Knowledge that Transforms

ABSTRACT Academics and practitioners agree that there are substantial barriers to systematically transferring audit research knowledge to policy‐makers. We adopt a design science approach to investigate the efficacy of employing a research synthesis, embedded in an interactive process with audit standard setters, to transfer such knowledge. We identify a standard‐setting issue that, we argue, is typical of the class of problems encountered by both parties when attempting knowledge transfer. Following design science prescriptions, we evaluate the pragmatic validity of our prototype research synthesis and its creation process. We provide initial evidence (“proof of concept”) that a research synthesis process can effectively and efficiently facilitate academic research knowledge transfer to inform audit standard setters' deliberations. Finally, we provide evidence that the problem of academic research knowledge transfer in accounting standard setting and evaluation continues. Our study and findings reflect how design science facilitates change in real‐world problem contexts through research‐based proofs of concept.

ABSTRACT We examine how audit partners' geographic proximity to clients affects audit quality. We use hand‐collected data to show that approximately half of audit partners are assigned to clients headquartered more than 100 km away from the partners' home locations. Few of these partners relocate after receiving their assignments and, as a result, more than one‐third of clients are audited by partners who must commute long distances to visit the client in person. We explore this phenomenon by first modeling how distance affects partner‐client matching. We find that partners' geographic proximity to a prospective client is an important matching criterion, but also that trade‐offs are made when other partner characteristics such as industry specialization are more likely to be important. Next, consistent with our prediction, we show that audit quality is lower when partners reside farther from their clients. We corroborate our primary findings by showing that the association between partner distance and audit quality is mitigated when partners have access to direct flights to their clients' headquarters and when clients are geographically dispersed. Our paper should be informative for regulators, practicing auditors, and academics interested in how partner‐client matching affects audit outcomes.

ABSTRACT This study uses a resilience perspective to examine the opportunities and challenges that management accountants may experience when they are given a role as a business partner in risk management. Drawing on insights from an in‐depth case study in a large European bank, our study sheds light on management accountants' responses to a change from a compliance‐oriented role to a business partner role. In the bank studied, part of the management accountants' new role was to balance various performance objectives and thereby to incorporate risk considerations in managerial decision‐making. Our findings suggest that this role challenged the management accountants due to the ambiguity inherent in the role and also due to unfavorable conditions that surrounded the role change. We find that these circumstances culminated in a move backward, with the management accountants falling back on practices that were consistent with the values and beliefs they had developed in their previous role. In doing so, they emphasized what the resilience literature labels “well‐learned responses.” These responses contributed to an emphasis on a narrow risk management approach and had implications for the management accountants' long‐term position within the organization. We discuss these findings against the background of previous research that suggests that management accountants move forward to the business partner role by engaging in job crafting (i.e., adapting their work) or identity work (i.e., redefining their role identity). By utilizing the concepts of lingering identities and identity asymmetries to explain the management accountants' move backward, we also shed light on new facets related to role identity.

ABSTRACT We investigate whether individual securities regulators exhibit personal styles in their work, a question of importance to corporate executives and capital market participants. Using the SEC's comment letters as our setting, we find that SEC staff members exhibit unique personal “styles.” We manually collect information on SEC staff members and provide evidence that staff members' personal characteristics influence the SEC's review process. Further analyses reveal that SEC staff members with a CPA qualification are associated with a lower likelihood of future accounting restatements; moreover, similarity between the SEC staff member and the firm's correspondent is associated with lower scrutiny intensity. Overall, our study offers evidence that SEC staff members exhibit individual differences and that their styles shape the SEC's enforcement actions. Our results offer implications for the working of securities regulators.

ABSTRACT This study develops a process model of how accounting may come to an end. Grounded in a longitudinal study of a risk culture survey, this model focuses on the dynamics that underpin the repetition of accounting practices, and sheds light on two boundary conditions of successful repetition and continuation, which are in tension with each other. On the one hand, there are pressures for repetition that preserves continuity and comparability. On the other hand, there is the ongoing organizational need to adjust accounting practices. Iterating between the case study findings, social studies of accounting, and the sociology of replication in scientific practice, the model shows how moving too close to either boundary increases the risk that repetition undermines the accounting practice being repeated: “perfect repetition” may be perceived as uninteresting and decision‐irrelevant; very “imperfect repetition” may be perceived as something too different and idiosyncratic, and hence also decision‐irrelevant. As a result, the analysis extends a rich literature that has examined empirical instances of failure of the conditions that sustain the repeatability of accounting practices. Via the theory of “self‐undermining repetition,” this study shows how the possibilities for accounting's ending are paradoxically inherent in the very act of repetition. This notion of “self‐undermining repetition” is deepened by a discussion of how it may be affected by four contingencies: task ambiguity, organizational politics, organizational actors' reflexivity, and external networks of support. Overall, the analysis of the self‐undermining dynamics of repetition and related contingencies contrasts with research that foregrounds the constitutive nature of repeated uses of accountings. It shows how repetition may also undermine, rather than cumulatively consolidate, accounting practices.

ABSTRACT Audit regulators and commentators propose prompting auditors to more fully take an investor's perspective as a remedy to their concern that auditors underreact to material misstatements. By contrast, we predict that prompting auditors in this manner will backfire, making them less (more) heavily weight indicia that misstatements are (not) material. We further predict auditors will apply this asymmetric weighting instrumentally —to a greater degree as needed—to justify management‐preferred conclusions. We test these predictions in two experiments in which in‐charge audit seniors judge the likelihood that identified audit differences are material and choose required adjustment amounts. Between‐participants, we manipulate whether or not auditors are prompted to take an investor's perspective and, within‐participants, whether these audit differences would or would not violate a qualitative criterion—by breaking or not breaking a favorable profitability trend. Study 1 uses a context in which a relatively low degree of motivated perspective taking is needed, as the audit difference is just below tolerable misstatement (TM). Investor‐prompted auditors assess audit differences as less likely to be material than do unprompted auditors, but only when the qualitative criterion is not violated. Study 2 adds a between‐participant manipulation of misstatement tolerability—that is, whether the audit difference is just below or well above TM. Consistent with an instrumental increase in motivated perspective taking, investor‐prompted auditors assess audit differences that simultaneously are less tolerable and violate a qualitative criterion as significantly less likely to be material. Overall, our theory and experimental evidence suggest prompting auditors to take the investor perspective may have unintended consequences.

ABSTRACT Speakers of weak future‐time reference (FTR) languages perceive the future as closer and more imminent. In this study, we examine the important question of whether the FTR properties of languages spoken by investors affect their demand for forward‐looking information, thereby influencing corporate management forecast practices in different countries. We predict that investors who speak weak‐FTR languages are more concerned about the future prospects of their investments and the ability of company management to respond to future changes, leading to a greater demand for management forecasts from these companies. We find that firms in weak‐FTR language countries exhibit a greater propensity for and frequency of issuing management forecasts and that they also issue more long‐horizon forecasts, compared to those in strong‐FTR language countries. Our results hold after controlling for other country‐level cultural factors. Within the same countries, firms with more foreign institutional ownership from weak‐FTR countries issue more (long‐horizon) management forecasts than their counterparts. Finally, firms from strong‐FTR countries significantly increase their issuance of (long‐horizon) management forecasts, after cross‐listing their stocks in Germany, a weak‐FTR country. This is the first study to examine language FTR as an antecedent to voluntary disclosures. We document a linguistic trait as a novel investor environment factor that shapes corporate voluntary disclosures and explains the cross‐country variations in management forecast practices.

ABSTRACT This study examines the processes by which English linguistic capital is legitimized as integral to professional accountants' distinction, prestige, and status in Jordan. Drawing on 27 interviews, the study reveals the dynamic and mutual interdependency of social hierarchies and Jordanian accountants' agency in embedding the English language in everyday practices and routines. Accountants in senior positions employ English linguistic practices and strategies linked to the global structures of the profession (e.g., IFRS, enterprise resource planning [ERP] systems, Big 4 firms). Typically, these respondents already have a good command of English due to their elite, socially and economically privileged upbringing. By comparison, less powerful accountants, not drawn from the elite, tend to accept and internalize the need for English in their field, despite being more proficient in Arabic. They employ coping strategies that largely reinforce their marginalization, although occasionally they are able to open up spaces for hybrid linguistic practices, as they adapt the use of Arabic and English to their practical, daily requirements. The data also suggest that all Jordanian accountants in this study, regardless of social background, experience emotional ramifications linked to the tensions between the global demand for English in their field and meanings associated with English and Arabic due to colonial history. Through the lens of Bourdieu's sociolinguistic and practice theory(s), Jordanian accountants experience frictions and internal contradictions, “split habitus/habitus clivé,” driving them to compartmentalize (decouple) their Arab and professional identities in a global accountancy context. Insights emanating from the study have implications for understanding and addressing unequal power and marginalization in professional accounting settings in Jordan and beyond.

ABSTRACT We examine how the presence of multiple supervisory agencies affects firm‐level compliance in form and substance with disclosure regulations. This analysis is important because coordination problems among regulators are frequently present in practice but often overlooked in academic research. We exploit that banks are subject to equivalent risk disclosure rules under securities laws (IFRS 7) and banking regulation (Pillar 3 of the Basel II Accord) but that different regulators start enforcing the rules at different points in time. We find that banks substantially increase their formal risk disclosures upon the adoption of Pillar 3 even if they already had to comply with the same requirements under IFRS 7. The effects are stronger if the central bank is responsible for bank supervision and bank regulators are equipped with more supervisory resources, but are less pronounced if the securities market regulator is an independent entity. In turn, banks facing more market pressures are more compliant with the rules. We further find persistent liquidity benefits of the increased risk disclosures but only after Pillar 3 became effective and its compliance was enforced by the banking regulator. Our results suggest that formal and material compliance with risk disclosure regulation are a function of both the resources of the supervisory agency and its incentive alignment with the regulated firms. In our setting, the banking regulator seems more effective in fulfilling this role.

ABSTRACT We examine how the extent and distribution of industry knowledge within an audit team affect audit outcomes. While prior research examining the role of auditors' industry knowledge focuses mainly on audit firms, audit offices, and audit partners, audits are conducted by audit teams. Using an audit framework and proprietary data from a Big 4 firm that includes audit hours for each team member, we find that Big 4 audit teams with higher average industry knowledge are associated with more audit effort. In contrast, we find mixed evidence on the relation between the average hourly internal cost rate and team knowledge. Furthermore, we find that balanced teams, which have at least one team member who qualifies as an industry specialist at both the senior rank and junior rank, produce higher‐quality audits than teams that have no specialists. In contrast, the audit quality of unbalanced teams, which have a specialist at the senior rank but not the junior rank or vice versa, is not statistically different than teams with no specialists. Overall, our evidence suggests that both the extent and distribution of industry knowledge within a team matter for audit production and that industry knowledge is utilized more effectively when it is spread throughout the team. The findings have useful implications for audit firms and regulators regarding how team composition and industry knowledge affect audit outcomes.