David N. Herda

Does client participation in an external audit affect their satisfaction with the audit service

Purpose - – The purpose of this paper is to determine if self-serving bias affects audit client satisfaction level with their audit firm. Design/methodology/approach - – A 2×2 between-subjects design is used, where the authors experimentally manipulate the level of client involvement in the audit and the extent of value-added services the client received. Findings - – Using a sample of 115 financial managers (audit clients), the authors find no evidence that self-serving bias exists among clients in the experimental setting. Rather, they find that clients appear to be more satisfied with their auditor when they (clients) participate more in the service exchange. Research limitations/implications - – The research is limited to a specific context within the privately held company audit setting. Practical implications - – Audit firms may consider encouraging their privately held clients to participate more in the audit process by clearly communicating expectations and providing clients with audit preparedness materials, including templates and training where necessary. Originality/value - – Although the self-serving bias has been shown to exist in the marketing literature, the authors present a setting where the relationship between service provider (auditor) and customer (client) is such that the self-serving bias may not hold.

An Examination of the Relationship between Audit Fees and Real Earnings Management Using a Simultaneous Equations Model

Real earnings management (REM) is actions taken by management that deviate from normal business practices carried out to meet certain earnings thresholds. Cohen, Dey, and Lys (2008); Cohen and Zarowin (2010); and Chi, Lisic, and Pevzner (2011) find that increased audit scrutiny prompts companies to switch from accrual-based earnings management (ABEM) to REM. In contrast, Sohn (2011) and Greiner, Kohlbeck, and Smith (2013) conclude that REM results in heightened audit scrutiny based on their finding of a positive statistical association between REM and audit fees (a widely-used proxy for scrutiny). However, the positive association researchers observe could be due to companies switching from ABEM to REM in response to audit scrutiny, rather than auditors increasing scrutiny in response to detected REM. To further investigate whether auditors respond to REM with increased scrutiny we examine the relations between REM and audit fees using a simultaneous equations model which allows for effects in both directions. Using this testing approach, we find that the effects indeed occur in both directions. Stated explicitly, we find that higher audit fees cause more REM and that more REM causes higher audit fees. Our results provide additional evidence that auditors respond to REM with increased scrutiny even though these activities do not violate accounting rules.