Search

We investigate how the design of audit processes influences employees' reporting decisions. We focus specifically on detective employee audits for which several employees are randomly selected after a defined period to audit their ex-post behavior. We investigate two design features of the audit process, namely, employee anonymity and process transparency, and analyze their impact on misreporting. Overall, we find that both components influence the extent of individuals' misreporting. A nonanonymous audit decreases performance misreporting more than an audit in which the employee remains anonymous. Furthermore, the high incidence of performance misreporting in the case of anonymous audits can be decreased when the process transparency is low. Thus, our study informs accountants about how the two design features of employee anonymity and transparency of the audit process can be used to constrain performance misreporting to increase the efficiency of audits. [ABSTRACT FROM AUTHOR]

This study investigates how relative performance information (RPI) and peers' rule-breaking affect an employee's own rule-breaking in both the absence and presence of weak formal controls. We vary the presence of RPI (absent vs. present), the level of peers' rule-breaking (low vs. high), and the presence of weak formal controls (absent vs. present). We find that in the absence of formal controls, RPI provision increases an employee's rule-breaking when he/she perceives that his/her peers' rule-breaking is high but not when his/her peers' rule-breaking is low. We attribute this finding to the increased importance of the behavior of others when RPI is present. Further, we provide evidence that the presence of weak formal controls increases rule-breaking relative to no controls. We argue that such controls alter employees' perception of the context and induce a more calculative focus on the economic benefits than the costs, while ethical motivations are crowded out. Finally, we show that ethical considerations triggered by RPI in situations of low levels of peers' rule-breaking become less important when weak controls are present. Overall, this study informs accountants about the effects of RPI, a crucial performance evaluation system, on the critical aspect of rule-breaking. [ABSTRACT FROM AUTHOR]

The global financial crisis brought to the fore questions surrounding the scope and quality of the external audit, market concentration and auditor independence. One of the issues currently being considered by the European Commission and European Parliament is mandatory audit firm rotation. The aim of this review is to identify, consider and evaluate stakeholder views and research evidence on mandatory audit firm rotation to highlight deficiencies in the existing research literature, identify opportunities for further research and make recommendations for policy-makers. As demonstrated, stakeholder views vary widely. We find that the research evidence on the impact of mandatory audit firm rotation on audit quality and auditor independence is inconclusive. Whilst there is some evidence that rotation may have a positive impact on ‘independence in appearance’, most research fails to generalise these findings to measures of audit quality associated with ‘independence in fact’ and there is even evidence of potentially adverse effects of rotation. Given the lack of evidence associating mandatory audit firm rotation with an improvement on audit quality, regulators need to determine carefully the long-term objectives of a mandatory rotation requirement before implementing a costly measure. We further highlight the need for future research looking at the implications of measures designed to improve audit quality. [ABSTRACT FROM PUBLISHER]