This course provides an intensive conceptual and applied introduction to auditing in society. It focuses on concepts and applications related to financial-statement auditors’ professional responsibilities as well as major facets of the audit process including risk assessment and audit reporting. In the U.S. financial-statement audits and related services generally are provided by Certified Public Accountants (CPAs). To succeed in this course, you should anticipate engaging in critical thinking and thoughtful communication about audit professionals' decision environments, decision processes, and deliverables. Additionally, you should understand the macro-level learning objectives in each of the course's weekly modules.
Independence and Audit Quality Part II
Loading...
Del curso dictado por University of Illinois at Urbana-Champaign
Auditing I: Conceptual Foundations of Auditing
17 calificaciones
University of Illinois at Urbana-Champaign
17 calificaciones
De la lección
MODULE 8: Audit Quality
Conoce a los instructores
Mark E. Peecher, PhD, CPAAssociate Dean of Faculty and Deloitte Professor of Accountancy
Department of Accountancy
Okay, welcome back.
I'm going to continue to push now on independence and audit qualities, as sort of part 2.
We've talked about the conceptual trade off what.
I want to focus on more here, is 2 things.
One is what's the true nature of the deterioration in
audit quality, either early in time or late in time with client management.
And then I'm going to ask a bigger, overarching question is,
is there a better goal than independence?
Are the regulators even getting it right when they're saying, you know, what we
maximally care about here is that the audit is done by an independent professional?
We'll see that there's actually really good conceptual reasons
for saying that it's really not about independence fundamentally,
that there's actually something else that matters even more than independence.
One of the things that's very clear from the academic literature in auditing,
and I've dug around here myself and have a number
of studies in the area, with some really great colleagues,
but one paper I do admire that's really done by people who are not auditing
experts, but are psychological experts is Bazerman, Morgan, and Loewenstein.
And they tee up the question of whether, when the audit fails
to prevent earnings management or, even worse,
fails to detect fraud, intentional misstatement by management,
is the source of that problem deliberate collusion,
in other words, bad auditors?
If great auditors are superheroes,
then auditors who deliberately collude with the client, well
they are nothing more than a villain.
A bad villain at that.
It's sort of like the bad cop who is actually running drugs, that is
actually so damaging to society because one of
the most, hopefully trustworthy agencies in society is failing to do their job.
Hopefully, these instances of deliberate collusion and hopefully,
the instances of bad immoral or amoral police officers are very,
very, limited in scope and you all can have your own opinion
about that of course and there is empirical evidence along those lines.
Or is it unintentional unconscious bias?
So, the first of these,
the deliberate collusion model assumes that auditors
form unbiased judgments when evaluating evidence,
but then they step back and Spock-like fashion from Star Trek,
and then they think about
how much bias am I going to let management get away with in its financial reports,
and if management can pay a higher audit fee or throw some consulting at me,
well then I'm going to go along to get along.
Of course if this bias is deliberate,
then one way to address it is just to make it very
costly if auditor's bias were to be detected.
You could think of completely disallowing the auditors to ever perform as an auditor
again in their lifetimes or you could sequester their paychecks for years on end.
Just ramp up the sanctions to a high enough level.
This model assumes that auditors very Spock-like and rationally
assess the costs and benefits of collusion and even more disturbingly,
it actually suggests that these auditors
pay no attention to the Code of Professional Conduct.
So all of those values that I've talked about in
an earlier lesson, about integrity, objectivity,
do professional care, kind of tossed out the window.
And if you detect me being a little bit
averse to this characterization, you're exactly right.
I just do not believe very much deliberate collusion occurs with management.
The other, and I think more insidious, problem is that well intended auditors are
biased unconsciously as a result of
their association with financial statements that are prepared by fellow humans.
We, in society, so much value trust and cooperation that sometimes we confuse
our preference for trust and cooperation with
a well established belief that that is exactly what is occurring.
That's sort of what you see here from the Bazerman, et al.
quotation. I won't read it out loud.
You can see it yourself, but that's the essence of what
they're putting forward in their paper.
So in this model of unconscious bias,
the auditor subconsciously influenced by management's preferred accounting,
management's preferred net income, when making judgments concerning audit evidence.
And as a result,
decisions could be biased in a manner that is consistent with
the auditor's self-interest, without any intention of doing so.
So, here's the rub.
Under this model, Bazerman, et al.
There's a lot of merit to this model if you ask me.
The idea of substantial auditor independence is impossible.
So what do you do to restore public trust?
Well remember, when things go bad,
independence in appearance can be regulated.
But regulation, or the threat of sanctions, are not going to
necessarily decrease auditor's bias if it's subconscious.
So how would you protect independence in mind?
One thing you can do is help the audit profession
become acutely aware of sources of subconscious bias.
Help them become more aware of the literature on confirmation bias
in our information processing and more aware of what Ziva Kunda,
another renowned social psychologist, who...the late Ziva Kunda, who's no longer with us.
She had a wonderful and simple lead describe theory called motivated reasoning.
The idea there is that auditors sometimes have goals
besides accuracy goals when they are engaged in their craft.
Instead of just accuracy goals and getting things right,
they do have directional goals.
And one of those directional goals, maybe to an extent to which the auditors are unaware,
is to help client management justify their financial reporting.
So if we can check those goals,
figure out a way for auditors to check those goals in the bud,
it will help restore the public trust.
Fortunately, I will tell you that the firms have become much
more on the cutting edge in
their receptivity to understanding the psychological research.
Myself and some great researchers out at the Brigham Young University, Steve Glover,
Doug Proud, are some examples Catherine Kadusa, is another example at Emory,
and I'm going to get in trouble because there are
so many people doing good work in this field,
has really shown how this research has bearing, it has implications for the profession.
Another question that emerges as a result of this independence debate is,
are we focusing on the wrong target?
With organizations like McDonald's who we have
these phrases, keep your eyes on the fries,
and that's of course a proverb that's saying,
you know, don't get caught up in things that are less relevant when what is most
relevant is something needs to maintain central focus in your attention.
So, some outstanding audit scholars,
Todd DeZoort is among them,
Holt, and Taylor, they basically,
Mark Taylor, Case Western as an example,
they question whether auditor independence is really the capstone of the profession.
Here's the essence of this, in a nutshell.
If you go back to a few lessons ago,
when you saw, as a graph, you had a y-axis and an x-axis,
and you looked at where did audit quality seem to be maximized,
you saw that it was not in the early years or really late years,
you saw after 9-11 years, in that U-shaped graph, that audit quality was maximized.
Well let me ask you a question.
Do you think in that period 9-11 that that is where independence was maximized?
Well, the answer is no.
It makes no sense for auditor independence to be maximized after
9 years of association to 11 years of association with the client.
You're getting closer and familiar with the client.
It's hard to believe that you're socially independent.
You're probably more socially independent in year 1 or 2.
So, they come up with,
and a really good argument, I believe,
that the most important attribute is not
independence, but it's really did the auditor do a reliable job?
Reliability of the audit.
So, what arguments do these authors make for a reliability framework?
And I would ask you,
do you think that their arguments are valid?
They basically argue that independence can be sacrificed, if it's with respect to
non-audit attest engagement that otherwise would help the auditor
become much more knowledgeable about what should be in the financial statements.
Their framework, some independence is necessary perhaps,
but independence is clearly not sufficient.
Arguably, reliability encompasses the essence of what auditing is about.
So, what have we learned here?
Well hopefully we've learned why should we care about whether
auditors are independent or really the extent to which they're independent.
We've questioned whether that independence is
the main goal or is there something better, reliability.
We also have focused on what trade-offs we make when we attempt
to protect auditor independence as a regulator or,
more endogenously, as the profession acting within itself.
We've also, as I just alluded to,
asked is there a potentially a better goal than independence?
I think the answer is resoundingly, yes.
It doesn't seem that all of the audit regulators have quite agree with me at this point.
Explora nuestro catálogo
Inscríbete de manera gratuita y obtén recomendaciones personalizadas, actualizaciones y ofertas.
Coursera brinda acceso universal a la mejor educación del mundo, al asociarse con las mejores universidades y organizaciones, para ofrecer cursos en línea.
© 2019 Coursera Inc. Todos los derechos reservados.
