Can Auditors Pursue Firm-Level Goals Nonconsciously on Audits of Complex Estimates? An Examination of the Joint Effects of Tone at the Top and Management's Specialist

Abstract

We examine whether tone at the top emphasizing firm-level commercial, audit quality, or both goals (balanced) can nonconsciously affect auditors' engagement-level tendency to accept management's estimates, and whether the effects differ if management engages a specialist. This study is motivated by academics' and regulators' increasing attention on firm-level tone at the top and concerns about management bias in audited estimates, especially when the evidence is prepared by management's specialist. We find firm-level goals can be pursued nonconsciously by auditors when performing a complex task. When management's specialist is absent, a balanced approach reduces auditors' tendency to agree with management's estimate compared to a commercial approach; however, it is less effective when management's specialist is present. We find an audit quality approach reduces auditors' tendency to accept management's estimate compared to a commercial approach, regardless of the absence/presence of a specialist. Our results have important implications for regulators and audit firms.

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

“…Estimation uncertainty is defined in accounting and auditing standards as "the susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement," and in this paper we focus on the uncertainty present on a particular measurement date (ISA 540.7; see AICPA 2011, AU-C 540.7). 2015; Joe, Vandervelde, and Wu 2017;Joe, Wu, and Zimmerman 2017;Pyzoha et al 2018;Smith-Lacroix et al 2012). Collectively, extant research highlights significant challenges auditors encounter when auditing FVMs and indicates that deficient auditor performance is one important contributing factor to the persistence of reported deficiencies.…”

“…Glover et al () find that the lack of available market data for nonfinancial FVMs forces auditors to rely more on management's assumptions and that management's insufficient knowledge regarding the valuation process presents significant challenges to auditors when auditing FVMs. Research also suggests that some auditors lack the necessary knowledge and expertise to fully understand and evaluate complex valuation inputs, analyses, and models, which may lead to deficient auditor performance due to overreliance on the work of specialists (e.g., Griffith , Hammersley, and Kadous ; Joe, Vandervelde, and Wu ; Joe, Wu, and Zimmerman ; Pyzoha et al ; Smith‐Lacroix et al ). Collectively, extant research highlights significant challenges auditors encounter when auditing FVMs and indicates that deficient auditor performance is one important contributing factor to the persistence of reported deficiencies.…”

“…2015; Joe, Vandervelde, and Wu 2017;Joe, Wu, and Zimmerman 2017;Pyzoha et al 2018;Smith-Lacroix et al 2012). Collectively, extant research highlights significant challenges auditors encounter when auditing FVMs and indicates that deficient auditor performance is one important contributing factor to the persistence of reported deficiencies.…”

“…Together, the extant literature, consistent with views held by the PCAOB, suggests that deficient auditor performance is a key factor contributing to recurring reported deficiencies (Cannon and Bedard ; Glover et al ; Griffith, Hammersley, and Kadous ; Griffith ; PCAOB , ). Recent research has also focused on strategies to improve auditor performance, with the aim of reducing reported deficiencies related to auditing FVMs (e.g., Griffith, Hammersley, Kadous, and Young ; Joe, Vandervelde, and Wu ; Pyzoha et al ).…”

Audit Leadership Diversity and Audit Quality

“…Prior research indicates that a company's tone at the top has important implications for employee behaviors (Bamber et al 2010;Dyreng et al 2010). A public accounting firm's tone at the top, as exhibited by the partners, represents the embodiment of firm culture and influences the effectiveness of the firm's system of quality control and overall audit quality (Jenkins, Deis, Bedard and Curtis 2008;Bamber and Iyer 2009;Pyzoha, Taylor and Wu 2020). The tone established by firm leaders provides an ethical foundation on which personnel within the firm base their judgments and decisions (COSO 2013).…”