The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates

Kang, Yoon Ju; Trotman, Andrew J.; Trotman, Ken T.

doi:10.1016/j.aos.2015.03.001

Cited by 55 publications

(45 citation statements)

References 45 publications

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“…The average meeting held each year reached nine times, and these meetings might discuss any policies related to green investment issues. Based on the similar studies on the role of audit committees in various corporate policies such as compliance with regulations [44], [45], [65], and firm performance [46], this study supported the finding of the previous studies [47]. Indeed, audit committees play important roles in monitoring company policies on environmental issues [47].…”

Section: Findings and Discussionsupporting

confidence: 86%

Does Green Investment Increase Financial Performance? Empirical Evidence from Indonesian Companies

et al. 2018

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The negative effects of globalization and rapid growth of industries on environment have changed the business paradigm from profit issues to profit, people and planet (triple bottom line). Consequently, a number of companies have invested their money in environmental issues (called as green investment). This study aims to investigate the effect of firm characteristics on green investment and how green investment influences financial performance. Using annual reports of companies receiving the Program for Pollution Control, Evaluation and Rating (PROPER) award and listed on the Indonesia Stock Exchanges in the year of 2009-2014 as research data, the findings showed that firm size, foreign ownership, industry profile, and frequency of audit committee meeting significantly influenced green investment whereas ISO14001 management certification had no effect on it. Interestingly, green investment positively determined an increase in firm financial performance. This reveals that the better the green investment, the higher the financial performance of the companies. The findings contribute to the importance of adopting green investment as a company's strategy to increase profit without destroying the environment. Secondly, this finding can be used by government as a reference for formulating any regulations concerning business and environment. Finally, the finding contributes to the importance of including environmental issues in business education.

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Section: Findings and Discussionsupporting

confidence: 86%

Does Green Investment Increase Financial Performance? Empirical Evidence from Indonesian Companies

et al. 2018

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“…First is the need for additional clarity, and clearer guidance from standard setters on audit requirements, audit procedures, and allowable estimation uncertainty. One obvious disadvantage of such suggestions is that they reduce the scope for auditor judgments, promote a “cookbook” approach to auditing, and reduce the opportunity for improvements in audit quality by innovative audit procedures (e.g., Kang et al ; Peecher et al ). An alternative approach would be to introduce some form of audit judgment rule whereby inspectors could apply a reasonableness test to assess auditors' judgments (see Kang et al ; Peecher et al ), consistent with the professional judgment framework suggested by Pozen (), which emphasizes “reasoned evaluation made in good faith and in a rigorous, thoughtful, and deliberate manner.” Experimentally, comparative judgments of both auditors and inspectors could be compared across different tasks, manipulating the complexity and uncertainty of the FVMs under status quo auditing standards, under auditing standards providing more guidance, and under Audit Judgment Rules (AJR) regulations.…”

Section: Future Experiments Motivated By Gtw Resultsmentioning

confidence: 99%

Mind the Gap: Why Do Experts Have Differences of Opinion Regarding the Sufficiency of Audit Evidence Supporting Complex Fair Value Measurements?

Glover

Taylor

et al. 2019

Contemporary Accting Res

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Reported deficiencies continue to persist in audits of fair value measurements and other complex accounting estimates (hereafter, “FVMs”), despite improvements in auditor performance observed by regulators. The persistence of reported deficiencies in audits of FVMs suggests that factors underlying this trend may be more complicated and multidimensional than previously suggested by regulators and academic research, which has focused largely on auditors' unsatisfactory performance as the principal source of reported deficiencies. Drawing from the judgment and decision‐making expertise literature, we gather field‐based data from audit experts to identify additional factors that are likely to be contributing to differences of opinion between audit and inspection experts and the persistence of reported deficiencies in audits of FVMs. We find evidence that audit experts interpret standards and evaluate audit evidence differently than inspectors, and thus perceive there to be a gap between what auditors and inspectors regard as sufficient appropriate audit evidence to support audits of FVMs (hereafter, “FVM gap”). Moreover, results highlight several areas in audits of FVMs where differences of opinion exist between auditor and inspector experts regarding what constitutes a reported deficiency. Within the contexts we examine, our results identify additional factors, beyond deficient auditor performance, that may contribute to the FVM gap. We also report audit partners' recommendations for ways to reduce the FVM gap and suggest avenues for future research. Gaining a more complete understanding of sources contributing to reported deficiencies will help regulators, standard setters, audit firms, and academics to identify ways to reduce the FVM gap and reported deficiencies in audits of FVMs.

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“…settings. In a study that examines the perceptions of Australian audit committee members on the effect of an AJR, Kang et al () also find that an AJR is not likely to result in higher audit quality. However, whether or not cross‐cultural differences affect auditors' response to an AJR is an empirical question that future research can consider.…”

Section: Resultsmentioning

confidence: 99%

“…There are concerns, however, that an AJR could adversely affect perceptions of audit quality as investors and other users may conclude that audit firms will reduce the intensity of their audits (U.S. Treasury , VII:30). Consistent with such concerns, Kang et al () find that audit committee members perceive accounting estimates will become less conservative and auditors' due diligence will be negatively affected with the introduction of an AJR.…”

Section: Introductionmentioning

confidence: 99%

Does an Audit Judgment Rule Increase or Decrease Auditors' Use of Innovative Audit Procedures?

Kang

Piercey

Trotman

2019

Contemporary Accting Res

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The current audit environment encourages auditors to conduct defensive auditing procedures in lieu of using new, innovative, and potentially more effective audit procedures, due to concerns these procedures may be second‐guessed in litigation or by audit inspectors such as the PCAOB. As a result, auditors may prefer traditional “generally accepted” procedures over innovative procedures that are potentially more effective. We test recent proposals that an Audit Judgment Rule (AJR) encourages the use of innovative, and potentially more effective, audit procedures analogous to the similar Business Judgment Rule that affords legal protections to corporate directors. Under an AJR, litigators or audit inspectors could not second‐guess auditor judgments, even if they perceive that alternate judgments would have ordinarily been reached, provided the auditor's judgment was made in good faith and in a rigorous manner. However, the AJR's requirements that auditors must defend the rigor of their innovative judgments could potentially backfire and lead auditors to select more traditional procedures. Under the framework of goal activation theory, we conduct an experiment with audit managers and seniors and find that an AJR makes auditors less likely to select innovative audit procedures, particularly when audit risk is high. They do so despite believing the innovative procedures to be more effective than the traditional procedures. Findings from a supplementary experiment with experienced auditors further suggest that national office affirmation of the reasonableness of the procedures does not help overcome this effect. Overall, our findings suggest that an AJR may have the unintended consequence of further increasing auditors' focus on more traditional, and potentially less effective, audit procedures.

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The effect of an Audit Judgment Rule on audit committee members’ professional skepticism: The case of accounting estimates

Cited by 55 publications

References 45 publications

Does Green Investment Increase Financial Performance? Empirical Evidence from Indonesian Companies

Does Green Investment Increase Financial Performance? Empirical Evidence from Indonesian Companies

Mind the Gap: Why Do Experts Have Differences of Opinion Regarding the Sufficiency of Audit Evidence Supporting Complex Fair Value Measurements?

Does an Audit Judgment Rule Increase or Decrease Auditors' Use of Innovative Audit Procedures?

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