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2005 AAA Auditing Section Doctoral Consortium Mark Penno University of Iowa

2005 AAA Auditing Section Doctoral Consortium Mark Penno University of Iowa. My Talk: Analytical Auditing Research: New Directions From Several Disciplines Highlights. Most background material (including most cites) for this talk is contained in a paper with the same title.

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2005 AAA Auditing Section Doctoral Consortium Mark Penno University of Iowa

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  1. 2005 AAA Auditing Section Doctoral ConsortiumMark PennoUniversity of Iowa

  2. My Talk:Analytical Auditing Research:New Directions From Several DisciplinesHighlights

  3. Most background material (including most cites) for this talk is contained in a paper with the same title..

  4. To download this paper: Googlemark-penno, where you will find:SSRN Author Page for MarkPenno

  5. Click and you will find: Analytical Auditing Research: New Directions from Several DisciplinesMark Penno

  6. Or e-mail me:mark-penno@uiowa.edu

  7. BASIC PREMISE 1: The economic paradigm has been a dominant paradigm in analytical auditing research.

  8. BASIC PREMISE 2:While the traditional modeling approach has made important contributions, it does not adequately represent the auditor’s role...

  9. CURRENT DEVELOPMENTS:…recently economic theory has benefited from recent developments in sociology, psychology, philosophy, artificial intelligence, and jurisprudence…

  10. It is necessary for auditing academics to familiarize themselves with these issues in order to better inform experimental and archival efforts, and perhaps even take part in the analytic work itself.

  11. THE TRADITIONAL ECONOMIC PARADIGM: Economic actors:T1) are self-interested(with guile);T2) maximize their discounted utility of personal payoffs; T3) have complete & transitive preferences.

  12. Observation (T1):Self interest is a simplification useful for modeling various phenomena.

  13. …amoral behavior without empathy or remorse.

  14. Purely self-interested person: Psychopath?

  15. Statement on Auditing Standards No. 78, 1995:

  16. The effectiveness of controls cannot rise above the integrity and ethical values of the people who create, administer, and monitor them..

  17. Audits of completely self-interested agents are probably very difficult/costly to do.

  18. Observation (T2):Utility maximization of expected payoffs: is a simplification useful for modeling various phenomenon.

  19. Much of what we do (in life) is rule-driven

  20. That is, we typically follow rules rather than performing expected utility maximizations over consequences for each decision that we make.

  21. James March..most of the time, most people in organizations follow rules even when it is not obviously in their self-interest to do so….

  22. …Much of the behavior in an organization is specified by standard operating procedures, professional standards, cultural norms, and institutional structures linked to conceptions of identity.

  23. My point:Accounting is mostly about rules..

  24. Observation (T3):Complete & transitive preferences: a simplification useful for modeling various phenomenon.

  25. We all experience dilemmas:

  26. If we COULD neatly order our preferences over payoffs, we would NEVER face dilemmas….Just choose the highest ranking alternative.

  27. ILLUSTRATION: From Keim and Grant (2003, 398): You [auditor] have just returned from a lunch with Jay Hoffman [long-time relationship], the new chief financial officer (CFO) for Bell Manufacturing….

  28. …He then told you …xxxx…. and asked that you keep this in confidence.

  29. Conflicts between rules (principles): Rule 1) Keeping confidences;Rule 2) Obligation to identify ethically-challenged individuals.

  30. Problem: incommensurability.A. Impossible to measure or compare. B. Lacking a common quality on which to make a comparison.

  31. Illustrations Of ResearchRelated to These Issues

  32. Norm-following(Schelling)

  33. Consider a sign, “DO NOT WALK ON THE GRASS.” If it were a quiet sunny afternoon between classes at a university, most people would obey that sign. But …

  34. Dynamic setting: Rule-following

  35. Cressman, Morrison, and Wen (1998) :Owners (principals) face opportunists (agents). An owner chooses a probability of monitoring p1, and an opportunist chooses a probability of not-stealing, q1.

  36. EQ1: the rate of increase in the probability of not stealing, q1, increases (decreases) with the probability of monitoring, p1; EQ2: the rate of increase in the probability of monitoring p1 decreases with the probability of not-stealing, q1.

  37. Cressman, Morrison, and Wen (1998) provide an interesting discussion of these models and effects in their examination of crime dynamics….

  38. A related setting for tax compliance dynamics is examined by Davis, Hecht and Perkins (TAR, 2003).

  39. Multiple-selves models

  40. Shefrin and Thaler (1981) present a dual-self model with1) short-term self, and2) long-term self.

  41. Similarly, Carrillo J. and T. Mariotti, 2000, “Strategic Ignorance as a Self-Disciplining Device”

  42. Tirole (2002) presents a simple description of their idea. The agent has a utility function of the form:

  43. The agent has an opportunity to learn about a future state of nature. When given the opportunity, she may decline.

  44. … She is afraid of what future selves will do with this information…

  45. SOME OTHER EXTANT UTILITY REPRESENTATIONS

  46. Laffont (1975) describes an approach called “Kantian economics.”

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