Carlin Dowling

A Big-4 Firm’s Use of Information Technology to Control the Audit Process: How an Audit Support System is Changing Auditor Behavior

This study investigates auditors’ reactions to a new audit support system that was designed by a Big-4 firm as a response to a stricter regulatory regime. The system’s features guide audit teams to comply with the firm’s methodology and auditing standards. Understanding auditors’ reactions is important because they influence the effectiveness of the system as a control. Our analysis of internal documents from the firm and interviews we conducted with auditors identifies that although many of the system’s features could have been used as a coercive control, this was not the case. The auditors view the system positively and reported that it enables the effective delivery of audit engagements. Two primary factors explain their reaction: (1) management’s interventions during system deployment, and (2) how the system’s design ensures compliance by providing audit teams with constrained choices in applying the system’s recommendations. These factors developed an auditor’s sense of empowerment by leveraging their skills and knowledge. Empowerment became stronger following management interventions that encouraged audit teams to challenge the system’s recommendations. We compare how auditors reacted to the new system with prior research, and document how this system’s features are changing auditor behavior and increasing the frequency and timeliness of audit team interaction. This analysis demonstrates that when used as a process control, an audit support system can have unintended consequences for auditor behavior and interaction. More generally, this study highlights that to understand how technology impacts auditor behavior, it is important to examine the technology’s design and deployment.

The Competitive Advantage of Audit Support Systems: The Relationship between Extent of Structure and Audit Pricing

ABSTRACT: This study investigates if different audit support system designs provide firms with competitive advantages when competing in the market for audit services. We examine the association between the extent of structure a system imposes on the audit process and audit pricing. We find that audit firms with systems that impose more structure on the audit process compete as lower-cost producers in industries more suited to a structured audit approach. However, when these audit firms are also national industry specialists, they retain a fee premium. This study provides evidence that audit support system design is associated with economic consequences for audit firms and clients. We include suggestions for future research. Data Availability: Data are available from sources described in the text with the exception of the level of structure embedded within a firms audit support system, which the audit firms provided on the condition of anonymity.

Auditor performance variation: impact of sub-specialty knowledge differences between industry-specialists

The extant literature has established that industry-specialist auditors gain performance-enhancing industry-specific sub-specialty knowledge (e.g., Solomon, Shields, & Whittington, 1999) via training and on the job experience. This knowledge has been shown to allow specialists to outperform non-specialists on a range of industry-specific tasks. The current study extends this line of research by comparing and contrasting the relative performance gains enjoyed by industry-specialist auditors in two different industry settings, one regulated and the other unregulated. When specializing in regulated industries, auditors gain very detailed industry-specific knowledge which is not the case for specialists in unregulated industries (Dunn & Mayhew, 2004). By comparing industry-specialists to non-specialists with matching industry-based experience, this study measures the relative benefits of specialization in different industry settings, rather than the benefits of specialization per se, which has been well established in the literature. This study finds that the performance gains made by regulated industry-specialists significantly outweigh those made by unregulated industry-specialists on industry-specific tasks. The implications of these results for future research and practice are explored in the body of the chapter.

Public Oversight of Audit Firms: The Slippery-Slope of Enforcing Regulation

This study uses the slippery-slope framework to understand how an oversight regulator’s enforcement style influences audit firms’ compliance actions. Using data from interviews with audit regulators and senior audit partners (including partners responsible for audit quality control) in Australia, we find that audit partners’ perceive that the regulator’s enforcement style has shifted from collaborative to coercive. As the regulator’s enforcement style became more coercive, it inhibited the development of trust and an antagonistic compliance climate emerged. In response, firms mandated strategies to increase the visibility of compliance (e.g., increasing mandatory use of checklists that focus on demonstrating form over substance). The results highlight the importance of a regulator’s enforcement style as a determinant of how audit firms manage inspection risk. An important conclusion is that audit partners are concerned that oversight of the profession is near a tipping point such that there is an increasing risk that continued coercive enforcement could increase compliance but simultaneously reduce audit quality.