SUMMARY Internationally operating audit firms rely heavily on global firm policies and audit methodologies to ensure consistency of audits across the globe. However, cultural differences are likely ...to affect auditors' compliance with such firm-wide systems of control. In this study we use proprietary data from a Big 4's internal quality reviews, involving 1,152 audit engagements from 29 countries, to assess the impact of cross-national cultural differences on auditors' compliance (or not) with the firm's policy in a specific yet crucial and culturally susceptible area of the audit process: fraud risk assessment procedures. We find that collectivism and societal trust are negatively associated, while religiosity is positively associated with compliance with global firm policy. However, we do not find evidence that compliance and power distance are associated. Overall, our findings suggest that cross-national differences in auditors' compliance with global audit firm methodology (or not) are associated with cross-national cultural differences. An implication of our findings is that a uniform local application of global audit methodologies may remain an illusion unless different, targeted approaches for different regions in the world are considered.
This paper investigates the effects on audit quality and audit fees of requiring the engagement partner to sign the audit report in the United Kingdom (U.K.). The effect of requiring the engagement ...partner to sign the audit report is timely since the Public Company Accounting Oversight Board (PCAOB) is considering mandating a similar requirement in the United States (U.S.). In the first year after the introduction of the signature requirement, we find a significant decline in abnormal accruals and the propensity to meet an earnings threshold, and we find a significant increase in the incidence of qualified audit reports and in earnings informativeness. In addition, audit fees are significantly higher in the post-signature period than in the pre-signature period. Moreover, we compare U.K. firms with a matched sample of U.S. firms and firms in other European countries in periods both before and after the U.K. adopted a signature requirement. Our results are generally consistent with the argument of improved audit quality in U.K. firms after the signature requirement is adopted.
How does artificial intelligence (AI) impact audit quality and efficiency? We explore this question by leveraging a unique dataset of more than 310,000 detailed individual resumes for the 36 largest ...audit firms to identify audit firms’ employment of AI workers. We provide a first look into the AI workforce within the auditing sector. AI workers tend to be male and relatively young and hold mostly but not exclusively technical degrees. Importantly, AI is a centralized function within the firm, with workers concentrating in a handful of teams and geographic locations. Our results show that investing in AI helps improve audit quality, reduces fees, and ultimately displaces human auditors, although the effect on labor takes several years to materialize. Specifically, a one-standard-deviation change in recent AI investments is associated with a 5.0% reduction in the likelihood of an audit restatement, a 0.9% drop in audit fees, and a reduction in the number of accounting employees that reaches 3.6% after three years and 7.1% after four years. Our empirical analyses are supported by in-depth interviews with 17 audit partners representing the eight largest U.S. public accounting firms, which show that (1) AI is developed centrally; (2) AI is widely used in audit; and (3) the primary goal for using AI in audit is improved quality, followed by efficiency.
ABSTRACT
We study the determinants of auditor industry specialization, the impact of specialization on fees and audit quality, and a regulator's optimal choice of audit standards in the presence of ...specialization. In industries with correlated firm values, a specialist auditor enjoys synergies from information spillovers between clients. These spillovers, however, only induce a specialist to decrease audit effort when the cost of effort and the prior precision of the firms' values are low. We derive empirical predictions about the determinants of specialization, and show that specialization benefits firms through lower expected fees and higher audit reporting quality, but only enhances the usefulness of reports to investors when the specialist exerts high audit effort. In a regulated setting, a stricter audit standard affects fees through its impact on specialization. We provide conditions under which standards that maximize firm value will be more strict and less strict when a regulator recognizes synergies.
JEL Classifications: C72; D80; D83; L22; M42; M48.
Our paper examines whether audit quality is higher for industry audit specialists at the national and cityoffice levels using the framework developed in Ferguson et al. 2003 and Francis et al. 2005. ...We find that auditors who are both national and city-specific industry specialists have clients with the lowest abnormal accruals, suggesting that joint national and city-specific industry specialists have the highest audit quality. In addition, we find some evidence that abnormal accruals of firms audited by city-industry specialists alone (without also being national specific industry specialists) are lower than those audited by nonindustry specialists. Using alternative measures of audit quality, we find that when the auditor is both a national and a city-specific industry specialist, its clients are less likely to meet or beat analysts' earnings forecasts by one penny per share and more likely to be issued a going-concern audit opinion. Together these results provide consistent evidence that audit quality is higher when the auditor is both a national and city-specific industry specialist, suggesting that auditors' national positive network synergies and the individual auditors' deep industry knowledge at the office level are jointly important factors in delivering higher audit quality.
We investigate the justifications provided by the Public Company Accounting Oversight Board (PCAOB) when sanctioning audit firms and individual auditors, as disclosed in the publicly released Settled ...Disciplinary Orders (SDOs). Employing responsive regulation theory, we seek to gain an understanding of violating behaviors by audit firms and individual auditors that attract regulatory responses ranging in nature from persuasive to punitive sanctions. Using 298 SDOs issued by the PCAOB from 2005 to 2020, we find that the frequency and severity of PCAOB sanctions at the firm level are positively associated with auditing standards violations, independence issues, and reckless behavior. At the individual auditor level, integrity violations and reckless behavior are positively associated with the frequency and severity of PCAOB sanctions. Our findings indicate that significantly higher financial penalties for individual auditors (audit firms) arise from manipulation of audit evidence (quality control criticisms). Further, the PCAOB financially penalizes Big 4-affiliated auditors and firms significantly more than their non-Big 4 counterparts. Other factors such as multiple individuals being implicated in an SDO and whether a firm and individual(s) are both implicated in the SDO are important considerations in sanction(s) imposed by the PCAOB. Overall, our findings suggest that the PCAOB adopts a responsive enforcement strategy when monitoring the auditors in their ethical and audit compliance efforts.
There is a large body of accounting research literature examining the use of analytical procedures by auditors and proposing either new types of analytical procedures or more effective ways of ...implementing existing procedures. In this paper, we demonstrate—using procurement data from a leading global bank—the value added in an audit setting of a new type of analytical procedure: process mining of event logs. In particular, using process mining, we are able to identify numerous transactions that we consider to be audit-relevant information, including payments made without approval, violations of segregation of duty controls, and violations of company-specific internal procedures. Furthermore, these identified anomalies were not detected by the bank's internal auditors when they conducted their examination of that same data using conventional audit procedures, thus establishing the benefits of using process mining to complement existing audit methods. Process mining is a very different approach to evidence collection and analysis as it does not focus on the value of transactions and its aggregations, but on the transactional processes themselves. In addition to demonstrating the benefits of process mining in an audit context, this paper also discusses the contributions that process mining can make both to accounting research and auditing practice.
•We have conducted a systematic review of 93 articles on ethics-based AI auditing.•We focus on how ethical principles and stakeholders are discussed.•Our results show heterogeneity in ...conceptualizations of ethical principles for AI.•Key stakeholders include researchers, developers, regulators, auditors, and users.•We assert that AI auditing provides guidance, methods, and awareness to stakeholders.
This systematic literature review synthesizes the conceptualizations of ethical principles in AI auditing literature and the knowledge contributions to the stakeholders of AI auditing. We explain how the literature discusses fairness, transparency, non-maleficence, responsibility, privacy, trust, beneficence, and freedom/autonomy. Conceptualizations vary along social/technical- and process/outcome-oriented dimensions. The main stakeholders of ethics-based AI auditing are system developers and deployers, the wider public, researchers, auditors, AI system users, and regulators. AI auditing provides three types of knowledge contributions to stakeholders: 1) guidance; 2) methods, tools, and frameworks; and 3) awareness and empowerment.
Recent research suggests that adopting imprecise accounting standards elevates audit firm litigation exposure and could undermine auditor objectivity if audit firms respond by herding to industry ...norms. This paper reports the results of two experiments that demonstrate how audit firms can effectively mitigate the elevated litigation exposure without herding to industry norms by staffing engagements with recognized technical experts, using judgment frameworks and automated decision aids, and providing persuasive evidence of adherence to auditing standards. We find that judgment frameworks are particularly well‐suited for defending judgments under imprecise standards, and represent a cost‐effective alternative to using technical experts. However, our results also indicate that judgment frameworks may provide a safe harbor for relatively low‐quality judgments when those frameworks are used under precise standards. We discuss implications for audit firms, courts, and regulators that currently conduct or evaluate audits within and across jurisdictions where the precision of accounting standards varies considerably.
We live in an "audit society" in which performance accounting and auditing requirements continue to expand, despite widespread criticism by academics and practitioners alike. Macro-institutional ...theories are good at explaining why organizations adopt practices whose efficacy is dubious by appealing to the power of their legitimizing and symbolic properties. Yet these theories are less able to explain how adoption happens and why practices of accounting and auditing persist and amplify, despite being objects of critique. This article addresses this puzzle by supplementing macro-institutional explanations of the audit society with a micro-foundational analysis grounded in a process model. The model theorizes the humble notion of the audit trail as a process that not only produces auditable accounts but is also a logic that is formative of organizational actors' dispositions to reproduce those accounts. The analysis contributes to debates about organizational micro-processes and micro-foundations by proposing that this logic of the audit trail is strongly performative of the conditions of its own reproduction and expansion. In explaining the persistence and amplification of the audit society, the model also shows how accounting and auditing are not inherently value-subverting and may be value-enhancing.
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