Research Seminars

Error management in audit firms: Error climate, type and originator

Speaker: Professor Steven SALTERIO
Queen's University, Canada

21 September 2012 - Salle T027 - From 14h00 to 16h00

Audit standard setters and regulators are increasingly focusing on the management context within which the audit firm conducts the audit for its effects on audit quality. We examine a key, but little understood facet of organizational life in audit firms, how audit staff who discover and report errors in audit files are routinely treated in response to such reporting such errors. This construct, denoted as audit office error management climate, can be characterized on a continuum between a relatively “blame” oriented climate to a relatively more “open” climate. The former is one where errors are not tolerated and those reporting or committing errors are punished whereas the latter characterizes error commitment as a normal, albeit unfortunate aspect of organizational life, where the error discovery is used an opportunity for the organization to learn and without sanctions being imposed on the originator as long as similar errors are not repeated. We examine audit office error-management climate in the context of audit specific contextual factors that might affect the decision to report the discovered errors: audit error type (conceptual/mechanical) and who committed the error (the individual who discovered it or a peer). We find an overall main effect for office error-management climate however; error management climate interacts as predicted with these contextual factors (error type and originator). Specifically, an open error-management climate results in an increase in the reporting of mechanical errors and an increase in reporting of peer errors versus a blame climate. Our findings suggest that standard setters and regulators need to understand their standards and inspections can affect the nature of audit firm error management climates and how the differences in such climates can affect audit quality by encouraging or suppressing the reporting by staff of errors in working paper files. Further, audit firm management needs understand how what may appear to be innocuous differences in management style at the individual audit office can affect audit quality by considering how individual audit management practices at the local level can defeat formal policies that reflect a desire for an open error management climate at the firm.

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