditors in an audit conflict situation. It tests the hypothesis that ethical reasoning scores for Hong Kong auditors will be lower than USA auditors on the basis of Hofstede's theory of cultural differences. Fifty experienced auditors from four Big Six CPA firms in Hong Kong who were administered the Defining Issues Test (DIT) participated in an experiment requiring them to make a decision on an auditor-client conflict situation. It was found that the higher the level of ethical reasoning, the lower the likelihood that the auditor would respond as acceding to the client's request. Higher levels of ethical reasoning were thus associated with more independent behavior. It was also found that P scores were significantly lower than the sample in USA thus suggesting that cultural differences could affect levels of ethical reasoning.
Based on previous research on cultural differences in analytic and holistic reasoning, it was hypothesized in these studies that when explaining events, North Americans would be more likely than East Asians to expect causes to correspond in magnitude with those events (i.e., big events stem from big causes and small events stem from small causes). In a series of studies, Canadian and Chinese participants judged the likelihood that high- or low-magnitude events were caused by high- or low-magnitude causes. Overall, Canadians expected events and their causes to correspond in magnitude to a greater degree than did Chinese. Also, Canadians primed to reason holistically expected less cause-effect magnitude correspondence than did those primed to reason analytically.