Audit Research-A Review

1. Audit Research-A Review William L Felix, Jr Eller Professor of Accounting University of Arizona

2. Classification of Auditing Research • Theory and Modeling – Auditing research that uses mathematical economics and game theory to analyze auditing • Behavioral/JDM – Auditing Research that uses research methods from psychology and sociology to study auditing

3. Classification (Continuted) • Archival/Empirical – Auditing research that analyzes issues using data from the practice of auditing and the financial markets. • Experimental Economics – Auditing research that uses the laboratory market setting developed in this field of economics.

4. Theory and Models • Current Research • An important basis for other research methods • Reviewers tend to set extremely high standards resulting in only a modest rate of production • Example - Kinney and Schwartz (current wp)– model to explain changes in accounting and auditing regulation; also explores alternative parameters.

5. Theory and Models • What’s Next? • Impact of new regulation – Sarbannes-Oxley, new EU regulation, others • Extending existing models to better explain the demand for and the pricing of audits • Models of the auditor’s actions in reaching an opinion • Better models of FFR and auditing

6. Behavioral/JDM • Current Research – Substantial amounts of research with a focus on the OFP, auditor judgments and teaming. • Recent good quality research has focused on client acceptance judgments and disagreements over accounting principals or disclosure decisions

7. Behavioral/JDM • Existing archival research (Mock and Wright, 1993 & 1999) indicates that, contrary to expectations and GAAS, auditors do not appropriately modify the extent and nature of their tests when they vary their assessments of IR and CR. JDM research suggests that they do. Better designs with better data are needed to understand this paradox.

8. Archival/Empirical • Current Research – Very active research area, especially with the recent availability of audit fees in the US audit market. • Example – “Do Non-audit Services Compromise Auditor Independence? Further Evidence,” Ashbaugh, LaFond, and Mayhew, TAR,2003

9. Archival/Empirical • What’s Next? • Expanded auditing research on the benefits and costs of SOX 2002 including the PCAOB (e.g., are audits more effective post SOX) • Evidence on the pricing of audits in the post SOX 2002 environment • Evidence for inducing better theory on the role of auditing and other monitors in the capital markets

10. Archival/Empirical • Other issues needing evidence • Better measurement on the market perceived quality of different auditors • Better evidence on how economics of auditing varies across the many different countries and cultures. • Better evidence on the audit opinion formulation process.

11. Experimental Economics • Current Research • Reasonable amount of research produced, but specialized training and cost has limited the extent of research in this domain. • Example: “Auditor Reputation Building,” Mayhew, JAR, 2001.

12. Experimental Economics • What’s Next? – Unique setting for obtaining evidence on changes in regulation that are alternatives. E.g., expecting increasing political pressure to modify SOX 2002 for smaller registrants, what alternatives exist and how well do they perform?

13. Experimental Economics • Big Issues in existing research • Need for more and higher quality economic theory development to support experimental markets • Connection to underlying research in economics suggest more blending with JDM research ideas

14. Auditing Research • Overall, auditing research is a vibrant, productive area of academic research. • And, the prospects are excellent. • The changing environment of auditing and the availability of US fee data should result in improving contributions to knowledge and practice.

15. Auditing Research Counting from a few of the research journals in North America, the annual production of published articles is substantial. 2003 – AJPT – 28 JAR - 4 TAR – 11 JAE –5 CAR – 7 = 55

16. Conclusions • Auditing research has prospered and produced much useful evidence. • Many important issues remain unresolved and are potential topics for future research