Although auditor-client interaction is considered an important determinant of financial reporting outcomes, concerns often arise that close working relationships between auditors and client managers can impair auditor independence. Several high-profile accounting scandals have intensified these concerns, impaired investors’ confidence in the financial reporting process and motivated regulators to respond with reforms to enhance auditors’ responsibility for maintaining financial reporting quality. Subsequent reports from the financial press indicate that these reforms had a chilling effect on the auditor-client relationship, but academic research has not examined the influence of regulatory scrutiny on the resolution of material accounting issues between auditors and managers. This study contributes to the literature by investigating the impact of regulatory scrutiny on auditors’ approach to resolving material accounting issues with managers and examining whether this impact is moderated by managers’ commitment to their preferred accounting. Auditors’ interaction approach involves developing arguments and recommendations in response to managers’ accounting preferences in an attempt to persuade managers to adopt more appropriate accounting. The results of an experiment with experienced auditors indicate that regulatory scrutiny and managers’ commitment to their preferred accounting interact to influence auditors’ interaction approach. Specifically, when regulatory scrutiny is low, reciprocity norms determine auditors’ interaction approach but, as regulatory scrutiny increases, accountability demands dominate auditors’ reciprocity motivations and modify auditors’ responses to managers’ accounting preferences. These results provide evidence that regulatory scrutiny introduces tension into the auditor-client relationship, but the effects of this tension on the resolution of material accounting issues is contingent on the interpersonal context. / Accounting

Fraud is an inevitable cost of doing business. Organisations are responding to the pervasiveness of fraud by employing increased fraud risk management strategies. Internal audit is the most effective corporate control available to management to address the threat of fraud. Internal audit as an effective corporate control is studied in the context of the mandatory obligation imposed by The Institute of Internal Auditors’ 2009 International Professional Practices Framework (hereafter, IPPF). This mandatory obligation requires the internal audit function to ‘evaluate the potential for the occurrence of fraud and [to evaluate] how the organisation manages fraud risk’ (IPPF performance standard 2120.A2 Risk Management). At the individual auditor level, the internal auditor is required to ‘possess the knowledge, skills, and other competencies to perform their individual responsibilities’ (IPPF attribute standard 1210 Proficiency). These standards have the potential to increase expectations on the internal audit profession to prevent and detect the threat of fraud. This expectations gap raises two research questions: (1) What are the determinants of auditors’ fraud detection capabilities? and (2) What constitutes expert performance in the fraud detection task? This thesis aims to address these research questions through the performance of two studies. Study 1 used interviews to investigate the determinants of fraud detection capabilities of both the external auditor and internal auditor. Study 2 drew on the results from Study 1 and was an online survey of Australian internal audit practitioners. Study 1 confirmed that the determinants of auditor expert performance in other audit tasks established in literature, namely, certification, continuous learning, practical experience, analytical reasoning, data analysis skills, communication skills, are also applicable to the fraud detection task. Further, the fraud detection task requires key, unique capabilities because fraud has an inherent element of deception and concealment by fraud perpetrators. The determinants of auditor expert performance unique to the fraud detection task include mentoring, technical skills, and the ability to work in a team. An additional finding is the identification of an effective control environment as a determinant related to the environment where the auditor performs audit work. The resulting model of auditor expert performance in fraud detection depicts the relationship of these determinants (independent variables) with expert performance in fraud detection (the dependent variable). The inclusion of new determinants and the revision of the definitions of determinants established in literature provided the solution to Research Question 1. Subsequently, auditor expert performance in fraud detection was defined based on the resulting combination of determinants. This was the solution to Research Question 2. Study 2 was an online survey with new scales of measurement that were developed from Study 1 interview data. Expert studies and pilot studies were conducted to validate these new scales of measurement. The online survey captured the perceptions of Australian internal audit practitioners about the determinants identified in Study 1. The survey data was applied to the model of auditor expert performance in fraud detection. The main findings of this study are: (1) the assessment of the effectiveness of the strategies to develop auditors’ knowledge of fraud and fraud detection - mentoring, practical experience, continuous learning, and certification; (2) the assessment of the effectiveness of each determinant in contributing towards auditor expert performance in fraud detection. The findings of this thesis supported the expectation that the uniqueness of the fraud detection task impacted on the composition of auditors’ fraud detection capabilities and subsequently, the composition and definition of auditor expert performance in fraud detection. The participation of practitioners – internal auditors, external auditors, and fraud investigators - and academics in the data collection and validation processes provided valuable insight into the research design and provided helpful data for the two studies. The main contribution of this thesis is the extension of Bonner and Lewis’ (1990) model of auditor expert performance to the fraud detection task. Next, the resulting model of auditor expert performance in fraud detection provides the internal audit profession, organisations, and the individual internal auditor with an understanding of the factors that impact on the individual internal auditor’s fraud detection capabilities. Therefore, this practical understanding of internal auditors’ fraud detection capabilities has the potential to: (1) contribute to the development and improvement of an organisation’s fraud risk management strategy; (2) inform the policy debate regarding the promulgation of professional and mandatory standards; and (3) contribute to auditing practice and the audit profession through the identification of strategies to educate the audit profession about fraud detection. The final contribution is the research design where the qualitative study (Study 1) contributed to the development of the survey instrument and provided insights into the results of the structural mode (Study 2).

Thesis (Ph. D.)--Victoria University (Melbourne, Vic.), 2009. / Includes bibliographical references.

Thesis (Ph.D.)--York University, 2008. Graduate Programme in Administration. / Typescript. Includes bibliographical references (leaves 155-170). Also available on the Internet. MODE OF ACCESS via web browser by entering the following URL: http://gateway.proquest.com/openurl?url_ver=Z39.88-2004&res_dat=xri:pqdiss&rft_val_fmt=info:ofi/fmt:kev:mtx:dissertation&rft_dat=xri:pqdiss:NR51725

The collapse of Enron and several other companies, such as Global Crossing and the more recent scandal of Tesco, raised concerns worldwide about auditor independence and audit quality. The scandals have proven that particularly the joint-provision of auditing and nonaudit services (NAS) along with a long-term auditor-client relationship tend to adversely impact auditor independence thus audit quality, triggering the need for a new regulation. In order to solve this problem, the European Union implemented a new regulation requiring public listed entities (PIEs), which are defined as listed companies, credit institutions and insurance undertakings, to rotate their audit firm after a period of 10 financial years. The primary purpose of my master thesis is to gain a deeper understanding of audit firms’ and public listed firms’ perceptions of auditor rotation, meant in the sense of audit firm rotation, and its impact on audit quality. More specifically, I aim to investigate whether audit firm rotation enhances audit quality due to a fresh view brought to the company audited by a new auditor or lowers it because of a new auditor’s lack of knowledge about the client’s industry. Current literature regarding the new EU regulation, audit firm rotation and its impact on audit quality as well as the early stage of implementation of the new EU Directive in Sweden helped me to recognize a research gap. Existing studies similar to mine have not been concerned with getting a deeper understanding about the perception of this topic by audit companies and public listed companies located in Sweden. The research philosophy of my study is based on the constructivist ontological view and interpretivist epistemological perspective. In addition, the deductive approach is used to study the research question, while applying the qualitative research method by carrying out multiple semi-structured interviews with auditors and CEOs (Chief Executive Officers) and CFOs (Chief Financial Officers) of public listed companies based in Sweden. The final results are gained through the combination of primary data gathered from the interviews, and secondary data collected during my literature search. My findings demonstrate that the auditors asked are in favour of audit partner rotation since according to their opinion it positively impacts audit quality because of the prevention of a too close relationship between auditor and client. Nevertheless, they do not see an additional advantage from audit firm rotation as they believe that audit partner rotation has already fulfilled the same purpose. CEOs and CFOs of public listed companies have diverse views regarding this topic. Three from five perceive auditor rotation is increasing audit quality due to the fresh look brought by a new auditor and enhanced auditor independence, while the two others think that the new regulation is reducing audit quality caused by the new auditor´s lack of industry knowledge of the client. Other factors positive influencing audit quality are the separation of NAS and audit, joint-audits, expertise and experience of the auditor, a detailed audit plan, providing of full information by the client and the appointment of the auditor by the client itself. Keywords: auditor rotation, audit firm rotation, EU regulation 2016, audit quality, long-term auditor-client relationship, auditing in Sweden, International Standards on Auditing (ISA), role of auditor, audit firm size, non-audit services and auditor independence.

The goal of this thesis is to identify the problems of group audits and approach to solving individual problems areas. This thesis describes the contents of group audit manuals, which are not publicly available, and contributes to the understanding of the processes by which a group of auditors shall proceed in their work.

The purpose of this study is to provide empirical evidence relevant to perceptions of internal auditor independence. Specifically, this study investigates how the auditor practitioners (both internal and external auditors) perceive the importance of five selected factors that characterize the organizational settings of an internal audit department. Role theory is the frame of reference used to develop the conceptual model for this study in which the judgment of internal auditor independence is viewed as the role perception of internal auditors. A modified version of the Brunswik's lens model was developed to provide "paramorphic" representation of judgment of independence. The research methodology of this study is based upon a laboratory experiment in which a replicated factorial design was used to elicit the subjects' judgments of independence. The data collected from this experiment were analyzed by three statistical methods: conjoint measurement, multiple regression, and cluster analysis. The major findings follow. First, the five selected factors were not perceived as equally important by the subjects. In general, internal auditor's scope of audit. scope o^ service, and reporting level were perceived as more important than adequacy of organizational support. and formalization of audit policies. Second, the two groups of auditors disagree, significantly, on the relative importance of scope of internal audit service. Third, while large individual differences existed on the relative importance of the five selected factors, the degree of judgment consensus, in general, is high within each auditor group. Fourth, the internal auditor's perceived role conflict and role ambiguity were inversely related to his perceived level of professional autonomy. Finally, the internal auditors' judgments were not notably affected by the perceptions of their own organizational environment. However, as evidenced by the different types of experienced role conflict and ambiguity, the nature of these auditors' environment varied considerably, Given the above findings, the following implications are suggested: First, the organizational settings are critical of internal auditor independence. Improperly structured settings not only affect the perceived independence but also are detrimental to professional autonomy — de facto independence. Second, rule making bodies should provide more explicit guidelines concerning internal audit independence evaluation, particularly, in the area of scope of internal audit service. Third, while the auditor's reporting level is an important factor to independence, it should not be the only consideration. Other factors, such as the ones used in this study, should be also evaluated to avoid misleading results.

This paper examines the occurrence and outcome of auditor litigation related to financial statement misstatements and the effect of auditor misstatement-based litigation on subsequent auditor behavior. The study is motivated by recent calls to limit auditor legal liability and the need to examine the ability of litigation to deter non-Generally Accepted Accounting Principles (GAAP) financial reporting. I find that misstatement severity is the primary driver of auditor litigation. Specifically, I find that auditor misstatement-based litigation is more likely when the misstatement is associated with fraud, a regulatory investigation, a larger stock price decline, and/or a greater number of accounting application [i.e., Financial Accounting Standards Board (FASB)/GAAP) failures. In addition, I find that auditor misstatement-based litigation is more likely to occur when the misstatement is associated with engagement fees that consist of a greater magnitude or a greater proportion of non-audit service fees. Further, I find that misstatement severity and the size of the plaintiffs? claims are the primary drivers of auditor settlements resulting from misstatement-based litigation. Specifically, I find that an auditor settlement resulting from misstatement-based litigation is more likely to occur when the misstatement is associated with fraud, a greater amount of alleged income or equity inflation over the class action time period, and/or a larger alleged percentage drop in share price over the class action time period. With respect to subsequent auditor behavior, I find evidence that auditor litigation results in more conservative subsequent auditor behavior across a litigated auditor?s office-wide client portfolio (that excludes the litigated client). Specifically, in the year following auditor litigation, I find evidence that litigation results in increased auditor constraint of client-reported positive and signed discretionary accruals, as well as longer audit report lags.

The large accounting scandals in the early 21st century had large impact on the future discussion regarding the importance of auditor independence. This led to stricter auditor independence rules in Sweden as well as internationally. Small and medium-sized enterprises frequently hire their auditor for consulting services. A long and close audit-client relationship is common for small and medium sized enterprises. This is considered to be a threat towards the auditor independence. The purpose of this thesis is to examine whether Swedish small and medium sized enterprises, who are required to be audited, are aware of the auditor independence regulations. The thesis further aims analyze if the regulation of audit independence is as necessary for small companies as for large companies with additional number of shareholders. A qualitative study has been performed where data has been collected through 102 telephone interviews with small and medium-sized companies. A questionnaire consisting of both multiple choice and open questions has been used for the interviews. The collected data were compiled in SPSS which generated graphs and tables that then were analyzed. Small and medium-sized companies believe it is important that the auditor is independent towards their company. On the other hand, management in Swedish small and medium-sized enterprises has no direct knowledge of what the auditor independence regulation implies. / De stora redovisningsskandalerna i början av 2000-talet fick stor betydelse för den kommande diskussionen angående vikten av revisorns oberoende. Detta ledde till strängare regler för revisorerna i Sverige såväl som internationellt. Revisorn fungerar i många små och medelstora företag som en ekonomisk rådgivare. Små företag har ofta en lång och nära relation med sin revisor. Detta anses vara ett hot mot revisorns oberoende. Syftet med denna uppsats är att undersöka om revisionspliktiga små och medelstora företag är medvetna om reglerna gällande revisorns oberoende. Uppsatsen avser vidare att analysera om reglerna för revisorns oberoende är lika nödvändiga för små företag som för stora företag med en stor andel aktieägare. En kvalitativ undersökning har utförts där data från 102 telefonintervjuer med små och medelstora företag har samlats in. Ett frågeformulär med både flersvarsfrågor och öppna frågor har legat som grund för undersökningen. Den insamlade datan sammanställdes i SPSS vilket genererade grafer och tabeller som sedan analyserades. Små och medelstora företag anser att det är viktigt att revisorn är oberoende gentemot deras företag. Å andra sidan har ledningen i svenska små och medelstora företag ingen direkt kunskap om vad revisorns oberoende reglering innebär.

This paper examines the occurrence and outcome of auditor litigation related to financial statement misstatements and the effect of auditor misstatement-based litigation on subsequent auditor behavior. The study is motivated by recent calls to limit auditor legal liability and the need to examine the ability of litigation to deter non-Generally Accepted Accounting Principles (GAAP) financial reporting. I find that misstatement severity is the primary driver of auditor litigation. Specifically, I find that auditor misstatement-based litigation is more likely when the misstatement is associated with fraud, a regulatory investigation, a larger stock price decline, and/or a greater number of accounting application [i.e., Financial Accounting Standards Board (FASB)/GAAP) failures. In addition, I find that auditor misstatement-based litigation is more likely to occur when the misstatement is associated with engagement fees that consist of a greater magnitude or a greater proportion of non-audit service fees. Further, I find that misstatement severity and the size of the plaintiffs? claims are the primary drivers of auditor settlements resulting from misstatement-based litigation. Specifically, I find that an auditor settlement resulting from misstatement-based litigation is more likely to occur when the misstatement is associated with fraud, a greater amount of alleged income or equity inflation over the class action time period, and/or a larger alleged percentage drop in share price over the class action time period. With respect to subsequent auditor behavior, I find evidence that auditor litigation results in more conservative subsequent auditor behavior across a litigated auditor?s office-wide client portfolio (that excludes the litigated client). Specifically, in the year following auditor litigation, I find evidence that litigation results in increased auditor constraint of client-reported positive and signed discretionary accruals, as well as longer audit report lags.