Business Commons^™

Audit Evidence, Technology, And Judgement: A Review Of The Literature In Response To Ed‐500, Dereck Barr‐Pulliam, Christopher G. Calvin, Marc Eulerich, Arpine Maghakyan

Accounting Faculty Publications

In October 2022, the International Auditing and Assurance Standards Board (IAASB) issued Exposure Draft 500 (ED-500). This is focused on revising and integrating the standard auditors use when evaluating audit evidence during an external audit. This study contributes to the ongoing discourse as the IAASB evaluates feedback to ED-500 and executes its standard-setting agenda. We review academic literature published in the past 10 years to synthesize extant knowledge specifically on the use of technology and the application of professional skepticism during audit evidence evaluation. Our review offers factors the IAASB should consider when seeking to modernize and future-proof its standards, …

An Extension Of The Theory Of Technology Dominance: Capturing The Underlying Causal Complexity, Steve G. Sutton, Vicky Arnold, Matthew Holt

Accounting Faculty Publications

The Theory of Technology Dominance (TTD) provides a theoretical foundation for understanding how intelligent systems impact human decision-making. The theory has three phases with propositions related to (1) the foundations of reliance, (2) short-term effects on novice versus expert decision-making, and (3) long-term epistemological effects related to individual deskilling and profession-wide stagnation. In this theory paper, we propose an extension of TTD, that we refer to as TTD2, primarily to increase our theoretical understanding of how, why, and when the short-term and long-term effects on decision-making occur and why advances in technology design have exacerbated some weaknesses and eroded some …

Post-Scandal Organizational (Dis)Order: A Grounded-Theory Approach Shifting From Murphy’S Law To Safer Regulatory Environments, Jesus R. Jimenez-Andrade, Timothy J. Fogarty, Richard J. Boland

Accounting Faculty Publications

The literature shows that, in the wake of negative media exposition, organizations’ self-regulation tends to be strengthened. We investigate such motivation from the perspective of the psychosocial consequences in executives’ and organizational self-confidence. A grounded-theory approach supports findings from 27 different events described by top-level executives from major publicly traded organizations. Their testimonies document that scandalous episodes, when they occur, leave a trauma footprint within the organizational and individual consciousness because of the perceived post-event humiliation, remorse, guilt, and fear. The paradigm of reliance and trust in the designed structures is severely altered. In turn, a climate of excessive self-regulation …

Living Up To Your Codes? Corporate Codes Of Ethics And The Cost Of Equity Capital, Hong Kim Duong, Marco Fasan, Giorgio Gotti

Accounting Faculty Publications

Purpose-

Previous literature provides mixed evidence about the effectiveness of a code of ethics in limiting managerial opportunism. While some studies find that code of ethics is merely window-dressing, others find that they do influence managers' behavior. The present study investigates whether the quality of a code of ethics decreases the cost of equity by limiting managerial opportunism.

Design/methodology/approach-

In order to test the hypothesis, the authors perform an empirical analysis on a sample of US companies in the 2004–2012 period. The results are robust to a battery of robustness analyses that the authors performed in order to take care …

Innovation Capacity: A Firm Level Response To Subsidy Activity In A National Setting, Assyad Al-Wreiket, Royce D. Burnett, Christopher J. Skousen, Ouadie Akaaboune

Accounting Faculty Publications

The purpose of this paper is to investigate the effect subsidies have on firm-level innovation across Eastern European and Central Asian countries and to assess if these effects move to increase firm-level capability. Specifically, we investigate the extent subsidy programs act to shape and guide firm-level innovative capabilities and how the presence of such capabilities affect operational performance. We employ a Probit model to investigate firm-level innovation and OLS regression to assess how subsidies, in association with the decision to adopt foreign technology and in-house research and development (R&D) affect firm productive capacity. Results suggest subsidies promote innovation and that …

The Velocity Of Risk, Sridhar Ramamoorti, James H. Wanserski, Richard Stover

Accounting Faculty Publications

Only a few decades ago, the onset of problematic risk events often was slow, and organizations handled the corresponding aftermath over a manageable time frame. Organizations armed with extensive public relations resources responded to most postevent crises after planning and analyzing thoughtful responses. Additionally, organizations carefully calculated their transparency with stakeholders regarding the event to manage its impact on the organization. Fast forward to today, and the pace of information is almost instantaneous. For example, when a popular U.S. fast food restaurant chain experienced an outbreak of E. coli-infected lettuce, its stock price decreased 44 percent within 90 days amid …

Risk Consumption, Sridhar Ramamoorti, Rick Stover

Accounting Faculty Publications

Understanding the difference between risk appetite and risk tolerance can deter organizations from digesting too much risk.

The concepts of risk appetite and risk tolerance were introduced in 2004 in The Committee of Sponsoring Organizations of the Treadway Commission’s (COSO’s) Enterprise Risk Management–Integrated Framework. Specifically, COSO defines risk appetite as “the amount of risk — on a broad level — that an entity is willing to accept in pursuit of value.” Naturally, organizations will have different risk appetites depending on their industry, management philosophy, operating style, culture, and objectives. Therefore, a range of appetites potentially exist for distinct risks, which …

Voluntary Changes In Accounting Principle: Literature Review, Descriptive Data, And Opportunities For Future Research, Marsha B. Keune, Timothy M. Keune, Linda C. Quick

Accounting Faculty Publications

Voluntary changes in accounting principle represent explicit and fundamental decisions by managers to exercise accounting discretion. This paper develops an organizing framework to review prior literature on voluntary changes, provides descriptive insights on contemporary changes, and identifies opportunities for future research on voluntary changes. The voluntary change literature is robust and has examined many questions using data prior to the Sarbanes-Oxley Act of 2002 (SOX). We find that contemporary voluntary changes often vary across the pre-SOX, post-SOX, and post-SFAS No. 154 periods by the materiality of their income effect, issue type, and justifications provided by managers, suggesting that manager use …

Materiality Defined: Differing Concepts Of Materiality Can Cause Confusion Among Stakeholders, Michael P. Fabrizius, Sridhar Ramamoorti

Accounting Faculty Publications

Because the term materiality arose within the context of financial reporting and statement assurance, internal auditors have been challenged in adapting or creating a definition that is relevant for themselves and their stakeholders. In the context of financial reporting, materiality is relevant to three stakeholder groups: 1) preparers of financial statements, 2) auditors, and 3) users of financial statements. Although materiality decisions are made by only two of these three groups--preparers and auditors--most internal auditors' conception of materiality likely has a user orientation. The auditor might ask, "How would a reasonably prudent investor react to the magnitude of misstatement (under- …

A Strategy For Teaching Critical Thinking: The Sellmore Case, Joseph F. Castellano, Susan Lightle, Bud Baker

Accounting Faculty Publications

The importance of teaching and applying critical thinking skills is apparently matched by its difficulty in doing so. Sara Rimer, writing for the January 18, 2011, edition of The Hechinger Report, discussed a study by Richard Arum that followed several thousand undergraduates from when they entered college in fall 2005 to when they graduated in spring 2009. Arum’s research, published in his book Academically Adrift: Limited Learning on College Campuses, found that large numbers of students did not learn critical thinking, complex reasoning, and written communication skills. Arum used testing data and student surveys from 24 colleges and universities ranging …

Auditing Organizational Governance: Internal Audit Has An Integral Role To Play In Improving The Organization's Strategic Performance, Sridhar Ramamoorti, Alan N. Siegfried, P. Alan White

Accounting Faculty Publications

Organizational governance is a broad concept that ensures superior strategy formulation, development, and execution in ways that balance performance, conformance, and accountability. It includes systems, controls, and associated processes that promote ethics and values, performance and accountability, and risk communication and coordination among the board, external and internal auditors, and management in meeting and exceeding stakeholder expectations. Internal audit’s role in organizational governance has always been recognized and valued, but it has become increasingly important in the wake of governance failures in financial and public sectors throughout the world. As a result, more and more boards as well as executive …

Why Audit Teams Need The Confidence To Speak Up, Susan Lightle, Joseph F. Castellano, Bud Baker

Accounting Faculty Publications

A climate of psychological safety is an important prerequisite for effective interpersonal relationships among audit team members and for audit teams to properly meet their fiduciary responsibilities. Audit processes can be more effective and the quality of audits can be improved if auditors understand the concept of psychological safety and its application for audit teams. The failure to create a climate of psychological safety among audit team members can have harmful effects on audit quality, but fortunately CPA firms can take steps to enhance psychological safety and enable more effective audit processes and audit work.

Is Cash Compensation For Long-Tenured Ceos Efficiently Allocated?, Yoshie Saito Lord

Accounting Faculty Publications

Uncertainty about a CEO’s ability is related to his/her length of service to a firm. Accordingly, monitoring systems should vary depending upon CEOs’ tenure. Long-tenured CEOs require less monitoring because their ability has been revealed over time. However, as CEOs advance in their careers, they are more likely to acquire power to influence board decisions. To analyze this implication, I use the previously reported differential sensitivity of CEO cash compensation to income-increasing and decreasing disposals. Contrary to prior findings, I find that cash compensation for long-tenured CEOs is positively associated with both income-decreasing but is shielded from income-increasing divesture decisions.

Public Corruption: Causes, Consequences & Countermeasures, Victor Hartman, Sridhar Ramamoorti

Accounting Faculty Publications

The article discusses the cause and consequences of public corruption in the U.S. It mentions several countermeasures against public corruption which include strengtening the organizational commitment, behaviour, and emphasizing code of ethics. The article also mentions the conflict of interests, challenges on law enforcement, and asset misappropriation.

Promoting And Supporting Effective Organizational Governance, Sridhar Ramamoorti, Alan N. Siegfried

Accounting Faculty Publications

Internal audit’s role in organizational governance has become increasingly important in the wake of the recent global financial crisis and the continuing spate of governance failures in both financial and public sectors throughout the world. Informed observers and commentators have asked initially, “Where were the external auditors?” then “Where was the audit committee?” and finally, “Where was internal audit in all this?” This report draws on survey responses from internal auditors in 166 countries to take stock of the current role of internal audit in the governance process and learn how internal audit can better position itself to contribute to …

Responsible Accounting For Stakeholders, Jeffrey S. Harrison, Joyce Van Der Van Der Laan Smith

Accounting Faculty Publications

Through a critique of existing financial theory underlying current accounting practices, and reapplication of this theory to a broad group of stakeholders, this paper lays a normative foundation for a revised perspective on the responsibility of the public accounting profession. Specifically, we argue that the profession should embrace the development of standards for reporting information important to a broader group of stakeholders than just investors and creditors. The FASB has recently moved in the opposite direction. Nonetheless, an institution around accounting for stakeholders continues to grow, backed by a groundswell of support from many sources. Based on institutional theory, we …

Lost Opportunities: The Underuse Of Tax Whistleblowers, Sarah J. Webber, Karie Davis-Nozemack

Accounting Faculty Publications

Legal literature on whistleblower programs often assumes an agency’s ability to effectively use a whistleblower tip. This article challenges that assumption in the context of tax enforcement by exposing the Internal Revenue Service’s dismal performance. The article uses Fourth Amendment jurisprudence, taxpayer privacy law, as well as whistleblower and tax enforcement literature to propose a new approach to using information from tax whistleblowers.

Do Industry Specialist Auditors Add Value In Mergers And Acquisitions?, Ho-Young Lee, Vivek Mande, Jong Chool Park

Accounting Faculty Publications

This study examines whether the stock market returns surrounding announcements of mergers and acquisitions (M&A) are higher for acquiring firms audited by industry specialists. External auditors are uniquely positioned to provide assurance on the financial statements of their acquiring clients both before and after an acquisition. Also, an important aspect of due diligence in M&A transactions is the external auditors review of the accounting records, financial statements, internal controls and information systems of the target company. Using a sample of 4,283 M&A announcements between 1988 and 2011 in the United States of America, we report the results from our main …

Does The Adoption Of Ifrs Affect Corporate Social Disclosure In Annual Reports?, Joyce Van Der Van Der Laan Smith, Andrea L. Gouldman, Rasoul H. Tondkar

Accounting Faculty Publications

In this exploratory study we investigate the impact of the implementation of IFRS on corporate social disclosures (CSD) within the context of stakeholder theory. We measure the level of CSD in annual reports using a disclosure instrument based on the United Nations Conference on Trade and Development report “Guidance on Corporate Responsibility Indicators in Annual Reports”. We find that IFRS adoption had a differential effect on CSD based on a firm's institutional setting i.e., the stakeholder–management relationship prevalent in their institutional environment. Firms in the stakeholder countries did not have a significant change in the level of CSD following the …

The Effects Of Offshoring On Judgment Quality In A Management Accounting Task, Daniel D. Selby

Accounting Faculty Publications

This study investigates the effects of offshoring on judgment quality in a management accounting context (i.e., capital budgeting). The effects of offshoring on judgment quality are understudied and might explain the ineffective and inefficient use of information in offshoring arrangements (Srikanth and Puranam, 2011). A 3x2 between-subject experiment was conducted where participants were assigned to one of three experimental conditions: onshore team, offshore team, or no team. Two dependent variables were measured for judgment quality: effectiveness and efficiency. My results suggest that offshoring may have detrimental effects on efficiency. However, I also find that offshoring does not affect effectiveness.

Should Religious Organizations Worry About Irs Audits?, Sarah J. Webber, Janet S. Greenlee

Accounting Faculty Publications

A great deal of media attention has focused on recent perceived financial abuses of churches and religious organizations. Cases of fraud within religious organizations have fueled the public perception that churches require some form of monitoring to prevent financial abuse. However, the IRS has limited authority to audit religious organizations under section 7611, and the results of such audits are generally unavailable to the public.

Through a Freedom of Information Act request, we obtained the outcomes of all section 7611 IRS audits of religious organizations conducted between 2001 and 2010. We found that although the number of both churches and …

Standard Costing Variances: Potential Red Flags Of Fraud?, Cecily A. Raiborn, Janet B. Butler, Lucian Zelazny

Accounting Faculty Publications

This article focuses on how standard cost variances can be used in detecting potential fraudulent activities. Each primary type of variance (material, labor, and overhead) is addressed with a discussion of possible inappropriate causal factors. Additionally, internal controls, graphic techniques, and other methods that can be implemented to combat fraud are provided.

The Importance Of Information Integrity: In A Data-Driven World, Unreliable And Inaccurate Information Can Lead To Bad Decision-Making, Sridhar Ramamoorti, Madhavan K. Nayar

Accounting Faculty Publications

What is information integrity? It is the trustworthiness and dependability of information. The credibility of information depends on whether we are getting it from sources we can trust. After all, the value of information to the decision-maker and problem-solver consists first in its integrity, and then in its usefulness and usability. Why? Because, even the best chef knows that you can't make a good omelet out of bad eggs! Consider the emerging trend of big data (see" Big Data" on page 34). According to IBM, people create 2.5 quintillion bytes of data every day (a quintillion is 1 followed by …

Nol Poison Pills: Using Corporate Law For Tax Purposes, Sarah J. Webber, Karie Davis-Nozemack

Accounting Faculty Publications

Hundreds of thousands of corporations report net operating loss (NOL) carryovers every year.1 Corporations, with the benefit of NOL rules, may turn disappointing losses into favorable tax results. During economic recovery, corporations are in better position to fully utilize the benefits of NOLs generated in prior years. NOL usage is not without peril, however. Corporations should carefully monitor corporate ownership changes to ensure that NOLs are not lost to the NOL trafficking rules. Under the NOL trafficking rules, excessive shareholder turnover triggers substantial NOL limitations. Unfortunately, corporations are not in control of their shareholder turnover, and therefore not in complete …

Paying The Irs Whistleblower: A Critical Analysis Of Collected Proceeds, Karie Davis-Nozemack, Sarah J. Webber

Accounting Faculty Publications

Congressional changes to the IRS Whistleblower Program were intended to induce more participation in the program by allowing larger incentives and greater certainty that whistleblowers would be paid. Since the Program was amended, tax whistleblower tips have increased 76 percent1 and revenue collected due to whistleblowers has increased 79 percent.2 Despite a rise in tips and revenue collected, whistleblower payments have not increased. In fact, the number of tax whistleblower awards paid has decreased 44 percent.3 We hypothesize that this trend is due to the administration of the program but also to the interpretation of “collected proceeds.” Collected proceeds are …

The Corporate Ethics Audit: To Prevent And Detect Management Fraud, Internal Auditors Must Have A Sound Understanding Of Human Behavior, Sridhar Ramamoorti, R. Luke Evans

Accounting Faculty Publications

In theory, management is responsible not only for designing and implementing strong systems of internal control but also confirming their continued effectiveness over time through monitoring activities. Yet, management override of these monitoring activities — -Soften described as the Achilles' heel of internal controls — is a growing trend at the executive level, as indicated by both of The Committee of Sponsoring Organizations of the Treadway Commission's fraud studies of 1998 and 2010. When the “overseer” becomes the perpetrator of fraud, how do shareholders protect themselves? Indeed, as the Roman satiric poet Decimus Juvenal wrote, “But who will guard the …

Failure To Benchmark: An Out-Of-Balance Scorecard At An Academic Institution, Richard J. Barndt, Charles H. Mcgee, Anthony J. Cataldo Ii

Accounting Faculty Publications

No abstract provided.

Don’T Burst The Bubble: An Analysis Of The First-Time Homebuyer Credit And Its Use As An Economic Policy Tool, Sarah J. Webber

Accounting Faculty Publications

In 2008, faced with a looming real estate crisis, Congress hastily acted to stabilize the economy by offering a first-time homebuyer credit. This tax credit was trumpeted as a solution to the excess inventory of homes for sale and to stop the free-fall in home values. The credit, however, failed to deliver on its promises. By analyzing the first-time homebuyer credit, its creation, its implementation and its economic impact, this Article concludes that, when compared to alternative policy solutions, Congress erred in using the tax code to implement a first-time homebuyer credit.

The Abcs Of Communicating Results, Deborah S. Archambeault, Morgen Rose

Accounting Faculty Publications

Communicating results is an integral part of the internal auditor's job, and The IIA's International Standards for the Professional Practice of Internal Auditing recognizes its importance by specifying in Standard 2420 that communications should be "accurate, objective, clear, concise, constructive, complete, and timely." In its 2009 survey. The Biggest Internal Audit Challenges in the Next Five Years, Protiviti, a global consulting firm, ranked communication with management and the audit committee as one of the biggest challenges facing internal auditing through 2012. Their subsequent 2010 Internal Audit Capabilities and Needs Survey identified presentation skills as the top "need to improve" personal …

The Effect Of Institutional And Cultural Factors On The Perceptions Of Earnings Management, Marshall A. Geiger, Joyce Van Der Van Der Laan Smith

Accounting Faculty Publications

In this study we examine the effect of stakeholder orientation versus shareholder orientation, and the level of cultural secrecy on individuals’ perceptions of earnings management practices. Examining perceptions from 1,260 participants from 13 countries indicates that individuals from stakeholder-oriented institutional back- grounds were less accepting of earnings management, including both accounting earn- ings management and operating earnings management activities, than participants from shareholder-oriented institutional backgrounds, and that individuals from secretive cultures were more accepting of both types of earnings management activities. Our findings provide evidence of the anticipated perceptual differences across countries with respect to earnings management and suggest the …