OPERATIVIZACIÓN DE LAS VARIABLES DE LA TEORÍA DE LA ACCIÓN RAZONADA Y LA TEORÍA DEL COMPORTAMIENTO PLANIFICADO

6.2.1 Judgment performance and experience

An important finding of this empirical study relates to the “expertise paradigm”. Prior research has produced mixed results regarding the impact of general experience on the auditor’s judgment performance. From approximately 1990 onwards, other research studies refined experience into general experience, task-specific experience and industry-specific experience, but none of these studies incorporated all three categories of experience. This thesis examined the individual impact of the three categories of experience on judgment performance as well as their interactions.

In Chapter 4 it was reported – related to the tasks ‘identification of client’s business risks and entity-level controls’ - that overall:

• General experience is not associated with the auditor’s judgment performance;

• Industry-specific experience is positively associated with the auditor’s judgment performance. Further analysis reveals that for the group of auditors with a level of industry-specific experience of between 0 and 1,000 hours (over three years) of industry-specific experience, industry-specific experience positively contributes to judgment performance and for respondents with more than 1,000 hours of industry-specific experience industry-industry-specific experience is negatively associated with the auditor’s judgment performance.

• Contrary to our expectations, task-specific experience is negatively associated with judgment performance.

These findings present the impact of single independent variables on the auditor’s judgment performance. In a linear regression model, which incorporated all independent variables, it was reported that industry-specific experience is significantly associated with judgment performance, and general experience and task-specific experience are not significantly associated with the auditor’s judgment performance.

In Chapter 5, which described the findings related to the task ‘assessment of the impact of client’s business risks and entity-level controls on audit risk’, the following findings were reported:

• General experience shows some positive impact on the auditor’s judgment performance;

• The relationship between industry-specific experience and judgment performance shows two peaks, namely for the group of auditors with no industry-specific experience and for the group of auditors with between 250 and 1,000 hours of industry-specific experience. The figure also shows two dips, namely for the group of auditors with between zero and 250 hours of industry-specific experience and for the group of auditors with more than 1,000 hours of industry-specific experience.

The first peak may be explained by the absence of client-specific experience. The presence of client-specific experience can result in more biased judgment- and decision-making.

• Task-specific experience is positively associated with the auditor’s judgment performance.

General experience and judgment performance

From this empirical study, it follows that general experience in the auditing field does not (see Chapter 4) contribute or contributes to a limited extent (see Chapter 5) to the auditor’s judgment performance. This result is in accordance with our expectations, based on prior research. In an overview article, Trotman (1998) reported that prior studies on the impact of general experience on the auditor’s judgment performance reported mixed results, i.e. both positive impact and negative impact were reported. A more recently conducted study related to the identification of risk factors task (Bedard and Graham, 2002), reported that general experience did not contribute to the auditor’s judgment performance. It is argued in the current empirical study that the findings from the conducted experiments can be explained by the fact that an increase in auditors’

general experience is accompanied by an increase in engagement-specific experience.

Underlying this argument is the assumption that individual auditor’s learning curves are at least to some extent unique and auditor’s judgments may deviate from auditors’

average judgments in comparable circumstances. As such, the findings suggest that general experience is not a good predictor of improved judgment performance.

Industry-specific experience and judgment performance

The empirical findings of this study revealed that industry-specific experience is positively associated with judgment performance both in an identification task and an assessment task. However, concerning the identification task, it was also reported that the positive association was related to respondents with industry-specific experience upwards to 1,000 hours of industry-specific experience over three years. From the level of 1,000 hours and higher, judgment performance tended to decline. An absolute number of 1,000 hours in general is quite low, since this equals 300 hours spend on industry-specific engagements on an annual basis, approximately one fifth of total productive hours on an annual basis. This implies that auditor with this level of industry-specific experience serve other industries for most of their available working period. It was argued that this level of industry-specific experience typically is caused by the type of industry. Auditors working in more regulated industries – like, e.g. the industries healthcare and financial services – regularly spend approximately 1,000 hours on an annual basis on industry-specific audit clients. Audit firms need to carefully consider the assignment of industry-specialized auditors to specific audit tasks. It may well be the case that auditors become less accurate and skeptical when spending too many hours on specific industries. Given the novelty of the Business Risk audit approach, prior research studies with which this empirical study directly can be compared, are not available. Prior research studies (e.g., Taylor 2001, Solomon et al., 1999) directed towards the impact of industry-specific experience on judgment performance related to other audit tasks, reported a positive impact. The results reported in this empirical study deviate from prior research in this field in the sense that the auditor’s judgment performance tends to increase up to some level of industry-specific experience, and tends to decline from this level of industry-specific experience.

Task-specific experience and judgment performance

The results of this empirical study showed contrary outcomes when comparing judgment performance in identification tasks and judgment performance in an assessment task.

For identification tasks a negative association was found between task-specific experience and judgment performance, where more experienced groups of auditors performed better in an assessment task. Regarding the identification tasks these results are contrary to prior research, and regarding the assessment task these results are in accordance with prior research (Bonner 1990; Bonner and Lewis, 1990). A potential explanation may be that for identification tasks auditors ‘suffer’ from client-specific experiences. This threat is more applicable to identification tasks compared to

assessment tasks. In an identification task, auditors need to search for the most relevant information inputs in a variety of knowledge databases, and consider comparable circumstances they experienced with other clients. What may constitute a significant business risk for one audit client may not be a significant business risk for another audit client. In other words, experienced auditor’s judgments may be biased by experiences with other clients. This bias is less prominent in assessment tasks, where the number of cues regularly is low. In addition, with assessment tasks the decision output is only a number or a risk-classification (low, medium, high). The variety of outputs is, hence, lower compared to identification tasks. A potential way of mitigating the auditor’s judgment bias in identification tasks is to make use of generally applicable industry-specific templates of business risks and controls. This may be complemented with group-decision-making procedures instead of individual decision-making procedures, for example team-planning events before the audit starts.

6.2.2 Judgment performance and feedback

Consistent with prior research (e.g., Libby and Trotman, 1993; Ashton, 1990) we would have expected that feedback would contribute positively to the auditor’s judgment performance. No significant results have been reported with respect to the identification tasks. Regarding the assessment task, judgment performance significantly increased with an increase in the perceived level of feedback except for the group with the highest level of perceived feedback (this group shows a slight decrease of .76 to .72). As a whole, our expectation with respect to the direction (positive) of the association was supported. It is, hence, suggested that feedback is a good mechanism for improving judgment performance. This result is somewhat surprising given the relatively low mean levels of feedback for audit managers (on a scale of 0 to 10 – sometimes to often – a mean level of feedback of 5.3 was reported). Generally, audit firms are strongly recommended to embed to a higher extent providing feedback in the audit process. US auditing standards (e.g., PCAOB AS2 and PCAOB AS3, 2004), require adequate supervision and review process during the audit from an audit quality perspective. So, feedback or review is important for all audit firms, but for Big4 – serving particularly SEC-clients – audit firms in particular. In the Dutch auditing profession, the importance of external file reviews (e.g., by AFM and CTK) tends to increase. In addition, the regulatory environment in the auditing profession is expected to change significantly with WTA (“Wet Toezicht Accountantskantoren”). Tan (1995) reported that announced reviews, as an ultimate type of (external) feedback, would positively contribute to the auditor’s judgment performance as measured by consensus and self-insight. This

stresses the importance of both internal feedback (as an audit firm’s control device) and the sufficiency of audit documentation.

6.2.3 Judgment performance and risk-aversion

In this empirical study, two identification tasks and an assessment task from the business risk audit approach were selected for the research design. These three tasks share the concept of risk: (business) risk identification, (business) risk mitigation, and (audit) risk assessment. As a final independent variable, the concept of general risk-aversion was included. Risk-risk-aversion, in this thesis, is related to a more general attitude towards risk, which every single individual faces in day-to-day circumstances. Risk-aversion has been measured as the percentage of assurance a respondent needs when selecting an uncertain chance to win an amount compared to a fully certain event of winning a (lower) amount. The concept of risk-aversion does not have a relationship with the nature of business risks or the nature of entity-level controls. Hence, the association of judgment performance with risk-aversion was not examined for the identification tasks. For the assessment task, the related hypothesis expected that respondents, who are more risk-averse, make decisions moving away from the average decision outcome, which implies a lower level of consensus. The statistical results supported our expectations. In order to keep audit quality at a high level, a high level of judgment performance (as measured by consensus) is necessary to audit firms. Based on these research findings, it is suggested that audit firms need to be aware of the fact that auditors in conducting audit tasks have different general risk perceptions. These general risk perceptions potentially result in different audit risk assessments. Audit firms are recommended to develop criteria related to audit risk assessments. This may be realized by developing a knowledge database incorporating audit risk assessments from existing audit engagements including references to the specific audit environment in terms of business risk factors, inherent risk factors and control risk factors.