I test whether hints at an attorney's line of argument influence accountants' expert witness testimony. In experiment 1, litigation services accountants review evidence adopted from a recent auditor-liability case and decide whether a defendant auditor complied with generally accepted auditing standards. I find that hints posed before the review of evidence result in decisions that are more consistent with the attorney's verdict preference. Motivated by a lack of research on the role of accountants' expert testimony in judges' decisions and by evidence that most auditor-liability cases settle, I find in experiment 2 that the certainty of decisions in an expert's report affects the settlement decisions of experienced lawyers, a proxy for trial judges. These findings show that hints at an attorney's line of argument can influence accountants' decisions about evidence documenting auditing issues, and that the certainty of decisions in an expert's report can affect the decisions of mock trial judges. The study has implications for drafting attorney-expert retention letters, and for training accounting experts and the judiciary about the role of hints in the attorney-expert setting.
Presents evidence that the presentation order of audit working-paper documentation affects the outcome of audit partners' going-concern decisions. Interaction of memory organization and the organization of working-paper evidence to affect audit decisions; Effects of order manipulation on the subjects' going-concern decisions; Implications of the research for audit working-paper design.
[This article reports evidence that the presentation order of audit working-paper documentation affects the outcome of audit partners' going-concern decisions. Although Frederick (1991) has found that memory organization and the organization of evidence interact to affect the retrieval of audit evidence from memory, this study establishes that memory organization and the organization of working-paper evidence interact to affect audit decisions. Order effects are hypothesized because the going-concern decision task is driven by voluminous working-paper evidence that is typically documented in an order convenient for compiling audited financial statements, not in an order optimal for minimizing the cognitive effort required to reconstruct the causal order of relevant events. The experiment reported in this article tests the proposition that evidence documented in a contextually meaningful causal order (rather than in the traditional working-paper order of the public accounting firm participating in the study) will diminish the cognitive effort required of highly experienced audit partners by facilitating their ability to evoke pre-existing going-concern schemata from long term memory. One hundred audit partners from a public accounting firm participated in the study. The experiment manipulated the presentation order of 60 sentences to compare the going-concern decisions of partners who read the audit evidence in variations of two distinctly different orders: causal order versus the participating firm's working-paper order. Evidence sentences were compiled from one of the firm's audit engagements by the researcher and by the engagement partner, manager, and reviewing partner assigned to the audit. Fifteen of the sentences referred to events consistent with a decision of substantial doubt about the entity's ability to continue as a going concern, 15 were consistent with a decision of no substantial doubt, 15 supported both decisions, and 15 supported neither decision. The sentences were arrayed in causal order by the researcher, engagement partner, and manager, using procedures outlined in Pennington and Hastie (1986, 1988). The working-paper order of presentation was prepared by the engagement partner, manager, and reviewing partner and represents the way an audit partner in the participating firm would likely encounter the evidence in a set of working papers assembled by the firm. The experiment was constructed as a 2 X 2 design: 25 subjects read the "yes" sentences (evidence for substantial doubt) in causal order and the "no" sentences in working-paper order, 25 read the "no" sentences in causal order and the "yes" sentences in working-paper order, 25 read both the "yes" and "no" sentences in causal order, and 25 read both the "yes" and "no" sentences in working-paper order. To control for within-cell order effects, randomly assigned subjects in each of the four treatment groups read the "yes" cues first, and the others read the "no" cues first. All subjects completed two tasks: a decision regarding substantial doubt based on the 60 evidence sentences and an assessment of their confidence in the decision. The results establish that the order manipulation affected the subjects' going-concern decisions but not their confidence in those decisions. Subjects decided there was substantial doubt about the client more often when the strongest evidence supporting this decision was read in causal order and, correspondingly, least often when the strongest evidence was read in the firm's working-paper order. The order effects documented in this study have important implications for audit working-paper design, particularly in complex unstructured decision tasks like the going-concern decision.]
Examines whether the provision of audit clients with nonaudit services result in knowledge spillovers and audit production efficiencies that could produce economic rents for the auditor. Demonstration of the comparability of the research sample with prior studies; Data set compiled from the participating firm's internal billing records.
Reviews the book, "Auditing Symposium VI: Proceedings of the 1982 Touche Ross/ University of Kansas Symposium on Auditing Problems," edited by Donald R. Nichols and Howard F. Stettler.
[In this article, we use audit-hour and billing-rate data supplied by a large public accounting firm to address the question, "Does providing audit clients with nonaudit services result in knowledge spillovers and audit production efficiencies that could produce economic rents for the auditor?" In prior analytical work, both Simunic (1984) and Beck et al. (1988) have argued that knowledge acquired while providing nonaudit services may "spill over" to the production of the audit, and thus generate production efficiencies. If audit production efficiencies lead to cost savings that are retained in whole or in part by the auditor (rather than passed on to the client), then economic rents accrue to the auditor, creating incentives for the auditor to resolve disputes in the client's favor. Although several past studies suggest that the joint provision of audit and nonaudit services may give rise to knowledge spillovers that could lead to economic rents (Palmrose 1986; Simon 1985; Simunic 1984; Turpen 1990), they do not provide direct evidence that spillovers or rents exist, and the empirical results are mixed. For example, Abdel-khalik (1990, 320) reports that he was unable to detect interdependencies between audit and nonaudit fees, a direct contrast to the findings of Simunic and Palmrose. Further, Palmrose reports a positive relation between audit fees and the nonaudit fees paid to nonincumbent firms, a finding that weakens the argument for knowledge spillovers. Thus, as Solomon (1990, 328) points out, "... the impact of MAS (management advisory services) on audit pricing as well as who (i.e., the client or the auditor) benefits from knowledge spillovers (if they exist) remains an open and interesting question." Our empirical analysis consists of three steps. First, we demonstrate the comparability of our sample to those in prior studies by fitting prior researchers' models to our data and replicating a finding Simunic (1984) interpreted as evidence of knowledge spillovers: a positive relation between audit and nonaudit fees. Second, we use a unique data set compiled from the participating firm's internal billing records, working papers, and audit planning memos to test for a positive relation between nonaudit services and audit effort. This test is motivated by Palmrose's (1986, 410) speculation that the higher audit fees paid by clients who also purchase nonaudit services may be driven by additional audit effort. We regress audit effort on nonaudit service fees (and Palmrose's control variables), partitioning nonaudit fees into three types: tax, accounting, and other. We use three measures of audit effort: unweighted audit hours, audit hours weighted by billing rate ratios, and audit hours weighted by billing rates. We find a weakly significant, positive relation between tax services and all three audit effort measures and between accounting-related consulting services and audit hours weighted by billing-rate ratios, which suggests that additonal effort is required for audits of clients who also purchase nonaudit services. With the assumption that the demand for auditing is inelastic (Beck et al. 1988, 52-54), these results do not support the existence of audit production efficiencies from knowledge spillovers. Third, we test whether there is a positive relation between audit fees for a given level of audit effort and each of our three types of nonaudit service fees. This test is motivated by the possibility that, if the demand for auditing is elastic (Simunic 1984, 698), the observed increase in audit fees and effort could be driven by demand for more auditing by purchasers of nonaudit services (e.g., in substitution for internal control) as the result of auditors passing on cost savings from knowledge spillovers. If auditors are able to retain some of the cost savings, and thereby earn economic rents in the form of higher fees for a given level of audit effort, then our results should reveal a significant, positive relation between nonaudit and audit fees. However, we do not find a significant relation when we control for direct measures of audit effort that were not available to prior researchers. These results suggest that, although purchasers of nonaudit services pay higher audit fees than nonpurchasers, the higher fees are associated with a proportional increase in audit effort, measured in this study as unweighted and weighted audit hours. These findings are inconsistent with one interpretation of prior research: that performing nonaudit services for audit clients may provide the auditor with incentives to compromise objectivity.]