Culverhouse School of Accountancy

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Are audit-related factors associated with financial reporting quality in nonprofit organizations?
(University of Alabama Libraries, 2012) Garven, Sarah Ann; Parsons, Linda M.; University of Alabama Tuscaloosa
In this paper I examine the effects of various audit-related factors on financial reporting quality in nonprofit organizations (NPOs). Similar to for-profit organizations, NPOs have incentives to report favorable financial results. However, whereas for-profit organizations focus on earnings, of particular importance to NPOs is the program ratio - the proportion of total expenses dedicated to providing programs that fulfill an organization's mission relative to supporting the organization (i.e., fundraising efforts and administration). A nonprofit can inflate its program ratio by opportunistically shifting expenses away from administration and fundraising and toward programs. Although several for-profit papers have examined the impact of audit-related factors on financial reporting quality, especially with regard to earnings management, there is very little evidence on the effects of these factors on financial reporting quality in NPOs. Due to important audit environment and institutional differences between the nonprofit and for-profit sectors, results on audit-related factors in for-profit organizations may not necessarily hold for nonprofit organizations. Thus, the nonprofit sector provides a useful setting to test the generalizability of the effects of audit-related factors on financial reporting quality from the for-profit sector to other sectors. Using logistic regression analyses, my results suggest that audit fees, new auditors, and the Sarbanes-Oxley Act may have some effect on financial reporting quality in nonprofit organizations. In addition, auditor assessments related to auditee risk, going-concern issues, and reportable conditions over financial reporting also may be factors in nonprofit financial reporting quality. However, contrary to results found in for-profit studies, new auditors and reportable conditions over financial reporting appear to be associated with higher nonprofit financial reporting quality, and auditor size using the traditional Big 4/non-Big 4 designation, as well as audit lag, do not appear to be significant factors in determining nonprofit financial reporting quality. Results are mixed with respect to auditor specialization. Overall, my study provides some evidence that certain audit-related factors are associated with financial reporting quality in nonprofit organizations, and also confirms that, due to the uniqueness of the nonprofit audit environment, results from for-profit studies cannot necessarily be generalized to the nonprofit sector.
Censorship in public libraries: an analysis using gatekeeping theory
(University of Alabama Libraries, 2017) Steele, Jennifer Elaine; Bonnici, Laurie J.; University of Alabama Tuscaloosa
One pressing issue in libraries today is the censorship of information. This study applies Kurt Lewin's gatekeeping theory to examine the decision-makers as well as the different pressures and constraints that are at issue in decisions regarding challenges and censorship attempts that occur in public libraries. Through an in-depth case study of two federal court cases dealing with challenges and censorship attempts that occurred in public libraries, this study seeks to identify the gatekeeping structures present within public libraries, specifically those that contribute to conditions that encourage librarians to censor. A qualitative content analysis of court documents as well as newspaper articles covering the court cases being analyzed, followed by a series of interviews with individuals involved in the cases, seek to reveal in more complexity the gatekeeping structure present in public libraries. Knowing who the decision-makers, or gatekeepers, are in the decision-making process, whether it is library boards, library directors, or public officials, is crucial to the understanding of censorship in public libraries. Central to the study is the phenomenon of librarians themselves engaging in acts of censorship. Factors such as power and authority can lead librarians to engage in censorship activities as a reaction to instructions from their governing bodies. Without a clear understanding of the function of gates and gatekeepers in the decision-making process, libraries may allow unintended censorship of ideas and information to persist. This study seeks to inform librarians and information professionals to become better equipped to support the fight against censorship.
Clicking and sharing health risk information on social media: how perception and emotion affect behavioral intentions
(University of Alabama Libraries, 2017) Zhang, Xueying; Zhou, Shuhua; University of Alabama Tuscaloosa
The dissemination of health risk information is a topic of key importance in health communication. With an explosion of information, health risk messages on social media need to elicit users’ intention to click and to forward to be useful. This study aimed to examine how fear appeal message and individual differences combined to drive users’ intentions to click and share health risk messages on Social Networking Sites (SNSs). Two experiments were conducted online to test the predictors of intentions to click and share respectively, with participants recruited from Mturk. The results suggested that (1) fear appeal message influenced intentions to click and share in a different way than the risk related perceptions did; (2) cognitive elaborations of the risk played a more important role in motivating click and share; (3) individual’s characteristics predicted the intentions to click and share significantly; (4) information processing styles moderated the influence of efficacy perception’s influence on intention to share and (5) the intention to follow the message significantly predicted intention to share. The theoretical and practical implications for health risk message design were discussed.
Cowboys, fathers, and everyone else: examining race in the walking dead through the myths of white masculinity
(University of Alabama Libraries, 2017) Pressnell, Levi Addison; Bennett, Beth Susan; University of Alabama Tuscaloosa
This study offers an analysis of three different series within The Walking Dead franchise: the comics, the AMC television series, and Telltale’s video games. The critical and commercial popularity of all three make them particularly worthy of study, and the franchise’s focus on characters invites a rhetorical study based on mythic figures across these three different media forms. While critical comparisons have been made either between the comics and the television series or between the comics and Telltale’s video game series, a comprehensive look at the series across all three media has so far escaped critical attention. The study explores characters in The Walking Dead media primarily through two dominant myths of White masculinity: the cowboy with his rugged individualism and the good patriarch with his care for his family. These mythic figures shift across different media, finding incarnations in many different characters and often revealing opposing perspectives that cannot find representation within the myths themselves. Critical analysis reveals the emergence of a general trend among the three series, one of increasing critique and eventual rejection of these myths of White masculinity. Alongside this trend, in character development, analysis across the three media forms suggests that increased interactivity, as seen in the video game franchise, encourages consumers to respond more directly to the myths on display. This factor was especially evident in confronting the racism that was directed at the protagonist of the first game, Lee Everett. Suggestions for future studies include how to adapt other pop culture franchises across different media, the expansion of interactivity with television viewing and second-screen services, and the continued evolution of zombie media.
The delay in recognizing goodwill impairment: flawed audit methodology or insufficient effort
(University of Alabama Libraries, 2016) Sorensen, Trevor; Lopez, Thomas J.; University of Alabama Tuscaloosa
In this study I examine whether the delay in recognizing goodwill impairment is associated with an audit process failure. Prior research finds that economic indicators of goodwill impairment precede the actual recognition of impairment by at least three years (Hayn and Hughes, 2006; Li et al., 2011; Ramanna and Watts, 2012; Li and Sloan, 2014). Griffith et al. (2015) suggest that auditors’ inability to properly audit fair value estimates (i.e., an audit process failure) is potentially the result of the auditor using a flawed methodology and/or an overreliance on management assertions (i.e., inadequate effort). I explore which of these is main explanation for the delay in recognizing goodwill impairment. Using a logistic model, I identify unrecognized goodwill impairment companies (UGI) and match them with companies that had no unrecognized goodwill impairment (NGI) and companies that recognized goodwill impairment (IMP). Utilizing fees as a proxy for audit effort, I provide evidence that auditors put forth more effort to test UGI companies for impairment when compared to NGI companies. This is consistent with auditors putting forth more effort when indicators of impairment are present. On the other hand, I find that auditors put forth the same level of effort for UGI and IMP companies. This is inconsistent with the expectation of increased effort due to the potential for material misstatement and increase litigation risk to the auditor since no impairment is recognized by UGI companies. Combined with Griffith et al., I infer that both a flawed methodology and insufficient audit effort contribute to the delay in recognizing goodwill impairment.
Do auditors' perceptions of materiality change in response to approaching deadlines?
(University of Alabama Libraries, 2012) Bennett, George Bradley; Hatfield, Richard C.; University of Alabama Tuscaloosa
This study examined the impact that deadline pressures have on auditors' perceptions of materiality. I use the context of the audit of Internal Controls over Financial Reporting (ICFR) to determine whether the year-end deadline impacts auditors' assessment of control deficiencies. I also considered how the perceived cause of the increased deadline pressure (i.e., whether the timing of testing is the auditor's fault) may further affect the auditors' judgment of significance. To evaluate these decisions, I used a 3x2 between-subjects experiment, manipulating time deadline pressure (low, high, and post-deadline) and the cause of the deadline pressure (auditor fault or not). I measured the auditors' assessment of the materiality of an identified control deficiency, as well as the amount of audit evidence the auditor would consider sufficient for retesting remediated controls. Findings suggest an interactive effect on auditors' materiality assessments of errors/deficiencies when they identify the error under high deadline pressure and the auditor is at fault for creating the higher pressure, resulting in a lower assessment of the errors' materiality under these conditions. Further, auditors are willing to test fewer items when the auditor is at fault for creating deadline pressure, as well as accepting a higher deviation rate for the sample (i.e., the auditors will accept more errors/deficiencies in fewer sample items). However, auditors increased their materiality judgments of identified errors when deadline pressure was no longer present (after year-end), even though incentives to issue an unqualified opinion still exist. This study extends existing literature by examining the temporal effects on materiality, specifically the auditor's perceptions and application of materiality. It also complements recent archival research examining consequences of adverse opinions on the audit of ICFR (e.g., Cassell et al., 2011; Hammersley et al., 2010) by considering how pressures and incentives to avoid such consequences influence the audit of ICFR.
Do Investors Care Who Did the Audit? Evidence from Form AP
(Wiley, 2021-05) Doxey, Marcus M.; Lawson, James; Lopez, Thomas J.; Swanquist, Quinn T.
In early 2017, the PCAOB mandated the disclosure of audit participants, including the lead audit partner and other audit firms participating in the audit (“component auditors”). In this study, we examine whether investors use these disclosures in a way that influences their investment decisions, a primary goal of the PCAOB. Using trading volume, absolute abnormal returns, and bid-ask spreads, we find little evidence of a significant investor response following the disclosure of partner identity or component auditor participation in the first three years of the requirement. We also examine instances where these disclosures are most likely to be informative (e.g., partners associated with restatements or component auditors with PCAOB deficiencies) and find no significant investor response. Taken together, we find little evidence that capital markets respond to partner and component auditor identity in the United States.
Donors, distance, and the influence of accounting information
(University of Alabama Libraries, 2020) Mercado, Julie; Parsons, Linda M.; University of Alabama Tuscaloosa
In this study, I test a practical intervention to a problematic occurrence in nonprofit organizations: the overemphasis of spending ratios, specifically the program ratio, when assessing nonprofit performance. Prior research indicates that donors place undue focus on not-for-profit (NFP) program ratios, which can result in suboptimal giving decisions because these ratios provide an incomplete measure of performance. To address this, regulators recommend that organizations provide explanatory information to aid donors in better understanding NFP performance. I present theoretical and experimental evidence to show that donations to an NFP with a low program ratio are higher if explanatory information is provided, and this effect is greater when the presentation of that information (concrete vs. abstract) is congruent with a donor’s distance (near vs. far). Additionally, I find that donors whose distance is far from an organization are more likely to be influenced by favorable desirability (goal-related) information than those whose distance is near. If donors are provided with unfavorable desirability information, they tend not to further penalize an NFP with a low program ratio if they are also provided with favorable feasibility (process-related) information (e.g., explanatory information). This study provides important insights regarding the communication of accounting information. Results suggest that the provision of explanatory information causes the negative impact of a low program ratio to decline, resulting in an increased willingness to donate to an NFP, especially when the explanatory information is congruent with a donor’s distance. While explanatory information does not change performance, it – along with favorable desirability information – can aid donors in better understanding the purpose and strategies of NFP spending.
Dual signals of future performance: how will the compensation committee respond?
(University of Alabama Libraries, 2012) Leggett, Denise Marie; Reitenga, Austin L.; University of Alabama Tuscaloosa
Pay-for-performance is an important contracting tool available to mitigate agency costs. Matsunaga and Park (2001) suggest CEOs of firms that meet or beat (miss) the analysts' forecast receive a bonus compensation premium (discount) in affirmation of a pay-for-performance relation based on extant literature that suggests meet or beat firms outperform miss firms. However, Bhojraj, Hribar, Picconi, and McInnis (2009) more recently suggest miss firms with a positive signal of future performance outperform beat firms with a negative signal of future performance. I extend Matsunaga and Park (2001) by examining the incremental contribution of a positive/negative future performance signal in the determination of CEO bonus compensation to determine if the pay-for-performance relation holds, particularly for the subset of firms with conflicting analysts' forecast/future performance signals. Generally, my hypotheses predicting the future performance signal will incrementally contribute to the determination of bonus compensation are unsupported. This result is consistent with a breakdown in the pay-for-performance relationship attributable to either a myopic focus on an earnings threshold signal or an inability to interpret the future performance signal. Alternately, this result could also suggest the firm considers the cost of missing the forecast to be greater than the cost associated with a decline in future performance.
The effect of off-site audit work on the judgment quality and development of staff auditors
(University of Alabama Libraries, 2016) Carrasco, Heather; Hatfield, Richard C.; University of Alabama Tuscaloosa
This study experimentally examines the effects of recent increases in off-site audit work (e.g., task-specific experience and social environment) on the judgment quality and development of staff auditors. First, I examine how preparing testwork (i.e. task-specific experience) affects the subsequent performance of staff auditors’ workpaper review. Second, I consider how the physical presence or absence (i.e., social environment) of a high-ranking auditor affects the judgment quality of staff auditors. I provide evidence that staff auditors, who have the opportunity to prepare basic audit tasks prior to reviewing workpapers, identify more mechanical seeded errors than auditors who only review workpapers. Further, I find that the presence of a high-ranking auditor improves the performance of staff auditors in completing a subsequent workpaper review task, especially when the participants prepare testwork prior to reviewing workpapers. The results of this study highlight the practical implications of the current audit environment; as well as contributing to the emerging literature examining off-site audit work.
The effects of internal audit role and reporting relationships on investor perceptions of disclosure credibility
(University of Alabama Libraries, 2009) Holt, Travis Paxton; DeZoort, F. Todd; University of Alabama Tuscaloosa
This study assesses whether internal audit role and reporting relationships affect investor judgment and decision-making. Specifically, the study examines whether investor perceptions of disclosure credibility of financial statement information are increased by the inclusion of an Internal Audit Report (IAR) that details an internal audit function whose role is primarily assurance-related (versus consulting-related) and who reports strategically to the audit committee and administratively to the CEO (versus strategically and administratively to the CFO). The study also tests whether the effects on investor perceptions of disclosure credibility are mediated by investor perceptions of the level of assurance provided by internal audit. The study is motivated by a lack of information about firms' internal audit functions given the function's key role in corporate governance and by the need to better understand the influence of various internal audit characteristics on investor judgment and decision-making. The lack of this governance information is costly to firms due to investors demanding a premium to bear the risks associated with the uncertainty. The experiment used a 2x2 design with internal audit role (i.e. primarily assurance vs. primarily consulting) and reporting relationship (i.e. reports strategically to the audit committee and administratively to the CEO vs. strategically and administratively to the CFO) randomly manipulated between subjects. The participants of the study were comprised of 84 MBA students serving as proxies for nonprofessional investors. The results indicate that participants perceived disclosure credibility to be significantly higher when the Chief Audit Executive reported strategically to the audit committee and administratively to the CEO (versus both strategically and administratively to the CFO). Mediation testing indicates that this increase in perceived disclosure credibility was attributable to an increase in the level of assurance provided for the disclosed financial information. The results reveal no significant differences in perceived disclosure credibility from the differing internal audit roles. Finally, supplemental analysis indicate that the reporting relationship judgments ultimately affected participants' price-earnings multiple decisions.
Effects of the concept release on the auditor's reporting model on jury verdicts of auditor's legal liability
(University of Alabama Libraries, 2013) Brasel, Kelsey; Hatfield, Richard C.; University of Alabama Tuscaloosa
This study examines the potential effects of the PCAOB's Concept Release 2011-003 to the standard auditor's report on an auditor's negligence liability. Specifically, I examine the effect of a required emphasis paragraph on the likelihood of guilty verdicts and damage awards in auditor negligence trials. Using a case study, participants determine the legal liability outcomes of a case against an auditor when an emphasis paragraph is absent compared to when the paragraph discusses significant accounts and estimates, as dictated by the Concept Release. This study utilizes hindsight bias and attribution theory, which relate to an individual's ability to reconstruct causal series of events ex-post, thereby affecting assumed foreseeability and responsibility. I predict the auditor's likelihood of guilty verdicts and damage awards will be higher when the emphasis paragraph is present (as required by the Concept Release) compared to when an emphasis paragraph is not provided. I also examine the likelihood of guilty verdicts and damage awards when an emphasis paragraph is present but differs in content. Consistent with hypothesized results, I find evidence that the presence of an emphasis paragraph in the auditor's report affects guilty verdicts. Specifically, the presence of an emphasis paragraph, regardless of content, increases guilty verdicts by jurors compared to when the emphasis paragraph is not present. However, contrary to hypothesized results I do not find evidence that the content of the emphasis paragraph in the auditor's report affects the magnitude of compensatory damage awards. Therefore, results suggest jurors have higher instances of guilty verdicts in an auditor negligence trial when the auditor's report contained an emphasis paragraph, regardless of if the emphasis paragraph did or did not discuss the account that eventually resulted in the audit failure. Results of this study have practical implications and contribute to both audit and legal liability literature. The topic of this study, the effects of a required emphasis paragraph in the standard auditor's report on an auditor's legal liability, remains important as the PCAOB considers requiring future changes to the auditor's reporting model.
An examination of analysts’ target price forecasts after accounting misstatements
(University of Alabama Libraries, 2020) Street, Daniel Alan; Swanquist, Quinn; University of Alabama Tuscaloosa
I investigate the magnitude, accuracy, and informativeness of analysts’ target price forecast revisions after material negative accounting misstatements. Although prior researchers find that analysts’ earnings forecasts decline after misstatements, the effects of misstatements upon analysts’ target price forecasts have not yet been investigated. Relative to analysts’ target price forecasts for control firms, I find that analysts decrease their target price forecasts more sharply for misstating firms. Although analysts’ target price forecast revisions are somewhat less accurate for misstating firms, I find that analysts’ target price forecast revisions for misstating firms remain informative to the stock market. Several misstatement and target price forecast characteristics (misstated account, misstatement intention, SEC investigation, and CEO turnover after misstatement) affect the average magnitude, accuracy, and informativeness of analysts’ target price forecast revisions. These findings inform investors regarding the extent to which they may effectively rely upon analysts’ target price forecasts after material negative accounting misstatements and contribute to our knowledge of the value relevance of historical accounting and future earnings expectations for sell-side analysts.
An examination of the theoretical links between symmetric timeliness, asymmetric timelines, and conditional conservatism
(University of Alabama Libraries, 2015) Ruch, George; Taylor, Gary; University of Alabama Tuscaloosa
Prior research has considered the ability of earnings recognition tendencies to proxy for conditional conservatism, but has yet to fully explore the validity of the theoretical link between these tendencies and conditional conservatism. This study analytically and empirically examines the extent to which two common earnings recognition tendencies, symmetric timeliness and asymmetric timeliness, are consistent with the theoretical definition of conditional conservatism. First, I demonstrate how symmetric and asymmetric timeliness contribute to the understatement of accounting net asset value. Second, I evaluate the extent to which symmetric and asymmetric timeliness are observable through their respective empirical estimates. I find that the extent to which symmetric timeliness and asymmetric timeliness meet the theoretical definition of conditional conservatism is dependent on the relative accumulations of economic gains and losses. Additionally, I find that asymmetric timeliness is only partially observable within the Basu (1997) Asymmetric Timeliness measure.
The financial reporting and tax aggressiveness implications of schedule utp
(University of Alabama Libraries, 2015) Davenport, Stephan Arthur; Stone, Mary S.; University of Alabama Tuscaloosa
In 2010, the Internal Revenue Service (IRS) announced the requirement to disclose uncertain tax positions (UTPs) on a new schedule (Schedule UTP) to be filed with federal corporate income tax returns. Schedule UTP requires companies to report line-item detail to the IRS of the aggregate disclosure requirement of uncertain tax benefits (UTBs) established by FIN 48 (KPMG 2010a). I examine firms’ change in reporting UTBs subsequent to the announcement of Schedule UTP. Overall, the results indicate firms reduce not only the levels of reported UTB, but they also significantly reduced the year to year changes in reported UTBs. Consistent with my predictions, firms which are required to file Schedule UTP earlier have an incrementally more significant reduction in reported UTBs. Results provide mixed evidence for financially conservative firms. Contrary to expectations, the decrease in reported UTBs is not incrementally more significant for firms in the upper quartile of tax aggressiveness. Additionally, I examine whether the announcement of Schedule UTP impacts other proxies for tax aggressive behavior. Results indicate that book-tax differences decrease subsequent to Schedule UTP. However, neither measure of tax aggressiveness based on effective tax rates provides statistically significant results. This finding suggests the decrease in reported UTBs is merely a change in reporting behavior and not a change in aggressive tax behavior.
A global election: analyses of Chinese, Russian, and Saudi Arabian news coverage of the 2016 U.S. presidential election
(University of Alabama Libraries, 2017) Stokes, Ethan Christopher; Gower, Karla K.; University of Alabama Tuscaloosa
This dissertation was designed to investigate how state-owned news media outlets from China, Russia, and Saudi Arabia covered the 2016 U.S. presidential election. More specifically, this study includes analyses of Chinese, Russian, and Saudi Arabian news stories from four major events throughout the 2016 election campaign: 1) the national conventions for the Republican and Democratic parties, 2) the first presidential debate, 3) Election Day, and 4) Inauguration Day. Drawing from the global news flow theoretical framework, this study examined the extent to which media dependency was present among the international news coverage. Furthermore, drawing from the nation branding theoretical framework, this study assessed how these state-owned news outlets presented the U.S. nation brand to their audiences. Using a content analysis methodological approach, the researcher coded 365 news stories into various quantitative coding categories and qualitative themes. The overall results show that the Chinese and Saudi Arabian sources favored Hillary Clinton and the Democratic Party, while the Russian sources favored Donald Trump and the Republican Party. Additionally, the results show that these news outlets cited U.S. news sources more often than non-U.S. news sources. Moreover, the overall results indicate that these news outlets’ coverage of the 2016 U.S. presidential election presented the U.S. nation brand negatively, and indicate perceptions of “gray zones” between the U.S. and other nations. This study’s theoretical implications, practical implications, and avenues for future research are discussed at length.
How and why does real earnings management affect auditors' evaluations of management's estimates?
(University of Alabama Libraries, 2015) Commerford, Benjamin P.; Hatfield, Richard C.; Houston, Richard W.; University of Alabama Tuscaloosa
Prior research often asserts that, because real earnings management (REM) does not violate Generally Accepted Accounting Principles (GAAP), it is not likely to draw auditor scrutiny. However, informed by Correspondent Inference Theory, I predict and find that observing REM can affect auditors' decisions in audit areas unrelated to REM. This study reports the results of an experiment in which auditors evaluate quantitatively immaterial audit differences arising from management's subjective estimates. I manipulate the presence versus absence of REM, and whether or not the audit difference affects the client's ability to meet an earnings target (i.e., qualitative materiality). Results indicate that, when a quantitatively immaterial audit difference affects the client's ability to meet an earnings target, auditors have a higher propensity to propose an adjustment. Further, regardless of whether or not the audit difference is qualitatively material, auditors are more likely to constrain management's estimates in the presence of REM. Finally, consistent with the notion of a cascading effect of dispositional inferences, I find that auditors' perceptions regarding the aggressiveness of management's disposition mediate the effect of REM on auditors' adjustment decisions. Additional analyses indicate that, when the audit difference is qualitatively material or when REM is present (or both) auditors have a heightened concern that management's estimates are biased. This study contributes to the literature by demonstrating that auditors' altered perceptions, stemming from observing REM, can affect their treatment of audit differences and, ultimately, impact the financial statements.
Intangible assets and default risk: an examination of the credit default swap market
(University of Alabama Libraries, 2013) Hill, Mary; Taylor, Gary; University of Alabama Tuscaloosa
In this study I examine the impact of intangible assets on default risk. Extant research primarily focuses on the relevancy of intangible assets in the equity markets, but the relevance of intangible assets in the credit markets has not been extensively explored. In fact, due to the differences between equity and debt, it is not apparent that the relevance of intangible assets would be the same for the equity and credit markets. Using data from the credit default swap (CDS) market, I provide evidence that both capitalized and uncapitalized intangible assets reduce default risk and that uncapitalized intangible assets are just as relevant to the CDS market as the items capitalized on the balance sheet. I also find that, uncapitalized intangible assets are more relevant for high default risk firms compared to low default risk firms and less relevant for high growth firms compared to low growth firms. Finally, I provide evidence of a market inefficiency for those firms with a low risk of default. Specifically, the CDS market appears to overreact to changes in debt but underreact to changes in uncapitalized intangible assets. This finding suggests that credit markets, similar to equity markets, would benefit from additional disclosures of intangible assets which are currently not capitalized.
Investigating the effects of post-audit review salience on auditor judgments: a comparative analysis of audit planning and reporting decisions resulting from PCAOB inspections and internal quality reviews
(University of Alabama Libraries, 2009) Stefaniak, Chad Matthew; Houston, Richard W.; University of Alabama Tuscaloosa
This paper reports the results of a study investigating the effects of PCAOB inspection (Inspection) and internal quality review (IQR) salience on auditors' audit planning and reporting decisions. To investigate these judgments, 48 auditors participated in a 1 x 3 between-subjects experiment in which the salience of a post-audit review is manipulated as Inspection salient, IQR salient, or no post-audit review is salient. Manipulating post-audit reviews salience is justified using the results of Stefaniak and Houston (2009), which suggest 63 (62) percent of their audit partners can or try to anticipate the engagements that will be selected for IQR (Inspection). Using the Houston, Peters, & Pratt (2005) model, I predict that auditors will assess higher audit fees in conditions where a post-audit review is salient. Using extant accounting research on the influence of accountability (DeZoort, Harrison, & Taylor, 2006) and sanctions (Shafer, Morris, & Ketchand, 1999), I also predict that auditors will make more conservative judgments in conditions where a post-audit review is salient. While I do not find auditors were more conservative in their judgments, I do find that post-audit review salience significantly increases audit fees. Furthermore, post-audit review salience significantly increased perceived litigation risk, overall client riskiness, substantive testing efforts, and budgeted hours, as well as significantly decreased the perceived financial condition of the client. This study is important for several reasons. First, it provides initial evidence as to the impacts of IQRs on auditor planning decisions, a quality review mechanism thus far not considered in the accounting literature. Second, it provides initial evidence and understanding of whether, and how, auditors pass post-audit review costs along to their clients.
An investigation of the relationship between mindsets and tasks in an audit environment
(University of Alabama Libraries, 2020) Blum, Emily; Hatfield, Richard C.; University of Alabama Tuscaloosa
This dissertation consists of two studies that investigate the connection between mindset and task in the audit environment. The first study, presented in Chapter 2, investigates how a creative mindset will influence auditor decision making on two different task types: structured and ill-structured tasks. A creative mindset can contribute to audit quality by helping auditors recognize problems, generate novel solutions, and overcome fixation on irrelevant data. However, creativity may come with costs—recent psychology research has found that creative individuals are more likely to engage in ethically questionable behaviors. I leverage regulatory fit theory (Higgins 2000; Higgins 2009) to propose an expanded theoretical model of the link between creativity and unethical behavior that integrates task structure into the existing model. Contrary to my predictions, I find that more creative auditors outperform less creative auditors on both structured and ill-structured tasks. Consistent with my predictions, I find that an ill-structured audit task activates a creative mindset. Although I found no evidence of the costs of creativity that have been found in previous works, future research is necessary to explore whether the “dark side” of creativity has implications for audit quality. The second study, presented in Chapter 3, investigates whether skeptical judgment and skeptical action are best facilitated by distinct and contrasting mindsets. Professional skepticism is an essential element of a high-quality audit. I present a framework in which the two elements that comprise professional skepticism—skeptical judgment and skeptical action—differ in that skeptical judgment involves heeding risks whereas skeptical action involves overcoming risks. This distinction suggests that a mindset that facilitates skeptical judgment may impede skeptical action, and vice versa. To test this proposition, I leverage the mindset theory of action phases (Gollwitzer 1990) to align skeptical judgment and skeptical action with two distinct and contrasting mindsets: skeptical judgment with a deliberative mindset, and skeptical action with an implemental mindset. I conduct an experiment in which I manipulate participants’ mindset, and then test both their skeptical judgment and skeptical action on an audit task. Consistent with theory, I find that skeptical judgment and skeptical action are facilitated by contrasting mindsets, which has important implications for researchers and practitioners designing interventions to improve auditor skepticism.

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