The effects of self‐esteem and perspective‐taking on group auditor's review actions

Abstract

We examine the effects of self‐esteem and perspective‐taking—both separately and jointly—on group auditors' selection of the next steps after reviewing the findings of a component auditor on a warranty provision. These individual and situational determinants of professional scepticism are important factors for enhancing audit quality in multinational group audits given the concerns about group audit quality raised by regulators. We hypothesize that group auditors who have high self‐esteem and are prompted to take the regulator's perspective plan more effective next steps after reviewing the work of component auditors. In an experiment with 103 audit partners and managers, we measured self‐esteem and manipulated a perspective‐taking prompt. As hypothesized, we find that group auditors who have high self‐esteem or who are prompted to take the regulator's perspective plan more effective next steps than those with low self‐esteem or who are unprompted. We find no support for an interaction between self‐esteem and perspective‐taking in the context of our study. Audit firms can use the insights from our study in selecting group auditors based on self‐esteem and developing firm policies to consider the regulator's perspective when reviewing the findings of component auditors to enhance audit quality in multinational group audits.

An examination of comment letters on suggested Part 10: audits of groups' financial statements in the proposed ISA for less complex entities

“…Of concern for firms, investors, and regulators is the extent to which these other auditors provide the expected uniform level of audit quality. Borkus et al, (2022) found that group auditors who have high self-esteem or who are prompted to take the regulator's perspective plan more effective next steps than those with low self-esteem or who are unprompted. Hence, Borkus et al, (2022) suggested that audit firms can use the insights from their study in selecting group auditors based on self-esteem and develop firm policies to consider the regulator's perspective when reviewing the findings of component auditors to enhance audit quality in multinational group audits.…”

“…Borkus et al, (2022) found that group auditors who have high self-esteem or who are prompted to take the regulator's perspective plan more effective next steps than those with low self-esteem or who are unprompted. Hence, Borkus et al, (2022) suggested that audit firms can use the insights from their study in selecting group auditors based on self-esteem and develop firm policies to consider the regulator's perspective when reviewing the findings of component auditors to enhance audit quality in multinational group audits. Carson et al (2022) examined what determines the involvement of component auditors in multinational group audits and the association with audit quality.…”

“…As the proposed Part 10 focuses on the audits of group financial Statements of the ISA for LCE, this section presents briefly some prior literature related to the group audits. Prior studies suggest that the setting of multinational group audits might be problematical, creating coordination and communication obstacles between group auditors and component auditors that potentially constrain professional skepticism in these types of audits (Borkus et al, 2022;Downey and Westermann, 2021). Relatedly, Sunderland and Trompeter (2017) stated that when conducting audits of large multinational groups, audit firms often rely on the work of other auditors who have been engaged to conduct portions of the audit in distant locations.…”