12/2/2015 State of the Ar t Re se ar c h Re late d to Auditor Pr ofe ssional Ske ptic ism 2013 - 2015 Jose ph Br aze l Nor th Car olina State Unive r sity T ammie Sc hae fe r Unive r sity of Missour i-Kansas City T ask Summa rize a c a de mic re se a rc h in the a re a o f a udito r pro fe ssio na l ske ptic ism (he re a fte r, PS) fro m 2013 to 2015 59 to ta l studie s ide ntifie d! I nc lude d: Co mmissio ne d studie s / Synthe se s Pub lishe d pa pe rs Unpub lishe d pa pe rs (wo rking pa pe rs) * Pa pe rs will b e c o lo r-c o de d thro ug ho ut the pre se nta tio n 1
12/2/2015 Cate gor ie s of Re se ar c h Co mmissio ne d Re se a rc h / Synthe se s I nc e ntive s T ime Mindse t / Pro mpts (I nde pe nde nc e o f Mind / Ob je c tivity) E nviro nme nta l & Co nte xtua l F a c to rs Co mpe te nc e (F ra ud De te c tio n & Othe r) T ra its (I nte g rity, F o rtitude , & E xpe rie nc e ) Commissione d Re se ar c h / Synthe se s Ne lso n (2009) Auditing Pra c tic e s Bo a rd (2010) Hurtt e t a l. (2013) Glo ve r a nd Pra witt (2014) 2
12/2/2015 Pro fe ssio na l Ske ptic ism: I nte ra c tio ns a nd Co nte xtua l F a c to rs (So urc e : I AASB dra ft I T C) E thic s E duc ation Auditing ISQC 1 Standar ds Standar ds Standar ds (IE SBA Code ) (IE Ss) (ISAs) Dir e c t Influe nc e r s • E duc a tio na l Institutio ns • Me mb e r Bo die s F ir m- Spe c ific F ac tor s E nvir onme ntal and Auditor s’ Char ac te r istic s • Inc e ntive s Conte xtual F ac tor s • F ir ms/ • Inde pe nde nc e of mind • F ir m Cultur e • Obje c tivity Ne twor k of F ir ms • T e a m Dyna mic • Compe te nc e • Standar d Se tte r s • Sta ffing • Busine ss E nviro nme nt • E xpe r ie nc e • T ime • Audit Co mmitte e s/ T • CWG L a w a nd Re g ula tio n • Inte g r ity • Supe r vision & On- the - Job • F or titude • Ove rsig ht • Culture T r a ining Autho ritie s • Re gulator s Auditor s’ De c ision Making • Manage me nt • E xe r c ise of: Pr ofe ssiona l Ske ptic ism o Pr ofe ssiona l Judg me nt o Due c a r e o • Doc ume nta tion Big Pic tur e Obse r vations Mo st studie s b e ing c o nduc te d a re e xpe rime nta l / US a udito rs o r da ta fro m US c o mpa nie s (78%) Mo re inte rna tio na l re se a rc h / q ua lita tive me tho ds Ma ny unpub lishe d pa pe rs – this is a n impo rta nt, time ly issue re se a rc he rs a re a tte mpting to ta c kle Mo st o f the pa pe rs o n fra ud de te c tio n a re pub lishe d 3
12/2/2015 Big Pic tur e Obse r vations L o ts o f re se a rc h sta rting to e xa mine PS a s a tra it o r a udito r c ha ra c te ristic (se ve ra l wo rking pa pe rs) Ro le o f sc re e ning a nd mo nito ring Re se a rc h o fte n a ims to e nha nc e a udit pra c tic e , no t ne c e ssa rily e nha nc e a udit re g ula tio n. Big Pic tur e Obse r vations Ma jo rity o f studie s de fine PS a s: a q ue stio ning mind … c ritic a l a sse ssme nt o f a udit e vide nc e . But the me asur e me nt o f PS va rie s tre me ndo usly b a se d o n the study’ s c o nte xt: Asse ssing a n a c c o unt a s mo re risky Co lle c ting mo re e vide nc e / spe nding mo re time / se a rc hing fo r inc o nsiste nt e vide nc e (c ha ng ing NT E o f te sting , le ss SAL Y) Cha lle ng ing a n a g g re ssive a c c o unting tre a tme nt E stima te s o f a c c o unts tha t diffe r fro m c lie nt e stima te s 4
12/2/2015 Big Pic tur e Obse r vations Mo st studie s lo o k a t wha t c a use s var iation in PS judg me nts o r PS a c tio ns (le ss re se a rc h o n a c tio ns) E xa mple s: I nhe re nt Risk a nd Ma na g e me nt Pe rso na litie s L ike liho o d o f I nve nto ry Va lua tio n Pro b le m (L o w to Hig h) OR Audito r K no wle dg e Do e s the a udito r g a the r a dditio na l, e xte rna l e vide nc e to te st ma na g e me nt e stima te s (Ye s o r No ) Inc e ntive s E va lua to rs ra te sta ff b a se d o n the o utc o me o f ske ptic a l b e ha vio r vs. whe the r the ske ptic a l b e ha vio r wa s a ppro pria te (Bra ze l e t a l. 2015) K e e ping the supe rio r “in the lo o p” o r g a ining the ir a ppro va l b e fo re e ng a g ing in ske ptic a l b e ha vio r did NOT mitig a te the pro b le m So urc e s o f pre ssure tha t inc re a se / de c re a se PS (We ste rma nn e t a l. 2015) I nc re a se : so urc e s tha t ho ld a udito rs a c c o unta b le fo r q ua lity (inspe c tio ns / wo rkpa pe r re vie ws) De c re a se : so urc e s tha t pro mo te de fe nsib ility o r pro fita b ility (time b udg e t pre ssure / e xc e ssive do c ume nta tio n) 5
12/2/2015 Inc e ntive s T a ke a wa ys: T he e va lua tio n o f PS ma y de pe nd mo re o n o utc o me tha n pro c e ss. Ca n this e ro de PS b e ha vio r o ve r time ? I nfo rm inspe c tio ns o f firm e va lua tio n syste ms / q ua lity c o ntro l. I nspe c tio n pre ssure “g o o d” fo r PS, unle ss e xc e ssive do c ume nta tio n is o ve r-riding c o nc e rn. F uture Re se a rc h: Wha t a re the ro le s o f me nto rs / supe rviso rs re la te d to PS? Who a re the supe rviso rs tha t re wa rd PS b a se d o n pro c e ss? Ho w do the ir e xpe rie nc e s diffe r? Do inc e ntive s fo r PS c ha ng e a s yo u pro g re ss in c a re e r? T ime T ime pre ssure & wo rklo a d impa c t (Bra ze l e t a l. 2015) SE C 10-K filing a c c e le ra tio ns in the 2000s Audit pa rtne rs surve ye d sa id the a c c e le ra tio ns mo re time pre ssure & le ss PS We ha d to c ra m 45 da ys o f ske ptic ism into 30 da ys a nd I fo und tha t we we re no t asking good follow up que stions b e c a use we ha d 50% mo re q ue stio ns o utsta nding a t a ny po int in time . I wa s ve ry c o nc e rne d a b o ut the risk tha t lo ng ho urs mig ht a dve rse ly impa c t the de gr e e of pr ofe ssional ske ptic ism ma inta ine d b y the sta ff. Our a udito rs we re ve ry b usy a nd the y re c o g nize d tha t pushing the c lie nt for s in a re a s mor e answe r b e ing a udite d to da y wo uld o nly de la y the c lie nt's de live ry o f sc he dule s ne e de d fo r a udit a re a s sc he dule d to b e sta rte d to mo rro w. Our te a ms ha d le ss time to sit-bac k and think a b o ut a lte rna tive sc e na rio s fo r c o mple x c lie nt tra nsa c tio ns. 6
12/2/2015 T ime 800 a udito rs surve ye d…wo rklo a d is hig h e no ug h tha t a udit q ua lity suffe rs (Pe rse llin e t a l. 2015) Wo rklo a d: de a dline s & sta ffing sho rta g e s (still a pro b le m in 2014) 5 – 20 (b usy se a so n) ho urs a b o ve thre sho ld: 40% indic a te impa ire d judg me nt, re duc e d PS T o wa rds the e nd o f the a udit, the re b e c a me mo re o f a ‘ ho w c a n I do c ume nt tha t this wo rks’ inste a d o f a ‘doe s this wor k’ appr oac h . Whe n pro fe ssio na l ske ptic ism is lowe r e d , I b e lie ve a udit q ua lity is g re a tly impa c te d . Whe n the re is a time c o nstra int a ppro a c hing a nd a pile o f wo rk to c o mple te , yo u wo rk lo ng e r ho urs, yo u try to b e c o me mo re e ffic ie nt, b ut yo u a lso fe e l so me pre ssure to trust yo ur o wn g ut o n c e rta in issue s. F o r e xa mple if a jo urna l e ntry do e sn't a ppe a r in line with e xpe c ta tio ns a nd it’ s la te a t nig ht, yo u ma y try to just e xpla in it yo urse lf, ra the r tha n spe nding standing . the time to disc uss with the c lie nt to ge t a full unde r T ime T a ke a wa ys: Sub sta ntia l time pre ssure , pa rtic ula rly a t ye a r-e nd, c a n impa ir PS. Will a future re po rting a c c e le ra tio n o r o the r re g ula tio n c urta il ye a r-e nd a udit time ? So lutio ns to ye a r-e nd time pre ssure : Mo re inte rim te sting , re sc he duling o the r wo rk, a nd wo rking mo re ho urs. F uture Re se a rc h: Budg e t fo r PS? Use o f I T a udit, CAAT s, use o f I A, a nd o utso urc ing no t se e n a s e ffe c tive stra te g ie s, why no t? Wha t o the rs? 7
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