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Abstract:
This paper examines the judgmental effects of the balanced scorecard. The balanced scorecard contains a large number of financial and nonfinancial performance measures divided into four categories. Based on judgment and decision making theory we examine whether the organization of the information and the diverse (common and unique) measures contained in the scorecard result in differences in managerial performance evaluation judgments. We find that relative performance evaluations are affected by organizing the measures into the balanced scorecard categories. Further, when scorecards for two divisions contain some common and some unique measures, performance evaluations are affected only by the common measures.

Abstract:
The balanced scorecard is one of the major developments in management accounting in the past decade (Ittner and Larcker 2001). Lipe and Salterio (2000) find that managers ignore one of the key scorecard features, the inclusion of measures that are unique to the strategic objectives of a business unit, when making performance evaluation judgments. This study identifies and tests two approaches to reducing this "common measures bias." We examine whether increasing effort via invoking process accountability (i.e., requiring managers to justify to their superior their performance evaluations) and/or improving the perceived quality of the balanced scorecard measures (i.e., via an independent third party assurance report on the balanced scorecard) increases managers' usage of unique performance measures in their evaluations. Results suggest that either the requirement to justify an evaluation to a superior or the provision of an assurance report on the balanced scorecard increases the use of unique measures in managerial performance evaluation judgments. Implications for theory and practice are discussed.

Balanced scorecard, performance measures, performance evaluation, debiasing, assurance, justification, and process accountability

Abstract:
The balanced scorecard has been hailed as one of the major developments in management accounting in the last decade. Lipe and Salterio (2000) show that one of the key features of this development, the inclusion of measures that are unique to the strategic objectives of a business unit, tend to be ignored by managers when making performance evaluation judgments. This study employs a debiasing framework (Kennedy 1993, 1995) to examine whether assurance over the reliability and relevance of the performance measures and/or invoking process accountability via a requirement to justify one's performance evaluation mitigates this bias. Results suggest that both an assurance report over all measures and the requirement to justify an evaluation to a superior reduce the common measures bias. Implications for theory and practice are discussed.

balanced scorecard, performance measures, performance evaluation, debiasing, assurance, justification, and process accountability

Abstract:
This study empirically examines the relation between certain board of director characteristics and the extent that audit committee composition voluntarily exceeds minimum mandated levels and includes outside directors with financial reporting and audit committee knowledge and experience. This study focuses on board characteristics as the board directly controls audit committee membership. Such staffing decisions can directly affect the ability of the audit committee to monitor management's financial reporting process on behalf of the board. Results suggests that Canadian firms which voluntarily include more outside directors on the audit committee than the mandated minimum have larger boards with more outsiders serving on those boards and are more likely to segregate the board chairperson position from the CEO/president positions. Additionally, firms who voluntarily create audit committees composed of outsider members with a breadth of relevant financial reporting and audit committee knowledge and experience have boards that are larger, have more outside members, and are less likely to be chaired by the CEO/president. Implications of these findings for auditors, institutional investors, regulators and other interested parties are discussed.

Audit committees; Audit committee composition; Audit committee knowledge and experience; Corporate governance.

Abstract:
This study empirically examines the relation between certain board of director characteristics and the extent that audit committee composition voluntarily exceeds minimum mandated levels and includes outside directors with financial reporting and audit committee knowledge and experience. This study focuses on board characteristics as the board directly controls audit committee membership. Such staffing decisions can directly affect the ability of the audit committee to monitor management's financial reporting process on behalf of the board. Results suggests that Canadian firms which voluntarily include more outside directors on the audit committee than the mandated minimum have larger boards with more outsiders serving on those boards and are more likely to segregate the board chairperson position from the CEO/president positions. Additionally, firms who voluntarily create audit committees composed of outsider members with a breadth of relevant financial reporting and audit committee knowledge and experience have boards that are larger, have more outside members, and are less likely to be chaired by the CEO/president. Implications of these findings for auditors, institutional investors, regulators and other interested parties are discussed.

Audit committees; Audit committee composition; Audit committee knowledge and experience; Corporate governance.

Abstract:
This chapter reviews the judgment and decision making research (JDM) that involves the production, certification and use of accounting information. We first outline the domain of accounting information and the roles of professional accountants and other users of accounting information. We then provide a brief historical perspective on accounting JDM research. We describe the current impact of JDM accounting research on accounting research more generally in the period 1995-2002 via an analysis of JDM accounting publications in top accounting journals. We then turn to describing recent foci of JDM accounting research both quantitatively using the classifications in this Handbook and qualitatively by examining in some detail significant recent JDM accounting articles. We conclude with some observations about the future of JDM accounting research.

Judgment and decision making, accounting, auditing

Abstract:
As the audit environment becomes more demanding and complex so does the set of analytical tools that the auditor is expected to be able to handle skillfully. The purpose of this paper is to examine the effects of two complex audit technologies now commonly used by auditors, benchmarking of various kinds of performance measures and strategic analysis, on the risk judgments of auditors carrying out the initial planning of an audit at the business unit level of a larger firm. Through rigorous task analysis based on in-depth understanding of the audit context we employ theory to predict and test how the auditors will utilize information in making their risk assessments. Our principal finding is that more in-depth strategic analysis facilitates the auditor's use of a greater set of information embedded in the complex set of benchmarked performance measures. However, contrary to our expectations benefits from the in-depth strategic analysis were not as widespread as we thought they would be nor was the need for wider investment by audit firms in benchmark data bases as great as it might have been. Finally, we provide evidence on the proposition that in-depth strategic analysis allows auditors to develop richer mental models, a long time belief of advocates of business risk audit methodologies but only indirectly tested to date.

Audit Judgment, Benchmark, Strategic Analysis, Risk Assessment, Mental Models, Performance Measures and Performance Measurement Systems

Abstract:
We develop a model of auditor-client accounting negotiation, using the elements of negotiation examined in the behavioral negotiation literature, elaborated to include accounting contextual features indicated in the accounting literature and suggested by interviews with senior practitioners. We use a questionnaire structured according to the model to describe the elements, contextual features and associations between the two groups in a sample of real negotiations chosen by 93 experienced audit partners. The paper demonstrates important aspects of the sampled accounting negotiations and makes suggestions for further empirical and model development research.

Auditor-client; Negotiation; Financial reporting; Accounting choice

Abstract:
We develop a model of auditor-client accounting negotiation, using the elements of negotiation examined in the behavioral negotiation literature, elaborated to include accounting contextual features indicated in the accounting literature and suggested by interviews with senior practitioners. We use a questionnaire structured according to the model to describe the elements, contextual features and associations between the two groups in a sample of real negotiations chosen by 93 experienced audit partners. The paper demonstrates important aspects of the sampled accounting negotiations and makes suggestions for further empirical and model development research.

Auditor-client; Negotiation; Financial reporting; Accounting choice

Abstract:
This research studies the relationship between state government budgetary policy and research universities' incentives. In particular, this paper examines the effects of state government decisions that effectively tax universities by controlling universities? receipts of indirect cost recoveries earned on federally sponsored research. The effects of this policy decision on universities are examined at both a macro level (the overall rate of indirect cost recoveries) and at a micro level (the types of management accounting systems employed to support rate negotiations). Employing both archival and survey data, the results of this research demonstrate that universities subject to state taxation of indirect cost recoveries tend to have lower indirect cost rates and use less elaborate management accounting systems to support rate negotiation efforts.

Abstract:
Much attention is beginning to be paid to auditor client management negotiation as a result of recent events in the financial world. Gibbins, Salterio and Webb [GSW 2001] developed an accounting specific negotiation model and gathered collaborative data from audit partners. To lay the basis for further understanding of the dynamics of the negotiation process, our research examines the views of chief financial officers (CFOs) and compares and contrasts those views with GSW's auditors. The results (1) provide additional evidence of the model's generalizability; (2) advance evidence of congruencies and divergences in the recalled negotiations; and (3) allow for model modification and elaboration in light of having the views of both parties. We show a high level of congruency in the two groups in the recall of the issue type, the people and the elements involved in the negotiation process, as well as the relative importance of various accounting contextual features. We also identify some elements and features that may cause auditor client management negotiations to be mainly distributive (win-lose) both in bargaining and in outcomes. The new CFO data and comparisons to the auditor data suggest two principal model revisions: a reduction in the large number of contextual features into a parsimonious set of the most important features; and advice to users of the negotiation model to be sensitive to differences in the parties' interpretations of the model's elements and features.

Audit negotiation, Chief Financial Officers, Model corroboration

Abstract:
The auditor's initial negotiation strategy and tactics choice determines how the upcoming negotiation is approached, carried out and potentially the eventual outcome. We experimentally examine two factors key to the auditor's initial formulation of his/her negotiation strategy: the nature of the auditor-client management relationship and the auditor's initial assessment of client management's flexibility in its accounting position. We posit that these two factors will condition the auditor's approach to the upcoming negotiation based on the negotiation literature. Our experimental results, obtained from 140 audit partners, indicate that initial client management accounting position inflexibility leads to auditors being more likely to use contending tactics and to be much firmer in their commitment to achieve the negotiation goal of a substantial reduction in income. Experimentally, we found only limited marginally significant effects for nature of the relationship. We also carried out hypotheses tests employing a structural equations model which allows for greater latitude in individual interpretation of the features manipulated. This model confirmed our main experimental results in addition to revealing subtleties that our experiment did not document. In particular, the more positive and cordial the auditor client relationship, the less committed the auditor is to the negotiation goal of a substantial reduction in income and the greater the likelihood the auditor will employ concessionary or compromising tactics. Also, we find the first evidence documented in the accounting negotiation research that auditors consider an integrative strategy, expanding the agenda of issues, when faced with an inflexible initial client accounting position. Our results have mixed implications for auditors. The experimental results show the auditors reacting appropriately to an inflexible client management initial accounting position, although not considering as wide a range of strategies as they might. Furthermore, the marginally significant experimental results for effects of client relationship nature on auditor judgments seem to be appropriate as relationship quality should not affect audit evidence evaluation and accounting policy judgment. However, the structural equations model's more fine-grained results indicate auditors respond to the nature of the relationship. The model shows that a more positive and cordial relationship leads auditors to select concessionary and compromising tactics along with a lower commitment to the negotiation goal of a substantial reduction in client net income, leading to the potential for more aggressive (income increasing) accounting being reported in financial statements.

negotiation, audit, relationship, dispute

Abstract:
This paper contributes to the growing literature on the auditor-client management negotiation process by focusing on the dyadic relationship. Our audit partner-CFO dyads describe the process of resolving issues related to financial reporting using a combination of open ended and semi-structured questions. Our qualitative and quantitative analysis of the interviews suggests that relationships can be characterized as either proactive or reactive and nested within these relationships some are described as good and some as poor. From our analysis, it appears that the CFO determines implicitly, and sometimes explicitly, the type of relationship they want with their auditor (i.e. proactive or reactive). However, it also appears that the audit partner is responsible for relationship quality (i.e. good or poor). But if the relationship is not in a good state or there is a mismatch between the CFO and audit partner personalities, the audit partner will most likely be switched either by the audit firm or the CFO. Further, our informants described a negotiation process that is not linear, but rather one that can iterate backwards, skip forward and return to redefine the basic issue. We label this aspect of negotiation as fluidity. Finally, two major types of issues were discussed (i.e. regulatory type issues or transaction-based issues) with the type of issue influencing many aspects of the resolution process. Overall, this qualitative research substantially increases our understanding of the nature of the CFO-audit partner dyadic relationship and improves our understanding of the components of prior models of auditor-client management negotiation.

Negotiation, Chief Financial Officer, Auditor, Accounting

Abstract:
We provide a discussion of Hannan, Rankin and Towry (HRT) (2006) The effect of information systems on honesty in managerial reporting: A behavioral perspective. Some agency theorists have suggested that while individuals have some preference for honesty, their honesty threshold is so low that they would lie for very small payoffs. HRT's results showing a significant preference for honesty raise questions about agency theory's boundary conditions. Our discussion: provides an overview of findings on honesty and lying from the organizational research literature; summarizes management control systems research on the prevention and detection of lying; critically evaluates several aspects of HRT's predictions, design and results; and generates possible directions for future research.

management control systems, honesty, lying, agency theory

Abstract:
Both Canadians and Americans often assume that the legal system works, as with apparently many other aspects of our society, the same in both countries. Just as these other assumptions often fail to stand up to detailed scrutiny, so may the assumption that Arthur Andersen LLP could have been charged with and convicted of obstruction of justice in Canada. In this paper we examine the hypothetical question of what if a public accounting firm had shredded documents as a result of fearing a provincial securities' regulatory investigation in Toronto or Calgary. We examine the key differences between both the law and the institutional environment in Canada and the United States to seek to determine whether such a prosecution could occur in Canada. We find that the letter of the law would probably have resulted in a successful prosecution if it was undertaken. The differences in the institutional environments likely would never have lead to the decision to prosecute criminally a Canadian public accounting firm. Implications of this conclusion are discussed.

ENRON, Andersen, Canada, Auditor, Criminal law

Abstract:
The Canadian approach to providing users assurance of enhanced financial statement integrity, where disclosures of internal control design weaknesses are contained in the Management Discussion and Analysis (MD&A) section of the annual report without any certification by management or external audit, is unique. We test whether these disclosures are credible after accounting for the potential offsetting effects of external audit on the financial statements (i.e. proxied by accrual quality). We employ a simultaneous estimation technique, nonrecursive path analysis, to deal with the likelihood that the strength of internal control, level of external audit monitoring and financial statement accrual quality are jointly endogenous.

We find an overall negative net effect of internal control weaknesses on accrual quality that features a large negative direct effect of weaknesses on accrual quality and a smaller offsetting positive indirect effect of weaknesses on accrual quality via audit effort. These results suggest that the uncertified, unaudited weakness disclosure is credible and that an incomplete substitution effect between internal control investment and external audit monitoring exists. The results of these findings for financial reporting integrity and to researchers are discussed.

Sarbanes-Oxley, Internal control, Accrual quality, Material weakness

Abstract:
For much of the past decade, the audit profession has been enjoined to enter new and novel fields of assurance services. This call implies the importation of constructs from traditional attest financial audits into new domains to provide elevated levels of assurance for information-users and decision-makers. Little is presently known about the process by which audit scope, practices and communications about the work done are developed in these new fields. This paper attempts to shed light on these issues through an in-depth field study of KPMG's audit of the Financial Times MBA rankings. The audit project is argued to import legitimacy to data provided by international Business Schools as well as imbue a derived legitimacy to the Financial Times rankings. At an operational level, audit planning, procedures and communicated written conclusions emerge as a much more negotiated and recursive practice than rhetoric might suggest.

Assurance, Negotiation, Field Study, Auditing, MBA rankings

Abstract:
Most serious auditor client management (ACM) negotiations occur between audit partners and senior client management. Research also shows that audit managers often attempt to resolve issues with client management for several reasons, including efficiency. Prior negotiation research in other settings as well as accounting suggests that if partners employ different strategies than managers, different negotiation outcomes will occur. Thus, given the importance of ACM negotiation to the resulting financial statements, an understanding of the intended strategy usage of partners versus managers is important. Further, generic negotiation research provides conflicting predictions about which integrative strategies would be planned to be used when experience level versus power/status differs, the exact situation of partners and managers. We find that in the use of one strategy, working together on solving the issue cooperatively, partners and managers intend to approach negotiations the same way; but that for another strategy, bringing other potential issues into consideration, their intended strategy use differs. Focusing on intended distributive (win-lose) strategies usage, we find that while power/status and experience negotiation research predictions suggest both partners and managers should use the strategies in the same manner, our results show accounting context specific use. We find that partners and managers intended distributive strategies use interacted with important elements of the accounting context which could not be predicted beyond the general likelihood of their existence if experience and power/status matters interacts with context. Implications for both practice and research are discussed.

negotiation, strategy, experience, surrogate, auditor

Abstract:
Since 2005 corporate governance disclosure requirements for Canadian public companies have been set by the Canadian Securities Administrators. The requirements are essentially a system of voluntary compliance with “best practices” but with mandatory disclosure of compliance or explanation of how it complied “in principle.” A company would be compliant if “best practices” were not followed, as long as compensating disclosure was made about the alternative approach taken. In December of 2008 the CSA proposed revisions to their requirements. The proposed new requirements support a so-called “principles approach” to governance, a substantial change from the “best practices” which are used as benchmarks in the 2005 requirements. Our study featured 307 TSX registrants and 148 TSX Venture registrants. We found the non-compliance rate for TSX firms ranged from 11% to 20%, using the lenient test of whether the company ignored the requirement to disclose and explain the company’s approach alternative approach to governance if they did not comply with best practices suggested in the nine areas we reviewed. We did not judge the appropriateness of the alternative approaches taken by firms that complied by making disclosure of differences with best practices, just as would be done under the new proposed “principles” based policy. For TSX Venture companies, non-compliance, in individual non-required areas, ranged from 25% to 84%, are of which are significantly higher than the current TSX rates of non-compliance. Overall, the non-compliance rate should give the investment community, and therefore the CSA, cause to hesitate.

corporate governance, disclosures, board of directors, Canada

Abstract:
After a rough introduction to the post-Sarbanes Oxley era, Canadian audit committees for TSX listed firms have mostly fallen into line with the reforms enacted by the Canadian Securities Administrators in 2004. A new study just completed shows that for a sample of over 450 Canadian companies that 90% or more complied with the regulatory requirements for Audit Committee member independence and financial literacy, assigned responsibilities acknowledged and audit firm fee disclosures.

The ‘made in Canada’ approach of providing ‘daylight’ by requiring disclosure of poor governance practices hoping that it would lead to substantive changes quickly does not seem to be born out given the predominance of Venture firms having management members on Audit Committees despite several years of disclosure of this departure from ‘best practice’. The lack of compliance in the area of mandated audit committee financial literacy disclosures among TSX companies is also problematic. ‘Negotiations’ among Canada’s thirteen regulators lead to the requirement for a financial expert on the audit committee to be dropped and replaced with this disclosure - yet even that disclosure is not being uniformly followed. Compounding this is the practice of nearly 90% of Venture companies voluntarily disclosing they have financially literate audit committees but with almost a third not providing any information about how they support that assertion.

Nonetheless, the study concludes that the overall story is a good news one for Canadian regulators. In one of the rare cases where regulators went public with a strong statement of disapproval of the level of noncompliance in their first study and kept their promise to carry out the follow up study in the next fiscal year, corporate Canada as represented by those listed on the “Big Board” seemed to be convinced that the regulators were serious about enforcement of this regulation.

audit committee, compliance, Sarbanes Oxley Act, 404, 302, Canada

Abstract:
Auditor-client negotiation about difficult client accounting issues involves both the auditor and the client. On the client side, the Chief Financial Officer (CFO) plays a central role in the financial reporting process, yet is rarely the focus of academic study. This paper reports how a sample of Canadian CFOs viewed the negotiation process and context, using an experiential questionnaire to build on the negotiation model developed and demonstrated for the auditor side of the negotiation by Gibbins, Salterio, and Webb 2001, and corroborated by a comparison of common questionnaire items across auditor and CFO samples by Gibbins, McCracken, and Salterio 2005.

The CFOs saw negotiation with the auditors as a consequence of change in accounting and disclosure standards or personnel influential to their financial reporting, or business changes, such as, new business deals or acquisitions. Negotiation was thrust upon the CFO, and the CFO then had to manage it. The CFOs informed other management (such as the CEO) and was aware of their interests, but did not generally seek their help. Informing the Board or the audit committee of the issue was much less frequent. The issue being negotiated was seen as complex, requiring research and analysis, and dependent on knowledge and expertise, with the result more likely reflecting form over substance (a result some CFOs suggested was more agreeable to the auditor than to the CFO).

Negotiation, Chief Financial Officer, Accounting, Auditor

Abstract:
Interest in audit committees as part of overall corporate governance has increased dramatically in recent years, with a specific emphasis on member independence, experience, and knowledge. This paper reports the results of a study investigating whether audit committee members' corporate governance experience and financial reporting and audit knowledge affect their judgments in auditor-corporate management conflict situations. A sample of 68 audit committee members completed an accounting policy dispute case and several knowledge and ability tests. The results indicate that, as expected, greater independent director experience and greater audit knowledge was associated with higher audit committee member support for an auditor who advocated a "substance over form" approach in the dispute with client management. Conversely, concurrent experience as a board director and a senior member of management was associated with increased support for management. Collectively, these findings have a number of implications for practice and research. The results provide justification for calls that audit committees be composed completely of independent directors. The results also support auditor concerns that varying knowledge levels lead to systematic differences in audit committee member judgments in disputes between auditors and management.

Audit committees; Experience; Knowledge; Corporate governance; Auditor-corporate management conflict; Financial reporting oversight

Abstract:
Regulators have recently cited concerns about the extent and quality of accounting consultation within accounting firms on difficult client accounting policy issues. In this paper we report the results of research that examines the role of accounting consultation units in public accounting firms. We describe the five largest accounting consultation units in Canada. The accounting consultation units are then examined through the lens of organizational memory theory. We find differences among the accounting consultation units in their ability to act as a source of organizational memory for firms. These differences include: the amount of resources devoted to the consultation function; the structure of the units, the mandate received by the unit from the firms, and the availability and amount of documentation about previous consultations. These differences suggest that firms' accounting consultation units differ in their ability to provide technical accounting advice. This may affect the actual or perceived quality of such advice to both clients and external regulators. In addition, this paper introduces organizational memory theory to the accounting literature. This theoretical approach may be useful in expanding the bounds of behavioral auditing research beyond the current emphasis on the individual auditor.