Auditing, Audit quality, Audit performance, Time pressure

This paper analyzes economic characteristics of firms that correct previously reported quarterly earnings. The basic findings are that, relative to their industry, the sample (correcting) firms are smaller, less profitable, have higher debt, are slower growing, and face more serious uncertainties. Their average stock returns between the issuance of erroneous quarterly reports and their correction are negative. Also, correction disclosure frequently precedes SEC or stockholder suits against firm management. Results are consistent with predictions based on the economic interests of management and their auditors.

Linda S. McDaniel, William R. Kinney, Jr., Expectation-Formation Guidance in the Auditor's Review of Interim Financial Information, Journal of Accounting Research, Vol. 33, No. 1 (Spring, 1995), pp. 59-76

Statement of Financial Accounting Standards (SFAS) No. 130 requires companies to report comprehensive income in a primary financial statement, but allows its presentation in either a statement of comprehensive income or a statement of stockholders' equity (Financial Accounting Standards Board [FASB] 1997). In an experiment, we examine whether and how alternative presentation formats affect nonprofessional investors' processing of comprehensive-income information, specifically, information disclosing the volatility of unrealized gains on available-for-sale marketable securities. The results show that nonprofessional investors' judgments of corporate and management performance reflect the volatility of comprehensive income only when it is presented in a statement of comprehensive income. We provide evidence consistent with our psychology-based framework that these findings occur because format affects how nonprofessional investors weight comprehensive-income information and not whether they acquire this information or how they evaluate it.

[A review of preparers' workpapers can lead to the detection of "classification" errors (i.e., incorrect determinations with respect to sampled audit items) and/or "conclusion" errors (i.e., incorrect conclusions about populations of audited items). We examined the effects of familiarity with the preparer and task complexity on reviewers' effectiveness at detecting these errors. The results indicate that reviewers of unfamiliar preparers reperform more of the preparers' work but do not detect more classification errors. Preparer familiarity and task complexity interactively determined effectiveness at detecting conclusion errors: when the task was complex, reviewers of familiar preparers detected more conclusion errors than reviewers of unfamiliar preparers. However, performance did not differ on the routine task. Furthermore, reviewers of familiar preparers were more effective on the complex relative to routine task, but the reverse result was true for reviewers of unfamiliar preparers.]

Examines the effects of familiarity with the preparer and task complexity on reviewers' effectiveness at detecting `classification' and/or `conclusion' errors in the audit review process. Overview of the review process; Deterioration in decision-making effectiveness; Between-familiarity comparisons; Within-familiarity comparisons.

Laureen A. Maines, Linda S. McDaniel, Mary S. Harris, Implications of Proposed Segment Reporting Standards for Financial Analysts' Investment Judgements, Journal of Accounting Research, Vol. 35, Studies on Experts and the Application of Expertise in Accounting, Auditing, and Tax (1997), pp. 1-24

In this paper we outline three ways that experimental methods can add value to academic accounting research, practice, and particularly standard setters such as the Accounting Standards Board (AcSB), the Financial Accounting Standards Board (FASB), and the International Accounting Standards Committee (IASC). Through examples, we illustrate that, compared to archival methods, experimental methods can have three advantages in supplying evidence on questions that are important and relevant to financial accounting prescriptions. These advantages are timeliness, inclusiveness, and causality. First, experimental methods can be more timely in that experiments can be designed to provide evidence on an ex ante basis. This advantage particularly applies when there are no relevant archival data available and/or no close historical substitutes for a proposed accounting standard. Second, experiments can be more inclusive. They can test a spectrum of standard‐setting solutions that the archival approach precludes for lack of available data. Finally, experimental methods can powerfully isolate and measure the direction and strength of cause‐effect relations. In their decision making, standard setters require knowledge on the nature and cause of intended and unintended consequences of proposed and already promulgated standards. Therefore, cause‐effect evidence is a critical and valuable input to their deliberations. Résumé. Les auteurs décrivent trois façons d'augmenter, grâce aux méthodes expérimentales, la qualité de la recherche universitaire en comptabilité, de l'exercice de la profession comptable et, en particulier, du travail de normalisation comptable auquel se livrent des organismes comme l'Accounting Standards Board (AcSB), le Financial Accounting Standards Board (FASB) et l'International Accounting Standards Committee (IASC). Par des exemples, les auteurs illustrent le fait que les méthodes expérimentales peuvent présenter trois avantages, par rapport aux méthodes d'archivage, dans la documentation des questions d'importance pertinentes aux normes de comptabilité financière: la rapidité, l'intégralité et la causalité. En effet, les méthodes expérimentales peuvent être, en premier lieu, plus rapides, du fait qu'il est possible de concevoir les expériences de manière à obtenir des preuves documentaires sur une base ex ante. Cet avantage se concrétise particulièrement lorsqu'il n'existe pas de données d'archives pertinentes disponibles et (ou) aucun proche substitut de données historiques relativement à une norme comptable proposée. En deuxième lieu, les méthodes expérimentales peuvent être plus englobantes. Elles permettent parfois de vérifier un éventail de solutions, en ce qui a trait aux normes, que la méthode des données d'archives ne permet pas de vérifier en raison de l'insuffisance des données disponibles. En dernier lieu, les méthodes expérimentales permettent d'isoler et de mesurer clairement l'orientation et l'intensité des relations de cause à effet. Dans leurs décisions, les responsables de la normalisation doivent disposer de renseignements sur la nature et la cause des conséquences prévues et imprévues des normes proposées et déjà promulguées. C'est pourquoi la documentation relative à la causalité est d'un apport déterminant et précieux dans leurs délibérations.

Recent corporate governance reforms that require audit committees to pre-approve audit and nonaudit services increase audit committees' accountability to third parties for actual auditor independence and audit quality. Other SEC reforms mandate the disclosure of fees for auditor-provided services and are aimed at influencing investors' perceptions of auditor independence. These fee disclosures also reveal audit committees' pre-approval decisions, enhancing public accountability. Thus, audit committees may be less willing to hire auditors for nonaudit services to avoid fee disclosures, even when joint provision improves audit quality. One hundred experienced corporate directors, responding as audit committee members or investors, participated in an experiment in which we manipulated the effect of the auditor's provision of nonaudit services on audit quality and the fee disclosure requirement. We find that audit committee members are more likely to recommend joint provision if audit quality improves, consistent with investors' preferences. However, unlike investors, committee members are more reluctant to recommend joint provision when public disclosures are required, even at the expense of audit quality. These findings offer evidence about an indirect effect of recent reforms.