ABSTRACT Auditors frequently use valuation specialists to help them evaluate fair values, but researchers and regulators know little about how auditors use these specialists. Based on interviews with 28 auditors and 14 valuation specialists, I develop a theoretical framework informed by expert systems and professional competition theories. The interviews suggest that institutional pressures in the fair value environment unevenly impact auditors and specialists, causing tension between auditors' needs for ontological security and jurisdictional claims. This tension leads to one‐sided competition between auditors and specialists and incomplete acceptance of specialists' work. Auditors' competitive behaviors coupled with this incomplete acceptance result in a tendency to make specialists' work conform to auditors' views. Collectively, these findings suggest that auditors use specialists as an institutional mechanism to create comfort, but not insight. This study links expert systems and professional competition theories, and it provides critical insight into some assumptions underlying tenets of each theory. It also informs researchers, regulators, and practitioners interested in understanding and addressing problems related to the use of specialists.

ABSTRACT Auditors are more likely to identify misstatements in complex estimates if they recognize problematic patterns among an estimate's underlying assumptions. Rich problem representations aid pattern recognition, but auditors likely have difficulty developing them given auditors' limited domain-specific expertise in this area. In two experiments, I predict and find that a relational cue in a specialist's work highlighting aggressive assumptions improves auditors' problem representations and subsequent judgments about estimates. However, this improvement only occurs when a situational factor (e.g., risk) increases auditors' epistemic motivation to incorporate the cue into their problem representations. These results suggest that auditors do not always respond to cues in specialists' work. More generally, this study highlights the role of situational factors in increasing auditors' epistemic motivation to develop rich problem representations, which contribute to high-quality audit judgments in this and other domains where pattern recognition is important.

The PCAOB adopted critical audit matters (CAMs) to meet public demand for informative audit disclosure, but stakeholders are concerned this goal has not been achieved. We explore this disconnect via interviews with 30 highly experienced auditors. We find that audit firms expended considerable resources to implement CAM best practices. However, overwhelming institutional pressure gave rise to informal rules of thumb that prioritize symbolic comfort over substantive change. The first is don’t be an outlier , so auditors defer to the national office to ensure conformity and avoid PCAOB scrutiny. The second is report the “right” number of CAMs by never reporting zero and reporting at least one recurring CAM. The third is avoid surprises by communicating with the client to ensure that CAMs do not contain original information and allowing management to preempt auditor disclosures. Collectively, these rules yield CAMs that comply with PCAOB standards but do not provide new information and instead maintain the status quo.

ABSTRACT Regulators and researchers provide evidence that auditors' judgment quality is problematic in complex audit tasks. We introduce a framework for improving auditor judgment in these tasks. The framework builds on dual‐process theory to recognize that high‐quality judgment in complex tasks requires that auditors (i) possess the knowledge needed for the task, (ii) recognize the need for analytical (versus heuristic) processing, and (iii) have sufficient cognitive capacity to complete the analytical processing. Based on the framework, we predict that auditors' need for cognition (NFC), a characteristic theoretically linked to recognizing the need for analytical processing, is associated with higher quality complex judgments. Analysis of 11 studies supports this assertion. We demonstrate the usefulness of the framework by predicting and finding that priming auditors with an accuracy goal improves judgments, particularly for lower NFC auditors, who are less likely to spontaneously engage in analytical processing. The framework facilitates systematic development of interventions to improve auditor judgment by highlighting that solutions should address the specific conditions causing judgment problems.

Junior auditors collect the bulk of audit evidence, yet they do not always speak up to communicate potentially important audit issues. Such inappropriate “voice” decisions can endanger audit quality. We examine whether and how staff auditors influence each other in making voice decisions. First, a survey provides descriptive evidence that staff auditors consult their peers for advice on whether to speak up. Next, two experiments provide evidence that voice advice among peers at the staff level can be problematic. We find that staff auditors consistently underestimate the importance of raising issues compared to their supervisors, and they rely on social cues that are not diagnostic of issue importance in giving voice advice to peers. Finally, we predict and find that staff auditors tend to follow peer advice when it confirms their initial stance, and that an expectation of high (versus low) quality supervisor feedback increases their willingness to speak up. Most importantly, we find that contradictory peer advice only influences staff auditors’ willingness to speak up when leadership feedback is not expected to be of high quality. Together these results indicate that staff auditors seek out and follow voice advice from their peers, but appropriate leadership feedback practices can mitigate the negative impact of peer advice on upward communication.

Auditors and regulators have invested heavily in improving audits of estimates in recent years, but problems in this area persist. We examine the causes of these problems and why they persist. To do so, we interview 24 very experienced auditors about how they audit complex accounting estimates such as fair values and impairments and what problems they experience in the process. We find that auditors overwhelmingly choose to audit the details of management's estimate rather than use other allowable approaches. The steps auditors describe and the language they use to describe those steps indicate that they follow a process of verifying individual elements of management's assertions on a piecemeal basis, resulting in overreliance on management's process, rather than engaging in a critical analysis of the overall estimate. The problems that auditors identify are consistent with this view, and include failures to notice inconsistencies among the estimate and other internal data or external conditions and overreliance on specialists to identify, evaluate, and challenge critical assumptions. We interpret these processes and problems using institutional theory and identify two root causes: standards' and firm policies' emphasis on verifying management's model, and audit firms' division of knowledge between auditors and specialists. Institutional theory proposes these conventions arise from firms extending use of procedures that are legitimate in one area (i.e., auditing accounts without significant uncertainty) to a new area (i.e., auditing complex estimates), even though they are likely less effective in the new area. These conventions are reinforced by regulators' method of inspection and by firms' reluctance to change methods without a prompt to change to a clearly better method. We argue that these institutionalized conventions thwart auditors' good‐faith attempts to engage in skeptical analysis of estimates. Thus, audit quality problems are likely to persist.

ABSTRACT Auditors experience significant problems auditing complex accounting estimates, and this increasingly puts financial reporting quality at risk. Based on analyses of the specific errors that auditors commit, we propose that auditors need to be able to think more broadly and incorporate information from a variety of sources in order to improve audit quality for these important accounts. We experimentally demonstrate that a deliberative mindset intervention improves auditors’ ability to identify unreasonable estimates by improving their ability to identify and incorporate into their analyses contradictory information from diverse parts of the audit and improving their ability to think critically about the evidence. We perform additional analyses to demonstrate that our intervention improves auditor performance by causing them to think differently rather than simply to work harder. We demonstrate that critical thinking can improve the identification of unreasonable estimates and, in doing so, we provide new directions for addressing audit quality issues.