Managerial Auditing Journal

CPAs' employment with former audit clients and auditor independence in the post-Enron era : Table of Contents

Philip Law — Mon Mar 08 02:05:32 GMT 2010

Abstract:
Purpose – Auditors' employment with their former audit clients has been an issue of concern to regulators and accounting bodies because of its perceived effect on auditor independence. Little prior research examines this issue and the results are mixed. This paper is motivated by the lack of research on the impact of certified public accountings (CPAs) employment with former audit clients on auditor independence, particularly in the Asia Pacific region in the post-Enron climate. Design/methodology/approach – This research is the first study of its type in the literature using both qualitative and quantitative analysis. The framework of the study is formed by the identification of gaps in the literature and semi-structured interviews. Two within-subjects independent variables – “auditors of different ranks” (rank factor) and “former auditor's direct prior professional relationship with the client” – and one between-subject independent variable – “Big 4” CPAs vs non-Big 4 CPAs – are examined. Mixed analysis of variance (ANOVA) are employed to analyze survey responses from 205 “Big 4” and 196 “non-Big 4” auditors. Findings – The rank factor has a significant influence on the perceptions of auditor independence. Perceived independence is impaired when a senior level professional such as partner or manager joins a former audit client, and revokes an US study conducted in the pre-Enron. Perceived independence is also impaired when the former auditor has a direct prior professional relationship with the former audit client. Results further indicate that when the former manager who has direct prior professional relationship with the client and then joins the audit client, independence is severely impaired. Originality/value – The results of this paper could help to establish an effective standard that deals with the employment/independence situations in the local auditing environment.

Investor reactions to disclosures of material internal control weaknesses : Table of Contents

Kim Ittonen — Mon Mar 08 02:05:32 GMT 2010

Abstract:
Purpose – The purpose of this paper is to examine investor reactions to material internal control weakness disclosures. In particular, the abnormal returns, the change in volatility, and the change in systematic risk are analyzed around auditors' material weakness reports. Design/methodology/approach – The sample consists of 342 firms with initial Sarbanes-Oxley Act, Section 404 weakness disclosures issued between 2005 and 2007. The paper uses three measures for investor reactions: abnormal returns and the change in volatility and systematic risk. The hypotheses of the paper are investigated using univariate analysis. Findings – The initial results imply surprisingly that the material weakness disclosure is good news to investors. However, after controlling for the preceding management's internal control disclosure, the results show that the abnormal reaction is positive only when the audit report is consistent with the preceding management report. In addition, the results show a significant change in volatility after the auditor's weakness disclosure. Research limitations/implications – These results imply that the investor reactions to auditors' material weakness disclosures depend on the content of the preceding report issued by management: there is a positive reaction if management has identified and reported the existing material weaknesses before the auditor, and a negative reaction when management has failed to identify or report the material weaknesses before the auditor. Originality/value – The findings of this paper emphasize that the value of the information contained in the auditors' material internal control weakness disclosures vary significantly depending on management disclosures.

The relationship between accounting students' love of money and their ethical perception : Table of Contents

Rafik Z. Elias, Magdy Farag — Mon Mar 08 02:05:32 GMT 2010

Abstract:
Purpose – The purpose of this paper is to investigate how accounting students view cheating actions inside and outside the classroom. It relates the love of money, a psychological variable, to the ethical perceptions of accounting students by examining their cheating perceptions. Design/methodology/approach – A survey is developed based on cheating actions and the love of money scales and administered to 213 undergraduate and graduate accounting students in two universities in the western US students' perceptions of cheating are measured. Students are classified according to their love of money as money-worshippers, money-repellants, or careless money-admirers. Findings – Accounting students view cheating actions outside the classroom as more unethical than cheating actions inside the classroom. The love of money is significantly related to perceptions of cheating. Money worshippers view cheating actions as more ethical followed by money-admirers and money-repellants who view such actions as more unethical. Research limitations/implications – The surveyed students may not be representative of all students in the USA. In addition, perceptions of cheating may not determine cheating behavior. Practical implications – Instructors should continue to emphasize the importance of ethical behavior. Future employers should consider the love of money as an important psychological variable related to ethical perception in their hiring decisions. Originality/value – Previous research founds that classroom cheating can be used to predict future workplace cheating among accounting employees. The study is the first to examine the relationship between the love of money and cheating among accounting students.

Audit committee financial expertise and misappropriation of assets : Table of Contents

Sameer T. Mustafa, Nourhene Ben Youssef — Mon Mar 08 02:05:32 GMT 2010

Abstract:
Purpose – The purpose of this paper is to investigate the relationship between the financial expertise of the audit committee (AC) and the incidence of misappropriation of assets in publicly held companies in the USA. Design/methodology/approach – The sample consists of 28 publicly held companies in the USA experiencing misappropriation of assets from 1987 to 1998, as well as 28 control companies matched according to size, industry, and time period. The effectiveness of the AC's financial expertise in reducing the occurrence of misappropriation of assets is examined by logistic models using two specific types of financial expertise: accounting and non-accounting financial expertise. Findings – The results support the notion that an independent AC member is only effective in reducing the occurrence of misappropriation of assets in publicly held companies if he/she is also a financial expert. Research limitations/implications – The paper contributes to the debate on the appropriate definition of “financial expert” and the efficacy of the financial expertise of AC members – as defined by the Sarbanes-Oxley legislation – in reducing the incidence of misappropriation of assets in publicly held companies in the USA. The paper includes only 28 cases of misappropriation of assets by employees involving collusion with an outsider, as discovered and reported in the news (i.e. newsworthy cases). Originality/value – While previous studies have drawn attention to the relationship between AC independence and misappropriation of assets, there is no empirical evidence to support or to refute the hypothesis that financial expertise has an impact on the occurrence of misappropriation of assets. This paper is the first to examine the association between the effectiveness of the AC and the occurrence of misappropriation of assets by testing the interaction between AC members' financial expertise and their independence.

Organisational commitment, role tension and affective states in audit firms : Table of Contents

Alice Garcia, Olivier Herrbach — Mon Mar 08 02:05:32 GMT 2010

Abstract:
Purpose – The purpose of this paper is to investigate the relationships between auditors' organisational commitment, role tension and affective states at work. Design/methodology/approach – The paper is based on a questionnaire survey of 150 Big Four auditors and a two-step longitudinal design. Findings – The results show that auditors experience both significant positive (such as pride) and negative (such as irritability) workplace affect. Moreover, organisational commitment is correlated with auditors' experiencing more frequent positive affect at work, while role conflict is correlated with experiencing more frequent negative affect. Research limitations/implications – Affect was not measured in real time, but through self-reports. Future research could study how and under what conditions auditors experience positive and negative emotions. Originality/value – This is one of the few studies that has sought to research the affective dimension of audit work.