Showing papers on "Audit published in 1997"

A review of research on the Alcohol Use Disorders Identification Test (AUDIT)

Abstract: Research on the core version of the Alcohol Use Disorders Identification Test (AUDIT) is reviewed. Sensitivities and specificities of the AUDIT or criteria of current hazardous use and, to a slightly lesser extent, lifetime alcohol dependence are high. In general, AUDIT scores are at least moderately related to other self-report alcohol screening tests. Several studies also show them as correlated with biochemical measures of drinking. Results of the AUDIT have also been associated with more distal indicators of problematic drinking. Indices of internal consistency, including Cronbach's alpha and item-total correlations, are generally in the 0.80's. Future directions for research on the AUDIT are suggested.

Struggling with the praxis of social accounting: Stakeholders, accountability, audits and procedures

Abstract: Addresses three related, though not entirely congruent, aims. Seeks, first, to initiate moves towards a “normative theory” ‐ a conceptual framework ‐ for the developing of social accounting by organizations. Second, aims inductively to draw out best practice from a range of social accounting experiments, illustrated, in particular, by reference to two short cases from Traidcraft plc and Traidcraft Exchange. Third, draws from the conclusions reached in the exploration of the first two aims and attempts to identify any clear “social accounting standards” or “generally acceptable social accounting principles” which can be used to guide the new and emerging social accounting practice. Presents a number of subtexts which attempt to link back to the accounting literature’s more trenchant critiques of social accounting; to address the tension between academic theorizing and engaging with practice; to synthesize different approaches to social accounting practice; and to respond to the urgency that the recent upsurge in interest in social accounting places on the newly formed Institute of Social and Ethical Accountability. An ambitious paper which means that coverage of issues must be thinner than might typically be expected ‐ exploratory, rather than providing answer, offers a collective view from experience and encourage engagement with the rapidly evolving social accounting agenda.

‘Improving ratings’: audit in the British University system

Abstract: This paper gives an anthropological comment on what has been called the ‘audit explosion’, the proliferation of procedures for evaluating performance. In higher education the subject of audit (in this sense) is not so much the education of the students as the institutional provision for their education. British universities, as institutions, are increasingly subject to national scrutiny for teaching, research and administrative competence. In the wake of this scrutiny comes a new cultural apparatus of expectations and technologies. While the metaphor of financial auditing points to the important values of accountability, audit does more than monitor—it has a life of its own that jeopardizes the life it audits. The runaway character of assessment practices is analysed in terms of cultural practice. Higher education is intimately bound up with the origins of such practices, and is not just the latter day target of them. © 1997 by John Wiley & Sons, Ltd.

The Influence of Contrary Information and Mitigating Factors on Audit Opinion Decisions on Bankrupt Companies

Abstract: The research described in this paper tests the use of contrary information and mitigating factors for the going-concern modification decision for soon-to-be bankrupt companies. Contrary information (i.e., information which questions the client's continued existence) includes, for example, defaults on debt. Mitigating factors are those which partially offset contrary information. In particular, given previous research (e.g., McKeown, Mutchler, and Hopwood [1991]) which reports an inverse relation between client size and the going-concern modification after controlling

The Impossibility of Auditor Independence

Abstract: The growing number of audit failures leads the authors to question the current auditing relationship. In no profession is impartiality more important than in auditing, they say. Yet psychological research indicates that such impartiality is impossible under current institutional arrangements. An audit is meant to ensure that a company's financial statement is valid, reliable, and complete. The auditor gives an unqualified opinion that the statement "fairly presents" the company's financial position. But the management of the company hires and pays the outside auditor; the company and its managers become the auditor's "client," thus making psychological independence impossible. Bazerman et al. examine a series of experiments on self-serving bias, in which bias entered unconsciously and unintentionally while subjects made supposedly impartial judgments. In the auditing relationship, certain characteristics exacerbate self-serving bias, causing auditors' judgments to favor their clients: 1. People tend to be less concerned about harming a statistical victim than a known victim. An auditor doesn't really know who will be harmed by misinformation, but he or she does know the people in the firm who would be harmed by a negative audit. 2. The negative consequences of a negative opinion on an audit are immediate, i.e., loss of contract or employment. 3. Auditors have long-standing relationships with the companies they audit. 4. Reporting standards are flexible or ambiguous. 5. People can mislead themselves about the nature of trade-offs and rationalize their behavior. Other factors add to the pressure on auditors such as the increased competition among accounting firms and the growth of consulting firms that also provide auditing services. An unfavorable audit risks not only the auditing relationship but the consulting one as well. Bazerman et al. call for reform of auditing's current structure to end the current epidemic of litigation.

Litigation Risk and Auditor Resignations

Abstract: Litigation against auditors has increased dramatically in recent years. Auditors can offset litigation risk in a number of ways, including improved audit quality and planning, increases in audit fees and increases in the issuance of modified opinions. Auditors can also adjust their client portfolios by becoming more selective in their choice of new clients and by withdrawing from high-risk engagements. We test the hypothesis that litigation risk motivates auditor resignations by comparing resignation companies with two groups of client companies that dismissed their auditors: one matched with the resignation companies on industry and year, and the other matched on year alone. We find resignation companies differ from dismissal companies along dimensions that capture the probability of litigation: financial distress, variance of abnormal returns, auditor independence, tenure and a modified (particularly going-concern) opinion. We also construct a litigation proxy based on a prior litigation-prediction model and find that the proxy is positively associated with the probability that the auditor will resign rather than be dismissed from the engagement. Our analysis is consistent with concerns expressed by the accounting profession that litigation pressures lead to the withdrawal of audit services for a segment of the market.

Resource Allocation Decisions in Audit Engagements

Abstract: . We examine the empirical relationship between auditors' resource allocations and selected engagement characteristics. Our measure of resources is hours of grades of labor (partner, manager, etc.) “charged” to audit activities (planning, internal control evaluation, etc.). Engagement characteristics examined are client size, industry affiliation, client complexity, risk, auditor provision of management advisory services to the auditee, and degree of control reliance. The data were obtained from publicly available sources and a survey developed and administered by an international public accounting firm. We find the cross-sectional variation in the labor charged to various audit activities can be explained by engagement characteristics found to be important in prior studies on audit fees, total labor inputs, and the mix of labor inputs. Measures of client size, industry, complexity, risk, and services provided are associated with changes in the allocation of labor among audit activities. We find no substitution of internal control review/testing for substantive testing on reliance audits. Task assignments vary by rank. Measures of client size, complexity, risk, and services provided are associated with activity-specific changes in the labor mix.

Expertise and the construction of relevance: Accountants and environmental audit

Abstract: Some accountants have begun to compete for work in the environmental auditing field and this essay describes the strategies by which they have attempted to represent themselves as relevant experts. A shift in regulatory style has stimulated experimentation with new instruments of control, including voluntary schemes for environmental auditing which emphasise a management control system. Subsequent attempts to define the relevant knowledge base of environmental auditing and to accredit verifiers have created a stage on which accountants can promote their claims. The essay draws attention to the construction of an overlap between the skills required for financial and environmental auditing. In turn, this strategy requires that other forms of expertise, such as in the field of the applied sciences, must be subordinated within an audit process which is controlled by the accountant.

The Effect of Audit Quality on Earnings Management

Abstract: This paper examines the relation between economic incentives to manage earnings and discretionary accruals and the modifying effects of audit quality on this relation. We hypothesize that incentives to smooth earnings and incentives created by debt agreements motivate managers to strategically bias earnings. However, we expect that earnings manipulation is tempered by the quality of the firm's external auditor. The findings indicate that companies with non-Big Six auditors (a proxy for lower audit quality) report discretionary accruals that significantly increase income compared to companies with Big Six auditors. We also find that managers respond to debt contracting and income-smoothing incentives by strategically reporting discretionary accruals. In addition, companies with incentives to smooth earnings upwards (downwards) report significantly greater income-increasing (decreasing) discretionary accruals when they have non-Big Six auditors. However, we do not find that audit quality affects earnings management that occurs in response to high leverage.

The provision of nonaudit services by accounting firms to their audit clients

Abstract: . There has been a strong growth in accounting firms' provisions of nonaudit services to their audit clients. To date, however, there have been few studies into the determinants of this joint provision of audit and nonaudit services. One reason for the paucity of research is the lack of publicly available data with which to empirically examine relationships and test theories. However, recent legislation in the United Kingdom requires publication of nonaudit fees paid to a company's auditor, and this disclosure provides the data with which to investigate the joint provision of consultancy and audit services. A model is developed that seeks to explain a company's decision to hire nonaudit services from the auditor. The model argues that companies that face potentially high agency costs purchase relatively smaller amounts of nonaudit services from their auditor. High agency-cost companies require independent audits in order to reassure investors and creditors; the provision of joint services, which increases the economic bonding of the auditor to the client, may jeopardize independence or the appearance of independence. The model is tested using data observations from 500 companies, and the results indicate that companies that have higher agency-cost proxies are associated with smaller purchases of nonaudit services from their auditors.

Tacit Managerial versus Technical Knowledge As Determinants of Audit Expertise in the Field

Abstract: In this paper, we test whether results of prior studies of the determinants of audit expertise generalize to measures of actual performance. In doing so, we expand the concept of expertise to include managerial dimensions in addition to those related to the technical requirements of audit tasks and we investigate how the managerial components of knowledge, together with technical knowledge and problem-solving abilities, distinguish auditors with superior performance at different levels of the organizational hierarchy. Past studies of the determinants of audit expertise have used auditors' experience or rank (e.g., Ashton and Brown [1980], Hamilton and Wright [1982], Bonner [1990], and Libby and Frederick [1990]) or their performance on experimental versions of technical auditing tasks (e.g., Bonner and Lewis [1990]) as proxies for actual performance. Establishing whether experience, knowledge, and ability measures are related to performance on the job is necessary to determine the economic significance of prior findings (Marchant [1990]). We identify experts based on actual performance evaluations produced as part of a CPA firm's compensation and promotion system. The

The corporate report and the private shareholder: lee and tweedie twenty years on

Abstract: The corporate annual report is seen as an important device for communication between management and shareholders (and others). Research by Lee and Tweedie during the 1970s produced evidence to suggest that many parts of the corporate annual report were neither well read nor well understood by private shareholders. Since then much has been done to change the face of corporate reporting, e.g. the introduction of a cash flow statement, a statement of recognized gains and losses and an operating and financial review. In addition, following the Cadbury Report recommendations, there are statements of responsibilities of directors and auditors. The auditors» report is now considerably longer than before following the publication of SAS 600. Providing shareholders with more information involves substantial costs but it might be argued that this has been worthwhile if it has improved the readership and understanding of the annual report. This paper reports the findings of a study into private shareholder readership of the corporate report of one company. It seeks, through a partial replication of the Lee and Tweedie studies, to determine the extent to which the modern annual report is read by shareholders, and to see whether the new forms of financial statements in particular are read. The results of this study reveal that, from the point of view of the private shareholder, little has changed over the past 20 years, despite the efforts of the accounting profession and the corporate community to improve communication between management and shareholders.

Litigation risk and auditor resignations

Abstract: Litigation against auditors has increased dramatically in recent years. Auditors can offset litigation risk in a number of ways, including improved audit quality and planning, increases in audit fees and increases in the issuance of modified opinions. Auditors can also adjust their client portfolios by becoming more selective in their choice of new clients and by withdrawing from high-risk engagements. We test the hypothesis that litigation risk motivates auditor resignations by comparing resignation companies with two groups of client companies that dismissed their auditors: one matched with the resignation companies on industry and year, and the other matched on year alone. We find resignation companies differ from dismissal companies along dimensions that capture the probability of litigation: financial distress, variance of abnormal returns, auditor independence, tenure and a modified (particularly going-concern) opinion. We also construct a litigation proxy based on a prior litigation-prediction model and find that the proxy is positively associated with the probability that the auditor will resign rather than be dismissed from the engagement. Our analysis is consistent with concerns expressed by the accounting profession that litigation pressures lead to the withdrawal of audit services for a segment of the market.

The audit review process: A characterization from the persuasion perspective

Abstract: In this paper, we describe the audit review process from a persuasion perspective. This perspective highlights that preparers have, and may take advantage of, opportunities to enhance their reputation by influencing the content and format of audit working papers (i.e. the working papers may be “stylized”). In turn, we highlight that reviewers may receive working papers containing messages intended to persuade the reviewer about the appropriateness of the work prepared and conclusions reached. We discuss the types of persuasion behaviors in which working-paper preparers may engage and the stylization that may result. In addition, we discuss potential behaviors by reviewers to cope with such behaviors and stylization. We make salient that to be effective, reviewers must anticipate persuasive behaviors of other audit team members, as well as the client. Further, we highlight that reviewers assume a working paper co-composer role. Finally, we suggest questions for future research related to persuasion behaviors and stylization, reviewer coping behaviors and the reviewer's role as a co-composer.

The Effects of SAS No. 82 on Auditors' Attention to Fraud Risk Factors and Audit Planning Decisions

Abstract: This study investigates whether the Auditing Standards Board's (ASB's) Statement on Auditing Standards No. 82 (AICPA [1997]) requiring auditors to separately assess the risk of fraud will lead auditors to spend more time reading fraud cues and design audit plans that are more sensitive to fraud risk. In this paper, fraud means intentionally misstating the financial statements. Auditors' ability to detect fraud has received significant attention from researchers, practitioners, legislators, and policymakers (see, e.g., Albrecht and Willingham [1993], National Commission

Modern management control systems : text and cases

Abstract: I. THE CONTROL FUNCTION OF MANAGEMENT. 1. Management and Control. II. CONTROL ALTERNATIVES AND THEIR EFFECTS. 2. Action Controls. 3. Results Controls. 4. Personnel and Cultural Controls. 5. Control Tightness (or Looseness). 6. Direct and Indirect Control System Costs. 7. Designing and Evaluating Control Systems. III. FINANCIAL RESULTS CONTROL SYSTEMS. 8. Financial Responsibility Centers. 9. Planning and Budgeting Systems. 10. Financial Performance Targets. 11. Performance-Dependent Rewards (and Punishments). IV. COMMON PROBLEM AREAS IN FINANCIAL-RESULTS-CONTROL. 12. Accounting Performance Measures and the Myopia Problem. 13. Limitations of ROI-Type Performance Measures. 14. Using Financial Results Controls on the Presence of Uncontrollable Factors. 15. The Transfer Pricing Problem. V. IMPORTANT CONTROL ROLES AND ETHICAL ISSUES. 16. Controllers, Auditors, and Boards of Directors. 17. Management Control-Related Ethical Issues and Analyses. VI. SIGNIFICANT SITUATIONAL INFLUENCES ON MANAGEMENT CONTROL SYSTEMS. 18. Influences of Uncertainty/Programmability, Diversification Strategy, and Business Strategy on MCSs. 19. Control in International and Multinational Corporations. 20. Control in Not-for-Profit Organizations.

The provision of non-audit services and the pricing of audit fees

Abstract: There have been a number of studies examining audit fees and this research has covered various nations. Recent legislation in Norway requires a company to disclose information on the audit fee and the fees for non-audit services paid to its auditor. Using this data, models of audit fee structure are developed. As with other studies, the size of the company is a major determinant of the audit fee. Payments for non-audit services are positively and significantly associated with audit fees; this relationship is difficult to explain although it parallels some research in the United States. Overall, the models explain about 75 per cent of the variability in audit fees.

Assessing the risk of management fraud through neural network technology

Abstract: Key Words: Analytical auditing, Management fraud, Neural networks. Data Availability: A list of the public companies used to develop the matched fraud and nonfraud sample is available from the authors upon request. All other data sources are described in the text. INTRODUCTION Numerous studies have examined techniques to assess the risk of errors and irregularities in financial statements (Calderon and Green 1994; Green and Calderon 1995; Loebbecke and Steinbart 1987; Wheeler and Pany 1990; Wilson and Colbert 1989). Significant post-expectation gap research has stemmed from revised auditing standards that extend the auditor's responsibility for the detection of material misstatement (AICPA 1988a, 1988b). In conflict with the goal of increased effectiveness of fraud detection are market pressures to increase audit efficiency. The National Commission on Fraudulent Financial Reporting (NCFFR), the Treadway Report, describes market pressures that include increased competition for services, reduced market fees, and a dynamic product service mix offered by the industry (NCFFR 1987). Advanced analytical procedures (APs) possess both efficiency and effectiveness potential. Statement on Auditing Standard (SAS) No. 56, "Analytical Procedures," requires the use of APs in the planning and review stages of all audits. The Standard defines APs as "consisting of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data" (AICPA 1988b). APs range from basic scanning to multifactor regression. Researchers have examined the use of both endogenous and exogenous data analytical procedures (Calderon and Green 1994; Green and Calderon 1995; Loebbecke and Steinbart 1987; Wheeler and Pany 1990). While prior research has indicated that simple and advanced planning techniques aid auditors when assessing primary risk of misstatement (Biggs and Wild 1984; Loebbecke et al. 1989; Loebbecke and Steinbart 1987; Wilson and Colbert 1989), results have not been promising because of high error rates. Methods used to signal errors have also been applied to fraud. Unlike errors, fraud is intentional and may be intentionally hidden. While developing the study's sample, it was noted that most fraud cases affected multiple accounts, financial statements and transactions. Individual APs are reported to be minimally effective in the detection of fraud (Green and Calderon 1995). Increased effectiveness may be achieved if APs survey an entire transaction cycle, recognizing changes in aggregate cycle and statement relationships as opposed to individual account changes. Neural networks (NNs) can simultaneously examine the changes and relationships between multiple accounts or groups of account balances. They are also a classification technique superior to earlier methods under varying situations (Salchenberger et al. 1992; Tam and Kiang 1992; Widrow et al. 1994). By examining a simultaneous relationship, NNs can then classify or predict the need to further investigate account balances represented on financial statements. The purpose of this study is to develop a NN model for fraud detection employing endogenous financial data. Three models, using different expectation methods to develop data input, act as an investigation rule to classify financial statement data. The paper will focus on the preliminary audit stage, where resources are allocated to areas based on screening tools indicating the increased risk of misstatement. The task of predicting financial statement fraud can be viewed as a classification problem, mirroring the technique used in the NN application to financial institutions' failure prediction (Tam and Kiang 1992; Salchenberger et al. 1992). The NN learns the pattern of input data in a learning fraud and nonfraud sample. The learned behavior pattern is then applied to a test fraud and nonfraud sample. Using the predictive model, each financial statement is categorizes as either fraud or nonfraud. …

Audit Bureau of Circulations

Abstract: ABC's role is to provide accurate, independent and comparable validation of circulation data to assist effective buying and selling of advertising space.

An Investigation of Audit Committees' Oversight Responsibilities

Abstract: Audit committee performance has come under close scrutiny in recent years from a variety of policy-makers, interest groups and researchers. In particular, the adequacy of audit committee oversight has been challenged. At the same time, audit committees are under pressure to increase the scope of their oversight work. This study examines audit committee oversight from the internal perspective of active U.S. audit committee members. A two-part survey used Wolnizer's (1995) list of seventeen prescribed audit committee objectives related to accounting and reporting, auditors and auditing, and corporate governance in general as a basis to assess audit committee members' abilities to recognize their assigned objectives and explore their perceptions of the key tasks and issues currently addressed by audit committees. The results indicate that audit committee members appreciate the importance of all audit committee members having sufficient expertise in oversight areas related to accounting, auditing and the law. However, some respondents agreed they lacked sufficient expertise in many or all of these areas. In addition, the findings indicate that audit committee members tend not to recognize their assigned responsibilities, but agree with the proposed expansion of committee responsibilities. Using a multimethod approach, internal control evaluation was consistently listed and ranked as the most important oversight responsibility. These findings provide insight into the priority perceived by audit committee members as to their oversight responsibilities, and the adequacy of U.S. reporting disclosures as signals of audit committee work.

Auditor Reputation: The International Empirical Evidence: Auditor Reputation

Abstract: The purpose of this paper is to consider whether some audit firms are perceived by the financial communities of different countries to have higher reputations than other audit firms. The results that will be considered come from three sources: audit fee studies, studies of the issue of new shares and studies of the effects on a company of changing its auditor. The studies reveal that there is considerable evidence that Big Six auditors are differentiated from other audit firms by company directors when recommending to shareholders the appointment of a firm of auditors and its audit fee. The results point to a Big Six audit fee premium of between 16 to 37% across the countries surveyed. Participants in the stock market (investors and bankers) also appear to differentiate between audit firms. The Big Six tend to be associated with a higher quality service in most of the countries surveyed. In addition, there is some evidence of differential effects within the Big Six, with Price Waterhouse being identified with above average reputation in the 1980s in three countries. However, for other Big Six firms any reputational effects appear to be country specific and do not generalize across countries.

Reliance on Decision Aids: An Examination of Auditors' Assessment of Management Fraud

Abstract: Key Words: Management fraud, Decision aid, Expert system, Decision aid reliance, Red flags. Data Availability: Contact the authors. Statement on Auditing Standards (SAS) No. 82(1) (AICPA 1997) requires that the auditor assess the overall risk of material financial misstatement due to fraudulent financial reporting (management fraud) and that the auditor respond to this risk by designing an audit to provide reasonable assurance of detection. The presence or absence of red flags, over 30 of which are identified in SAS No. 82, can influence the auditor in assessing the likelihood of management fraud and have predictive value for assessing the likelihood of management fraud (Bell et al. 1993; Loebbecke et al. 1989). The risk assessment and audit planning response are important since too weak a response could jeopardize the effectiveness of the audit (i.e., could fail to uncover existing fraud) and too strong a response could result in an inefficient audit (McDaniel and Kinney 1995). Prior research and documented audit failures indicate that auditors have difficulty assessing the likelihood of management fraud. SAS No. 82 gives little guidance on how the information in the red flags should be used to form a judgment of management fraud risk.(2) Auditors, most of whom have never encountered management fraud, rarely have the proper background that would lead to an ability to detect management fraud (Johnson et al. 1991; Loebbecke et al. 1989). In addition, multi-cue judgments of this type are inherently difficult for unaided human judges, even those considered to have a high level of expertise in the matter being judged (see Kleinmuntz (1990) for a review). Decision aids have been shown to outperform experts for multi-cue judgements (Kleinmuntz 1990; Libby and Libby 1989) so decision aids that make the firm's knowledge available to all auditors have the potential of improving auditor judgments of management fraud risk (Hackenbrack 1993). The purpose of this study is to examine how three distinct types of decision aids influence auditors in assessing the risk of management fraud and in determining subsequent audit actions. The decision aids, which have been proposed for management fraud assessment, are: checklists (Pincus 1989), statistical models (e.g., a cascaded logit model) (Bell et al. 1993), and expert systems (Eining et al. 1990). All three of these decision aids use red flag cues and two of them, statistical models and expert systems, provide specific assessments of the risk of management fraud. While these assessments are likely to be superior to unaided human judgment based upon the same set of cues, recent studies suggest that decision makers are often hesitant to rely on decision aids, apparently placing more confidence in their own unaided judgment than in the aid (Ashton 1990, 1992; Arkes et al. 1986; Peterson and Pitz 1986). In those studies, the non-reliance on decision aids led to worse performance. We conducted a laboratory study with auditors using their respective decision aid to assess the likelihood of management fraud for three situations with varying degrees of risk. Once each assessment was made, the auditors were asked to identify the appropriate additional audit steps. Our research focused on characteristics that would potentially increase reliance on the aid. These characteristics, referred to as constructive dialogue, were incorporated into the expert systems but not into the other two decision aids. All three decision aids were modeled after those used in practice, but presented in a common computerized form to enhance experimental control. The results from our study provide strong support for the positive influence of the constructive dialogue in the expert system. The only difference between the expert system and the logit model was the inclusion of the constructive dialogue in the expert system, as both provided the same risk assessment for each case. …

An Examination of Factors Affecting the Decision to Waive Audit Adjustments

Abstract: The value of audit services is determined by an auditor's ability to both (1) discover misstatements in the client's accounting system and (2) report those misstatements (DeAngelo [1981a, 1981b]) Audit adjustments reflect the auditor's discovery of a potential breach in the client's accounting system The decision to waive an audit adjustment is important, since it can potentially lead to misleading financial statements Waiving an adjustments) may also result in litigation and loss of auditor reputation Despite its importance, we have very little empirical evidence on the decision to waive an adjustment The purpose of this study is to initiate an understanding of the importance placed by auditors on a number of factors noted in the literature in determining whether a proposed audit adjustment is waivedThe study reported here utilizes archival data gathered from actual audit engagements to examine variables that may explain the decision to waive an audit adjustment The findings reveal that in additio

The persuasiveness of audit evidence: The case of accounting policy decisions☆

Abstract: This study examines how auditors respond to precedents in accounting situations where authoritative guidance does not exist. Three experiments were conducted with practicing audit managers and partners from a Canadian Big Six accounting firm. The results show that auditors rely to a greater extent on precedents that are similar (versus not similar) to the problem situation. When the client's position on the accounting matter was known to the auditor and all available precedents pointed to the same treatment of the accounting issue in question, auditors did not heed the client's position. Rather, they used the available precedents to judge the appropriate accounting. In contrast, when the client's position was known and the available precedents were mixed in their implications for the appropriate accounting treatment, auditors tended to follow the client's position. These results are considered in light of issues of auditor independence and the accounting regulatory environment.

The rise of the professional accountant in British management

Abstract: This article quantifies the growth in the number of professional accountants in British management, charts their influence over the past century, and analyses the causes. It is most likely that Britain initially spawned large numbers of accountants because of the particular nature of its capital market which led to demands for the independent auditing of company accounts. British companies then recruited their accountants from this ever growing pool of professionally qualified auditors and the reason why these accountants rose to the top in British management was probably that the profession provided virtually the only formal management training available in Britain.

Auditing without Commitment

Abstract: I study the optimal contract when a principal cannot commit to an audit. The contract must provide incentives for the agent to comply as well as for the principal to audit. The key tradeoff is efficiency versus noncompliance instead of the familiar rent versus efficiency. Information rent is zero whether production cost is high or low. For high production cost, the agent is asked to produce greater than the amount under full information. The probability of audit is higher when the principal cannot commit compared to when he can.