C. Janie Chang, Gongmeng Chen and Chee W. Chow
In response to increasing pressures for public sector efficiency and effectiveness, many countries have switched from cash-based governmental accounting to accrual-based…
Abstract
In response to increasing pressures for public sector efficiency and effectiveness, many countries have switched from cash-based governmental accounting to accrual-based approaches. But other countries have rejected this change, suggesting that its costs and benefits may vary with country-specific factors. To gain insights into the desirability and feasibility of changing China’s governmental accounting from the current cash-based system to one based on the accrual approach, we survey 608 Chinese government staff and officials who either prepare or use such reports. These respondents identify a number of specific inadequacies in the current system and express widespread support for converting towards an accrual-based approach. They also assess the severity of potential impediments to change and the most workable arrangement and timetable for such a change.
C. Janie Chang, Joanna L.Y. Ho and Anne Wu
This paper aims to examine resource allocation behaviors of US and Taiwanese managers to help multinational firms understand the potential for divergence in resource allocations…
Abstract
Purpose
This paper aims to examine resource allocation behaviors of US and Taiwanese managers to help multinational firms understand the potential for divergence in resource allocations under different contextual conditions by managers from different national cultures.
Design/methodology/approach
The experimental design was developed as a 2 (national culture) × 2 (degree of project completion) × 2 (nature of market information) factorial design. The first two were between-subject factors. Because we would investigate subjects’ responses to both favorable and unfavorable conditions, the nature of market information was designed as a within-subject factor. Also, to avoid an order effect, half of the subjects first received favorable information and then unfavorable information, and the other half received the market information in the opposite order. Questionnaires were distributed randomly to subjects.
Findings
The results show that Taiwanese managers are less willing than US managers to continue a project in the presence of favorable information, but that both groups are equally willing to continue the project when receiving unfavorable information. Furthermore, Taiwanese managers allocate more funds than US managers do when the project is near completion. The authors use uncertainty avoidance and individualism to explain the different judgment and decision behaviors of these two cultural groups.
Research Limitations/implications
In this study, the authors examine only two contextual factors in resource allocation contexts. There are other important contextual factors associated with national culture that should be scrutinized, such as risks involved in each project, incentive plans related to performance evaluation and information asymmetry between central managers and division managers. It would be interesting for future studies to examine these factors in conjunction with different dimensions of national culture.
Originality/value
This study provides empirical evidence of the impact of different aspects of national culture (i.e. uncertainty avoidance and collectivism/individualism) on managerial resource allocation in light of different degrees of project completion and different types of market information. The results of our experiment add to both practice and theory of management. The findings of this study help top-level managers better understand the effects of national culture on division managers’ resource allocations. Hence, it may be possible to design incentive schemes and decision aids to mitigate the divergence in judgments and decision-making that can be attributed to cultural differences. This study also contributes to the management literature by extending our knowledge of complex managerial resource allocation decisions by incorporating the role of national culture with contextual factors.
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C. Janie Chang, Yan Luo and Linying Zhou
The purpose of this study is to examine the impact of workloads at public accounting firms on the likelihood of an audit deficiency being identified during a triennial inspection…
Abstract
Purpose
The purpose of this study is to examine the impact of workloads at public accounting firms on the likelihood of an audit deficiency being identified during a triennial inspection by the Public Company Accounting Oversight Board (PCAOB).
Design/methodology/approach
Using the human resource information disclosed in PCAOB inspection reports, this study constructs two firm-specific workload measures: the ratio of issuer clients to audit partners; and the ratio of issuer clients to professional staff. Firm-level audit deficiency is measured at three levels of severity: Do any of the audit engagements inspected by the PCAOB reveal an audit deficiency? Are any of the identified audit deficiencies directly related to the auditors’ failure to identify a departure from GAAP in the client’s financial statement? Are any of the identified audit deficiencies associated with a significant adjustment or restatement in the client’s subsequent period financial statements? This study uses logistic regression to examine the association between audit deficiency and the workload of public accounting firms.
Findings
The empirical evidence suggests that the workload of public accounting firms is positively associated with the likelihood of a deficient audit, auditor’s failure to identify client’s GAAP departure and/or an audit deficiency resulting in a significant adjustment or even a restatement of the client’s financial statements in the subsequent period.
Originality/value
This study is among the first to investigate the impact of firm workload on deficient audits.
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Chi‐Chun Chou and C. Janie Chang
The increasing provision of timely financial information through web‐based technology is expected to improve the quality of communication between a company and its stakeholders…
Abstract
Purpose
The increasing provision of timely financial information through web‐based technology is expected to improve the quality of communication between a company and its stakeholders. However, the information asymmetry problem still exists since almost all “web‐releases” usually remain unaudited. The purpose of this paper is to propose conceptual and technical frameworks of continuous auditing to provide a solution for this problem. This solution could also move the traditional auditing forward to the new e‐auditing generation.
Design/methodology/approach
This paper develops a conceptual framework to present why continuous auditing would dominate other auditing approaches in examining web‐based financial information. Using a 3 × 2 × 2 × 1 design, this study compares the economic efficiency of three auditing approaches under the joint‐combination of various disclosure types, materiality perceptions and information environments. A technical framework, the external continuous auditing machine, is derived from the conceptual framework to specify the generic procedures to perform the online control testing and the continuous substantive testing over web‐releases.
Findings
Continuous auditing issues are scrutinized both theoretically and technically. Two main conclusions arise. First, the behavior model simulates various information disclosing and auditing environment and argues that the continuous auditing would be the most appropriate approach for web‐releasing assurance. Although the hypothesis derived from that model still needs further empirical supports, the anticipated sustaining is quite reasonable under the emergent web‐release practice.
Originality/value
Given the new era of online, real‐time business reporting, constructing a theoretical model and applying it to develop a technical model for implementing continuous audits for web‐releases provide significant contributions to the accounting/auditing professionals as well as researchers.
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C. Janie Chang, Chin S. Ou and Anne Wu
To survive in the turbulent, global business environment, companies must apply strategies to increase their competitiveness. Expectancy theory indicates that salary rewards can…
Abstract
To survive in the turbulent, global business environment, companies must apply strategies to increase their competitiveness. Expectancy theory indicates that salary rewards can motivate employees to achieve company objectives (Vroom, 1964). First, we develop an analytical model to predict that companies using a high-reward strategy could outperform those using a low-reward strategy. Then, we obtain archival data from banking firms in Taiwan to test the proposed model empirically. We control the effects of operating scale (firm size) and assets utilization efficiency (assets utilization ratio). Empirical results show that salary levels and assets utilization efficiency significantly affect banks’ profitability.
Chengyee Janie Chang, Yutao Li and Yan Luo
The purpose of this study is to examine how auditors would react when there are exogenous negative shocks to their client portfolios.
Abstract
Purpose
The purpose of this study is to examine how auditors would react when there are exogenous negative shocks to their client portfolios.
Design/methodology/approach
Using a sample of 31,256 firm-year observations (2001–2016), the authors investigate whether industry shocks to a subset of an auditor’s clients distract the auditor and affect the professional skepticism applied in the audits of other clients.
Findings
The authors find that clients of distracted auditors are more likely to meet or beat analyst consensus forecasts, suggesting that auditors’ professional skepticism is compromised by distractive events. The cross-sectional analyses reveal that the negative impact of the distractive events on audit quality is more pronounced when the distracted auditors audit less important clients, face lower third-party legal liabilities and experience higher growth. Using an alternative measure of audit quality, the additional analysis shows that clients of distracted auditors exhibit a higher probability of restating their earnings in subsequent years. Overall, the empirical evidence suggests that when distracted, auditors render lower quality audit.
Originality/value
The study complements recent work by Cassell et al. (2019), which shows that the 2008–2009 financial crisis affected the quality of the audits of nonbank clients of bank-specialized auditors. While Cassell et al. (2019) focus on one shock (financial crisis) to one industry (i.e. the financial services industry), the study examines more frequent shocks over a wide range of industries to identify the potential effects of distractive events, improving the generalizability of the findings to all industries and all auditors (specialist and nonspecialist) in nonrecession periods.
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Chengyee Janie Chang and Yan Luo
This paper aims to examine major cognitive biases in auditors’ analyses involving visualization, as well as proposes practical approaches to address such biases in data…
Abstract
Purpose
This paper aims to examine major cognitive biases in auditors’ analyses involving visualization, as well as proposes practical approaches to address such biases in data visualization.
Design/methodology/approach
Using the professional judgment framework of KPMG (2011), this study performs an analysis of whether and how five major types of cognitive biases (framing, availability, overconfidence, anchoring and confirmation) may occur in an auditor’s data visualization and how such biases potentially compromise audit quality.
Findings
The analysis suggests that data visualization can trigger and/or aggravate the common cognitive biases in audit. If not properly addressed, such biases may adversely affect auditors' judgment and decision-making.
Practical implications
To ensure that data visualization improves audit efficiency and effectiveness, it is essential that auditors are aware of and successfully address cognitive biases in data visualization. Six practical approaches to debias cognitive biases in auditors’ visualization are proposed: using data visualization to complement rather than supplement traditional audit evidence; positioning data visualization to support rather than replace sophisticated analytics tools; using a dashboard with multiple dimensions; using both visualized and tabular data in analyses; assigning experienced audit staff; and providing pre-audit tutorials on cognitive bias and visualization.
Originality/value
The study raises awareness of psychological issues in an audit setting.
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Mark Kohlbeck, Jomo Sankara and Errol G. Stewart
This paper aims to examine whether external monitors (auditors and analysts) constrain earnings strings, an indicator of earnings management, and whether this monitoring is more…
Abstract
Purpose
This paper aims to examine whether external monitors (auditors and analysts) constrain earnings strings, an indicator of earnings management, and whether this monitoring is more effective after the implementation of the Sarbanes-Oxley Act of 2002 (SOX), given the emphasis of SOX on improving auditing, financial reporting and the information environment.
Design/methodology/approach
Agency theory establishes the premise between external monitoring and earnings strings. Auditor tenure and number of analysts following provide measures for external monitoring quality. Using prior research, empirical models explaining the presence of an earnings strings and earnings strings trend are developed to test the hypotheses.
Findings
Pre-SOX, extreme auditor tenure, indicating lower quality external monitoring, is associated with greater earnings strings trend, and analyst coverage is associated with increased likelihood of earnings strings and greater earnings strings trend consistent with analyst pressure on management. More effective auditor and analyst monitoring occurs post-SOX in terms of reduced likelihood of earnings strings and earnings strings trend.
Originality/value
The authors provide evidence on how elements of external monitoring are associated with increased earnings strings pre-SOX. Further, they contribute to the debate on the impact of SOX on external firm monitoring and the overall financial information environment. By focusing on earnings strings, the outcome of earnings management, the authors provide a unique understanding of external monitoring that also provides insight on the overvaluation of equity and ultimate destruction of firm value. The evidence demonstrates how regulation has contributed to an improved financial reporting environment and external monitoring.