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The objective of this research study is to investigate the impact of auditor dismissals and resignations on commercial lending decisions. The study also examines whether a reason given for a dismissal or resignation affects commercial lending decisions. Eighty-five commercial loan officers were given a scenario involving a hypothetical company loan applicant and were first asked to assess the level of risk associated with granting a line of credit. Next, they were asked to assess the probability that they would grant the line of credit. Five different questionnaire versions were created by varying information about an auditor change and the reason for the change. The study finds that risk assessments of and the probability of granting credit to the applicant company do not significantly differ due to knowledge about auditor changes. In addition, participants did not view auditor resignations differently than auditor dismissals. Finally, disclosure of a disagreement as a reason for an auditor change did not have an impact on lending decisions.

Part IV provides readers with the extant requirements for the application of materiality to recognition, measurement, presentation, and disclosure in the financial statements. This part also includes a detailed critical review of the recent Practice Statement on materiality, the FASB’s proposed ASU on the notes and the amendments to the Conceptual Framework proposed by the IASB and the FASB.

The part expands to issues that are typical of Management Commentary, including the SEC guidance on materiality in Management Discussion and Analysis.

It informs about the complexities and subtle differences between financial statements and bookkeeping and the different standards of reasonableness versus materiality.

A section moves from materiality to material misstatements and covers the application of materiality in auditing.

Another section goes in depth on internal control over financial reporting, showing the linkages between materiality and risk appetite and risk tolerance and the related application guidance.

The results of recent research suggest that certain provisions of the Sarbanes–Oxley Act of 2002 (SOX) may have been less successful than intended (e.g., Abbott, Parker, & Peters, 2009). Based on two different descriptions of economic bonding between auditors and their clients, we propose an explanation of why this might be so by showing that the effect of SOX mandates, and regulation in general, aimed at enhancing auditor independence is dependent on whether shareholders or managers monitor the auditor. The results of prior empirical studies are examined in context of the framework we describe, and suggestions for future research on this important topic are outlined.

This paper has two purposes. The first is to demonstrate that over time, and in a number of professional and academic places, the concept of auditor independence has been contested; that is, there have been different concepts of auditor independence within different time periods, and even when there appears to have been consensus on the meaning of auditor independence, there have been significant debates about auditor independence. The second purpose of the paper is to advocate a complete reconsideration of the concept of auditor independence; one which would move us towards the idea that auditors should be prohibited from acting as advocates in any way on behalf of their clients, and that client management should have no ability whatsoever to determine the audit fee or the scope of audit engagement. These are controversial ideas. They are meant to be so.

In this chapter, we study the evolution of the auditor’s report from its emergence more than 150 years ago to the present. During this period, the standard auditor’s report has evolved from a rudimentary form to its current and more sophisticated structure with a clearly defined title, addressed to specific entities, and systematically divided into sections that are meant to highlight certain aspects of the audit examination. We describe the major events that have affected the financial reporting environment in the United States and, in turn, how these events have transformed the auditor’s report over the last century. As will be demonstrated in the chapter, the progression of the presentation of the auditor’s report, from being a certification to the standard report of the present day, has been guided primarily by the kind of information that investors and creditors wanted to know in relation to their investments in public companies. However, the desire for that information was often influenced by periodic incidents of corporate scandals. These scandals made it imperative that a monitoring mechanism was established to maintain the confidence of investors and creditors in the reporting of financial information about companies and the overall functioning of the capital markets.

Mandatory auditor firm rotation (mandatory rotation) has been a controversial issue in the United States for many decades. Mandatory rotation has been considered at various times as a means of improving auditor independence. For example, in the United States, the Public Company Accounting Oversight Board (PCAOB) has considered mandatory rotation as a solution to the independence problem (PCAOB, 2011) and the European Parliament approved legislation that will require mandatory rotation in the near future (Council of European Union, 2014). The concept of implementing a mandatory rotation policy has been encouraged by some constituents of audited financial statements and rejected by other constituents of audited financial statements. Although there are apparent pros and cons of such a policy, the developmental process of such a policy in this country has not necessarily been an open-democratic, objective process. Universal mandatory rotation may or may not be the ideal solution; however, an open-democratic, objective process is needed to facilitate the development of a solution that considers the needs of all major stakeholders of audited financial statements – not simply accounting firms and public companies, but also investors. The purpose of this paper is to critically examine key issues relating to mandatory rotation and to encourage and stimulate future research and ongoing dialogue regarding this issue, in spite of efforts by certain constituents to silence the issue. This paper provides an overview of the various reasons, including practical, theoretical, political, and self-motivated reasons, why a mandatory rotation policy has not been implemented in the United States in order to address the potential conflict of interest between the auditor and client. This paper will also discuss how some deliberations of mandatory rotation have been flawed. The paper concludes with a summary of key issues along with two approaches for regulators, policy makers, and academics to consider as ways to improve the process and address auditor independence. The authors are not advocating for any specific solution; however, we are advocating for a more objective, unified approach and for the dialogue regarding auditor rotation to continue.

Over the last decade, many published papers lament auditors’ shift from professionalism to commercialism and call for increasing auditors’ commitment to the public interest (see, e.g., Bailey, 2008; Fogarty & Rigsby, 2010; Lampe & Garcia, 2013; Wyatt, 2004; Zeff, 2003a, 2003b). At the same time, suggesting effective methodologies for improving auditors’ commitment to the public interest is particularly challenging because issues arising in the audit context are complex, and often involve tradeoffs between multiple stakeholders (e.g., Gaa, 1992; Massey & Thorne, 2006). An understanding of auditors ethical characterizations across separate phases of the audit process is needed so that methodologies can be devised to improve auditors’ commitment to the public interest. Thus, in this paper we interviewed 24 auditors and asked them to describe critical ethical incidents that they have encountered throughout the various phases of the audit process. Our results not only document the tension underlying the shift between professionalism and commercialism in auditing suggested by others, but also show that ethical conflicts are found in each phase of the audit and there are cross-phase differences in the auditors’ ethical characterizations. Limitations of the findings are also discussed as are suggestions for future research.