Would an Audit Judgment Rule Improve Audit Committee Oversight and Audit Quality?

Abstract

SUMMARY The current regulatory environment encourages auditors to engage in “defensive auditing.” That is, auditors must show that they complied with widely accepted standard procedures in order to reduce their exposure to PCAOB inspectors and courts. This could discourage innovation in auditing, since new and innovative procedures are not standard practice. A new stream of research examines a proposed change to legal rules that would protect auditors from being second-guessed, even when they make non-standard judgments, provided that they are made rigorously and in good faith. This proposed “Audit Judgment Rule” (“AJR”) could potentially improve audit quality by encouraging innovation. We review two studies that examine the effects of such an AJR on the judgments of audit committee members and auditors. Results of these studies suggest that an AJR may have unintended consequences, reducing audit innovation and audit quality. We discuss implications for implementing an AJR, including directions for future research.

The Association Between Audit Committee Financial Expert Characteristics and Audit Fees

“…Prior research shows that older members tend to be more careful, conservative, and innovative (Peterson, Smith, & Hibbing, 2020;Hoisl, 2007;Sundaram and Yermack, 2007). Therefore, as an audit committee financial expert gets older, she may require more efficient, innovative, and high-quality audit procedures ( (Kang & Piercey, 2020) of the auditing firm. This will lead to expansive audit coverage for increased financial reporting quality as well as increased audit fees.…”

“…This means that as a female ACFE becomes older, she tends to become more conservative and innovative, as she gains expert knowledge over years of experience. Therefore, she may require more innovative, and effective higher-quality audit procedures (Kang & Piercey, 2020) as she gets older. Kang & Piercey (2020) find that "audit committee members perceive a higher level of comfort regarding the issues surrounding the accounting estimate when more innovative procedures are adopted.…”

“…Therefore, she may require more innovative, and effective higher-quality audit procedures (Kang & Piercey, 2020) as she gets older. Kang & Piercey (2020) find that "audit committee members perceive a higher level of comfort regarding the issues surrounding the accounting estimate when more innovative procedures are adopted. This higher level of comfort is likely due to audit committee members' belief that more innovative procedures will lead to higher audit quality" Therefore, our variable of interest is the interaction of a firms' ACFE Age and ACFE Gender.…”

Audit Risk Evaluation Using Data Envelopment Analysis with Ordinal Data

“…The assessment of audit risk for either business units or financial statement items is an essential part of the audit planning process (AICPA, 1997; Low, 2004). Consequently, this type of difficult assessment enables auditors to allocate more audit resources to high‐risk units (Kanter et al ., 1990; Kang and Piercey, 2020). Accurate assessment of audit risk will lead to more efficient engagements (Low, 2004; De Martinis and Houghton, 2019); or, it will result in technical and allocative inefficiencies across audit engagements (Chang et al ., 2018; Cheng et al ., 2000).…”