Nicole Thorne Jenkins

The Ties that Bind: Knowledge-Sharing Networks and Auditor Job Performance

The dissemination of knowledge in audit firms is a critical process that has gone relatively unexamined by researchers. Using social network analysis to quantify the knowledge-seeking networks in a Big 4 audit firm in the U.S., we examine the association between the types and patterns of knowledge-seeking ties and individual auditor performance. Our initial finding is that auditor job performance is negatively associated with the number of knowledge-seeking ties. Further, our analyses demonstrate that this negative association is being driven by explicit knowledge-seeking rather than tacit knowledge-seeking activities and is stronger for higher-ranked auditors. Thus, knowledge-seeking by auditors may come at a cost, particularly when that knowledge is codifiable and when the seeking is done by those at higher levels of the firm. We also find that tacit knowledge-seeking ties to managers can be beneficial for auditor performance, and tacit knowledge-seeking ties to senior managers and partners is sometimes detrimental (particularly when sought by lower-ranked auditors). In sum, this suggests that who is seeking knowledge and who is being sought for knowledge are both important for performance. Our findings may assist researchers to better understand how auditors leverage their social connections to learn, which in turn may affect audit efficiency and effectiveness. Further, audit firms might benefit from better understanding the consequences of knowledge-seeking from different sources and use this understanding to make decisions that maximize desirable information flows.

Comment on IASB/FASB 2011 ED on Revenues from Contracts with Customers

The Committee is concerned with a number of options and exceptions introduced by the 2011 ED. These options and exceptions allow alternative accounting models. Their retention on a contract-by-contract basis may create confusion for both preparers and users of financial reporting. It may leave room for intentional misstatements and structuring opportunities to anticipate profits and delay losses. As a result, the Committee believes that the initial purpose of this project (i.e., creating a comprehensive revenue recognition model that clarifies the principles for recognizing revenue and that can be applied consistently across various transactions, companies, industries, and capital markets) is not achieved and convolution and inconsistency have been introduced. One of the reasons for preparing this standard was to establish one comprehensive standard for revenue recognition, instead of separate standards concerned with distinctive industries or sectors. However, distinct standards help preparers and users clearly understand and interpret the respective models that are applied, while the ED does not. Methods and problems that are specific to some sectors may then spread to others, involving hazardous changes in accounting practices. Our Committee has already criticized the revenue recognition project, while arguing for an alternative approach that stresses the need for prudence in revenue and income recognition. The alternative suggested above focuses on the ongoing flow of enterprise activity to determine when a good or service is being transferred to the customer, or by convention on a period-by-period basis. This aspect is clearer under the model already applied in IAS 11. Well-targeted guidance may fix the issues related to specific business models not only for construction contracts, but also sophisticated long-term agreements and continuous service provision. ED involves a number of major and critical options that are included as exceptions and entirely left to preparers’ discretion on a contract-by-contract basis. This accounting modeling by exception factually leads to a plurality of accounting methods and approaches that are neither clearly defined for preparers nor clearly presented to users. These options include: • Contracts which last less than one year or more than one year; • Variable customer consideration estimated at its expected value or its most likely payment; • Revenue allocation (step4) and recognition (step5) based on transfer of (control over) an asset that occurs “over time” or “at one point in time”; • Updating and unwinding of time value of money. The ED does not introduce a single model of revenue recognition. It fails to design an understandable and feasible approach to revenue and income recognition. It even fails in providing clearly defined alternative options. The ED may then result in confusion and generate an increased variety of under-identified practices. At the same time, it introduces high complexity for and a burden of high costs on preparers. The Committee recommends the Boards should apply the control model to ordinary sales but not to long-term contracts (construction contracts, continuous service contracts). If the Boards aim to allow several accounting models, the Committee recommends these models be distinguished under clearly defined alternatives that are to be consistently applied to large categories of contracts with customers, not idiosyncratically, on a contract-by-contract basis. These categories should be presented and disclosed separately in financial statements in a meaningful way. In conclusion, the ED, in its current form, would not represent an effective improvement over existing IAS 11 and IAS 18 which did not raise major difficulties and shortcomings in the large majority of cases. Instead of issuing a new standard, well-targeted guidance may fix the issues related to business models characterized by sophisticated long-term agreements and continuous service provision.