Search results

This chapter traces the evolution of personality trait research in the behavioral accounting literature and offers suggestions for past and future trends. These personality traits include, among others, those measured by the Myers-Briggs Type and Five Factor models (FFMs), Type A/B, tolerance for ambiguity, locus of control, authoritarianism, and the Dark Triad components of narcissism, Machiavellianism, and psychopathy. In a broad spectrum analysis of accounting journals without regard to timing or geographics, we attempt to capture the major phases of personality trait research and provide suggestions as to the surrounding environment for such progressions in the literature. In addition to more established research streams, this chapter also discusses other personality traits that have only been marginally investigated in the accounting literature, and possible directions for future research.

This study examines the effects of incentive compensation and guanxi, a type of informal personal relationship between people, on the objectivity of Chinese internal auditors. Given that the objectivity of internal auditors is essential for promoting financial reporting quality, it is important to investigate the effectiveness of internal audit functions, especially in emerging markets where the corporate governance mechanisms designed to promote objectivity are less mature.

The research employs a 2 × 2 between participants experiment with 116 graduate accounting student participants.

After controlling for internal auditors’ ethicality, we find that close-guanxi between management and internal auditors and incentive compensation in the form of bonuses based upon meeting earnings targets both have the capacity to impair the objectivity of Chinese internal auditors. Participants were more tolerant of management’s attempts to manage earnings when there was close guanxi or bonus compensation. Further, compensation structure only influenced internal auditors’ support of management when guanxi was distant, but when there was close guanxi between internal auditors and management, internal auditors were unlikely to challenge management regardless of the compensation structure.

Part V analyzes the details of how to assess materiality. It first tackles qualitative versus quantitative criteria and the role of professional judgment. It then analyzes the selection of quantitative threshold, to expand to the choice of benchmarks. It contrasts the whole financial statements with subaggregates, line items, and components.

Specific sections contrast IASB, FASB, SEC, and other guidance on materiality applied to comparative information, interim reporting, and segment reporting.

The section on estimates mingles complex guidance coming from accounting, auditing, and internal control over financial reporting to explain how the management can improve its assessment of materiality concerning estimates.

After explaining the techniques to move from individual to cumulative misstatements, the part tackles verification ex post, and finally summarizes the intricacies of whether immaterial misstatements are permissible and their consequences.

This chapter investigates whether jurors, in their attribution of auditor responsibility, may be inappropriately influenced by the client use of a principles-based accounting standard, even if this standard is properly applied. Following prior research on questionable auditor conduct and its subsequent evaluation by juries, which is often subject to hindsight and outcome bias, this chapter examines whether an auditor's legal liability increases when its client uses principles-based accounting standards, by conducting a controlled experiment with 124 qualified jurors serving a county circuit court. Each juror is properly instructed and provided one of four different cases, obtained by manipulating two levels of an accounting standard, one principles-based and one rules-based, and by manipulating two subsequent client-loss outcomes, one moderately negative and one severely negative. This study finds jurors evaluate auditors more negatively if auditors have relied on a principles-based accounting standard. This attribution is influenced by hindsight bias and the perceived risk-taking responsibility of the investor, but independent of the client-loss outcome severity. These results contribute to the discussion of adopting or converting to the principles-based International Financial Reporting Standards (IFRS) by the United States.

Prior research suggests that perceived levels of a subordinate auditor’s competence affects audit reviewers’ judgments. We extend this line of research by investigating the effects of perceived client competence (hereafter, ClientComp) and its interaction with subordinate auditor’s competence (hereafter, AuditorComp) on audit reviewers’ judgments. Using data from highly experienced CPA audit managers, senior managers, and partners, we find a significant main effect for AuditorComp, but not for ClientComp. We also find that when AuditorComp is high, levels of ClientComp do not affect audit reviewers’ judgments. However, we cannot support the hypothesis that when AuditorComp is low ClientComp will significantly affect audit reviewers’ judgments. These mixed results suggest that in the post-SOX (2002) era regulatory environment, audit reviewers may be exercising heightened professional skepticism about ClientComp whenever they consider clients’ assertions.

This study challenges the conventional theoretical approach of the ‘Three Lines of Defence’ Model adopted by most of the Maltese credit institutions. The authors propose a paradigm shifting conceptualised framework that would alter the corporate governance structures of banks. The objective is to test the feasibility and willingness of credit institutions to adopt such an approach.

This study challenges the current practices of the internal auditing profession and organisations and invites them to evaluate their structures whilst recognising the benefits of adopting a combined assurance function.

In order to test this hypothesis, the authors sought out semi-structured interviews with controllers (Internal Auditors, Risk Managers and Compliance Officers) within Maltese Credit Institutions, varying in size from significant, medium-sized and small institutions; personal from the Malta Financial Services Authority – The regulator, the Big four audit firms and members of the Malta Forum of Internal Auditors, and practitioners working both within and outside the financial industry.

There were two contrasting opinions regarding the suggested proposition. On the one hand, those operating within the credit institutions, as well as the regulator and the external auditors, do not believe that the proposition of integrating risk, compliance and internal audit functions (IAF) in one team would be possible; the reason being that independence, which is the cornerstone of every IAF, would be severely impacted. On the other hand, there were those practitioners working outside the banking industry but with sufficient experience and knowledge in the field, who challenged the traditional concept of independence. They argue that the functions should not be separate from each other because they have much in common.

Four themes emerged from the study: (1) challenges as a concept, (2) benefits, (3) risks and (4) condition for successful implementation. All interviewees, from risk departments, boards, external auditors and regulators agree that a strong, knowledgeable and independent IAF is fundamental to every organisation but more so within the financial industry. Nevertheless, this study revealed two schools of thought that emerged from the findings in relation to the IAF and its regulation, and specifically, when the authors presented the proposition of an integrated function.

The need for independent audit goes back to the agency theory, the theory of delegation of power and the issue of trust. Stakeholders delegate power to management to manage the business on their behalf, yet they face the risk of information asymmetry and management motivations to commit fraud. The main aim of having an independent auditor was therefore to reduce the risk of information asymmetry and fraudulent behaviour by management. Auditors are required by the International Auditing Standards to detect material fraud and error, and they are expected to have a duty of care for stakeholders. However, recently independent auditors, whether conducting private or public audit, have been scrutinised for failing to detect material fraud. There have been a lot of discussions in the literature about the role of private auditors in detecting fraud, but very little discussions about the role of public auditors in detecting fraud. This chapter will outline the difference between private audit and public audit; explain the legal liability of public auditors in relation to fraud detection; the role of public auditors in detecting fraud; and will critically review the root causes for auditors’ failure to detect fraud.