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Essays on Auditors’ Judgments and Decisions in Negotiation and Communication

Arizona Mustikarini of the School of Business and Law at the University of Agder has submitted her thesis entitled «Essays on Auditors’ Judgments and Decisions in Negotiation and Communication» and will defend the thesis for the PhD-degree Tuesday 10 January 2023. (Photo: Private)

During the course of an audit, auditors are required by auditing standards to collect sufficient and relevant audit evidence and conduct various audit tasks. They perform these to arrive at an audit opinion regarding whether the financial statements are fairly presented following the applicable financial reporting framework.
In order to do so, it is imperative that auditors maintain good interactions and get familiar with the audit clients. However, maintaining these relationships is not an easy task and often comes with some caveats.

Arizona Mustikarini

PhD Candidate

You may follow the disputation online. Link for registration as an online spectator at the bottom of this page.

 

Arizona Mustikarini of the School of Business and Law at the University of Agder has submitted her thesis entitled «Essays on Auditors’ Judgments and Decisions in Negotiation and Communication» and will defend the thesis for the PhD-degree Tuesday 10 January 2023.

She has followed the PhD programme at the School of Business and Law at the University of Agder.

 

Summary of the thesis by Arizona Mustikarini:

Maintaining auditor-client interaction is important, but how it affects auditors’ judgments and decisions?

During the course of an audit, auditors are required by auditing standards to collect sufficient and relevant audit evidence and conduct various audit tasks. They perform these to arrive at an audit opinion regarding whether the financial statements are fairly presented following the applicable financial reporting framework.

In order to do so, it is imperative that auditors maintain good interactions and get familiar with the audit clients. However, maintaining these relationships is not an easy task and often comes with some caveats.

Auditors should understand how maintaining client interactions and relationship-building will affect their professional judgments and decisions.

To address these issues, I carried out three studies in my doctoral dissertation.

First study: Literature review

In the first study, I systematically review the auditing literature on auditors’ interactions and relationships with their clients.

This review takes a bird’s eye view and aims to understand how the auditing literature portrays the dominant elements surrounding auditor-client interaction. This includes whether the interaction engenders audit disputes or conflicts and how these conflicts are resolved between auditors and clients.

Several elements emerge from this review. However, I focus on the two most interesting and relevant elements related to auditor-client interaction, first, how auditors’ negotiation approach affects audit outcomes, and second, how auditors’ communication modes affect their professional skepticism. These topics are empirically investigated in the following studies.

Second study: Auditors’ negotiation approach

The second study focuses on how auditors’ negotiation approach affects audit outcomes.

I extend the focus on auditor-client negotiation using a context where potential fraud may occur in an audit. Specifically, I investigate auditors’ decisions throughout the audit where they are required to identify and investigate potential fraud issues.

Importantly, I also examine how auditors resolve potential fraud issues with their clients from a negotiation lens.

This study is conducted in two developing countries, Indonesia and Ghana. Auditors in these settings may have more experience with fraud because fraud is relatively not a rare occurrence compared to those in developed countries.

A survey of audit partners and managers is conducted, and interesting and novel results are found as follows.

Important finding: Fraud is mostly undertaken by senior management

With regard to identifying potential fraud, auditors in Indonesia and Ghana report that asset misappropriation fraud is mostly undertaken by senior management, whereas literature suggests that this type of fraud is mostly committed by lower-level employees.

This finding is important because policymakers, practitioners, and academics emphasize fraudulent financial reporting more than asset misappropriation fraud due to its severe impact on the overall financial statements.

Nonetheless, because asset misappropriation fraud is committed by senior management, this type of fraud should also receive attention due to its potential to severely impact financial statements.

Regarding auditors’ decisions in investigating potential fraud issues, conducting internal control assessment coupled with utilizing information technology has been an important notion in the academic literature and auditing practices for aiding fraud detection.

However, I find that auditors in this study setting cite little benefits of using these techniques to detect fraud. Once fraud is detected, this study finds that auditors in Indonesia and Ghana modify their audit procedures to respond to fraud.

Although it seems to be aligned with the requirements of auditing standards, this finding is important because prior research conducted in developed countries often reports that auditors generally fail to modify audit procedures effectively. Research often cites this failure stems from auditors’ lack of fraud experience.

Auditors’ strategy for resolving detected potential fraud issues with clients

At the end of the audit, auditors should resolve detected potential fraud issues with audit clients.

By utilizing a negotiation lens, I find that auditors often use a contending negotiation approach when resolving these issues.

However, it is interesting that this contending approach does not lead to favorable outcomes where the client records all the proposed audit adjustments. Instead, the clients would only record the majority of the adjustments.

Despite being the auditor’s preferred negotiation strategy, the contending approach may harm the auditor-client relationship. Therefore, in resolving a sensitive issue like potential fraud, auditors can benefit from finding a balance between using a contending and conceding negotiation approach that may lead to preferred audit outcomes.

Third study: Auditors’ communication modes

The next topic on auditor-client interaction I focus on is how auditors’ communication modes with the client have an impact on their professional skepticism.

In the third study, I empirically investigate auditors’ judgments and decisions in the evidence collection process.

I use a unique setting during the Coronavirus pandemic where auditors are required to conduct the audit remotely. In this remote audit setting, auditors’ interaction with the client changes from the usual face-to-face interaction to mostly utilizing email and video communication like Zoom.

Although the restriction measures are currently eased in the post-pandemic environment, working remotely remains relevant, including for auditors.

As such, the implications of this study are imperative to audit decision-making on how using these modes of communication with different features, textual and audiovisual, have differing impacts on auditors’ judgments and decisions when collecting audit evidence.

Better judgement using video communication than e-mail

Using an experiment, I find that auditors’ judgment is influenced less by prior client reputation when auditors interact with the client by video, compared to by email.

Specifically, when the auditor has a positive impression of the client personnel, using video communication affects better auditors’ judgments compared to email.

Furthermore, results from the experiment also suggest that auditors with a more positive impression of the client are less likely to follow up with the client personnel when they receive the evidence and respond by video than by email.

This means auditors are less likely to take further actions, such as obtaining additional evidence and questioning the evidence they have received.

From a practical perspective, this finding could inform decision-makers, such as audit firms, about a trade-off between the effectiveness and efficiency of gathering sufficient audit evidence.

Given that remote auditing will continue in the foreseeable future, the overall results of this study can aid decision-makers in deciding whether the use of email and video are equally effective for auditors’ judgments and decisions, particularly in the evidence collection process.

Disputation facts:

The trial lecture and the public defence will take place in Auditorium I1 066, Campus Kristiansand and online via the Zoom conferencing app - registration link below.

Head of department of Economics and Finance, Liv Bente Hannevik Friestad, School of Business and Law at the University of Agder, will chair the disputation.

The trial lecture Tuesday 10 January at 10:15 hours

Public defense Tuesday 10 January at 12:00 hours

Given topic for trial lecture«Overview of research on auditor-client negotiation and future research agenda»

Thesis Title«Essays on Auditors’ Judgments and Decisions in Negotiation and Communication»

Search for the thesis in AURA - Agder University Research Archive, a digital archive of scientific papers, theses and dissertations from the academic staff and students at the University of Agder.

The thesis is available here:

https://hdl.handle.net/11250/3041124

The paper III was excluded (with respect to publishers requirements) from the dissertation until the paper will be published. A full thesis can be borrowed from the Faculty. Please contact Gunvor Guttormsen on e-mail gunvor.guttormsen@uia.no 

The Candidate: Arizona Mustikarini (1985, Yogyakarta Indonesia) Diploma of International Management Program, Pforzheim University of Applied Sciences Germany (2006), Bachelor’s Degree in Accounting from the Faculty of Economics and Business, Universitas Gadjah Mada, Indonesia (2007), Master of Business (Accounting) at Monash Business School, Melbourne Australia (2015). Work experiences: Four-year experience as an associate auditor at PricewaterhouseCoopers Jakarta Indonesia, five-year experience as a lecturer at the Faculty of Economics and Business Universitas Gadjah Mada Indonesia.

Opponents:

First opponent: Associate Professor Ellen Kulset, University of South-Eastern Norway

Second opponent: Professor Tan Hun Tong, Nanyang Technological University, Singapore

Professor Anna Alon, School of Business and Law at the University of Agder, is appointed as the administrator for the assessment committee.

Supervisor in the doctoral work was Professor Iris Caroline Stuart, University of Agder

What to do as an online audience member:

The disputation is open to the public, but to follow the trial lecture and the public defence digitally, transmitted via the Zoom conferencing app, you have to register as an audience member on this link:

https://uiano.zoom.us/meeting/register/u50kd-ytqjIiGdG2LW_a0dSjCwJrrKypaXel

A Zoom-link will be returned to you. (Here are introductions for how to use Zoom: support.zoom.us if you cannot join by clicking on the link.)

We ask online audience members to join the virtual trial lecture at 10:05 at the earliest and the public defense at 11:50 at the earliest. After these times, you can leave and rejoin the meeting at any time. Further, we ask online audience members to turn off their microphone and camera and keep them turned off throughout the event. You do this at the bottom left of the image when in Zoom. We recommend you use ‘Speaker view’. You select that at the top right corner of the video window when in Zoom.

Opponent ex auditorio:

The chair invites members of the public to pose questions ex auditorio in the introduction to the public defense. Deadline is during the break between the two opponents. The person asking questions should have read the thesis. For online audience the Contact Persons e-mail are available in the chat function during the Public Defense, and questions ex auditorio can be submitted to Gunvor Guttormsen on e-mail gunvor.guttormsen@uia.no