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ItemAuditors' evaluation of evidence: The effect of communication medium and management information(Georgia Institute of Technology, 2015-07-17) Carlisle, MelissaThis study investigates the effect of communication channel (e.g., face-to-face, written) and management information (i.e., background information on the reliability of client personnel) on auditors’ judgments of evidence persuasiveness in a management inquiry setting. Management information directs auditors to focus on the source of the evidence, creating a goal of assessing management during evidence collection. Auditors are distracted away from the evidence when the communication channel presents management characteristic cues (i.e., face-to-face), unrelated to the message and related to their new unconscious goal of assessing management. By comparison, when evidence is communicated by a channel that does not provide additional management characteristic cues (i.e. written), auditors are better able to evaluate the evidence without distraction. I predict an interaction effect, where communication channel effects auditor judgments when management information is provided, but not otherwise. I design a 2x2 between-participants experiment to test my theory and present results of an experiment with 122 practicing senior auditors. Auditor participants receive an explanation from a client’s assistant controller to explain an unexpected fluctuation in a financial ratio. I manipulate the means by which the assistant controller communicates with the auditor (communication channel) and the presence of background information about the assistant controller (management information). Results of my experiment indicate an interaction effect of the communication channel and management information. When management information is provided, auditors assess the evidence as more persuasive when communication is face-to-face versus text. Auditors not receiving management information do not assess the evidence any differently, irrespective of communication channel. I also find evidence that auditors assess management differently when management information is provided. The results suggest that auditors are focused more on evaluating management when communicating through face-to-face versus written channels. Further, these assessments of management are consistent with the pattern of persuasiveness, indicating that they use this information more in their judgments when communicating face-to-face versus text and only when management information is provided. The results of this research suggest auditors may be assessing evidence as more persuasive than merited when management information is present and auditors are communicating with management face-to-face. Auditors as well as regulators should be aware of this effect so that adjustments can be made. Future researchers should consider these results in future research on management inquiry.
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ItemThe unintended effect of group identity: an experimental investigation of benefit asymmetry and employees' cooperation(Georgia Institute of Technology, 2014-07-01) Xu, HuiThe primary purpose of this study is to investigate whether the effect of group identity on individuals' willingness to cooperate is moderated by benefit asymmetry (i.e., mutual cooperation may benefit some group members more than others). I conduct an experiment in which participants act as group members for a hypothetical company. Consistent with expectations, I find that a strong group identity promotes employees' cooperation rates, but only in situations in which benefits resulting from mutual cooperation are symmetric. When the benefits are asymmetric, employees' willingness to cooperate depends on whether they are disadvantaged or advantaged as well as the level of group identity. Specifically, the disadvantaged employees are less likely to cooperate when group identity is high. In contrast, the advantaged ones' willingness to cooperate is unaffected by the level of group identity. Results of my study suggest that, in situations of benefit asymmetry, inducing a high level of group identity may have unintended negative consequences on group performance as well as organizational productivity.
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ItemEffects of risk-based inspections on auditor behavior(Georgia Institute of Technology, 2014-06-30) Shefchik, Lori B.I examine how risk-based inspections influence auditor behavior in a multi-client setting. I conduct an experiment using an abstract setting that captures the theoretical constructs present in the audit ecology. I manipulate the presence of risk-based inspections between-participants and the level of client risk (higher vs. lower) within-participants. Consistent with the theoretical predictions, under conditions of high resource pressure, I find that auditor effort is higher under a regime with risk-based inspections as compared to a regime without inspections, and the auditor effort increases more for higher-risk clients than for lower-risk clients. More notably, following attentional control theory, I predict and find that risk-based inspections diminish the quality of auditor decision performance for lower-risk clients. Specifically, auditors' decision performance is worse (i.e., more suboptimal) for lower-risk clients than for higher-risk clients (ceteris paribus), but only under a risk-based inspections regime. Likewise, auditors' decision performance for lower-risk clients is worse in a regime with risk-based inspections than in a regime without inspections. I theorize that accountability pressures from PCAOB inspections combined with pressures from high resource constraints (that naturally occur in the audit environment) induce task-related anxiety on auditors. Following attentional control theory in a multi-task setting, I predict anxiety interrupts auditors' decision-making processing shifting attention toward higher-risk clients contributing to the anxiety, and away from lower-risk (untargeted) clients, thereby decreasing the quality of decision performance for lower-risk clients. I perform several supplemental analyses to test the underlying theory. First, I conduct a second experiment where auditors operate under relatively lower resource pressure and find that auditors’ decision performance is no longer worse for lower-risk clients in an inspections regime. The results support the theory that it is the combined pressures of inspections and high resource constraints causing the negative effects. Second, I conduct a supplemental experiment and measure participants' levels of anxiety. In support of the underlying theory, participants' reported anxiety levels are higher under a regime with versus without inspections. Third, I perform several robustness checks to rule out alternative explanations of the findings. The findings of this study contribute to the auditing literature, and they have practical and regulatory implications. First, by identifying higher auditor effort in a regime with inspections, I join others in documenting potential benefits of inspections on auditor behavior, and thus audit quality. Second, by examining the effect of risk-based inspections on auditor effort in a multi-task setting, I extend prior research by providing evidence that inspections increase auditor effort more for higher-risk clients than for lower-risk clients. Third, and most notably, by identifying diminished auditor decision performance for lower-risk clients under a risk-based inspections regime, this is the first study to provide theory and evidence on how risk-based inspections can lead to potential negative consequences on audit behavior, and thus audit quality.
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ItemThe effects of ego and external stress on group cooperation(Georgia Institute of Technology, 2014-05-16) Liu, YuebingI conduct two experiments to examine the effects of different types of stress on individuals' willingness to cooperate. The experience of stress is characterized by the primary cognitive appraisal of threat. It activates the emotion of anxiety and induces stress coping behaviors. I posit that because different types of stress differ in terms of the secondary dimension of cognitive appraisal, the responsibility of possible failure, they lead to different stress coping behaviors in collaborative contexts. Based on the attribution of threat, I classify stress into two types, ego and external stress. Under ego stress, the possible failure is attributed to one's capabilities. Ego stressors, such as lack of skill, cause individuals to worry about their capabilities, posing a threat to goal achievement. I argue that ego stress motivates an individual to seek affiliations for joint protection. I provide experimental evidence that ego stress increases cooperation. Under external stress, on the other hand, the possible failure is attributed to factors in the environment. External stressors, such as environmental uncertainty, cause individuals to worry about threat related factors in the environment, which also may hinder goal achievement. I argue that external stress motivates people to avoid risks, including the risk of being exploited by a partner. I provide evidence that external stress reduces cooperation.
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ItemExperience, episodic knowledge and judgment in an audit committee member task: experimental evidence(Georgia Institute of Technology, 2010-07-07) Singtokul, Ong-ArdI conduct experiments to investigate how episodic knowledge obtained from prior experience as an auditor or a manager affects audit committee members' judgment in supporting the auditor in a disagreement with management. This paper sheds light on the advantage of first-hand accounting-related experience in the important oversight task. It also brings to bear the potential benefit from direct manager experience as claimed by researchers and regulators. I find that the episodic knowledge obtained from prior experience as an auditor, especially the experience of having been a diligent auditor, strengthens the degree of auditor support of participants in the role of an audit committee member. By contrast, the effect of episodic knowledge from first-hand experience as a manager on the likelihood of auditor support varies with the manager type. While the episodic knowledge acquired from direct experience as an aggressive manager augments the level of auditor support, such knowledge attained by prior experience as a conservative manager has no significant effect.
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ItemAccounting-based earnings management and real activities manipulation(Georgia Institute of Technology, 2008-06-24) Yu, WeiIn the first essay, I examine the association between auditor industry specialization and earnings management choices. Prior research suggests that industry specialist auditors constrain accounting-based earnings management. But such actions may cause client companies to seek alternative means to manage earnings. Specifically, companies that hire industry specialist auditors may alter operating decisions to meet earnings targets, referred to as real activities manipulation. This essay investigates whether clients of industry specialist auditors that have an incentive to manage earnings are constrained from managing earnings through accruals manipulation and, therefore, are more likely to engage in real activities manipulation. Further, I examine whether operating performance declines for firms suspected of real activities manipulation. My findings indicate that clients of industry specialist auditors with incentives to manage earnings have lower absolute value of accruals relative to firms with incentives to manage earnings that do not hire industry specialist auditors. These clients of industry specialist auditors are also more likely to engage in real activities manipulation, suggesting this is a possible unintended consequence of hiring an industry specialist auditor. I also document evidence that firms suspected of real activities manipulation have lower future operating performance relative to firms not suspected of real activities manipulation. In the second essay, I examine the association between the tightness of accounting standards and earnings management choices. Prior studies suggest that managers switch from accounting-based earnings management to real activities manipulation in response to tightening accounting standards. My study investigates this line of reasoning. I develop an analytical model and conduct an experimental examination of the effect of flexibility of accounting standards under different institutional environments. I find that managers switch from accounting-based earnings management to real activities manipulation with tightening accounting standards only when the institutional investors have a short-term investment horizon. In contrast, when managers are monitored by institutional investors with a long-term investment horizon, they do not engage in such behavior.
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ItemInternal Control Failures and Corporate Governance Structures A Post Sarbanes-Oxley Act (SOX) Analysis(Georgia Institute of Technology, 2007-03-20) Goh, Beng WeeIn 2002, Congress passed the Sarbanes-Oxley Act, which requires firms to assess internal controls and report internal control weaknesses. My study examines the causes and consequences of material weaknesses (MW) reported under Section 302 of SOX. First, I investigate whether firms that report MW are associated with less effective audit committees and boards of directors. Using 184 firms that reported MW and a matched-pair sample of control firms, I find that firms with lower audit committee financial expertise, smaller audit committees, and lower board independence are more likely to have MW. Second, I examine whether the managerial labor market imposes penalties on top management, audit committees, and boards of directors for internal control failures. I find that MW firms have significantly higher turnover of their audit committee members and outside directors than the control firms following the MW detection. Audit committee members and outside directors in the MW firms also lose more outside directorships than their counterparts in the control firms. Additional analyses show that the extent of reputational penalties increase with the severity of the MW detected. Third, I examine whether the MW firms improve their governance structures upon the MW detection. The results indicate that MW firms experience greater improvement in their governance structures than the control firms. By the second year following the MW detection, the MW and control firms no longer differ in terms of audit committee independence, audit committee financial expertise, audit committee size, and board independence. Last, I examine whether the market reacts positively to the improvement in governance structures. I find a positive relation between the two-year buy-and-hold abnormal returns and the MW firms improvement in audit committee size and board independence. This result is consistent with the improvement in governance structures restoring investor confidence in financial reporting.