Helen L. Brown-Liburd

Effects of Earnings Forecasts and Heightened Professional Skepticism on the Outcomes of Client-Auditor Negotiation

Ethics has been identified as an important factor that potentially affects auditors’ professional skepticism. For example, prior research finds that auditors who are more concerned with professional ethics exhibit greater professional skepticism. Further, the literature suggests that professional skepticism may lead the auditor to more vigilantly resist the client’s position in financial reporting disputes. These reporting disputes are generally resolved through negotiations between the auditor and client to arrive at the final reported amounts. To date, the role that professional skepticism potentially plays in the negotiation process has been relatively unexplored. The literature prior to the enactment of Sarbanes–Oxley (SOX) suggests that auditors are more likely to approve a client position when the matter in dispute is relatively ambiguous and when changing the client’s position will result in the client failing to meet analysts’ expectations. However, changes resulting from SOX have led auditors to be more vigilant and therefore results found in the pre-SOX environment may not hold in the current environment where auditors are held more accountable for their actions. Results from an experiment with experienced audit managers and partners suggest that in the post-SOX climate, auditors’ negotiations do not appear to be substantively influenced by management being able to meet or beat forecasts. Moreover, we find that when auditors exhibit heightened professional skepticism, they are more ethical by being conservative and they stand more resolute than when auditors do not exhibit heightened professional skepticism. Finally, although we do not find a main effect for the influence of earnings forecast, we do find a significant interaction between earnings forecast and heightened professional skepticism. Implications for practice and research are then presented.

CSR Disclosure Items Used as Fairness Heuristics in the Investment Decision

The growth in demand for corporate social responsibility (CSR) information raises the question of how various CSR disclosure items are used by investors, an important stakeholder group driven by instrumental, moral, and relational motives. Prior research examines the instrumental motive to maximize individual shareholder wealth and the moral motive to actualize personal stewardship interests. We contribute to the literature by examining investors’ relational motive to realize positive stakeholder relationships within and between organizations and communities. The relational motive arises when investors look at a company’s treatment of other stakeholder groups as a heuristic to form a perception of how fairly they will also be treated by that company in the future, and thus invest in the company they perceive as fair. Fair treatment in the future matters to the investor who purchases stock from the company or via the capital markets in exchange for becoming a shareholder and thus a residual claimant of the company. As such, the investor expects future cash flows from holding and/or reselling the stock and expects to be treated fairly by the company in the future. We propose that investors, use as a fairness heuristic, CSR disclosure items – CSR investment level or CSR assurance – that represent the company’s commitment to its stakeholders, and that the resulting fairness perception affects the extent to which the CSR disclosure items influence their investment decision. Using responses from 113 investors in an online experiment, we find that fairness perceptions are higher when CSR investment is above (versus below) the industry average, and that fairness perceptions partially mediate the impact of the CSR investment level on investment amount allocations. We do not find that the presence (versus absence) of CSR assurance is used by investors as a fairness heuristic. Our results are robust to controlling for preferences for financial performance and hence investors’ instrumental motive, and to controlling for individual environmental attitudes, and hence investors’ moral motive. Implications for future research and public policy are discussed.

The Effects of the Internal Control Opinion and Use of Audit Data Analytics on Perceptions of Audit Quality, Assurance, and Auditor Negligence

Advanced audit data analytics tools allow auditors to analyze the entire population of accessible client transactions. Though this approach has measurable benefits for audit efficiency and effectiveness, auditors caution that it does not incrementally increase the level of assurance expressed relative to the fair presentation of the financial statements. We experimentally examine whether the audit testing methodology (audit data analytics versus traditional sampling) and the type of internal control (ICFR) opinion auditors issue (unqualified versus adverse) affect jurors’ perceptions of auditor negligence after an audit failure. We predict and find that when auditors issue an unqualified ICFR opinion, jurors make higher negligence assessments when auditors employ traditional statistical sampling techniques than when they employ audit data analytics. We also find that when auditors issue an adverse ICFR opinion, jurors attribute less blame to auditors and correspondingly more blame to the investor for an audit failure. Additional analyses reveal that jurors perceived the use of audit data analytics as an indicator of higher audit quality, and as such, are less likely to find auditors negligent. However, jurors do not perceive a difference in the level of assurance provided by the financial statements when auditors use ADAs or traditional sampling testing methods. Our study informs regulators, practitioners, and academics about the contextual effects of the ICFR opinion, as well as the perceived assurance and potential litigation effects of using advanced technological tools in the audit.