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Auditor-Client Mismatch May Squeeze Audit Quality

Tammy Whitehouse | February 21, 2013

Young auditors are often outgunned or intimidated by management at the companies where they perform their audit work, leaving audit work incomplete or poorly documented, according to a recent academic study.

Bradley Bennett at the University of Massachusetts and Richard Hatfield at the University of Alabama said they found evidence that staff auditors are often mismatched with company management in terms of age, experience, and accounting knowledge, and it influences auditors' decisions regarding the collection of audit evidence during their field work. The study suggests auditors who feel mismatched with management may reduce their collection of audit evidence to avoid interactions with management, although the situation improves when auditors obtain evidence through e-mail communications, which enables them to avoid face-to-face or telephone contact.

The study also suggests when auditors have curtailed their work as a result, about half document their findings in “a vague or inappropriate manner,” the authors say, probably reducing the likelihood that reviewing auditors will notice a problem. “Given the extent of audit evidence collected by young staff auditors, these findings have direct implications for work paper and audit quality,” the study says.

The Public Company Accounting Oversight Board has come down hard on audit firms across the board in recent years, in large part for failing to adequately challenge management assertions in some contentious or complex areas of accounting, and for failing to obtain or document audit evidence to support their opinions. The PCAOB has specifically called on audit firms to improve the objectivity and skepticism of auditors, and the firms have stepped up their internal training and policies in response.

The study results provide new evidence regarding the impact of auditor-client interactions on audit quality, according to the authors. “Typical contextual features of these interactions, such as a potential social mismatch, can create a situation that reduces the amount of evidence collected by staff auditors,” the study says.

The research looked at situations where client management made overt attempts to intimidate junior auditors and compared it with the effect on audit quality where management made no such attempts. The authors said auditors were no more or less likely to back off on audit procedures when clients used intimidation tactics. The study also looked closely at the use of electronic communication such as e-mail to gather audit evidence; it found auditors were more likely to press issues through e-mail than through face-to-face communication. The authors note, however, that audit practice tends to discourage electronic forms of communication for tasks involving risk out of concern for a greater likelihood of misinterpretation, and earlier research supports it is a legitimate phenomenon.