Description
ThesediscussantcommentsaddresstheKang,Trotman,andTrotmanstudyonwhetherintroducinganauditjudgmentrule–whichisanalogoustothebusinessjudgmentruleappliedtocorporateofficersanddirectors–anddeployinginnovativeauditproceduresaffectauditcommitteemembers’questioningonaccountingestimates.Ibelievethattheauthorshaveidentifiedaveryrelevantandtimelytopicforanalysis.Inaddition,theauthorshavedoneagoodjobmotivatingtheimportanceofthetopicgiventheincreasinglyregulatedpost-Sarbanes-Oxleyenvironment.
Accounting, Organizations and Society 46 (2015) 77–80
Contents lists available at ScienceDirect
Accounting, Organizations and Society
journal homepage: www.elsevier.com/locate/aos
Commentary on “The effect of an audit judgment rule on audit
committee members’ professional skepticism: The case of accounting
estimates” (Kang, Trotman, and Trotman)
Sandra C. Vera-Muñoz
248 Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556-5646, United States
a r t i c l e i n f o
Article history:
Received 31 March 2015
Revised 6 April 2015
Accepted 7 April 2015
Available online 4 May 2015
a b s t r a c t
These discussant comments address the Kang, Trotman, and Trotman study on whether introducing an
audit judgment rule – which is analogous to the business judgment rule applied to corporate o?cers
and directors – and deploying innovative audit procedures affect audit committee members’ questioning
on accounting estimates. I believe that the authors have identi?ed a very relevant and timely topic for
analysis. In addition, the authors have done a good job motivating the importance of the topic given
the increasingly regulated post-Sarbanes-Oxley environment. In these comments, I attempt to place the
Kang, Trotman, and Trotman study into context and facilitate generation of research ideas by others. My
comments are divided into three sections: introduction, the evolving roles and responsibilities of audit
committees and independent auditors, and comments on research design and some directions for future
research.
© 2015 Elsevier Ltd. All rights reserved.
1. Introduction
The roles and responsibilities of independent auditors and au-
dit committees have been evolving over the last two-and-a-half
decades, owing in part to the changing economic and regulatory
landscape that has shaped this period. First, the wave of corpo-
rate scandals in the 1990s provided impetus for new regulatory
bodies and regulations that were built on the premise that public
companies’ stakeholders should understand and have con?dence in
the work of independent auditors and audit committees.
1
In addi-
tion, owing to the volatility of the global markets, business transac-
tions have become increasingly complex, which has led to a grow-
ing use of judgments and complex accounting estimates for fair
value measurements, asset impairments, and valuation allowances,
among others (U.S. Department of the Treasury, 2008). This em-
phasis on judgments and accounting estimates in the ?nancial
reporting frameworks has led auditors’ decisions to be increas-
ingly informed by the use of risk-based audit methodologies. In
E-mail address: [email protected]
1
For reviews of the extant accounting literature on auditor communications with
the audit committee, see Cohen, Gaynor, Krishnamoorthy, and Wright (2007); on
the expanded role of audit committee members, see DeZoort, Hermanson, Archam-
beault, and Reed (2002) and Vera-Muñoz (2005).
turn, high-risk areas of audit engagements are increasingly being
scrutinized by the Public Company Accounting Oversight Board’s
(PCAOB) inspections.
With the above institutional context as a backdrop, Kang, Trot-
man, and Trotman (current issue) (hereafter KTT) is based on the
premise that auditors in general experience di?culty in auditing
complex accounting estimates, thus suggesting that audit quality in
this area may be compromised (Gri?th, Hammersley, Kadous, &
Young, 2015). KTT (current issue) reports the results of an experi-
ment that is appropriately motivated by the need for evidence on
the effects of (1) introducing (vs. not introducing) an audit judg-
ment rule (AJR) and (2) deploying innovative (vs. standard) au-
dit procedures on audit committee members’ (ACM) professional
skepticism regarding the reasonableness of a signi?cant account-
ing estimate related to an inventory write-down. The study uses a
2 × 1 + 1 design: an AJR is introduced (vs. not introduced) when
a standard audit procedure is deployed; and an innovative audit
procedure is deployed when an AJR is introduced.
The AJR for auditors, suggested by Peecher, Solomon, and Trot-
man (2013), is analogous to the business judgment rule (BJR) ap-
plied to corporate o?cers and directors. The BJR is based on the
premise that if in the course of management, o?cers and directors
arrive at a decision that is within their and the corporation’s au-
thority, and for which there is a rational basis “and they act in goodhttp://dx.doi.org/10.1016/j.aos.2015.04.002
0361-3682/© 2015 Elsevier Ltd. All rights reserved.
78 S.C. Vera-Muñoz / Accounting, Organizations and Society 46 (2015) 77–80
faith, as the result of their independent discretion and judgment,
and unin?uenced by any consideration other than what they hon-
estly believe to be in the best interests of the corporation,” then
a court will not second-guess the judgment of the o?cers and/or
directors; nor will a court “surcharge the directors and o?cers for
any resulting loss” (O’Connell and Boutros, 2002, p. 385).
KTT (current issue) ?nds that, given a standard audit procedure
is deployed, the ACM perceive greater accountability when an AJR
is introduced (vs. not introduced). This is because the ACM believe
that introducing an AJR causes the accounting estimate for an in-
ventory write-down to be less conservative and the independent
auditors’ due diligence to be negatively impacted by the AJR (H1a).
However, the ACM do not ask more questions to the auditors, the
Chief Financial O?cer (CFO), or the chief internal auditor when
an AJR is introduced (H1b). KTT (current issue) also ?nds that the
auditors’ deployment of innovative (vs. standard) audit procedures
when an AJR is introduced increases (albeit marginally) the ACM’s
perceived overall comfort with the ?nancial statements, as they
believe that audit quality is higher when an innovative audit pro-
cedure is deployed (H2a). However, given an AJR is introduced, the
study ?nds no signi?cant difference in the number of questions
asked by the ACM to the external auditors, regardless of whether
or not an innovative audit procedure is deployed (H2b), although
the ACM’s questions appear to have probative value.
This commentary proceeds as follows. First, I will put in context
the importance of the research question addressed by KTT (current
issue) by discussing brie?y the evolving roles and responsibilities
of both independent auditors and ACM in overseeing the integrity
of the ?nancial reporting process. Next, I will comment on some
aspects of the research design used by KTT (current issue), and will
offer some directions and broad questions for future research. My
discussion is guided by Fig. 1.
2. The evolving roles and responsibilities of audit committees
and independent auditors
As shown in Fig. 1, several issues related to legal/regulatory
compliance, coupled with environmental factors have in?uenced
the evolving roles and responsibilities of both the audit com-
mittees and independent auditors over the last two-and-a-half
decades.
2
Multiple regulators, including the Securities and Ex-
change Commission (SEC), the PCAOB, and the various exchanges
have oversight over both audit committees and independent au-
ditors. The Sarbanes–Oxley Act of 2002 (SOX) enacted by the SEC
formally charged audit committees with “overseeing the account-
ing and ?nancial reporting processes of the issuer and audits of
the ?nancial statements of the issuer” (SOX, Section 2, De?nitions,
Number [3][A], U.S. House of Representatives, 2002) and estab-
lished the PCAOB. Although the PCAOB has no regulatory author-
ity over audit committees, the consequences of the Board’s inspec-
tions, auditing standards, and other initiatives potentially impact
the incentives of independent auditors and audit committees, as
well as the incentives of the issuers and their ?nancial reporting
process (Abernathy et al., 2013; Church & Shefchik, 2012; DeFond,
2010; Palmrose, 2013).
At the same time, the increasing emphasis on judgments and
estimates in the ?nancial reporting frameworks and the use of risk-
based audit methodologies have led the PCAOB to increase their
focus on the communications between auditors and audit commit-
tees. In particular, in 2012 the PCAOB issued Auditing Standard No.
16 (AS 16), “Communications with Audit Committees” (AS No. 16,
PCAOB, 2012). AS 16 is intended to increase existing auditor com-
munication requirements by requiring the auditor to communicate
2
For a review of PCAOB research, see Abernathy, Barnes, and Stefaniak (2013).
with audit committees certain matters regarding the company’s ac-
counting policies, practices, and estimates, including: a description
of the process and signi?cant assumptions management used to
develop critical accounting estimates that have a high degree of
subjectivity, any signi?cant changes management made to the pro-
cesses or assumptions, a description of management’s reasons for
the changes, and the effects of the changes on the ?nancial state-
ments (AS No. 16, PCAOB, 2012, p. A1–7, A1–8). These enhanced
communications between the auditors and ACM highlight the im-
portance of ACM’s ability to exercise professional skepticism when
inquiring about management’s assertions related to accounting es-
timates.
3. KTT (current issue) research design and some directions for
future research
3.1. Innovative audit procedures
As mentioned earlier, KTT (current issue) examines the effects
of deploying innovative (vs. standard) audit procedures on ACM’s
professional skepticism when an AJR is introduced. They ?nd that
using more innovative audit procedures marginally increases ACM’s
perceived overall comfort with the ?nancial statements, but ?nd
no association between auditors’ use of innovative audit proce-
dures and ACM’s professional skepticism. These results may be ex-
plained by construct validity issues in the operationalization of the
audit procedures variable, which raises some concerns regarding
the interpretation of the results. In particular, the narrative in the
standard procedures condition indicates that the audit engagement
partner “notes that the audit inspectors expect standard proce-
dures, and that standard procedures are helpful in reducing their
criticism of the audit.” In contrast, the narrative in the innovative
procedures condition indicates that the audit engagement partner
“notes that innovative audit procedures are helpful in adding a sur-
prise element to the more predictable standard audit procedures.”
An unintended consequence of these two different narratives
is that the manipulation may have unintentionally introduced
between-condition differences in the engagement partner’s objec-
tive: to attenuate inspectors’ criticism of the audit (i.e., “defensive
auditing”) in the standard audit procedures condition, versus to in-
crease audit effectiveness in the innovative audit procedures condi-
tion. To the extent that these different narratives may have caused
different perceptions of the engagement partner’s objective in the
ACM’s minds, and/or to the extent that the objectives of the partic-
ipating ACM were aligned or misaligned with their perceptions of
the engagement partner’s objectives, this confounding factor makes
it di?cult to disentangle whether the results are due to the audit
procedures manipulation itself, or to the effects of unintentionally
introducing differences in the engagement partner’s objective.
A second concern regarding the audit procedures manipulation
relates to the fact that the narrative in the standard procedures
condition gives examples of tests that rely exclusively on internal
data. In contrast, the narrative in the innovative procedures condi-
tion gives examples of tests that rely on both internal and exter-
nal data. Similar to the concern mentioned above, this potentially
confounding factor makes it di?cult to disentangle whether the
results are due to the intended manipulation itself, or to the par-
ticipating ACM’s preferences for internal data vs. both internal and
external data.
Notwithstanding the above construct validity concerns, KTT
(current issue) provides preliminary evidence of an association be-
tween auditors’ deployment of innovative audit procedures, given
an AJR is introduced, and ACM’s perceptions of overall comfort
with the ?nancial statements. More research is needed to provide
empirical evidence on whether there is an association between de-
ployment of innovative audit procedures and ACM’s professional
S.C. Vera-Muñoz / Accounting, Organizations and Society 46 (2015) 77–80 79
PROFESSIONAL
SKEPTICISM
Fig. 1. The evolving roles and responsibilities of audit committees and independent auditors in overseeing the integrity of the ?nancial reporting process.
skepticism. Some broad research questions that arise are: Would
the enhanced communications between independent auditors and
ACM (e.g., as required by AS 16) assist the latter in understanding
the nature and scope of innovative audit procedures? Would such
increased understanding provide impetus for more widespread use
of innovative audit procedures, particularly for ?nancial statement
accounts most often impacted by audit de?ciencies? Do enhanced
communications between auditors and ACM increase (a) the like-
lihood of PCAOB inspectors’ acceptance of innovative audit proce-
dures?; and/or (b) the e?cacy of PCAOB inspections? In addressing
these questions, future studies might draw on the literature on re-
sistance to innovation (Sharpe, 2013; Sung & Choi, 2014) to predict
the effects (both positive and negative) of using innovative audit
methodologies on PCAOB’s inspections.
As discussed earlier, given the increasingly regulated post-SOX
environment, PCAOB inspections tend to penalize audit ?rms’ rep-
utations (e.g., when de?cient judgments are documented by in-
spection agencies). One consequence of this is the prevalence of
“overly cautious audits or ‘;defensive’ auditing” (U.S. Department
of the Treasury, 2008, p. VII: 28). At the same time, PCAOB in-
spections do not reward exceptional or best practices that would
improve longer-term audit quality, nor do they provide incentives
for audit ?rms to undertake research and development of new
methods of auditing as the environment changes (Kinney, 2005).
Some broad research questions that arise are: Given the penalties-
oriented incentives of PCAOB inspections, how do independent au-
ditors and audit committees balance the cost-and-bene?t tradeoffs
of developing and deploying innovative methodologies for audit-
ing the reasonableness of complex, future-oriented accounting es-
timates? A fruitful area for future research is the use of data ana-
lytics, which shows promise for auditors (e.g., for internal controls
testing, fair value measurement, and revenue recognition), as data
analytics afford auditors the opportunity to look at larger samples
of data and to ?nd anomalies for further investigation.
Finally, as noted above, the design in KTT (current issue) is
not a fully-crossed, 2 × 2 design (i.e., AJR introduced vs. not intro-
duced; innovative vs. standard audit procedures). A fully-crossed
design would allow examining the effect of deploying innovative
(vs. standard) audit procedures on ACM’s professional skepticism
given the current regime (i.e., when an AJR is not introduced), or
whether this effect obtains only when an AJR is introduced. This
is important because existing U.S. standards (e.g., ASB, PCAOB) do
not preclude auditors from using innovative audit procedures un-
der the current regime. A fully-crossed design would also allow
testing for the interaction between audit procedures and the AJR.
3.2. Time and resource constraints
The speed and complexity of business and risk oversight are
straining many audit committee agendas. As new ?nancial and en-
terprise risks (e.g., cybersecurity, foreign corruption) continue to
multiply, the workload of the audit committees continues to ex-
pand beyond their core role of overseeing a company’s ?nancial
reporting. The audit committee has arguably become the “kitchen
junk drawer” for many corporate boards (Rapoport & Lublin, 2015).
Consistent with this argument, a global survey of audit committee
members recently released by public accounting ?rm KPMG cau-
tions audit committees “to be wary of ‘;mission creep,’ and to con-
sistently question whether new and ongoing issues belong on the
audit committee’s agenda. Does the allocation of risk oversight ac-
tivities make sense in light of how the risk and regulatory environ-
ment has changed recently?” (KPMG, 2015, p. 18).
Indeed, when asked, “To which group has the board assigned
the majority of tasks directly related to the oversight of several
categories of risk?,” the respondents in the KPMG global survey
ranked the audit committee as being primarily responsible (rela-
tive to the full board and to other committees of the board) in
four areas: legal/regulatory compliance, ?nancial risk, anti-bribery
and corruption, and risk management process. Further, the KPMG
survey reports that three quarters of the 1500 respondents said the
amount of time required to carry out their responsibilities has in-
creased at least “moderately” over the past two years. Addition-
ally, 40% of the respondents expressed either dissatisfaction or in-
creased di?culties with their audit committees’ time and expertise
to oversee the major risks on their agendas in addition to carrying
80 S.C. Vera-Muñoz / Accounting, Organizations and Society 46 (2015) 77–80
out their core oversight responsibility (KPMG, 2015, p. 15).
Taken together, the above discussion is consistent with the ar-
gument that, to the extent that time and resource constraints hin-
der ACM’s ability to get the information they need effectively and
e?ciently (e.g., from the external and internal auditors, CEOs and
CFOs), their ability to exercise professional skepticism will also
be negatively impacted. Results of post hoc analyses of demo-
graphic factors in KTT (current issue) provide preliminary evidence
of a potential ACM background effect (e.g., external audit expe-
rience, partner experience, ?nancial knowledge) on their profes-
sional skepticism. These results point to some fruitful areas for fu-
ture research. For instance, future studies could examine the indi-
vidual and joint effects of time constraints, ACM background, AJR,
and innovative audit methodologies on ACM’s professional skep-
ticism. A broad research question is: Do tradeoffs exist between
audit committee makeup, time constraints, and professional skep-
ticism?
3.3. Professional skepticism of auditors and audit committee
members
In connection with its 2012–2016 Strategic Plan, the PCAOB has
identi?ed as a near-term priority a project to “enhance the ability
of audit committees to evaluate the independence, objectivity, and
skepticism of their auditors” (Center for Audit Quality, 2013, p. 5).
Furthermore, in 2015 the SEC is expected to issue a concept release
that will address ways of enhancing audit committee disclosures,
including matters such as whether the audit committee should re-
port on its role in the ?nancial reporting supply chain along with
the CEO, CFO, and audit ?rm, and whether auditors or someone
else should be required to assess and report on the duties and op-
erational effectiveness of the audit committee.
KTT (current issue) examines whether a proposed AJR affects
audit committee members’ professional skepticism; however, their
study does not examine whether the proposed AJR affects auditors’
professional skepticism. Importantly, when audit committee mem-
bers in the aforementioned KPMG survey were asked to rate their
audit committee’s oversight effectiveness in challenging manage-
ment and applying skepticism, 93% of the 1500 respondents gave
ratings ranging from “generally” to “highly” effective (KPMG, 2015,
p. 25). In contrast, when asked about their general level of sat-
isfaction that their external auditor demonstrates objectivity and
appropriate skepticism through their actions and discussions, over
one-third of the 1500 respondents said that they were either “less
than satis?ed” or “not satis?ed” (KPMG, 2015, p. 20). These results
point to a gap between ACM’s perceptions of their ability to ap-
ply professional skepticism when scrutinizing the work of exter-
nal auditors, and their perceptions of auditors’ ability to demon-
strate general objectivity and skepticism through their discussions
and interactions with the ACM.
As shown in Fig. 1, because both auditors and audit committee
members are responsible for overseeing the integrity of the ?nan-
cial reporting process, research that examines factors that affect
how audit committee members assess independent auditors’ pro-
fessional skepticism is needed. Some potential research questions
that arise are: Do differences in the ACM’s experience/expertise
and ?nancial literacy differentially affect their assessments of au-
ditors’ professional skepticism? Do ACM’s early professional skep-
ticism assessments of auditors facilitate their ability to construc-
tively engage both parties in areas of common interest and to get
the information that ACM need effectively and e?ciently? Do en-
hanced communications between ACM and external auditors about
di?cult or contentious matters (e.g., as suggested by AS 16) af-
fect (positively or negatively) the ACM’s assessments of auditors’
professional skepticism? By publishing further research on these
questions, academics can provide useful insights on the causes and
consequences of auditors’ and ACM’s professional skepticism. KTT
(current issue) is a step in the right direction.
Acknowledgments
The author gratefully acknowledges the helpful comments and
suggestions of Lisa Koonce (Editor), and the generous ?nancial sup-
port of Deloitte & Touche LLP and of KPMG LLP through its Depart-
ment of Accountancy’s Faculty Fellowship program.
References
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Accounting Horizons, 26(1), 43–63.
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ommendations and opportunities for future research. Accounting Horizons, 21(2),
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Kang, Y. J., Trotman, A. J., & Trotman, K. T. (2015). The effect of an audit judgment
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Peecher, M. E., Solomon, I., & Trotman, K. T. (2013). An accountability framework for
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Sung, S. Y., & Choi, J. N. (2014). The roles of individual differences and innovation
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doc_713977653.pdf
ThesediscussantcommentsaddresstheKang,Trotman,andTrotmanstudyonwhetherintroducinganauditjudgmentrule–whichisanalogoustothebusinessjudgmentruleappliedtocorporateofficersanddirectors–anddeployinginnovativeauditproceduresaffectauditcommitteemembers’questioningonaccountingestimates.Ibelievethattheauthorshaveidentifiedaveryrelevantandtimelytopicforanalysis.Inaddition,theauthorshavedoneagoodjobmotivatingtheimportanceofthetopicgiventheincreasinglyregulatedpost-Sarbanes-Oxleyenvironment.
Accounting, Organizations and Society 46 (2015) 77–80
Contents lists available at ScienceDirect
Accounting, Organizations and Society
journal homepage: www.elsevier.com/locate/aos
Commentary on “The effect of an audit judgment rule on audit
committee members’ professional skepticism: The case of accounting
estimates” (Kang, Trotman, and Trotman)
Sandra C. Vera-Muñoz
248 Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556-5646, United States
a r t i c l e i n f o
Article history:
Received 31 March 2015
Revised 6 April 2015
Accepted 7 April 2015
Available online 4 May 2015
a b s t r a c t
These discussant comments address the Kang, Trotman, and Trotman study on whether introducing an
audit judgment rule – which is analogous to the business judgment rule applied to corporate o?cers
and directors – and deploying innovative audit procedures affect audit committee members’ questioning
on accounting estimates. I believe that the authors have identi?ed a very relevant and timely topic for
analysis. In addition, the authors have done a good job motivating the importance of the topic given
the increasingly regulated post-Sarbanes-Oxley environment. In these comments, I attempt to place the
Kang, Trotman, and Trotman study into context and facilitate generation of research ideas by others. My
comments are divided into three sections: introduction, the evolving roles and responsibilities of audit
committees and independent auditors, and comments on research design and some directions for future
research.
© 2015 Elsevier Ltd. All rights reserved.
1. Introduction
The roles and responsibilities of independent auditors and au-
dit committees have been evolving over the last two-and-a-half
decades, owing in part to the changing economic and regulatory
landscape that has shaped this period. First, the wave of corpo-
rate scandals in the 1990s provided impetus for new regulatory
bodies and regulations that were built on the premise that public
companies’ stakeholders should understand and have con?dence in
the work of independent auditors and audit committees.
1
In addi-
tion, owing to the volatility of the global markets, business transac-
tions have become increasingly complex, which has led to a grow-
ing use of judgments and complex accounting estimates for fair
value measurements, asset impairments, and valuation allowances,
among others (U.S. Department of the Treasury, 2008). This em-
phasis on judgments and accounting estimates in the ?nancial
reporting frameworks has led auditors’ decisions to be increas-
ingly informed by the use of risk-based audit methodologies. In
E-mail address: [email protected]
1
For reviews of the extant accounting literature on auditor communications with
the audit committee, see Cohen, Gaynor, Krishnamoorthy, and Wright (2007); on
the expanded role of audit committee members, see DeZoort, Hermanson, Archam-
beault, and Reed (2002) and Vera-Muñoz (2005).
turn, high-risk areas of audit engagements are increasingly being
scrutinized by the Public Company Accounting Oversight Board’s
(PCAOB) inspections.
With the above institutional context as a backdrop, Kang, Trot-
man, and Trotman (current issue) (hereafter KTT) is based on the
premise that auditors in general experience di?culty in auditing
complex accounting estimates, thus suggesting that audit quality in
this area may be compromised (Gri?th, Hammersley, Kadous, &
Young, 2015). KTT (current issue) reports the results of an experi-
ment that is appropriately motivated by the need for evidence on
the effects of (1) introducing (vs. not introducing) an audit judg-
ment rule (AJR) and (2) deploying innovative (vs. standard) au-
dit procedures on audit committee members’ (ACM) professional
skepticism regarding the reasonableness of a signi?cant account-
ing estimate related to an inventory write-down. The study uses a
2 × 1 + 1 design: an AJR is introduced (vs. not introduced) when
a standard audit procedure is deployed; and an innovative audit
procedure is deployed when an AJR is introduced.
The AJR for auditors, suggested by Peecher, Solomon, and Trot-
man (2013), is analogous to the business judgment rule (BJR) ap-
plied to corporate o?cers and directors. The BJR is based on the
premise that if in the course of management, o?cers and directors
arrive at a decision that is within their and the corporation’s au-
thority, and for which there is a rational basis “and they act in goodhttp://dx.doi.org/10.1016/j.aos.2015.04.002
0361-3682/© 2015 Elsevier Ltd. All rights reserved.
78 S.C. Vera-Muñoz / Accounting, Organizations and Society 46 (2015) 77–80
faith, as the result of their independent discretion and judgment,
and unin?uenced by any consideration other than what they hon-
estly believe to be in the best interests of the corporation,” then
a court will not second-guess the judgment of the o?cers and/or
directors; nor will a court “surcharge the directors and o?cers for
any resulting loss” (O’Connell and Boutros, 2002, p. 385).
KTT (current issue) ?nds that, given a standard audit procedure
is deployed, the ACM perceive greater accountability when an AJR
is introduced (vs. not introduced). This is because the ACM believe
that introducing an AJR causes the accounting estimate for an in-
ventory write-down to be less conservative and the independent
auditors’ due diligence to be negatively impacted by the AJR (H1a).
However, the ACM do not ask more questions to the auditors, the
Chief Financial O?cer (CFO), or the chief internal auditor when
an AJR is introduced (H1b). KTT (current issue) also ?nds that the
auditors’ deployment of innovative (vs. standard) audit procedures
when an AJR is introduced increases (albeit marginally) the ACM’s
perceived overall comfort with the ?nancial statements, as they
believe that audit quality is higher when an innovative audit pro-
cedure is deployed (H2a). However, given an AJR is introduced, the
study ?nds no signi?cant difference in the number of questions
asked by the ACM to the external auditors, regardless of whether
or not an innovative audit procedure is deployed (H2b), although
the ACM’s questions appear to have probative value.
This commentary proceeds as follows. First, I will put in context
the importance of the research question addressed by KTT (current
issue) by discussing brie?y the evolving roles and responsibilities
of both independent auditors and ACM in overseeing the integrity
of the ?nancial reporting process. Next, I will comment on some
aspects of the research design used by KTT (current issue), and will
offer some directions and broad questions for future research. My
discussion is guided by Fig. 1.
2. The evolving roles and responsibilities of audit committees
and independent auditors
As shown in Fig. 1, several issues related to legal/regulatory
compliance, coupled with environmental factors have in?uenced
the evolving roles and responsibilities of both the audit com-
mittees and independent auditors over the last two-and-a-half
decades.
2
Multiple regulators, including the Securities and Ex-
change Commission (SEC), the PCAOB, and the various exchanges
have oversight over both audit committees and independent au-
ditors. The Sarbanes–Oxley Act of 2002 (SOX) enacted by the SEC
formally charged audit committees with “overseeing the account-
ing and ?nancial reporting processes of the issuer and audits of
the ?nancial statements of the issuer” (SOX, Section 2, De?nitions,
Number [3][A], U.S. House of Representatives, 2002) and estab-
lished the PCAOB. Although the PCAOB has no regulatory author-
ity over audit committees, the consequences of the Board’s inspec-
tions, auditing standards, and other initiatives potentially impact
the incentives of independent auditors and audit committees, as
well as the incentives of the issuers and their ?nancial reporting
process (Abernathy et al., 2013; Church & Shefchik, 2012; DeFond,
2010; Palmrose, 2013).
At the same time, the increasing emphasis on judgments and
estimates in the ?nancial reporting frameworks and the use of risk-
based audit methodologies have led the PCAOB to increase their
focus on the communications between auditors and audit commit-
tees. In particular, in 2012 the PCAOB issued Auditing Standard No.
16 (AS 16), “Communications with Audit Committees” (AS No. 16,
PCAOB, 2012). AS 16 is intended to increase existing auditor com-
munication requirements by requiring the auditor to communicate
2
For a review of PCAOB research, see Abernathy, Barnes, and Stefaniak (2013).
with audit committees certain matters regarding the company’s ac-
counting policies, practices, and estimates, including: a description
of the process and signi?cant assumptions management used to
develop critical accounting estimates that have a high degree of
subjectivity, any signi?cant changes management made to the pro-
cesses or assumptions, a description of management’s reasons for
the changes, and the effects of the changes on the ?nancial state-
ments (AS No. 16, PCAOB, 2012, p. A1–7, A1–8). These enhanced
communications between the auditors and ACM highlight the im-
portance of ACM’s ability to exercise professional skepticism when
inquiring about management’s assertions related to accounting es-
timates.
3. KTT (current issue) research design and some directions for
future research
3.1. Innovative audit procedures
As mentioned earlier, KTT (current issue) examines the effects
of deploying innovative (vs. standard) audit procedures on ACM’s
professional skepticism when an AJR is introduced. They ?nd that
using more innovative audit procedures marginally increases ACM’s
perceived overall comfort with the ?nancial statements, but ?nd
no association between auditors’ use of innovative audit proce-
dures and ACM’s professional skepticism. These results may be ex-
plained by construct validity issues in the operationalization of the
audit procedures variable, which raises some concerns regarding
the interpretation of the results. In particular, the narrative in the
standard procedures condition indicates that the audit engagement
partner “notes that the audit inspectors expect standard proce-
dures, and that standard procedures are helpful in reducing their
criticism of the audit.” In contrast, the narrative in the innovative
procedures condition indicates that the audit engagement partner
“notes that innovative audit procedures are helpful in adding a sur-
prise element to the more predictable standard audit procedures.”
An unintended consequence of these two different narratives
is that the manipulation may have unintentionally introduced
between-condition differences in the engagement partner’s objec-
tive: to attenuate inspectors’ criticism of the audit (i.e., “defensive
auditing”) in the standard audit procedures condition, versus to in-
crease audit effectiveness in the innovative audit procedures condi-
tion. To the extent that these different narratives may have caused
different perceptions of the engagement partner’s objective in the
ACM’s minds, and/or to the extent that the objectives of the partic-
ipating ACM were aligned or misaligned with their perceptions of
the engagement partner’s objectives, this confounding factor makes
it di?cult to disentangle whether the results are due to the audit
procedures manipulation itself, or to the effects of unintentionally
introducing differences in the engagement partner’s objective.
A second concern regarding the audit procedures manipulation
relates to the fact that the narrative in the standard procedures
condition gives examples of tests that rely exclusively on internal
data. In contrast, the narrative in the innovative procedures condi-
tion gives examples of tests that rely on both internal and exter-
nal data. Similar to the concern mentioned above, this potentially
confounding factor makes it di?cult to disentangle whether the
results are due to the intended manipulation itself, or to the par-
ticipating ACM’s preferences for internal data vs. both internal and
external data.
Notwithstanding the above construct validity concerns, KTT
(current issue) provides preliminary evidence of an association be-
tween auditors’ deployment of innovative audit procedures, given
an AJR is introduced, and ACM’s perceptions of overall comfort
with the ?nancial statements. More research is needed to provide
empirical evidence on whether there is an association between de-
ployment of innovative audit procedures and ACM’s professional
S.C. Vera-Muñoz / Accounting, Organizations and Society 46 (2015) 77–80 79
PROFESSIONAL
SKEPTICISM
Fig. 1. The evolving roles and responsibilities of audit committees and independent auditors in overseeing the integrity of the ?nancial reporting process.
skepticism. Some broad research questions that arise are: Would
the enhanced communications between independent auditors and
ACM (e.g., as required by AS 16) assist the latter in understanding
the nature and scope of innovative audit procedures? Would such
increased understanding provide impetus for more widespread use
of innovative audit procedures, particularly for ?nancial statement
accounts most often impacted by audit de?ciencies? Do enhanced
communications between auditors and ACM increase (a) the like-
lihood of PCAOB inspectors’ acceptance of innovative audit proce-
dures?; and/or (b) the e?cacy of PCAOB inspections? In addressing
these questions, future studies might draw on the literature on re-
sistance to innovation (Sharpe, 2013; Sung & Choi, 2014) to predict
the effects (both positive and negative) of using innovative audit
methodologies on PCAOB’s inspections.
As discussed earlier, given the increasingly regulated post-SOX
environment, PCAOB inspections tend to penalize audit ?rms’ rep-
utations (e.g., when de?cient judgments are documented by in-
spection agencies). One consequence of this is the prevalence of
“overly cautious audits or ‘;defensive’ auditing” (U.S. Department
of the Treasury, 2008, p. VII: 28). At the same time, PCAOB in-
spections do not reward exceptional or best practices that would
improve longer-term audit quality, nor do they provide incentives
for audit ?rms to undertake research and development of new
methods of auditing as the environment changes (Kinney, 2005).
Some broad research questions that arise are: Given the penalties-
oriented incentives of PCAOB inspections, how do independent au-
ditors and audit committees balance the cost-and-bene?t tradeoffs
of developing and deploying innovative methodologies for audit-
ing the reasonableness of complex, future-oriented accounting es-
timates? A fruitful area for future research is the use of data ana-
lytics, which shows promise for auditors (e.g., for internal controls
testing, fair value measurement, and revenue recognition), as data
analytics afford auditors the opportunity to look at larger samples
of data and to ?nd anomalies for further investigation.
Finally, as noted above, the design in KTT (current issue) is
not a fully-crossed, 2 × 2 design (i.e., AJR introduced vs. not intro-
duced; innovative vs. standard audit procedures). A fully-crossed
design would allow examining the effect of deploying innovative
(vs. standard) audit procedures on ACM’s professional skepticism
given the current regime (i.e., when an AJR is not introduced), or
whether this effect obtains only when an AJR is introduced. This
is important because existing U.S. standards (e.g., ASB, PCAOB) do
not preclude auditors from using innovative audit procedures un-
der the current regime. A fully-crossed design would also allow
testing for the interaction between audit procedures and the AJR.
3.2. Time and resource constraints
The speed and complexity of business and risk oversight are
straining many audit committee agendas. As new ?nancial and en-
terprise risks (e.g., cybersecurity, foreign corruption) continue to
multiply, the workload of the audit committees continues to ex-
pand beyond their core role of overseeing a company’s ?nancial
reporting. The audit committee has arguably become the “kitchen
junk drawer” for many corporate boards (Rapoport & Lublin, 2015).
Consistent with this argument, a global survey of audit committee
members recently released by public accounting ?rm KPMG cau-
tions audit committees “to be wary of ‘;mission creep,’ and to con-
sistently question whether new and ongoing issues belong on the
audit committee’s agenda. Does the allocation of risk oversight ac-
tivities make sense in light of how the risk and regulatory environ-
ment has changed recently?” (KPMG, 2015, p. 18).
Indeed, when asked, “To which group has the board assigned
the majority of tasks directly related to the oversight of several
categories of risk?,” the respondents in the KPMG global survey
ranked the audit committee as being primarily responsible (rela-
tive to the full board and to other committees of the board) in
four areas: legal/regulatory compliance, ?nancial risk, anti-bribery
and corruption, and risk management process. Further, the KPMG
survey reports that three quarters of the 1500 respondents said the
amount of time required to carry out their responsibilities has in-
creased at least “moderately” over the past two years. Addition-
ally, 40% of the respondents expressed either dissatisfaction or in-
creased di?culties with their audit committees’ time and expertise
to oversee the major risks on their agendas in addition to carrying
80 S.C. Vera-Muñoz / Accounting, Organizations and Society 46 (2015) 77–80
out their core oversight responsibility (KPMG, 2015, p. 15).
Taken together, the above discussion is consistent with the ar-
gument that, to the extent that time and resource constraints hin-
der ACM’s ability to get the information they need effectively and
e?ciently (e.g., from the external and internal auditors, CEOs and
CFOs), their ability to exercise professional skepticism will also
be negatively impacted. Results of post hoc analyses of demo-
graphic factors in KTT (current issue) provide preliminary evidence
of a potential ACM background effect (e.g., external audit expe-
rience, partner experience, ?nancial knowledge) on their profes-
sional skepticism. These results point to some fruitful areas for fu-
ture research. For instance, future studies could examine the indi-
vidual and joint effects of time constraints, ACM background, AJR,
and innovative audit methodologies on ACM’s professional skep-
ticism. A broad research question is: Do tradeoffs exist between
audit committee makeup, time constraints, and professional skep-
ticism?
3.3. Professional skepticism of auditors and audit committee
members
In connection with its 2012–2016 Strategic Plan, the PCAOB has
identi?ed as a near-term priority a project to “enhance the ability
of audit committees to evaluate the independence, objectivity, and
skepticism of their auditors” (Center for Audit Quality, 2013, p. 5).
Furthermore, in 2015 the SEC is expected to issue a concept release
that will address ways of enhancing audit committee disclosures,
including matters such as whether the audit committee should re-
port on its role in the ?nancial reporting supply chain along with
the CEO, CFO, and audit ?rm, and whether auditors or someone
else should be required to assess and report on the duties and op-
erational effectiveness of the audit committee.
KTT (current issue) examines whether a proposed AJR affects
audit committee members’ professional skepticism; however, their
study does not examine whether the proposed AJR affects auditors’
professional skepticism. Importantly, when audit committee mem-
bers in the aforementioned KPMG survey were asked to rate their
audit committee’s oversight effectiveness in challenging manage-
ment and applying skepticism, 93% of the 1500 respondents gave
ratings ranging from “generally” to “highly” effective (KPMG, 2015,
p. 25). In contrast, when asked about their general level of sat-
isfaction that their external auditor demonstrates objectivity and
appropriate skepticism through their actions and discussions, over
one-third of the 1500 respondents said that they were either “less
than satis?ed” or “not satis?ed” (KPMG, 2015, p. 20). These results
point to a gap between ACM’s perceptions of their ability to ap-
ply professional skepticism when scrutinizing the work of exter-
nal auditors, and their perceptions of auditors’ ability to demon-
strate general objectivity and skepticism through their discussions
and interactions with the ACM.
As shown in Fig. 1, because both auditors and audit committee
members are responsible for overseeing the integrity of the ?nan-
cial reporting process, research that examines factors that affect
how audit committee members assess independent auditors’ pro-
fessional skepticism is needed. Some potential research questions
that arise are: Do differences in the ACM’s experience/expertise
and ?nancial literacy differentially affect their assessments of au-
ditors’ professional skepticism? Do ACM’s early professional skep-
ticism assessments of auditors facilitate their ability to construc-
tively engage both parties in areas of common interest and to get
the information that ACM need effectively and e?ciently? Do en-
hanced communications between ACM and external auditors about
di?cult or contentious matters (e.g., as suggested by AS 16) af-
fect (positively or negatively) the ACM’s assessments of auditors’
professional skepticism? By publishing further research on these
questions, academics can provide useful insights on the causes and
consequences of auditors’ and ACM’s professional skepticism. KTT
(current issue) is a step in the right direction.
Acknowledgments
The author gratefully acknowledges the helpful comments and
suggestions of Lisa Koonce (Editor), and the generous ?nancial sup-
port of Deloitte & Touche LLP and of KPMG LLP through its Depart-
ment of Accountancy’s Faculty Fellowship program.
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