A 2016 research paper investigates whether alternative
judgment frameworks help Big 4 audit managers and partners constrain
management’s aggressive financial reporting under accounting standards that differ
in their precision. The authors found that a framework based on the SEC’s
Advisory Committee on Improvements to Financial Reporting (CIFiR)
recommendation that auditors critically evaluate the pros and cons of
alternative accounting methods helps auditors constrain aggressive reporting
under less precise standards.
Although the results highlight a limitation of
counterfactual reasoning on its own at enhancing auditor constraint of
aggressive reporting, this study provides evidence on how structured thinking
can overcome this limitation. In particular, combining this consideration of
the alternatives with a structured thought process that encourages auditors to
think about the issue at increasing levels of abstraction effectively shifts
auditor focus away from client considerations and towards substance-over-form
considerations, thereby incrementally enhancing auditor constraint of
aggressive reporting across different levels of accounting standard precision.
These research findings should be of interest to academics,
regulators, standard-setters and auditors as they continue to contemplate ways
to improve auditor professional judgment under different levels of accounting
standard precision. For more information, read the research paper, Do
Auditor Judgment Frameworks Help in Constraining Aggressive Reporting? Evidence
under More Precise and Less Precise Accounting Standards by Ann G.
Backof (University of Virginia - McIntire School of Commerce), E.
Michael Bamber (University of Georgia) and Tina
Carpenter (University of Georgia - C. Herman and Mary Virginia Terry
College of Business) published in the journal, Accounting, Organizations and Society,
Volume 51, May 2016, Pages 1–11.
