Chris, I think of the auditor’s job as involving a tension between providing professional service to a client versus fulfilling a duty to maintain skepticism and independent on behalf of stakeholders that rely on audited financial statements.   As an auditor, I’ve got to maintain independence but Im paid by the company that Im auditing for the service that Im providing.   Is that the primary tension that you study?

Chris explained that this is indeed the tension that she studies.  There are safeguards that protect the public on audit quality.  The Board of Directors of a corporation is required to appoint an audit committee in most jurisdictions.   This audit committee chooses the auditor.  Since Sarbanes Oxley, the firm’s management is restricted even more than previously in interfering with auditors as they develop their opinion.  What really matters to audit quality?  Chris’s findings suggest that a motivation for accuracy must be cultivated internally within audit firms as a counterbalance to defensive and impression motivations.

What are the research questions that Chris studies on audit quality?

Large audit firms measure attitudes of skepticism and motivations for quality among their staff members through surveys in which auditors are asked many detailed questions about their work environment, peer relationships, and personal beliefs.   Lots of resources are poured into making sure that the environment supports attitudes of skepticism.   But these resources – and the survey results – are not publicly available to researchers for analysis.

The regulator is the source of most of the research data in this area.  The regulators are charged with responsibility for holding auditors to standards.  They strive to understand whether auditors are exercising the required attitudes of skepticism in their work with clients.   They examine auditor attitude to risks, business practices, and performance.   But it’s difficult to measure skepticism directly.   Having said this, regulators conduct audits and sometimes issue reports of auditor deficiencies, which are not intended to be indications of any sort of problem in the statements of the firm being audited.  Problems with financial statements are rare. But these reports can be used to understand audit quality by researchers, which is what Chris and her peers seek to accomplish.

Chris’s work on mindset theory examines how regulators might provoke auditors into the appropriate attitudes of skepticism by encouraging them to be alert to anomalies, and to report irregularities.  But this is a challenge.

What do we make of the secondment of audit staff from accounting firms into regulatory bodies?

Most of the entry-level auditors at firms are hired off College campuses.  It is only after accumulating some experience in auditing that these personnel are eligible for rotations into regulatory bodies such as the SEC and PCAOB.   Chris is not too concerned about regulatory capture.   Overall, she finds that these rotations allow auditors to learn about regulations, and allow regulators to learn about auditor concerns.  The exchange of information between firms and regulators through rotations of employees is likely to be constructive rather than destructive to good audit practice, according to Chris.  

Yet this is all so difficult to study because, in part, firms are reluctant to disclose their proprietary information on audit attitudes.   This is because so much is at stake for them.   It’s very difficult to get information.

One fascinating aspect of your profile is your work across international boundaries, where – I imagine – norms of behavior and expectations may vary culturally.  What have you found in your research on variation in the audit system?

Regulator websites from agencies around the world report on audit deficiencies (although these rarely are associated with revisions of auditor opinions or of revisions to audited financial statements).   One common theme is the importance of auditor skepticism.  The challenge of maintaining this skepticism seems to be universal across countries.

Chris’s main finding…

The root causes of audit deficiencies are almost never the individual.   If you replace someone in an audit role without changing the system, you are likely to get the same behavior.  What we need is to think much more systematically and carefully about the ways that information is structured and that incentives arise.  That’s how we can improve audit quality – and thereby the quality of financial statements.

Chris sees two critical ways in which audit firms can enhance audit quality.  The first is by modeling good behavior through the actions of senior partners and staff.   And the second is by framing the discovery of discrepancies positively in ways that create psychological safety for the auditor.   The HR professionals are onto something.

Do we see innovation in the ways that auditors do their work?

AI is being implemented to support auditors in exercising their judgement.   It’s expanding their intellectual capacity by automating some of the tedious work of auditing.  It allows faster and more accurate understandings of relevant restrictions, and it generates hypotheses that auditors can test in their work.    

What do you want our listeners to be thinking about as we say goodbye?

The financial reports that companies issue do not tell us about auditor attitudes, and therefore are not comprehensive sources of information on audit quality.    What might help Strategy researchers in understanding these issues is research by scholars studying audit quality – and especially research by behaviouralists.   It is the organizational and human-resource practices of audit firms that reveal a great deal about the quality of financial reports.