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The purpose of this paper is to describe and analyze the accounting standards reforms that have moved the accounting profession away from rules‐based towards principles‐based accounting practice and financial reporting, and to explore the implications for boards of directors of fair value estimates of the unknowable contaminating financial statements with financial misstatements.

The paper critically reviews the internationally accepted accounting, auditing and financial reporting standards with respect to fair value accounting and relates them to directors' fiduciary duties – the duties of care, of oversight, and of obedience.

The search for relevance in financial accounting raises daunting challenges for boards of directors tasked with fairly presenting the financial condition of a reporting business entity.

The accounting profession has long been epistemologically conservative, judging reliability to be more important than relevance in the compiling of financial statements. With the fair value reforms, relevance has achieved ascendency over reliability. This necessitates an increase in the need for more research in the epistemology and ethics of accounting.

Boards of directors need to be well‐informed about, and fully engaged with, the assessment of the level of risk of material misstatement associated with the fair value accounting estimates, and with the adequacy of the related mandatory explanatory disclosures.

This paper's originality is grounded in its exploration of the epistemology of accounting in the light of the adoption of fair value conventions in the internationally accepted accounting, auditing and financial reporting standards and its drawing out of the implications this has for corporate governance.

The purpose of this paper is to introduce analyst estimates and option pricing-based variables in modeling material accounting misstatements.

The paper uses a logistic regression model to analyze a comprehensive sample of AAER and non-AAER firms listed in the USA.

By applying a cross-sectional, sequence of time-series logistic regression models, the authors find better identifiers of ex ante risk of fraud than prediction models based on an inspection of abnormal accruals. These identifiers include the managed earnings (ME) component of a firm and the change in a firm’s option contracts’ implied volatility (IV) prior to an earnings announcement.

The empirical findings contribute to an understanding of earnings manipulation (fraud) and should be of value to auditors and regulatory bodies interested in identifying financial statement fraud, particularly the Securities and Exchange Commission, which has been improving its accounting quality model (AQM or Robocop) fraud detection tool for many years. The results contribute substantially to enhancing the current accounting literature by introducing two non-accrual-based measures that significantly enhance the predictive power of an accrual-based accounting misstatement prediction model.

This paper radically departs from relying on the assumption that the clearest and easiest pathway to detect fraud reporting ex ante is through an examination of accruals. Instead, the authors use a richer source of information about the possibility of a firm’s misstatement of its financial accounting numbers, namely, analyst estimates of ex post earnings and the IV from exchange-traded option contracts.

Auditors are required to perform analytical procedures during the planning and concluding phases of the audit. Such procedures typically use data aggregated at a high level. The authors investigate whether artificial neural networks, a more sophisticated technique for analytical review than typically used by auditors, may be effective when using high level data.

Data from companies operating in the dairy industry were used to train an artificial neural network. Data with and without material seeded errors were used to test alternative techniques.

Results suggest that the artificial neural network approach was not significantly more effective (taking into account both Type I and II errors) than traditional ratio and regression analysis, and none of the three approaches provided more overall effectiveness than a purely random procedure. However, the artificial neural network approach did yield considerably fewer Type II errors than the other methods, which suggests artificial neural networks could be a candidate to improve the performance of analytical procedures in circumstances where Type II error rates are the primary concern of the auditor.

The authors extend the work of Coakley and Brown (1983) by investigating the application of artificial neural networks as an analytical procedure using aggregated data. Furthermore, the authors examine multiple companies from one industry and supplement financial information with both exogenous industry and macro-economic data.

The current study aims to investigate the amount of downward pressure on audit fees and its effect on audit quality.

The research population includes 104 listed companies on the Tehran Stock Exchange. In this study, at first, the audit fees pressure was measured; then, by comparing it with actual audit fees, the pressure on audit costs was calculated. Finally, the hypotheses were tested using logistic regression.

The results of models and hypotheses show that, as expected, during the intensification of sanctions (i.e. during 2010), compared with other years, business entities have exerted more pressure to reduce audit fees; moreover, there is a positive significant relationship between fees pressure and the rate of misstatement (reverse audit quality criterion) at 10 per cent error level during 2010, whereas in years before and after 2010, there is no significant relationship between audit fees pressure and audit quality.

The conducted studies in Iran so far have investigated time pressures imposed on auditors. In this study, the audit fees pressure is investigated.

Effective internal control over financial reporting (ICFR) should either prevent or enable correction of any material misstatement in a firm’s financial statements. Independent auditors, guided by professional standards, prepare an ICFR audit report, which provides a gauge by which the public can evaluate the reliability of a firm’s financial information. A firm manager may be tempted to misstate financial statements if he/she perceives a substantial reward for doing so. This study examines whether managers and firms are rewarded for misstating their financial statements in situations where there are incentives to do so, specifically, when an industry-leading peer is fraudulently inflating its reported earnings. The authors test to see if managers experience an increase in compensation as a result of misstatement. The authors also test to see if their firms benefit from misstating via changes to their cost of capital. Results suggest that neither managers nor their firms benefit from managing earnings by misstating financial statements. These findings are important, because a manager who ex ante understands that misstating will not lead to benefits personally or his/her firm is less likely to misstate in the first place.

This study reviews and discusses the accounting literature that analyzes the role of auditors and enforcers in the context of fraud.

This literature review includes both qualitative and quantitative studies, based on the idea that the findings from different research paradigms can shed light on the complex interactions between different financial reporting controls. The authors use a mixed-methods research synthesis and select 64 accounting journal articles to analyze the main proxies for fraud, the stages of the fraud process under investigation and the roles played by auditors and enforcers.

The study highlights heterogeneity with respect to the terms and concepts used to capture the fraud phenomenon, a fragmentation in terms of the measures used in quantitative studies and a low level of detail in the fraud analysis. The review also shows a limited number of case studies and a lack of focus on the interaction and interplay between enforcers and auditors.

This study outlines directions for future accounting research on fraud.

The analysis underscores the need for the academic community, policymakers and practitioners to work together to prevent the destructive economic and social consequences of fraud in an increasingly complex and interconnected environment.

This study differs from previous literature reviews that focus on a single monitoring mechanism or deal with fraud in a broadly manner by discussing how the accounting literature addresses the roles and the complex interplay between enforcers and auditors in the context of accounting fraud.

This study aims to address the following four research questions: first, whether auditors report critical audit matters (CAMs) to shield themselves against possible litigation; second, whether reporting quality affects auditors’ propensity to report CAMs; third, whether auditors’ tenure length – reflecting familiarity with clients’ financial reporting – affects their likelihood to report CAMs; and fourth, whether auditors’ conservatism increases the likelihood of CAMs reporting.

Data are manually collected from audit reports including CAMs in 10-K, then financial data are collected from the Capital IQ database, and market data are collected from the CRSP database. Using propensity score matching, the initial sample of companies with CAMs is matched with companies without reported CAMs. Performance adjusted discretionary accruals, real earnings management proxy, Khan and Watts’ (2009) C-score, propensity to issue a going concern opinion, Dechow et al.’s (2011) F-Score, Rogers and Stocken’s (2005) model and Houston et al.’s (2010) model are used to measure reporting quality, auditor conservatism, misstatement risk and litigation risk, respectively.

The results do not show that auditors report CAMs opportunistically to shield themselves from litigation risk. However, the results do suggest that auditors have a greater tendency to report CAMs when reporting quality is low and when they are more conservative. On the other hand, they have less tendency to report CAMs in their first year of engagement.

The findings of this study have important implications for the auditor behavior literature as it shows that, when it comes to reporting CAMs, auditors actually behave objectively and do not report in a trite way. This study also provides early archival evidence on a standard that relates to the first major change to the auditor’s report in decades. To the best of the author’s knowledge, it is the first to provide evidence on the association between auditor conservatism and auditors tendency to report CAMs and the first to triangulate prior research on auditor litigation risk by providing the first archival evidence on the auditors “litigation-shielding” concern.

This study examines whether auditors attempt to meet the stated objective of reporting CAMs by signaling information about reporting quality. This study demonstrates that reporting CAMs is not a “boilerplate” communication. This study has implications for standards setters, as it shows that CAMs are reported in a way consistent with the objectives of the new standard, namely, via signaling information in the audit report on the quality of the financial statements.

In terms of originality, this paper uses a manually collected sample and, to the best of the author’s knowledge, is the first to focus on auditor’s behavior rather than on investors or clients reactions to CAMs. Also, this paper addresses a recently issued standard using US data and archival approach, rather than experimental. This paper also provides relevant evidence related to concerns raised earlier but were not empirically examined, such as reporting CAMS as “boilerplate” expectations. This paper provides new evidence on the auditors’ behavior with regard to litigation risk.

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.

This paper aims to examine how the allocation of audit hours to the year-round procedures, based on the risk of material misstatements in financial statements, impacts audit quality.

Using a data set on audit hours spent on year-round and year-end procedures, the authors build an empirical model for testing the effectiveness of year-round auditing of Korean public firms during the period of 2014–2018.

The initial tests do not show that proportionate increases in year-round procedures increase audit quality. However, after the authors control for the risk of material misstatements, the authors find that proportionate increases in year-round audit hours generally increase audit quality, except for high-risk firms where audit quality increases only as year-end hours proportionately increase. For high-risk firms, the results suggest that increases in year-round audit procedures occur at the cost of the essential year-end work. Similarly, except for high-risk firms, the authors find that the allocation of more audit effort to year-round procedures improves audit efficiency.

To the best of the authors’ knowledge, this study provides some of the first empirical evidence showing how a risk-based approach to allocating audit effort over the duration of an audit can impact audit quality and efficiency. Regulatory bodies, such as the International Auditing and Assurance Standards Board and Public Company Accounting Oversight Board, which consider the proper allocation of audit hours as a key audit quality indicator, should find the results useful.

This paper aims to examine the perspectives of auditors, regulators and financial report preparers on the effects of key audit matters (KAMs) reporting on audit effort, fees, quality and report transparency.

The authors conducted 21 semi-structured interviews with stakeholders (13 Audit Partners, 5 Chief Financial Officers and 3 regulators) and thematically analysed the interviews. They use the frame of “Paradox of Transparency” to explain the findings.

Auditors perceive that the overall quality control of their audits has improved both in the planning and execution stages, and such improvement can mostly be attributed to the coercive pressures from professional bodies and regulators. Nevertheless, audit fee remains unchanged. Auditors disclose industry generic items and descriptions of KAMs, sometimes masking the real problem areas of the clients. Even after improving the performative audit quality, transparency of audit reporting has not improved. Issues that warrant going concern qualifications or audit report modifications are now reported as KAMs. Hence, KAMs reporting might make the audit report less transparent.

Localised audit environments and institutions affect the transparency of KAMs reporting. Without attention to corporate governance and auditors’ independence issues, paradoxically, performative improvement in audit quality (due to the KAMs reporting requirement) does not enhance the transparency of audit reports.

To the best of the authors’ knowledge, this study is the first to provide field-level evidence in Bangladesh and other developing countries about the perceptions of auditors, financial report preparers and regulators on the effects of KAMs reporting on audit efforts, fees, quality and report transparency.