An Accountability Framework for Financial Statement Auditors and Related Research Questions

Posted: 16 Oct 2010 Last revised: 4 Sep 2013

See all articles by Mark E. Peecher

Mark E. Peecher

University of Illinois at Urbana-Champaign; University of Illinois College of Law

Ira Solomon

University of Illinois at Urbana-Champaign

Ken Trotman

UNSW Australia Business School, School of Accounting

Date Written: July 15, 2013

Abstract

We address the following overarching questions: What kind of accountability framework could regulators use to (a) motivate auditors to improve audit quality, and (b) evaluate how well auditors have carried out their duties? We draw on research in accounting, economics, psychology, and neuroscience to critique the accountabilities, incentives, and learning opportunities embedded in auditors’ extant regulatory environment. We first establish that forward-looking estimates are the basis for most financial statement information and that some of these estimates are highly uncertain, which increases the challenges faced by auditors. We propose an accountability framework with two dimensions: rewards versus penalties and processes versus outcomes. We show that auditors’ current regulatory accountabilities generally are in the form of penalties rather than rewards and primarily depend on audit outcomes rather than attributes of auditors’ judgment processes. We provide evidence from a range of disciplines that questions the suitability of the present system for improving the quality of auditors’ judgments and the quality of evaluations of those judgments made by inspectors. We identify four potential changes for improvement in audit quality based on our framework. Each of these identified changes has an impact on one or both of the two dimensions in our framework. For each of these changes, we outline JDM research questions that could be addressed to inform our overarching questions and to provide empirical evidence to help refine our accountability framework and improve audit quality.

Keywords: Professional judgment, professional skepticism, inspections, audit quality, accountability

JEL Classification: M41

Suggested Citation

Peecher, Mark E. and Solomon, Ira and Trotman, Ken, An Accountability Framework for Financial Statement Auditors and Related Research Questions (July 15, 2013). Peecher, M. E., et al. An accountability framework for financial statement auditors and related research questions. Accounting, Organizations and Society (2013), Available at SSRN: https://ssrn.com/abstract=1692322 or http://dx.doi.org/10.2139/ssrn.1692322

Mark E. Peecher (Contact Author)

University of Illinois at Urbana-Champaign ( email )

Gies College of Business
1206 South Sixth Street
Champaign, IL 61820
United States
217-333-4542 (Phone)
217-244-0902 (Fax)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

Ira Solomon

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-3808 (Phone)
217-244-0902 (Fax)

Ken Trotman

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

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