Derrald Stice, Han Stice and Roger White
This study aims to examine the effect of individual auditor quality (below the partner level) on overall audit quality.
Abstract
Purpose
This study aims to examine the effect of individual auditor quality (below the partner level) on overall audit quality.
Design/methodology/approach
We aggregate audit employee-level individual performance evaluations to create a measure of auditor quality at the office level.
Findings
We find that high-quality audit offices are associated with a lower likelihood of client restatement, fewer client abnormal accruals and a higher likelihood of a client receiving a going concern opinion. We partition employees into low, medium and high level, based on job title, to investigate which employee levels drive these results. We find that the restatement results are driven by high quality high-level employees (Senior Managers/Directors), whereas the going concern results are driven by high quality low-level employees (Seniors). Furthermore, we find evidence that high-quality audit teams are associated with all aspects of audit quality and the magnitude of these team effects are much larger than those of the effects for any individual employee type.
Originality/value
Our findings are consistent with higher-level auditors preventing the most serious financial statement deficiencies, low-level employees contributing to audit firm independence and overall team quality creating synergy which has the strongest effect on all aspects of audit quality. These insights based on individual auditor evaluations are new to the literature. Overall, our empirical results suggest that individual auditor quality is associated with higher quality audits and that employees at all levels affect audit outcomes.
Details
Keywords
James D. Stice, Earl K. Stice, David M. Cottrell and Derrald Stice
The operating activities section of the statement of cash flows presents a long-standing teaching challenge for accounting educators. The direct method is easy to understand yet…
Abstract
The operating activities section of the statement of cash flows presents a long-standing teaching challenge for accounting educators. The direct method is easy to understand yet difficult to prepare; the indirect method is harder to understand but easier to prepare. Many instructors address the two methods separately, requiring students to learn two different ways for preparing the operating section of a statement of cash flows. Because of this focus on the mechanics of preparation, the result is often an emphasis on how to prepare the cash flow statement rather than on the essential information the statement provides. In this paper, the authors note that both direct and indirect methods begin at the same point, that is, the income statement, and end at the same point, that is, cash flow from operations. Then, the authors describe one process by which the income statement and the balance sheet can be analyzed to provide the information required to present operating cash flow using either the direct or the indirect method. Using this approach allows students to apply one intuitive process for computing cash flow from operations rather than memorizing two different sets of rules for direct and indirect methods.